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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2005
or
(_) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
000-50330
----------------------
Commission File Number
EAST PENN FINANCIAL CORPORATION
-------------------------------
(Exact name of registrant as specified in it charter)
Pennsylvania 65-1172823
- ---------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
731 Chestnut Street, Emmaus, Pennsylvania 18049
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number: 610-965-5959
------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
6,302,560 shares of common stock, par value $0.625 per share, outstanding as of
April 26, 2005.
EAST PENN FINANCIAL CORPORATION
INDEX
QUARTERLY REPORT ON FORM 10-Q
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
March 31, 2005 (Unaudited) and December 31, 2004
Consolidated Statements of Income (Unaudited) 4
Three months ended March 31, 2005
and March 31, 2004
Consolidated Statements of Stockholders' Equity (Unaudited) 5
Three months ended March 31, 2005
and March 31, 2004
Consolidated Statements of Cash Flows (Unaudited) 6
Three months ended March 31, 2005
and March 31, 2004
Notes to Interim Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURES 22
EXHIBIT INDEX 23
Page 2
ITEM 1. FINANCIAL STATEMENTS
EAST PENN FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In thousands, except per share data) 2005 2004
(Unaudited) (Audited)
--------- ---------
ASSETS
Cash and due from banks $ 8,155 $ 7,334
Interest bearing deposits 29 1,234
Federal funds sold -- 214
--------- ---------
Cash and cash equivalents 8,184 8,782
Securities available for sale 85,828 87,609
Securities held to maturity 1,039 1,040
--------- ---------
Total securities 86,867 88,649
Mortgages held for sale 1,996 1,146
Loans, net of unearned income 250,341 240,669
Less: allowance for loan losses (2,912) (2,838)
--------- ---------
Total net loans 247,429 237,831
Bank premises and equipment, net 7,876 7,510
Investment in restricted stock 2,634 2,986
Other real estate owned 35 20
Bank owned life insurance 7,297 7,224
Accrued interest receivable and other assets 5,826 5,266
--------- ---------
Total assets $ 368,144 $ 359,414
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 42,053 $ 42,029
Interest bearing 255,959 256,236
--------- ---------
Total deposits 298,012 298,265
Securities sold under agreements to repurchase 2,696 2,349
Short-term borrowings 12,202 3,000
Long-term debt 25,000 25,000
Junior subordinated debentures 8,248 8,248
Accrued interest payable and other liabilities 805 885
--------- ---------
Total liabilities 346,963 337,747
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized
16,000,000 shares; none issued -- --
Common stock, par value $0.625 per share
authorized 40,000,000 shares; issued 2005
6,610,852 shares; 2004 6,608,852 shares;
outstanding 2005 6,302,560 shares; 2004
6,300,560 shares 4,132 4,131
Surplus 9,234 9,225
Retained earnings 10,170 9,887
Accumulated other comprehensive income (loss) (505) 274
Less: Treasury stock - at cost, 308,292 shares (1,850) (1,850)
--------- ---------
Total stockholders' equity 21,181 21,667
--------- ---------
Total liabilities and
stockholders' equity $ 368,144 $ 359,414
========= =========
See Notes to Consolidated Financial Statements
Page 3
EAST PENN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2005 and 2004
(Unaudited)
Three Months Ended
------------------
(In thousands, except per share data) 2005 2004
------ ------
Interest income
Interest and fee income on loans $3,561 $2,949
Securities:
Taxable 816 975
Tax-exempt 145 127
Other 28 19
------ ------
Total interest income 4,550 4,070
------ ------
Interest expense
Deposits 1,010 945
Federal funds purchased and securities
sold under agreements to repurchase 55 13
Long-term debt 196 198
Junior subordinated debentures 136 136
------ ------
Total interest expense 1,397 1,292
------ ------
Net interest income 3,153 2,778
Provision for loan losses 126 154
------ ------
Net interest income after
provision for loan losses 3,027 2,624
------ ------
Other income
Customer service fees 239 221
Mortgage banking activities, net 103 114
Net realized gains on sale of securities -- 17
Income from investment in life insurance 73 76
Other income 108 81
------ ------
Total other income 523 509
------ ------
Other expense
Salaries and wages 956 908
Employee benefits 349 278
Occupancy 213 177
Equipment 193 174
Other operating expenses 734 617
------ ------
Total other expense 2,445 2,154
------ ------
Income before income taxes 1,105 979
Federal income taxes 255 228
------ ------
Net income $ 850 $ 751
====== ======
Basic and diluted earnings per share $ 0.13 $ 0.12
Cash dividends per common share $ 0.09 $ 0.08
See Notes to Consolidated Financial Statements
Page 4
EAST PENN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended
March 31, 2005 and March 31, 2004
(Unaudited)
Accumulated
Other
Common Retained Comprehensive Treasury
(In thousands, except per share data) Stock Surplus Earnings Income (Loss) Stock Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 4,130 $ 9,218 $ 7,645 $ 400 ($ 1,850) $ 19,543
--------
Comprehensive income:
Net income -- -- 751 -- -- 751
Changes in net unrealized gains
(losses) on securities available
for sale, net of tax effect -- -- -- 781 -- 781
--------
Total comprehensive income 1,532
--------
Exercise of 300 common stock options -- 2 -- -- -- 2
Cash dividends ($0.08 per share) -- -- (504) -- -- (504)
---------------------------------------------------------------------------------
Balance, March 31, 2004 $ 4,130 $ 9,220 $ 7,892 $ 1,181 ($ 1,850) $ 20,573
=================================================================================
Balance, December 31, 2004 $ 4,131 $ 9,225 $ 9,887 $ 274 ($ 1,850) $ 21,667
Comprehensive income:
Net income -- -- 850 -- -- 850
Changes in net unrealized gains
(losses) on securities available
for sale, net of tax effect -- -- -- (779) -- (779)
--------
Total comprehensive income 71
--------
Exercise of 2,000 common stock
options 1 9 -- -- -- 10
Cash dividends ($0.09 per share) -- -- (567) -- -- (567)
---------------------------------------------------------------------------------
Balance, March 31, 2005 $ 4,132 $ 9,234 $ 10,170 ($ 505) ($ 1,850) $ 21,181
=================================================================================
See Notes to Consolidated Financial Statements
Page 5
EAST PENN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2005 and 2004
(Unaudited)
Three Months Ended March 31,
(In thousands) 2005 2004
-------- --------
CASH FLOWS from OPERATING ACTIVITIES
Net income $ 850 $ 751
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 126 154
Provision for depreciation and amortization 171 156
Net amortization of securities premiums and discounts 55 68
Net realized gain on sale of securities -- (17)
Proceeds from sale of mortgage loans 5,759 6,645
Net gain on sale of loans (103) (114)
Loans originated for sale (6,506) (7,771)
Earnings on investment in life insurance (73) (76)
Decrease in accrued interest receivable
and other assets 129 110
Increase (decrease) in accrued interest payable
and other liabilities (80) 181
-------- --------
Net Cash Provided by Operating Activities 328 99
-------- --------
CASH FLOWS from INVESTING ACTIVITIES
Decrease in interest bearing time deposits -- 200
Purchases of available for sale securities (2,557) (200)
Proceeds from maturities of and principal repayments
on available for sale securities 3,102 2,946
Proceeds from sales of available for sale securities -- 3,093
Proceeds from maturities of and principal repayments
on held to maturity securities 1 --
Proceeds from the sale of other real estate owned -- 127
Net increase in loans (9,739) (503)
Net (increase) decrease in restricted stock 352 (318)
Purchases of bank premises and equipment (537) (1,409)
Investment in Berkshire Bank (287) --
Purchase of life insurance -- (1,500)
-------- --------
Net Cash Provided by (Used in) Investing Activities (9,665) 2,436
-------- --------
CASH FLOWS from FINANCING ACTIVITIES
Net increase (decrease) in deposits (253) 3,532
Net increase in securities sold under
agreements to repurchase 347 464
Increase in short-term borrowings 9,202 --
Proceeds from the exercise of stock options 10 2
Dividends paid (567) (504)
-------- --------
Net Cash Provided by Financing Activities 8,739 3,494
-------- --------
Net (Increase) Decrease in Cash and Cash Equivalents (598) 6,029
Cash and cash equivalents - Beginning 8,782 8,593
-------- --------
Cash and cash equivalents - Ending $ 8,184 $ 14,622
======== ========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 1,372 $ 1,342
======== ========
Federal income taxes paid $ 0 $ 0
======== ========
SUPPLEMENTAL SCHEDULE of NON-CASH INVESTING
and FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 15 $ 0
======== ========
See Notes to Consolidated Financial Statements
Page 6
EAST PENN FINANCIAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
1. Basis of Presentation
East Penn Financial Corporation (the "Company") was incorporated on
January 27, 2003 for the purpose of forming a bank holding company. On
July 1, 2003, the Company completed the reorganization and merger with
East Penn Bank (the "Bank") and its wholly owned subsidiary, East Penn
Mortgage Company, into the holding company form of ownership. In the
reorganization, the Bank became a wholly owned banking subsidiary of the
Company. On July 31, 2003, the Company formed East Penn Statutory Trust I
(the "Trust"), a Connecticut statutory business trust, for the purpose of
issuing $8 million in capital pass-through securities to investors.
The consolidated financial statements include the accounts of the
Company, and its wholly owned subsidiary, the Bank. All significant
intercompany accounts and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for fair presentation have been included.
Operating results for the three-month period ended March 31, 2005,
are not necessarily indicative of the results that may be expected for the
year ended December 31, 2005. For further information, refer to the
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.
2. Investment in Bank
On September 23, 2003, the Company made an initial purchase of
141,300 common stock shares of a newly formed de novo bank, named
Berkshire Bank, located in Wyomissing, Berks County, Pennsylvania. Upon
the completion of Berkshire's initial stock offering, the Company
purchased an additional 12,123 shares, which resulted in increasing the
Company's investment to $1,534,000 of Berkshire Bank's outstanding common
stock as of December 31, 2003. In consideration of the Company's and its
director's and officer's combined ownership of Berkshire Bank common
stock, the aggregate percentage ownership was 19.9% as of the 2003 year
end, which is in line with the terms of a Stock Subscription and Purchase
Agreement between the Company and Berkshire Bank. Under this agreement,
the Company is also entitled to purchase from Berkshire Bank up to 5% of
additional stock at any time beginning on the date of the warrant and for
10 years thereafter at an exercise price of $10.00 per share of stock. The
total number of shares that are subject to purchase under all Company's
warrants, options or rights shall not exceed 25% of the total number of
shares of Berkshire Bank common stock.
During 2004 Berkshire Bank announced a 5-for-4 stock split, effected
in the form of a 25% stock dividend, payable July 22, 2004, which resulted
in the Company receiving an additional 38,355 shares. As part of a
three-phase stock offering, which began on September 1, 2004 and was
effective through March 31, 2005, the Company purchased an additional
57,119 shares of common stock. As of March 31, 2005, the Company's total
investment in Berkshire Bank was $2,147,000, represented by 248,897
shares, resulting in a 19.9% aggregate ownership in consideration of the
combined ownership of the Company, its directors and its officers. The
investment is carried at cost and is included in the other assets category
on the balance sheet.
In August 2003, the Company entered into an agreement that was
approved by the Federal Reserve
Page 7
Bank of Philadelphia in September 2003. This agreement imposes certain
restrictions where the Company has agreed not to:
o solicit proxies with respect to any voting securities of Berkshire
Bank or influence the manner in which any other shareholder of
Berkshire Bank votes any voting securities of Berkshire Bank;
o cause any voting securities of Berkshire Bank to be subject to a
voting trust;
o cause Berkshire Bank to become a subsidiary of the Company;
o have any designated representative serve or act as an officer,
director, employee or agent of Berkshire Bank;
o propose any person for election as a director of Berkshire Bank;
o attempt to influence the dividend policies or practices of Berkshire
Bank; the investment, loan or credit decision policies; the pricing
of services; personnel decisions; operations activities;
o exercise or seek to exercise any controlling influence over the
management of Berkshire Bank;
o enter into any banking or non-banking transactions with Berkshire
Bank, except that the Company may establish and maintain deposit
accounts with Berkshire Bank, provided the aggregate balance of all
such accounts does not exceed $500,000 and that the accounts are
maintained on substantially the same terms as those prevailing for
comparable accounts of persons unaffiliated with Berkshire Bank.
Based upon the limitations imposed by this agreement, the Company is
considered to be a passive investor.
3. Investment in East Penn Statutory Trust I
In January 2003, the Financial Accounting Standards Board issued
FASB Interpretation No. 46 ("FIN46"), "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51", which was revised in December
2003. This Interpretation provides guidance for the consolidation of
variable interest entities (VIEs). The Trust qualifies as a variable
interest entity under FIN 46. The Trust issued mandatory redeemable
preferred securities, "Trust Preferred Securities", to third party
investors and loaned the proceeds to the Company. The Trust holds, as its
sole asset, subordinated debentures issued by the Company.
FIN 46 required the Company to deconsolidate the Trust from the
consolidated financial statements as of March 31, 2004. There has been no
restatement of prior periods. The impact of this deconsolidation was to
increase junior subordinated debentures or long-term debt by $8,248,000
and reduce the mandatory redeemable capital debenture line item by
$8,000,000, which had represented the Trust Preferred Securities of the
Trust. The Company's equity interest in the Trust subsidiary of $248,000,
which had previously been eliminated in the consolidation, is now reported
in "other assets". For regulatory reporting purposes, the Federal Reserve
Board has indicated that the Trust Preferred Securities will continue to
qualify as Tier I Capital subject to previously specified limitations,
until further notice. If regulators make a determination that Trust
Preferred Securities can no longer be considered in regulatory capital,
the securities become callable and the Company may redeem them. The
adoption of FIN 46 did not have an impact on the Company's results of
operations or liquidity.
4. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
--------------------------
March 31,
2005 2004
--------------------------
Net income applicable to common stock $ 850,000 $ 751,000
==========================
Weighted-average common shares outstanding 6,301,116 6,299,170
Effect of dilutive securities, stock options 20,133 19,961
--------------------------
Weighted-average common shares outstanding
used to calculate diluted earnings per share 6,321,249 6,319,131
==========================
Basic and diluted earnings per share $ 0.13 $ 0.12
==========================
Page 8
5. Comprehensive Income
The components of other comprehensive income (loss) and related tax
effects for the three months ended March 31, 2005 and 2004 are as follows:
Three Months Ended
---------------------
March 31,
2005 2004
---------------------
(In thousands)
Unrealized holding gains (losses) on
available for sale securities ($1,181) $ 1,200
Less reclassification adjustments for
gains (losses) included in net income -- 17
---------------------
Net unrealized gains (losses) (1,181) 1,183
Tax effect 402 (402)
---------------------
Net of tax amount ($ 779) $ 781
=====================
6. Stock Option Plan
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation". Accordingly, no compensation costs have been
recognized for options granted in 2005 and 2004. Had compensation costs
for stock options granted been determined based on the fair value at the
grant date for awards under the plan consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share for the
quarters ended March 31, 2005 and 2004, would have been reduced to the pro
forma amounts indicated below:
Three Months Ended
--------------------
March 31,
2005 2004
--------------------
(In thousands, except per share data)
Net income as reported $ 850 $ 751
Total stock-based compensation cost, net of tax,
that would have been included in the
determination of net income if the fair
value based method had been applied
to all awards -- --
--------------------
Pro forma net income $ 850 $ 751
====================
Basic earnings per share:
As reported $ 0.13 $ 0.12
Pro forma $ 0.13 $ 0.12
Diluted earnings per share:
As reported $ 0.13 $ 0.12
Pro forma $ 0.13 $ 0.12
7. Guarantees
The Company does not issue any guarantees that would require
liability recognition or disclosure, other than its standby letters of
credit. Standby letters of credit that are written are conditional
commitments issued by the Bank to guarantee the performance of a customer
to a third party. Generally, all letters of credit, when issued, have
expiration dates within one year. The credit risk involved in issuing
letters of credit is essentially the same as those that are involved in
extending loan facilities to customers. The Bank, generally, holds
collateral and/or personal guarantees supporting these commitments. The
Bank had $881,000 of standby letters of credit as
Page 9
of March 31, 2005. Management believes that the proceeds obtained through
liquidation of collateral and the enforcement of guarantees would be
sufficient to cover the potential amount of future payments required under
the corresponding guarantees. The current amount of the liability as of
March 31, 2005 for guarantees under standby letters of credit is not
material.
8. New Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123(R), "Share-Based Payment'. Statement No. 123(R)
revised Statement No. 123, "Accounting for Stock-Based Compensation", and
supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and its related implementation guidance. Statement No. 123(R) will require
compensation costs related to share-based payment transactions to be
recognized in the financial statements (with limited exceptions). The
amount of compensation cost will be measured based on the grant-date fair
value of the equity or liability instruments issued. Compensation cost
will be recognized over the period that an employee provides service in
exchange for the award.
On April 14, 2005, the Securities and Exchange Commission ("SEC")
adopted a new rule that amends the compliance dates for Statement No.
123(R). Under the new rule, the Company is required to adopt Statement No.
123(R) in the first annual period beginning after June 15, 2005. The
Company has not yet determined the method of adoption or the effect of
adopting Statement No. 123(R), and it has not determined whether the
adoption will result in amounts that are similar to the current pro forma
disclosures under Statement No. 123(R).
In December 2003, the Accounting Standards Executive Committee
issued Statement of Position 03-3 (SOP 03-3), "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer." SOP 03-3 addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer, including business combinations,
if those differences are attributable, at least in part, to credit
quality. SOP 03-3 is effective for loans for debt securities acquired in
fiscal years beginning after December 15, 2004. The Company adopted the
provisions of SOP 03-3 on January 1, 2005.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107
("SAB No. 107"), "Share-Based Payment", providing guidance on option
valuation methods, the accounting for income tax effects of share-based
payment arrangements upon adoption of SFAS No. 123(R), and the disclosures
in MD&A subsequent to the adoption. The Company will provide SAB No. 107
required disclosures upon adoption of SFAS No. 123(R) on July 1, 2005.
Page 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005
The following is management's discussion and analysis of the significant
changes in the consolidated results of operations, capital resources and
liquidity presented in the accompanying unaudited consolidated financial
statements for the Company. This discussion should be read in conjunction with
the preceding consolidated financial statements and related footnotes, as well
as, the Company's December 31, 2004 Annual Report on Form 10-K. Current
performance does not guarantee and may not be indicative of similar performance
in the future.
In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements. The forward-looking statements contained in
this report are subject to certain risks, assumptions and uncertainties. Because
of the possibility of change in the underlying assumptions, actual results could
differ materially from those projected in the forward-looking statements.
Additional factors that might cause actual results to differ materially from
those expressed in the forward-looking statements include, but are not limited
to:
- operating, legal and regulatory risks,
- economic, political and competitive forces affecting the Company's
services, and
- the risk that management's analyses of these risks could be
incorrect and/or that the strategies developed to address them could
be unsuccessful.
The Company's forward-looking statements are relevant only as of the date
on which the statements are made. By making forward-looking statements, the
Company assumes no duty to update them to reflect new, changing or unanticipated
events or circumstances. Readers should carefully review the risk factors
described in other periodic reports and public documents that the Company files
from time to time with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
Disclosure of the Company's significant accounting policies is included in
Note 1 to the consolidated financial statements of the Company's Annual Report
on Form 10-K for the year ended December 31, 2004. Some of these policies are
particularly sensitive requiring significant judgments, estimates and
assumptions to be made by management. Additional information is contained on
pages 12 and 14 of this report for the provision and allowance for loan losses.
OVERVIEW
Net income for the three months ended March 31, 2005 and 2004 was $850,000
and $751,000. The increase of $99,000, or 13.2%, is attributable to its core
banking business as exemplified by an 8.1% increase in net interest income, a
2.8% increase in other income and an 18.2% decrease in the provision for loan
losses. On a basic and diluted per share basis, net income for the three months
ended March 31, 2005 was $0.13, respectively, as compared with $0.12 for the
three months ended March 31, 2004. Net income as a percentage of average assets
on an annualized basis, also known as return on average assets, increased to
0.95% for the first three months of 2005 from 0.89% for the first three months
of 2004 as a result of increased net income. Net income as a percentage of total
average stockholders' equity on an annualized basis, also known as return on
average equity, was 16.0% and 15.6% for the first three months of 2005 and 2004,
respectively. The increase in this ratio is attributable to an increased level
of net income.
During the first three months of 2005, the Company's assets grew
$8,730,000, or 2.4%, to $368,144,000 as of March 31, 2005 from $359,414,000 as
of December 31, 2004. This increase is primarily attributable to loans, which
increased to $250,341,000 as of March 31, 2005 from $240,669,000
Page 11
as of December 31, 2004, offset by a decline of $1,782,000, or 2%, in the
investment securities portfolio, the proceeds of which were reinvested in
funding loans. Total deposits decreased by $253,000, or 0.1%, during the first
three months of 2005 to $298,012,000 as of March 31, 2005 from $298,265,000 as
of December 31, 2004. This compares to an increase of $3,532,000, or 1.3%, to
$283,430,000 at March 31, 2004 from $279,898,000 as of December 31, 2003. The
growth in total deposits during the first three months of 2005 was less than the
growth in deposits during the same period in 2004 as a result of competitive
interest rates in the market, and, to a certain degree, customers' continued
uncertainty as to how to best invest their funds. To compensate for deposit
growth in order to support increased loan demand, short-term borrowings
increased to $12,202,000 as of March 31, 2005 from $3,000,000 as of December 31,
2004.
RESULTS OF OPERATIONS
Net Interest Income
For the three months ended March 31, 2005, total interest income increased
by $480,000, or 11.8%, to $4,550,000, compared with $4,070,000 for the three
months ended March 31, 2004. This increase is the result of a 6.6% increase in
average interest-earning assets, which grew $20,803,000, to $336,342,000 for the
first three months of 2005, compared with $315,539,000 for the first three
months of 2004. The favorable impact to interest income is due to the growth in
average interest earning assets, primarily due to increased loan volume, which
was funded from the cash flow generated from the investment securities
portfolio, increased short-term borrowings and deposit growth. Further impacting
interest income were increases in the prime rate, which resulted in better than
anticipated yields on interest earning assets, which increased to 5.49% for the
three months ended March 31, 2005 from 5.19% for the same period in 2004.
Total interest expense increased by $105,000, or 8.1%, to $1,397,000 for
the three months ended March 31, 2005, from $1,292,000 for the three months
ended March 31, 2004. This increase is attributable to the growth of average
interest bearing liabilities, which increased $18,256,000, or 6.5%, to
$299,281,000 for the first three months of 2005 from $281,025,000 for the first
three months of 2004. Growth in deposits and short-term borrowings contributed
to the increase in average interest bearing liabilities. While the interest
expense increased, overall cost of funds modestly increased to 1.89% for the
first three months of 2005 as compared with 1.85% for the same period in 2004.
The increase in the cost of funds was minimized by the Bank's ongoing efforts to
manage its interest rates and their resulting impact on expenses.
Net interest income increased by $375,000, or 13.5%, to $3,153,000 for the
three months ended March 31, 2005 from $2,778,000 for the three months ended
March 31, 2004. This increase is not only attributable to the growth in the
volume of interest sensitive assets, but also due to the growth in the net
interest rate spread, which increased to 3.59% for the first three months of
2005 from 3.34% for the first three months in 2004. The net interest margin
increased to 3.80% from 3.54% for the three-month periods ending March 31, 2005
and 2004. While short-term interest rates started to increase during the second
half of 2004 into 2005, the Bank strived to minimize possible deterioration of
its net interest rate spread and margin, considering the growth of its interest
sensitive assets and liabilities.
Provision for Loan Losses
For the three months ended March 31, 2005, the provision for loan losses
was $126,000, an decrease of $28,000, or 18.2%, compared with $154,000 for the
three months ended March 31, 2004. Asset quality continues to be strong in the
first quarter of 2005 and this is exemplified by the fact that less of a
provision was appropriated to the allowance for loan losses.
The allowance for loans losses represented 1.16% of total loans at March
31, 2005, compared with 1.18% as of December 31, 2004 and 1.22% as of March 31,
2004. Management performs ongoing assessments of the loan loss reserve in
relation to loan portfolio growth, credit exposure to individual borrowers,
overall trends in the loan portfolio and other relevant factors, and believes
the reserve is reasonable and adequate for the periods presented.
Page 12
Other Income
Other income for the first three months ended March 31, 2005 increased
$14,000, or 2.8%, to $523,000 from $509,000 for the first three months ended
March 31, 2004. This increase is due to an $18,000 increase in customer service
fees, and a $28,000 increase in other miscellaneous income, which included
increased fee income from processing a higher than normal volume of credit card
transactions. These increases were offset by a decline of $11,000 in fee income
from mortgage banking activities, a decline of $17,000 from gains on sales of
available for sale securities, since no sales occurred during the first quarter
of 2005, and a $4,000 decline in income from the investment in life insurance.
Other Expenses
Other expenses, which include salary, occupancy, equipment and all other
expenses incidental to the operation of the Company, increased to $2,445,000 for
the first quarter of 2005 from $2,154,000 for the first quarter of 2004. The
$291,000, or 13.5%, increase is not only due to the Company's continued growth,
but is more specifically attributable to increased occupancy and equipment costs
associated with the renovation, move and full utilization of a 3-story brick
building purchased in 2004.
Salaries and employee benefit expenses, which make up the largest
component of other expenses, increased $119,000, or 10%, to $1,305,000 for the
first quarter of 2005 from $1,186,000 for the first quarter in 2004. The
increase is primarily attributable to the staff additions and increases in
normal salary and medical benefit costs.
Occupancy expenses increased $36,000, or 20.3%, to $213,000 for the three
months ended March 31, 2005 from $177,000 for the three months ended March 31,
2004. The increase is due to the costs associated with the renovation of a
3-story brick building located at 18 South 2nd Street, Emmaus, Pennsylvania, to
prepare it for full occupancy by executive, operational, administrative and
lending departments of the Bank.
Equipment expense increased $19,000, or 10.9%, to $193,000 for the three
months ended March 31, 2005 from $174,000 for the three months ended March 31,
2004. This increase is the result of additional costs and depreciation
associated with equipment purchased to accommodate the Company's growth and its
need to update certain equipment and systems.
Other operating expenses increased $117,000, or 19%, to $734,000 for the
three months ended March 31, 2005 from $617,000 for the three months ended March
31, 2004. This increase is the result of the Company's growth.
Income Taxes
Income tax expense was $255,000 for the three months ended March 31, 2005,
an increase of $27,000, or 11.8%, compared with $228,000 for the three months
ended March 31, 2004. This increase is due to a higher level of pre-tax income
with a level amount of tax-exempt income.
Net Income
Net income for the three months ended March 31, 2005 was $850,000, an
increase of $99,000, or 13.2%, compared with $751,000 for the three months ended
March 31, 2004. The increase in net income is the result of increases of
$375,000 in net interest income, a decrease of $28,000 in the provision for loan
losses, and an increase of $14,000 in other income, offset by increases of
$291,000 in other expenses and $27,000 in taxes. Factors contributing to the
increased level of net income include increased interest income from loan growth
and the impact of increases in short-term interest rates, as well as the Bank's
efforts to manage its cost of funds. Increased other income, derived from
increased customer service fees and credit card processing, further enhanced net
income. Basic and diluted earnings per share for the three
Page 13
months ended March 31, 2005 were each $0.13 per share compared with $0.12 per
share for the three months ended March 31, 2004.
FINANCIAL CONDITION
Securities
The Company's securities portfolio is comprised of securities, which not
only provide interest income, including tax-exempt income, but also provide a
source of liquidity, diversify the earning assets portfolio, allow for the
management of risk and tax liability, and provide collateral for repurchase
agreements and public fund deposits. Policies are in place to address various
aspects of managing the portfolio, including but not limited to, concentrations,
liquidity, credit quality, interest rate sensitivity and regulatory guidelines.
Adherence to these policies is monitored by the Company's Asset/Liability
Committee on a monthly basis.
Although the Company generally intends to hold its investment securities
to maturity, a significant portion of the securities portfolio is classified as
available for sale, with new purchases generally categorized as available for
sale. Securities in the available for sale category are accounted for at fair
value with unrealized appreciation or depreciation, net of tax, reported as a
separate component of stockholders' equity. Securities in the held to maturity
category are accounted for at amortized cost. The Company invests in securities
for the yield they produce and not to profit from trading. The Company holds no
trading securities in its portfolio.
The securities portfolio at March 31, 2005 was $86,867,000, compared to
$88,649,000 at December 31, 2004, a decrease of $1,782,000, or 2%. The decline
is attributable to prepayments of principal, which have been used to fund loan
demand. Securities available for sale decreased to $85,828,000 at March 31, 2005
from $87,609,000 at December 31, 2004, while securities held to maturity were
$1,039,000 at March 31, 2005 as compared with $1,040,000 at December 31, 2004.
The carrying value of the available for sale portion of the portfolio at
March 31, 2005 includes an unrealized loss of $765,000 (reflected as accumulated
other comprehensive loss of $505,000 in stockholders' equity, net of deferred
income tax asset of $260,000). This compares with an unrealized gain at December
31, 2004 of $416,000 (reflected as accumulated other comprehensive income of
$274,000 in stockholders' equity, net of deferred income tax liability of
$142,000).
Loans
The loan portfolio comprises the major component of the Company's earning
assets and generally is the highest yielding asset category. Gross loans
receivable, net of unearned fees and origination costs, increased $9,672,000, or
4%, to $250,341,000 at March 31, 2005 from $240,669,000 at December 31, 2004.
This increase is attributed to increased commercial loan demand. Gross loans
represented 84% of total deposits at March 31, 2005 as compared with 80.7% at
December 31, 2004, since loan growth has outpaced deposit growth.
Credit Risk and Loan Quality
The Company continues to be prudent in its efforts to minimize credit
risk. The Bank's written lending policy requires underwriting, loan
documentation and credit analysis standards to be met prior to the approval and
funding of any loan. In accordance with that policy, the internal loan review
process monitors the loan portfolio on an ongoing basis. The Credit
Administration area then prepares an analysis of the allowance for loan losses
on a quarterly basis, which is then submitted to the Board of Directors for its
assessment as to the adequacy of the allowance. The allowance for loan losses is
an accumulation of expenses that has been charged against past and present
earnings in anticipation of potential losses in the loan portfolio.
The allowance for loan losses at March 31, 2005 and December 31, 2004 was
$2,912,000 and $2,838,000, respectively, compared to $2,541,000 at March 31,
2004. The increase in the allowance is
Page 14
attributable to the growth of the loan portfolio and the shift in the loan mix,
where there has been continued growth in commercial loans, which generally carry
a higher level of credit risk. At March 31, 2005, the allowance for loan losses
represented 1.16% of the gross loan portfolio, compared with 1.18% at December
31, 2004. This compares to 1.22% at March 31, 2004. At March 31, 2005,
management believes the allowance for loan loss reserve to be reasonable and
adequate to meet potential losses.
Table 1 - "Analysis of Allowance for Loan Loss" - details the activity,
which occurred in the allowance over the first three months of 2005 and 2004.
Table 1 - Analysis of Allowance for Loan Loss (1)
-----------------------------------------------------------------------
(in thousands)
2005 2004
------- -------
Balance, beginning of year $ 2,838 $ 2,403
Provision charged to operating expense 126 154
Charge-offs:
Commercial (36) 0
Real estate 0 0
Consumer (18) (22)
------- -------
Total charge-offs (54) (22)
Recoveries:
Commercial 3
Consumer 2 3
------- -------
Total recoveries 2 6
Net (charge-offs) (52) (16)
------- -------
$ 2,912 $ 2,541
======= =======
Net (charge-offs) recoveries to average
net loans (0.02)% (0.01)%
(1) Bank's loan portfolio is entirely domestic
-----------------------------------------------------------------------
The Bank's lending policy is executed through the assignment of tiered
loan limit authorities to individual officers of the Bank, the Officer's Loan
Committee, the Board Loan Committee and the Board of Directors. Although the
Bank maintains sound credit policies, certain loans may deteriorate for a
variety of reasons. The Bank's policy is to place all loans on a non-accrual
status upon becoming 90 days delinquent in their payments, unless there is a
documented and reasonable expectation of the collection of the delinquent
amount. Loans are reviewed monthly as to their status, and on a quarterly basis,
a Watch List of potentially troubled loans is prepared and presented to the
Board of Directors. Management is not aware of any material potential loan
problems that have not been disclosed in this report.
Table 2 - "Asset Quality Ratios" - summarizes pertinent asset quality
ratios at March 31, 2005 and December 31, 2004.
Table 2 - Asset Quality Ratios
--------------------------------------------------------------------------
3/31/05 12/31/04
Non-accrual loans/Total loans 0.37% 0.41%
Non-performing assets (1) /Total loans 0.42% 0.45%
Net charge-offs/Average loans 0.02% 0.03%
Allowance/Total loans 1.16% 1.18%
Allowance/Non-accrual loans 312.45% 287.83%
Allowance/Non-performing loans (1) 290.04% 267.48%
(1) - Includes non-accrual loans.
--------------------------------------------------------------------------
At March 31, 2005, the Company had other real estate owned as acquired
through foreclosure, in the amount of $35,000, an increase of $15,000 from
$20,000 at December 31, 2004. The Company expects to dispose of the remaining
properties with minimal or no loss.
Page 15
Loan concentrations are considered to exist when the total amount of loans
to any one or a multiple number of borrowers engaged in similar activities or
having similar characteristics exceeds 10% of loans outstanding in any one
category. The majority of the Bank's lending is made within its primary market
area, which includes Emmaus and the East Penn community in Lehigh County,
Pennsylvania.
Bank Owned Life Insurance
The Company has Bank Owned Life Insurance ("BOLI") for a chosen group of
employees, namely officers, where the Bank is the owner and beneficiary of the
policies. The Bank's deposits and proceeds from the sale of investment
securities funded the BOLI. Earnings from the BOLI are recognized as other
income. The BOLI is profitable from the appreciation of the cash surrender
values of the pool of insurance, and its tax advantage to the Company. This
profitability is used to offset a portion of current and future employee benefit
costs and a Nonqualified Supplemental Executive Retirement Plan for the
Company's Chief Executive Officer.
The Company had $7,297,000 and $7,224,000 in BOLI as of March 31, 2005 and
December 31, 2004. Although the BOLI is an asset that may be liquidated, it is
the Company's intention to hold this pool of insurance because it provides
tax-exempt income that lowers the Company's tax liability, while enhancing its
overall capital position.
Investment in Bank
On September 23, 2003, the Company purchased 141,300 shares for $1,413,000
of common stock outstanding of a newly formed de novo bank, named Berkshire
Bank, located in Wyomissing, Berks County, Pennsylvania. On October 22, 2003,
the Company purchased an additional 12,123 shares for $121,000, which resulted
in increasing the Company's investment to $1,534,000, or 18.3%, of Berkshire
Bank's outstanding common stock as of December 31, 2003. In consideration of the
Company's and its director's and officer's combined ownership of Berkshire Bank
common stock, the aggregate percentage ownership was 19.9% as of the 2003 year
end, which is in line with the terms of a Stock Subscription and Purchase
Agreement between the Company and Berkshire Bank.
During 2004 Berkshire Bank announced a 5-for-4 stock split, effected in
the form of a 25% stock dividend, payable July 22, 2004, which resulted in the
Company receiving an additional 38,355 shares. On September 1, 2004, Berkshire
Bank commenced a three-phase common stock offering effective through March 31,
2005. The offering price of the stock during the first two phases was $10.50 per
share through October 31, 2004 and $11.00 per share thereafter. In order to
maintain its level of investment in Berkshire Bank, the Company purchased an
additional 30,618 shares at $10.50 per share and 26,501 shares at $11.00 per
share, respectively. As of March 31, 2005, the Company's total investment in
Berkshire Bank was $2,147,000, represented by 248,897 shares, resulting in a
19.9% aggregate ownership. The investment is carried at cost and is included in
the other assets category on the balance sheet.
Deposits
Deposits are the major source of the Company's funds for lending and
investment purposes. Total deposits at March 31, 2005 were $298,012,000, a
decrease of $253,000, or 0.1%, from total deposits of $298,265,000 at December
31, 2004. The decrease in deposits is due a decline of $4,506,000 in interest
bearing deposits offset by increases of $24,000 in non-interest bearing demand
deposit accounts, $1,551,000 in savings accounts and $2,678,000 in certificates
of deposit. While deposit growth was limited, there was a shifting between
deposit categories where funds were placed into higher priced deposits. By
managing the timing of deposit rate increases, the Company was able to minimize
the impact of increased costs as is exemplified by the fact that the cost of
funds from deposits increased to 1.60% as of March 31, 2005 from 1.57% as of
December 31, 2004.
Securities Sold under Agreements to Repurchase
Securities sold under agreements to repurchase increased $347,000, or
14.8%, to $2,696,000 at
Page 16
March 31, 2005 from $2,349,000 at December 31, 2004. Securities sold under
agreements to repurchase generally mature in one business day and roll over
under a continuing contract.
Short-Term Borrowings
There was an outstanding balance of $12,202,000 in federal funds purchased
and other overnight borrowings at March 31, 2005 as compared with $3,000,000 at
December 31, 2004. The Bank has a $5,000,000 federal funds line of credit with
its main correspondent bank, Atlantic Central Bankers Bank, Camp Hill,
Pennsylvania ("ACBB") as well as a short-term line of credit of $25 million with
the Federal Home Loan Bank of Pittsburgh ("FHLB"), which is part of the maximum
borrowing capacity of $174,590,000. Because loan growth outpaced deposit growth
during the first three months of 2005, overnight borrowings were used as an
alternate source of funding loan growth.
Long-Term Debt and Borrowing Capacity
The Bank had $25 million outstanding in fixed rate term loans at March 31,
2005 and December 31, 2004 with the FHLB. The $25 million borrowing is comprised
of the following fixed rate borrowings (in thousands):
Maturity Amount Rate
----------------- ------- -----
November 28, 2005 $5,000 2.20%
November 28, 2006 6,000 2.80%
November 28, 2007 7,000 3.43%
November 28, 2008 7,000 3.78%
------- -----
Total $25,000 3.13%
======= =====
The Bank has a total maximum borrowing capacity for both short and
long-term borrowings of approximately $174,590,000 with the FHLB, out of which
$7,902,000 represents short-term, overnight borrowings and $25 million
represents fixed rate term loans, which were outstanding at March 31, 2005, and
resulted in an unused borrowing capacity of approximately $142,000,000.
Mandatory Redeemable Capital and Junior Subordinated Debentures
As of March 31, 2005, the Company had $8,248,000 outstanding in junior
subordinated debentures, which were issued on July 31, 2003 to investors as
capital trust pass-through securities by East Penn Statutory Trust I ("Trust"),
a wholly owned subsidiary of the Company. The securities have a fixed rate of
6.80% through September 17, 2008. The capital securities are redeemable by the
Company on or after September 17, 2008, at par, or earlier, if the deduction of
related interest for federal income taxes is prohibited, classification as Tier
I Capital is no longer allowed, or certain other contingencies arise. The
capital securities must be redeemed upon final maturity of the subordinated
debentures on September 17, 2033. Proceeds totaling $4.3 million were
contributed to the capital at the Bank. The Company chose to utilize the
multi-issuer trust preferred alternative, which proved to be a less expensive
and more flexible resource of regulatory capital.
Asset/Liability Management
The management of interest rate risk involves measuring and analyzing the
maturity and repricing of interest-earning assets and interest bearing
liabilities at specific points in time. The imbalance between interest-earning
assets and interest bearing liabilities is commonly referred to as the interest
rate gap. The interest rate gap is one measure of the risk inherent in the
existing balance sheet as it relates to potential changes in net interest
income. Maintaining an appropriate balance between interest-earning assets and
interest bearing liabilities is a means of monitoring and possibly avoiding
material fluctuations in the net interest margin during periods of changing
interest rates.
The Company's overall sensitivity to interest rate risk is low due to its
non-complex balance sheet. The Company manages its balance sheet with the intent
of stabilizing net interest income and net economic
Page 17
value under a broad range of interest rate environments. The Company has the
ability to effect various strategies to manage interest rate risk, which
include, but are not limited to, selling newly originated residential mortgage
loans, controlling the volume mix of fixed/variable rate commercial loans and
securities, increasing/ decreasing deposits via interest rate changes, borrowing
from the FHLB, and buying/selling securities. Adjustments to the mix of assets
and liabilities are made periodically in an effort to give the Company
dependable and steady growth in net interest income, while at the same time,
managing the related risks.
Liquidity
Liquidity represents the Company's ability to efficiently manage cash
flows at reasonable rates to support possible commitments to borrowers or the
demands of depositors. Liquidity is essential to compensate for fluctuations in
the balance sheet and provide funds for growth and normal operating
expenditures. Liquidity needs may be met by converting assets into cash or
obtaining sources of additional funding.
Liquidity from asset categories is provided through cash, amounts due from
banks, interest-bearing deposits with banks and federal funds sold, which were
$8,184,000 at March 31, 2005, compared to $8,782,000 at December 31, 2004.
Additional asset liquidity sources include principal and interest payments from
securities in the Company's investment portfolio and cash flow from its
amortizing loan portfolio. Longer-term liquidity needs may be met by selling
securities available for sale, selling loans or raising additional capital. At
March 31, 2005, management indicated that there was $72,662,000 in liquid
securities as compared with $72,232,000 at December 31, 2004. Liquid securities
increased by $430,000 since year-end due to the need to pledge additional
securities as collateral for the public fund deposit account balances, which
similarly increased from year end.
Liability liquidity sources include attracting deposits at competitive
rates. Deposits at March 31, 2005 were $298,012,000, compared to $298,265,000 at
December 31, 2004. In addition, the Bank has federal fund lines of credit with
its main correspondent bank, ACBB, and with the FHLB, which are reliable sources
for short and long-term funds.
The Company's financial statements do not reflect various off-balance
sheet commitments that are made in the normal course of business, which may
involve some liquidity risk. Off-balance sheet arrangements are discussed in
detail below.
Management is of the opinion that its liquidity position, at March 31,
2005, is adequate to respond to fluctuations "on" and "off" the balance sheet.
In addition, management knows of no trends, demands, commitments, events or
uncertainties that may result in, or that are reasonably likely to result in the
Company's inability to meet anticipated or unexpected liquidity needs.
Off-Balance Sheet Arrangements
The Company's financial statements do not reflect various off-balance
sheet arrangements that are made in the normal course of business. These
commitments consist mainly of loans approved but not yet funded, unused lines of
credit and letters of credit made in accordance with the same standards as
on-balance sheet instruments. Unused commitments at March 31, 2005 were
$88,130,000, which consisted of $63,655,000 in unfunded commitments to existing
loans, $10,635,000 to grant new loans, $12,959,000 in unused lines for overdraft
privilege and $881,000 in letters of credit. Because these instruments have
fixed maturity dates, and because many of them will expire without being drawn
upon, they do not generally present a significant liquidity risk to the Company.
Management believes that any amounts actually drawn upon can be funded in the
normal course of operations. The Company has no investment in or financial
relationship with any unconsolidated entities that are reasonably likely to have
a material effect on liquidity or the availability of capital resources.
Capital
The following Table 3 presents the risk-based and leverage capital amounts
and ratios at March 31, 2005 for the Company and the Bank.
Page 18
To be Well Capitalized
under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- --------- ------- ---------- -------
(Dollars in Thousands)
As of March 31, 2005:
Total capital (to risk-weighted assets):
Company $32,590 12.1 % =>$21,556 =>8.0 % N/A N/A %
East Penn Bank 30,098 11.3 =>18,668 =>8.0 =>$26,669 =>10.0
Tier 1 capital (to risk-weighted assets):
Company 28,907 10.7 =>10,779 =>4.0 N/A N/A
East Penn Bank 27,186 10.2 =>10,668 =>4.0 =>16,001 =>6.0
Tier 1 capital (to average assets):
Company 28,907 8.0 =>14,486 =>4.0 N/A N/A
East Penn Bank 27,186 7.6 =>14,388 =>4.0 =>17,986 =>5.0
These capital ratios continue to remain at levels, which are considered to
be "well-capitalized" as defined by regulatory guidelines.
Banking laws and regulations limit the amount of cash dividends that may
be paid without prior approval from the Company's regulatory agencies. In
abidance with such requirements, on January 21, 2005, the Board of Directors
authorized and declared a semi-annual cash dividend for 2005 in the amount of
$0.09 per share, payable on February 28, 2005 to all shareholders of record as
of February 4, 2005. The payment of this semi-annual cash dividend decreased
retained earnings by $567,000.
Restrictions under the Pennsylvania Banking Code of 1965 are placed on the
size of a Bank's investment in fixed assets as a percentage of equity.
Presently, the Bank exceeds the allowable limit of 25% of equity, as defined by
the Pennsylvania Department of Banking. The Bank's fixed assets as a percentage
of equity decreased to 36.3% at March 31, 2005, as compared with 38.3% at March
31, 2004. This decrease is due to the increase in stockholders' equity, which
offset any increases in fixed assets. Generally, the Bank contacts the
Department of Banking prior to the acquisition of material dollar fixed asset
additions to obtain the Department's approval. On an ongoing basis, compliance
with this section of the Banking Code is expected to occur through normal
depreciation adjustments and retention of earnings.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of conducting business activities, the Company is
exposed to market risk, principally interest risk. Interest risk arises from
market driven fluctuations in interest rates that affect cash flows, income,
expense and values of financial instruments. The asset/liability committee,
using policies and procedures approved by the Board of Directors, is responsible
for managing the rate sensitivity position.
No material changes in the market risk strategy occurred during the
current period. No material changes have been noted in the Company's equity
value at risk. A detailed discussion of market risk is provided in the Form 10-K
for the period ended December 31, 2004.
ITEM 4.
Controls and Procedures
Page 19
(a) Evaluation of disclosure controls and procedures
As of March 31, 2005, the Company carried out an evaluation, under
the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective
in timely alerting them to material information relating to the
Company (including its consolidated subsidiary) required to be
included in the Company's periodic filings.
(b) Changes in internal control over financial reporting
The Company made no significant changes in its internal control over
financial reporting or in other factors that could significantly
affect these controls during the quarter ended March 31, 2005,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------
In the opinion of the Company, after review with legal
counsel, there are no proceedings pending to which the Company is a
party or to which its property is subject, which, if determined
adversely to the Company, would be material in relation to the
Company's financial condition. There are no proceedings pending
other than ordinary, routine litigation incident to the business of
the Company. In addition, no material proceedings are pending or are
known to be threatened or contemplated against the Company by
governmental authorities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- -------
Nothing to report.
Item 3. Defaults upon Senior Securities
- -------
Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
- -------
Nothing to report.
Item 5. Other Information
- -------
Nothing to report.
Item 6. Exhibits
- ------
3(i) Registrant's Articles of Incorporation, as amended, are
incorporated herein by reference to Annex B to the
Registrant's Registration Statement on Form S-4
(Registration No. 333-103673) as filed with the
Securities and Exchange Commission on March 7, 2003.
3(ii) Registrant's By-Laws are incorporated herein by
reference to Annex C to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-103673) as
filed with the Securities and Exchange Commission on
March 7, 2003.
Page 20
10.1 East Penn Financial Corporation's 1999 Stock Incentive
Plan for the benefit of officers and key employees is
incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-4
(Registration No. 333-103673) as filed with the
Securities and Exchange Commission on March 7, 2003.
10.2 East Penn Financial Corporation's 1999 Independent
Directors Stock Option Plan for the benefit of
non-employee directors is incorporated by reference to
Exhibit 10.1 to the Registrant's Registration Statement
on Form S-4 (Registration No. 333-103673) as filed with
the Securities and Exchange Commission on March 7, 2003.
10.3 Executive Employment Agreement between East Penn Bank
and Brent L. Peters, dated April 12, 2001, is
incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-4
(Registration No. 333-103673) as filed with the
Securities and Exchange Commission on March 7, 2003.
10.4 The Supplemental Executive Retirement Plan ("SERP")
between East Penn Bank and Brent L. Peters, dated May
31, 2001, is incorporated herein by reference to Exhibit
10.4 to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-103673) as filed with the
Securities and Exchange Commission on March 7, 2003.
10.5 East Penn Financial Corporation's Dividend Reinvestment
and Stock Purchase Plan is incorporated by reference to
the Registrant's Registration Statement on Form S-3
(Registration No. 333-116754) as filed with the
Securities and Exchange Commission on June 23, 2004.
11 Statement re: Computation of per share earnings is
incorporated by reference herein to Note 4 on page 8 of
this Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-15(e)/15d-15(e).
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-15(e)/15d-15(e).
32.1 Certification of Chief Executive Officer pursuant to
Section 1350 of the Sarbanes Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
Section 1350 of the Sarbanes Oxley Act of 2002.
Page 21
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
EAST PENN FINANCIAL CORPORATION
(Registrant)
By: /s/ Brent L. Peters
-------------------------------------------
Brent L. Peters
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2005
By: /s/ Theresa M. Wasko
-------------------------------------------
Theresa M. Wasko
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 10, 2005
Page 22
Exhibit Index
3(i) Registrant's Articles of Incorporation, as amended, are incorporated by
reference to Annex B to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-103673) as filed with the Securities and
Exchange Commission on March 7, 2003.
3(ii) Registrant's By-Laws are incorporated by reference to Annex C to the
Registrant's Registration Statement on Form S-4 (Registration No.
333-103673) as filed with the Securities and Exchange Commission on March
7, 2003.
10.1 East Penn Financial Corporation's 1999 Stock Incentive Plan for the
benefit of officers and key employees is incorporated by reference to
Exhibit 10.3 to the Registrant's Registration Statement on Form S-4
(Registration No. 333-103673) as filed with the Securities and Exchange
Commission on March 7, 2003.
10.2 East Penn Financial Corporation's 1999 Independent Directors Stock Option
Plan for the benefit of non-employee directors is incorporated by
reference to Exhibit 10.2 to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-103673) as filed with the Securities and
Exchange Commission on March 7, 2003.
10.3 Executive Employment Agreement between East Penn Bank and Brent L. Peters,
dated April 12, 2001, is incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-4 (Registration No.
333-103673) as filed with the Securities and Exchange Commission on March
7, 2003.
10.4 Supplemental Executive Retirement Plan ("SERP") between East Penn Bank and
Brent L. Peters, dated May 31, 2001, is incorporated by reference to
Exhibit 10.4 to the Registrant's Registration Statement on Form S-4
(Registration No. 333-103673) as filed with the Securities and Exchange
Commission on March 7, 2003.
10.5 East Penn Financial Corporation's Dividend Reinvestment and Stock Purchase
Plan is incorporated by reference to the Registrant's Registration
Statement on Form S-3 (Registration No. 333-116754) as filed with the
Securities and Exchange Commission on June 23, 2004.
11 Statement re: Computation of per share earnings is incorporated by
reference herein to Note 4 on page 8 of this Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-15(e)/15d-15(e).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-15(e)/15d-15(e).
32.1 Certification of Chief Executive Officer pursuant to Section 1350 of the
Sarbanes Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 1350 of the
Sarbanes Oxley Act of 2002.
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