UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1504091
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201
(Address of principal executive offices) (Zip Code)
(570) 459-3700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 __
--------- -------
The Registrant had 4,152,115 shares of Common Stock outstanding as of August 14, 2002.
Item
No.
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Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Statements of Financial Condition at
June 30, 2002 and September 30, 2001 1
Consolidated Statements of Operations for the Three Months Ended
June 30, 2002 and 2001 2
Consolidated Statement of Comprehensive Income for the Three
Months Ended June 30, 2002 and 2001 3
Consolidated Statements of Operations for the Nine Months Ended
June 30, 2002 and 2001 4
Consolidated Statement of Comprehensive Income for the Nine
Months Ended June 30, 2002 and 2001 5
Consolidated Statements of Changes in Equity for the Year Ended
September 30, 2001and the Nine Months Ended
June 30, 2002 6
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 3 Quantitative and Qualitative Disclosures about Market Risk 32
Part II - OTHER INFORMATION
1 Legal Proceedings 33
2 Changes in Securities and Use of Proceeds 33
3 Defaults Upon Senior Securities 33
4 Submission of Matters to a Vote of Security Holders 33
5 Other Information 33
6 Exhibits and Reports on Form 8 - K 33-34
Signatures
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Financial Condition (unaudited)
June 30, 2002 and September 30, 2001
(in thousands)
June 30, September 30,
2002 2001
---- ----
Assets
Cash and cash equivalents $7,453 $9,060
Securities available-for-sale 334,976 243,648
Securities held-to-maturity (estimated fair value of $3,622 at June
2002 and $17,819 at September 2001) 3,652 17,842
Loans (less allowance for loan losses of $4,884 for June 2002 and
$4,497 for September 2001) 475,281 498,151
Accrued interest receivable 7,576 6,892
Assets acquired through foreclosure 506 390
Property and equipment, net 12,763 12,165
Goodwill 3,655 2,957
Intangible Assets 9,295 9,355
Bank owned life insurance 10,149 -
Other assets 9,239 8,370
-------- --------
Total assets $874,545 $808,830
======== ========
Liabilities and Equity
Deposits $572,047 $ 515,735
Federal Home Loan Bank advances 208,426 204,441
Other borrowings 7,589 5,990
Trust preferred securities 7,000 0
Advances from borrowers for taxes and insurance 1,373 646
Accrued interest payable 2,609 2,130
Other liabilities 3,838 4,051
-------- --------
Total liabilities $802,882 $732,993
-------- --------
Preferred stock ($.01 par value; 2,000,000 authorized shares; 0
shares issued) - -
Common stock ($.01 par value; 16,000,000 authorized shares;
6,427,350 shares issued) 64 64
Additional paid-in capital 61,981 62,142
Common stock acquired by stock benefit plans (4,419) (5,213)
Retained earnings - substantially restricted 38,734 36,136
Accumulated other comprehensive income 1,655 894
Treasury stock, at cost (2,003,281 shares for June 2002 and
1,533,945 shares for September 2001) (26,352) (18,186)
-------- --------
Total equity $71,663 $75,837
-------- --------
Total liabilities and equity $874,545 $808,830
======== ========
See accompanying notes to consolidated financial statements.
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Three Months Ended June 30, 2002 and 2001 (unaudited)
(in thousands, except for share data)
For the Three months ended
June 30,
Interest Income: 2002 2001
-------- --------
Loans $9,848 $10,144
Mortgage-related securities 2,232 1,516
Investment securities:
Taxable 1,346 1,780
Non-taxable 236 456
------- -------
Total interest income 13,662 13,896
Interest Expense:
Deposits 4,148 4,956
Federal Home Loan Bank advances and other 3,086 2,924
------- -------
Total interest expense 7,234 7,880
Net interest income 6,428 6,016
Provision for loan losses 726 623
------- -------
Net interest income after provision for loan losses 5,702 5,393
Non-interest Income:
Service charges and other fees 499 449
Insurance premium income 822 739
Trust fee income 167 136
Other income (expense) 244 (5)
Gain (loss) on sale of:
Real estate owned (10) (1)
Loans 956 29
Available-for-sale securities 4 350
------- -------
Total non-interest income 2,682 1,697
Non-interest Expense:
Salaries and net employee benefits 3,134 2,714
Occupancy costs 752 683
Data processing 182 186
Professional fees 434 283
Federal Home Loan Bank service charges 260 227
Amortization 296 326
Other 945 764
------- -------
Total non-interest expense 6,003 5,183
Income before income taxes 2,381 1,907
Income taxes 830 651
------- -------
Net income $1,551 $1,256
====== ======
Earnings per share - basic $0.39 $0.27
===== =====
Earnings per share - diluted $0.36 $0.26
===== =====
See accompanying notes to consolidated financial statements.
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Comprehensive Income
For the Three Months Ended June 30, 2002 and 2001 (unaudited)
(in thousands)
June 30,
2002 2001
---- ----
Net Income $1,551 $1,256
====== ======
Other comprehensive income , net of tax
Unrealized gains on securities:
Unrealized holding gains arising during the period $3,090 $349
Less: Reclassification adjustment for gains included in net income
3 231
------ ------
Other comprehensive income $3,087 $ 118
------ ------
Comprehensive income $4,638 $1,374
====== ======
See accompanying notes to consolidated financial statements.
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Nine Months Ended June 30, 2002 and 2001 (unaudited)
(in thousands, except per share data)
For the Nine Months Ended
June 30,
2002 2001
---- ----
Interest Income:
Loans $29,798 $29,460
Mortgage-related securities 6,261 4,104
Investment securities:
Taxable 4,404 5,464
Non-Taxable 711 1,374
------ ------
Total interest income 41,174 40,402
Interest Expense:
Deposits 12,802 15,319
Federal Home Loan Bank advances and other 8,931 8,344
------ ------
Total interest expense 21,733 23,663
Net interest income 19,441 16,739
Provision for loan losses 1,969 1,044
------ ------
Net interest income after provision for loan losses 17,472 15,695
Non-interest Income:
Service charges and other fees 1,502 1,216
Insurance premium income 2,264 1,304
Trust fee income 515 405
Other income (expense) 430 (101)
Gain (loss) on the sale of:
Real estate owned (30) 3
Loans 1,195 526
Available-for-sale securities (7) 300
------ ------
Total non-interest income 5,869 3,653
Non-interest Expense:
Salaries and net employee benefits 9,203 7,401
Occupancy costs 2,169 1,955
Data processing 514 530
Professional fees 1,129 754
Federal Home Loan Bank and other service charges 742 698
Amortization 809 861
Other 2,534 2,110
------ ------
Total non-interest expense 17,100 14,309
Income before income taxes 6,241 5,039
Income taxes 2,182 1,468
------ ------
Net income $4,059 $3,571
====== ======
Earnings per share - basic $0.98 $0.75
===== =====
Earnings per share - diluted $0.93 $0.73
===== =====
See accompanying notes to consolidated financial statements.
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Comprehensive Income
For the Nine Months Ended June 30, 2002 and 2001 (unaudited)
(in thousands)
For the Nine Months Ended
June 30,
2002 2001
------ ------
Net Income $4,059 $3,571
====== ======
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during the period $756 $3,977
Less: Reclassification adjustment for gains (losses)
included in net income (5) 198
------ ------
Other comprehensive income $ 761 $3,779
------ ------
Comprehensive income $4,820 $7,350
====== ======
See accompanying notes to consolidated financial statements.
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Changes in Equity (unaudited)
For the Year Ended September 30, 2001
and the Nine Months Ended June 30, 2002
(in thousands)
Common Stock Accumulated
Additional Acquired by Other
Common Paid Stock benefit Retained Comprehensive Treasury Total
Stock In Capital Plans Earnings Income (loss) Stock Equity
-------- ---------- ------------- ------- ------------- -------- -------
Balance, September 30, 2000 $ 64 $ 62,164 $ (6,221) $ 33,207 $ (3,711) $(12,528) $ 72,975
ESOP shares committed to be released 105 443 548
Stock awards (49) 565 516
Stock options exercised (32,808 shares) (204) 391 187
Net changes in gains on
securities available for sale, net of tax 4,605 4,605
Treasury stock at cost (647,604 shares) (8,423) (8,423)
Acquisition of Higgins Insurance
Agency (215,052 shares) 126 2,374 2,500
Cash dividend paid (1,878) (1,878)
Net income 4,807 4,807
------- -------- ------- ------- ------- -------- --------
Balance, September 30, 2001 $ 64 $ 62,142 $ (5,213) $ 36,136 $ 894 $(18,186) $ 75,837
ESOP shares committed to be released 233 386 619
Stock awards (35) 408 373
Stock options exercised (38,713 shares) (359) 836 477
Treasury stock reissuance (9,060 shares) 85 85
Net changes in gains on
securities available for sale, net of tax 761 761
Treasury stock at cost (505,557 shares) (9,087) (9,087)
Cash dividend paid (1,461) (1,461)
Net income 4,059 4,059
------- -------- ------- ------- ------- -------- --------
Balance, June 30, 2002 $ 64 $ 61,981 $ (4,419) $ 38,734 $ 1,655 $(26,352) $ 71,663
See accompanying notes to consolidated financial statements.
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 2002 and 2001 (unaudited)
(in thousands)
For the Nine Months Ended
June 30,
2002 2001
---- ----
Operating Activities:
Net Income $4,059 $3,571
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for foreclosed assets 90 61
Provision for loan losses 1,969 1,044
Depreciation 1,079 1,052
Amortization 809 861
Deferred income tax provision 3,325 2,411
ESOP expense 619 414
Stock award expense 373 246
Amortization and (accretion) on:
Held-to-maturity securities (9) (3)
Available-for-sale securities 519 (392)
Amortization of deferred loan fees (439) (302)
(Gain) loss on sale of:
Assets acquired through foreclosure 30 (3)
Loans (1,195) (526)
Available-for-sale securities 7 (300)
Changes in assets and liabilities:
Increase in accrued interest receivable (684) (1,396)
Increase in other assets (5,977) (15,016)
Increase (decrease) in accrued interest payable 479 (908)
Decrease in accrued income taxes payable (1,502) (29)
Increase in other liabilities 1,289 1,796
--------- ---------
Net cash provided by (used in) operating activities $4,841 $(7,419)
Investing Activities:
Net increase in loans $(40,549) $(84,578)
Proceeds from sale of:
Available-for-sale securities 16,837 60,005
Held to maturity securities - 8,669
Assets acquired through foreclosure 775 555
Loans 62,073 5,339
Proceeds from repayments of held-to-maturity securities 14,199 -
Proceeds from repayments of available-for-sale securities 53,484 19,053
Purchase of:
Held-to-maturity securities - (6,454)
Available-for-sale securities (160,628) (121,037)
Office properties and equipment (1,677) (3,174)
Federal Home Loan Bank stock (450) (11,525)
Purchase of bank owned life insurance (10,149) -
--------- ---------
Net cash used in investing activities $(66,085) $(133,147)
See accompanying notes to consolidated financial statements.
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 2002 and 2001 (unaudited)
(in thousands)
Financing Activities
Net increase in deposit accounts $56,312 $73,694
Net (decrease) increase in Federal Home Loan Bank short-term advances (6,000) 2,000
Borrowings of Federal Home Loan Bank long-term advances 10,000 108,000
Repayments of Federal Home Loan Bank long-term advances (15) (41,014)
Net increase in advances from borrowers for taxes and insurance 727 696
Proceeds from issuance trust preferred securities 7,000 -
Net increase in other borrowings 1,599 3,332
Purchase of treasury stock (9,087) (7,589)
Stock issued for the purchase of
Higgins Insurance Associates, Inc. - 2,500
Treasury stock reissuance 85 -
Stock options exercised 477 187
Cash dividend on common stock (1,461) (1,383)
------- -------
Net cash provided by financing activities $59,637 140,423
Decrease in cash and cash equivalents (1,607) (143)
Cash and cash equivalents, beginning of period 9,060 6,295
------- -------
Cash and cash equivalents, end of period $7,453 $6,152
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $21,254 $24,572
======= =======
Income taxes $482 $882
======= =======
Supplemental disclosure-non-cash information:
Transfer from loans to real estate owned $1,847 $1,106
======= =======
Net change in unrealized gains on securities
available-for-sale, net of tax $761 $3,779
======= =======
See accompanying notes to consolidated financial statements.
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
Summary of Significant Accounting Policies
Basis of Financial Statements Presentation
The accompanying consolidated financial statements were prepared in accordance with
the instructions to Form 10-Q, and therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles (“GAAP”). However, all normal recurring adjustments which,
in the opinion of management, are necessary for a fair presentation of the
financial statements, have been included. These financial statements should be
read in conjunction with the audited financial statements and the notes thereto
included in the Company’s Annual Report for the period ended September 30,
2001. The results for the three and nine months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ended
September 30, 2002.
Principles of Consolidation and Presentation
The accompanying financial statements of the Company include the accounts of First Federal Bank (the "Bank"), Northeast
Pennsylvania Trust Co. ("Trust Co."), Abstractors, Inc., Higgins Insurance Agency ("Higgins"), NEP Capital Trust I and
FIDACO, Inc. The Bank, the Trust Co., Abstractors, NEP Capital Trust I and Higgins are wholly-owned subsidiaries of the
Company. The Trust Co. offers trust, estate and asset management services and products. Abstractors, Inc. is a title
insurance agency. Higgins provides insurance and investment products to individuals and businesses. NEP Capital Trust I is
a statutory business trust created under the laws of the state of Delaware. FIDACO, Inc. is an inactive subsidiary of the
Bank and its only major asset is an investment in Hazleton Community Development Corporation. All material inter-company
balances and transactions have been eliminated in consolidation. Certain previously disclosed amounts have been
reclassified to conform with presentation contained herein.
The
Company follows accounting principles and reporting practices which are in
accordance with GAAP. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ significantly form those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to
determination of the allowance for loan losses, the evaluation of deferred taxes
and the evaluation of other than temporary impairment for certain investments.
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
Business
The Company is the holding
company for the Bank, the Trust Co., Abstractors, Inc., NEP Capital Trust I and
Higgins. The Company through its subsidiaries serves Northeastern and Central
Pennsylvania through nineteen full service community banking offices, three
financial centers and a loan production office. The Company provides a wide
range of financial services to individual, small business and corporate
customers. The Company and its subsidiaries are subject to competition from
other financial institutions and companies that provide financial services. The
Company, the Bank, the Trust Co. and Higgins are subject to the regulations of
federal and state agencies and undergo periodic examinations by those regulatory
authorities.
Recent Accounting Developments
In April 2002, the FASB
issued SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections.” This
Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements, along with rescinding FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers and amending FASB Statement No.
13, Accounting for Leases. This Statement (1) eliminates an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions, (2) eliminates the extraordinary item
treatment of reporting gains and losses from extinguishments of debt, and (3)
makes certain other technical corrections.
The provisions of this
Statement related to the rescission of Statement 4 shall be applied in fiscal
years beginning after May 15, 2002. Any gain or loss on extinguishments of debt
that was classified as an extraordinary item in prior periods presented that
does not meet the criteria in Opinion 30 for classification as an extraordinary
item shall be reclassified. Early application of the provisions of this
Statement related to the rescission of Statement 4 is encouraged.
The provisions of this
Statement related to Statement 13 shall be effective for transactions occurring
after May 15, 2002. All other provisions of this Statement shall be effective
for financial statements issued on or after May 15, 2002.
Early application of this Statement is encouraged. The Corporation does not expect the adoption of this Statement to have an impact
on its earnings, financial condition or equity.
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
In June 2002, the FASB
issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal
Activities.” This Statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).”
The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Corporation does not expect the
adoption of this Statement to have an impact on its earnings, financial
condition or equity.
Earnings per Share
The following table presents the reconciliation of the numerators and denominators of the basic and
diluted EPS computations.
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(unaudited)
(Dollars in thousands, except per share data)
Basic:
Net Income $1,551 $1,256 $4,059 $3,571
====== ====== ====== ======
Weighted average shares outstanding
3,791,301 4,561,576 3,937,384 4,578,771
Plus: ESOP shares released or
committed to be released 224,960 173,539 212,105 160,684
------- ------- ------- -------
Basic weighted-average shares
outstanding 4,016,261 4,735,115 4,149,489 4,739,455
========= ========= ========= =========
Earnings per share - basic $0.39 $0.27 $0.98 $0.75
===== ===== ===== =====
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(unaudited)
(Dollars in thousands, except per share data)
Diluted: (1)
Net Income $1,551 $1,256 $4,059 $3,571
====== ====== ====== ======
Basic weighted shares outstanding 4,016,261 4,735,115 4,149,489 4,739,455
Dilutive Instruments:
Dilutive effect of outstanding
stock options 26,084 34,327 26,366 14,648
Dilutive effect of stock awards 213,385 131,405 202,786 139,032
------- ------- ------- -------
Dilutive Shares Outstanding 4,255,730 4,900,847 4,378,641 4,893,135
========= ========= ========= =========
Earnings per share - diluted $0.36 $0.26 $0.93 $0.73
===== ===== ===== =====
(1) Diluted earnings per share include the dilutive effect of the Company's weighted average stock options/awards outstanding using
the Treasury Stock method.
The Company had 285,462 and 401,869 anti-dilutive common stock options outstanding as of June 30, 2002 and 2001, respectively. In
accordance with the treasury stock method, these options are not included in the calculations of diluted earnings per share for the
periods presented.
Conversion to Stock Form of Ownership
The Company is a business corporation formed at the direction of the Bank under the laws of Delaware on
December 16, 1997 in connection with the Bank’s conversion from the mutual
to stock form of ownership (the “Conversion”). On March 31, 1998, the
Company issued its common stock, par value $.01 per share (the “Common
Stock”).
The Bank established a
liquidation account at the time of the Conversion in an amount equal to the
equity of the Bank as of September 30, 1997. In the unlikely event of a complete
liquidation of the Bank, (and only in such an event), eligible depositors who
continue to maintain accounts at the Bank shall be entitled to receive a
distribution from the liquidation account. The amount of the liquidation account
decreases to the extent the balances of eligible deposits decrease. The
liquidation account approximated $8.0 million at September 30, 2001.
The Company may not declare
or pay dividends on its stock if such declaration and payment would violate
statutory or regulatory requirements, including reducing the Bank’s
regulatory capital below the amount in the liquidation account.
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
In addition to the
16,000,000 authorized shares of Common Stock, the Company authorized 2,000,000
shares of preferred stock with a par value of $0.01 per share (the
“Preferred Stock”). The Board of Directors is authorized, subject to
any limitations by law, to provide for the issuance of the shares of Preferred
Stock in series, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof. As of June 30, 2002, there were no shares of Preferred
Stock issued.
Goodwill and Intangible Asset-Adoption of Statement 142
Statement of Financial
Accounting Standards (“SFAS”) No. 142‘s (the
“Statement”) transitional goodwill impairment evaluation, requires the
Company to perform an assessment of whether there is an indication that goodwill
is impaired as of the date of adoption. To accomplish this, the Company must
identify its reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of adoption. The
Company then has up to six months from the date of adoption to determine the
fair value of each reporting unit and compare it to the reporting unit’s
carrying amount. To the extent a reporting unit’s carrying amount exceeds
its fair value, an indication exists that the reporting unit’s goodwill may
be impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s
goodwill, determined by allocating the reporting unit’s fair value to all
of its assets (recognized and unrecognized) and liabilities in a manner similar
to a purchase price allocation in accordance with SFAS No.141, to its carrying
amount, both of which would be measured as of the date of adoption. This second
step is required to be completed as soon as possible, but no later than the end
of the year of adoption. Any transitional impairment loss would be recognized as
the cumulative effect of a change in accounting principle in the Company’s
statement of earnings. The Company has completed its evaluation and, based on
the evaluation of the Company’s operations by an independent third party,
there was no indication of transitional impairment losses as of the date of
adoption.
As of the date of adoption,
the Company had unamortized goodwill in the amount of $3.1 million, which will
be subject to the transition provisions of SFAS No.141 and No.142. Amortization
expense related to goodwill was $0 and $58,000 for the three months ended June
30, 2002 and 2001, and $0 and $141,000 for the nine months ended June 30, 2002
and 2001, respectively.
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
The following tables
represent the effect on net income and earnings per share had goodwill not been
amortized:
For the Three Months Ended
June 30,
2002 2001
---- ----
(unaudited)
(Dollars in thousands, except per share data)
Goodwill amortization (net of tax) - $(35)
Net income $1,551 $1,256
====== ======
For the Three Months Ended
June 30,
2002 2001
---- ----
(unaudited)
(Dollars in thousands, except per share data)
Net Income $1,551 $1,256
====== ======
Addback: Goodwill amortization (net of tax) - 35
--
Adjusted net income $1,551 $1,291
====== ======
Basic earnings per share:
Net income $0.39 $0.27
----- -----
Goodwill amortization - -
- -
Adjusted net income $0.39 $0.27
===== =====
Diluted earnings per share:
Net income $0.36 $0.26
Goodwill amortization - -
- -
Adjusted net income $0.36 $0.26
===== =====
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
For the Nine Months Ended
June 30,
2002 2001
---- ----
(unaudited)
(Dollars in thousands, except per share data)
Goodwill amortization (net of tax) - $(87)
Net income $4,059 $3,571
====== ======
For the Nine Months Ended
June 30,
2002 2001
---- ----
(unaudited)
(Dollars in thousands, except per share data)
Net Income $4,059 $3,571
====== ======
Addback: Goodwill amortization (net of tax) - 87
- --
Adjusted net income $4,059 $3,658
====== ======
Basic earnings per share:
Net income $0.98 $0.75
Goodwill amortization - 0.02
- ----
Adjusted net income $0.98 $0.77
===== =====
Diluted earnings per share:
Net income $0.93 $0.73
Goodwill amortization - 0.02
- -----
Adjusted net income $0.93 $0.75
===== =====
During fiscal 2002, the Company purchased three banking offices from Schyulkill Savings and Loan Association of Schyulkill Haven, PA. Also during fiscal 2002, Higgins acquired the DeAndrea Agency which specializes in personal and commercial insurance. These acquisitions resulted in the Company recognizing an amortizable intangible asset with a value of $489,000. The Company also recognized an amortizable intangible asset with a value of $220,000 relating to the issuance of trust preferred securities.
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortizing Goodwill - - $ 3,240 $(283)
Nonamortizing Goodwill $3,938 $(283) - -
Amortizing Intangibles:
CDI $10,878 $ (2,047) $10,623 $(1,343)
Other 454 (65) - -
Nonamortizing intangibles $ 75 - $75 -
Aggregate Amortization Expense:
For the nine months ended June 30, 2002 $809
For the year ended September 30, 2001 $1,151
Estimated Amortization Expense:
For the year ended September 30, 2002 $1,089 - $969 -
For the year ended September 30, 2003 $1,006 $840
For the year ended September 30, 2004 $874 $743
For the year ended September 30, 2005 $739 $630
For the year ended September 30, 2006 $641 $569
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
Securities
Securities are summarized as follows (unaudited):
JUNE 30, 2002
----------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available-for-sale securities:
Municipal securities $16,246 $29 $(125) $16,150
Obligations of U.S. Government agencies 27,780 347 - 28,127
Mortgage-related securities 219,688 2,768 (240) 222,216
Trust Preferred securities 13,681 32 (1,525) 12,188
Corporate Bonds 37,638 1,346 (3) 38,981
--------- ---------- ---------- --------
Total debt securities 315,033 4,522 (1,893) 317,662
--------- ---------- ---------- --------
FHLB Stock $10,621 $- $- $10,621
Freddie Mac Stock 2,241 68 (125) 2,184
Fannie Mae Stock 2,000 55 (105) 1,950
Other equity securities 2,447 167 (55) 2,559
--------- ---------- ---------- --------
Total equity securities 17,309 290 (285) 17,314
--------- ---------- ---------- --------
Total $332,342 $4,812 $(2,178) $334,976
========= ========== ========== =========
Held-to-maturity securities:
Municipal securities $3,553 - $(30) $3,523
Certificates of Deposit 99 - - 99
--------- ---------- ---------- --------
Total $3,652 $ - $(30) $3,622
========= ========== ========== =========
SEPTEMBER 30, 2001
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available-for-sale securities:
Municipal securities $23,030 $42 $(532) $22,540
Obligations of U.S. Government agencies 14,471 134 - 14,605
Mortgage-related securities 136,257 2,294 (84) 138,467
Trust Preferred securities 13,701 - (1,723) 11,978
Corporate Bonds 40,688 1,337 (31) 41,994
--------- ---------- ---------- --------
Total debt securities 228,147 3,807 (2,370) 229,584
FHLB Stock 10,222 - - 10,222
Freddie Mac Stock 1,613 37 (58) 1,592
Fannie Mae Stock 2,000 4 (5) 1,999
Other equity securities 206 50 (5) 251
--------- ---------- ---------- --------
Total equity securities 14,041 91 (68) 14,064
Total $242,188 $3,898 $(2,438) $243,648
========= ========== ========== =========
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
Held-to-maturity securities:
Municipal securities $3,552 $- $(127) $3,425
Obligations of U.S. government agencies 13,992 106 (2) 14,096
Certificates of Deposit 298 - - 298
--------- ---------- ---------- --------
Total $17,842 $106 $(129) $17,819
========= ========== ========== =========
Loans
Loans are summarized as follows (unaudited):
June 30, 2002 September 30, 2001
-------------- ------------------
(in thousands)
Real Estate loans:
Residential $209,060 $223,159
Commercial 81,957 62,732
Construction 5,174 13,690
-------- ---------
Total real estate loans $296,191 $299,581
-------- --------
Consumer Loans:
Home equity loans and lines of credit $78,719 $79,840
Automobile 63,734 78,307
Education - 2,846
Unsecured lines of credit 2,080 1,884
Other 10,503 10,288
-------- ---------
Total consumer loans $155,036 $173,165
-------- ---------
Commercial loans $30,493 $31,588
-------- ---------
Total loans $481,720 $504,334
Less:
Allowances for loan losses (4,884) (4,497)
Deferred loan origination fees (1,555) (1,686)
-------- ---------
Total loans, net $475,281 $498,151
======== ========
The allowance is maintained at a level that represents management’s best estimate of known and inherent estimated losses based upon an evaluation of the loan portfolio. Loan losses, other than those incurred on loans held for sale, are charged directly against the allowance and recoveries on previously charged-off loans are credited to the allowance. Management’s evaluation is based upon, among other things, delinquency trends, the volume of non-performing loans, prior loss experience of the portfolio, current economic conditions, and other relevant factors. Although management believes it has used the best information available to it in making such determinations, and that the allowance for loan losses is adequate, future adjustments to the allowance may be necessary, and net income may be adversely affected if circumstances differ substantially from the assumptions used in determining the level of the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for losses on loans. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
The Company’s
determination of the allowance is based on management’s evaluation of past
loan loss experience, known and inherent risks in the loan portfolio, adverse
situations that have occurred that may affect a borrower’s ability to
repay, the estimated value of underlying collateral, economic conditions and
other relevant factors. Management determines the allowance through a formula
allowance, specific allowances for identified problem loans and an unallocated
allowance.
The formula allowance
element gives consideration to historical losses and the current composition of
the loan portfolios. The formula allowance is determined by applying loss
factors against all non-impaired loans.
Specific
allowances are established against individual residential 1-4 mortgage,
consumer, commercial, and commercial and multi-family real estate loans for
which management has performed analyses and concluded that, based on current
information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
An unallocated allowance is
established for losses which may not have been identified through the formula
and specific portions of the allowance. The unallocated portion is more
subjective and requires a high degree of management judgment and experience.
The activity in the allowance for loan losses is as follows (in thousands) (unaudited):
For the nine For the nine
months ended For the year ended months ended
June 30, 2002 September 30, 2001 June 30, 2001
------------- ------------------ -------------
Balance, beginning of period $4,497 $4,162 $4,162
Additional allowance from
acquisition - 817 817
Charge-offs (1,686) (1,857) (1,782)
Recoveries 104 24 16
Provision for loan losses 1,969 1,351 1,044
----- ----- -----
Balance, end of period $4,884 $4,497 $4,257
====== ====== ======
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
Deposits
Deposits consist of the following major classifications (in thousands) (unaudited):
June 30, 2002 September 30, 2001
------------- ------------------
Percent Percent
Amount of Total Amount of Total
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Savings accounts (passbook, statement, clubs) $96,829 16.93% $89,936 17.44%
Money market accounts 70,464 12.32% 40,185 7.79%
Certificates of deposit less than $100,000 230,101 40.22% 218,811 42.42%
Certificates of deposit greater than $100,000(1) 69,869 12.21% 83,682 16.23%
NOW Accounts 74,862 13.09% 58,829 11.41%
Non-interest bearing deposits 29,922 5.23% 24,292 4.71%
------ ----- ------ -----
Total deposits at end of period $572,047 100.00% $515,735 100.00%
======== ======= ======== =======
(1) Deposit balances in excess of $100,000 are not federally insured.
Corporation Obligated Floating Rate Trust Preferred Securities
On March 25, 2002, the
Company sponsored the creation of NEP Capital Trust I, a Delaware statutory
business trust. The company is the owner of all of the common securities of the
Trust. On April 10, 2002, the Trust issued $7.0 million in the form of floating
rate capital securities through a pooled trust preferred securities offering.
The proceeds from this issuance, along with the company’s $217,000 capital
contribution for the Trust’s common securities, were used to acquire $7.2
million aggregate principal amount of the Company’s floating rate junior
subordinated deferrable interest debentures due April 22, 2032 (the
“Debentures”), which constitute the sole asset of the Trust. The
interest rate on the Debentures and the capital securities is variable and
adjustable semi-annually at 3.70% over the six-month LIBOR, with an initial rate
of 6.02%. A rate cap of 11.00% is effective through April 22, 2007. The Company
has, through the Trust agreement establishing the Trust, the guarantee
agreement, the notes and the related Indenture, taken together, fully
irrevocably and unconditionally guaranteed all of the trust’s obligations
under the capital securities.
A summary of the Trust securities issued and outstanding follows:
Amount
Outstanding at
Distribution
June 30, Prepayment Payment
Name 2002 2001 Rate Option Date Maturity Frequency
- ----- ------------------------------ ----------- -------- ---------
NEP Capital Trust I $7,000,000 - 6.02% April 22, 2007 April 22, 2032 Semi-annually
In addition, the Debentures are subject to redemption at par at the option of the Company, subject to prior regulatory approval, in whole or in part on any interest payment date after
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
April 22, 2007. The
Debentures are also subject to redemption prior to April 22, 2007 after the
occurrence of certain events that would either have a negative tax effect on the
Trust or the Company or would result in the trust being treated as an investment
company that is required to be registered under the Investment Company Act of
1940. Upon repayment of the Debentures at their stated maturity or following
their redemption, the Trust will use the proceeds of such repayment to redeem an
equivalent amount of outstanding trust preferred securities and trust common
securities.
Loan Sale
In June 2002, the Bank sold
loan receivables through a securitization transaction. In the transaction, auto
loan receivables were transferred to an independent trust (the
“Trust”) that issued certificates representing ownership interests in
the Trust, primarily to institutional investors. Although the Bank continues to
service the underlying accounts and maintain the customer relationships, this
transaction is treated as a sale for financial reporting purposes to the extent
of the investors’ interest in the Trust. Accordingly, the receivables
associated with the investors’ interests are not reflected on the balance
sheet. In connection with this transaction, the bank enhanced the credit
protection of the certificateholders by funding a cash reserve account.
A transfer of financial
assets in which the transferor surrenders control over those assets is accounted
for as a sale to the extent that consideration, other than beneficial interests
in the transferred assets, is received in exchange. Liabilities and derivatives
incurred or obtained by transferors as part of a transfer of financial assets
are initially measured at fair value, if practicable. Servicing assets and other
retained interests in the transferred assets are measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer.
Due to prepayment risk, the
retained interest is measured like available-for-sale securities. Accordingly,
the retained interest is reported at fair value, which at June 30, 2002,
approximates the net carrying amount of such assets. Unrealized holding gains or
losses on the retained interest, if any, are excluded from earnings and
reported, net of taxes, as a separate component of shareholders’ equity,
except that, if a decline in fair value is judged to be other than temporary,
such a decline is accounted for as a realized loss and is presented as a
reduction of securitization income in the accompanying statement of operations.
The Bank estimates the fair
value of the retained interest at the date of the transfer and during the period
of the transaction based on a discounted cash flow analysis. The Corporation
receives annual servicing fees based on the loan balances outstanding and rights
to future cash flows arising after investors in the securitization trust have
received their contractual return and after certain administrative costs of
operating the trust. These cash flows are estimated over the life of the loans
using prepayment, default and interest rate assumptions that market participants
would use for financial instruments subject to similar levels of prepayment,
credit and interest rate risk.
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
The key assumptions used in measuring the fair value of the retained interest and cash collateral account for the transaction is
shown in the following table:
Retained interest
Prepayment speed (ABS) 1.5%
Expected default rate 1.5%
Discount rate 18%
Weighted average life of underlying automobile
loans 1.45 years
In connection with this
June 2002 transaction, the Bank recorded a pre-tax gain on the sale of auto
loans of $854,000. The Bank has recognized a retained interest related to the
loan sale, which, in aggregate, totaled $2.9 million at June 30, 2002. The
retained interest and the cash reserve accounts are subject to liens by the
providers of the credit enhancement facilities for the securitizations.
The key economic
assumptions and the sensitivity of the fair value of the retained interest asset
to an immediate adverse change of 10% and 20% to those assumptions are as
follows for the period indicated:
June 30, 2002
-------------
(dollars in thousands)
Fair value of retained interest $ 2,869
Weighted-average repayment rate assumption:
Pre-tax decrease to earnings due to a 10% adverse change $ 142
Pre-tax decrease to earnings due to a 20% adverse change $ 282
Weighted-average expected default rate:
Pre-tax decrease to earnings due to a 10% adverse change $ 114
Pre-tax decrease to earnings due to a 20% adverse change $ 225
Weighted-average discount rate:
Pre-tax decrease to earnings due to a 10% adverse change $ 92
Pre-tax decrease to earnings due to a 20% adverse change $ 175
As of June 30, 2002, the weighted-average life (in years) of the underlying auto loans in the Trust was 1.45 years. The terms of the transaction includes provisions related to the performance of the underlying receivables and other specific conditions that could result in an early payout of invested amounts to the certificateholders.
Changes in fair value based on a 10 percent adverse variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. Realistically, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this 10-Q includes certain forward-looking statements based on current management expectations. These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions. The Company intends such forward-looking statements to be covered by the safe harbor provisions of the Private Securities Reform Act of 1995 and is including this statement for purposes of such safe harbor provisions. The Company’s actual results could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Bank’s loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices. These factors should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake – and specifically disclaims any obligation – to publicly revise any forward – looking statements to reflect events or circumstances after the date of the statements to reflect the occurrence of anticipated or unanticipated events. Further description of the risks and uncertainties to the business are included in detail in Section B, Management Strategy; and Section D, Liquidity and Capital Resources.
A. General
The Company transacts
business primarily through the Bank and to a lesser extent its other
subsidiaries. The Bank’s results of operations are dependent primarily on
net interest income, which is the difference between the income earned on its
loan and investment portfolios (interest income) and its cost of funds,
consisting of the interest paid on deposits and borrowings (interest expense).
Results of operations are also affected by the Bank’s provision for loan
losses, loan and security sales, service charges, other fee income, insurance
premium income and non-interest expense. The Bank’s non-interest expense
principally consists of compensation and employee benefits, office occupancy and
equipment expense, professional fees, data processing, amortization and
advertising and business promotion expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities.
On November 10, 2000, the
Company acquired Security of Pennsylvania Financial Corp., the holding company
for Security Savings Association of Hazleton, a local financial institution. On
December 31, 2000, the Company acquired Higgins Insurance Agency, a Pottsville
based insurance agency, which has been serving customers throughout Schuylkill
and Luzerne Counties since 1946. Higgins offers personal, health and commercial
insurance.
On January 2, 2002, the
Company purchased three banking offices from Schuylkill Savings and Loan
Association of Schuylkill Haven, Pa. The Company purchased $11.4 million of
loans and assumed $12.8 million of deposits from these offices.
On January 8, 2002, Higgins acquired the DeAndrea Agency which specializes in personal and commercial insurance.
Selected Financial Data
Three months ended Nine months ended
June 30, June 30,
Selected Ratios: 2002 2001 2002 2001
- ---------------- ---- ---- ----- ----
Return on average assets(1) .72% .64% .65% .64%
Return on average equity(1) 8.93% 6.49% 7.56% 6.23%
Net interest margin (fully tax equivalent)(1) 3.23% 3.37% 3.33% 3.26%
Allowance for loan losses to loans, net (2) 1.02% .80% 1.02% .80%
(1) Annualized
(2) Based on period end loans
B. Management Strategy
The Bank’s operating strategy is that of a community-based financial institution, offering a wide variety of financial products to its retail and business customers. The Bank, while maintaining its focus on residential lending has been concentrating on increasing its consumer, small business and commercial lending. In order to promote long-term financial strength and profitability, the Bank’s operating strategy has focused on: (i) meeting the financial needs of its customers through expanded product offerings, improved delivery systems and by taking advantage of technological advances, including the internet; (ii) increasing profitability by emphasizing higher-yielding consumer and commercial loans; (iii) maintaining a strong regulatory capital position; (iv) managing its interest rate risk by emphasizing consumer and commercial loans, in addition to shorter term, adjustable rate, one-to four-family loans, soliciting longer-term deposits and utilizing longer-term advances from the Federal Home Loan Bank of Pittsburgh (the “FHLB”); and (v) maintaining strong asset quality by utilizing strong underwriting guidelines.
C. Critical Accounting Policies
Impairment of Asset.The
Company has a $1.5 million investment in the preferred stock of Buildersfirst
Holdings, Inc. Since the investment does not have a readily determinable market
value, the Company is not accounting for the investment under SFAS No. 115. The
accounting for this security was initially guided by EITF Topic No. D-68, EITF
Topic No. 98-13 and EITF Topic No. 99-10, which, in essence, provide that
investee losses should be absorbed by investments in other securities once an
investee’s common equity has been exceeded by net losses. However, during
the Company’s 2001 third fiscal quarter the investee issued additional
equity and entered into certain other business relationships which reduced the
Company’s influence over the investee and resulted in the Company
prospectively utilizing the cost method of accounting for its remaining
investment in Buildersfirst Holdings, Inc.
Allowances for Loan Losses. The Bank’s allowance for loan losses is maintained at a level
that management considers adequate to provide for known and inherent losses,
based upon an evaluation of the loan portfolio. Management’s evaluation is
based upon an analysis of the portfolio, past loss experience, current economic
conditions and other relevant factors. While management uses the best
information available to make evaluations, such evaluations are highly
subjective, and future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank’s allowance for
losses on loans. Such agencies may require the Bank to recognize additions to
the allowance, based on their judgments about information available to them at
the time of their examination. The allowance is increased by the provision for
loan losses, which is charged to operations. Loan losses are charged directly
against the allowance, and recoveries on previously charged-off loans are added
to the allowance.
Loans are deemed to be
“impaired” if upon management’s assessment of the relevant facts
and circumstances, it is probable that the Bank will be unable to collect all
proceeds due according to the contractual terms of the loan agreement.
“Impaired” loans
are charged off when the Company determines that foreclosure is probable or that
collection is unlikely and determines the value of the collateral is less than
the recorded investment of the impaired loan or in the case of unsecured loans,
management determines the loan to be uncollectable.
The Company’s policy
for the recognition of interest income on impaired loans is to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days
or more (unless the loan principal and interest are determined by management to
be fully secured and in the process of collection), or earlier if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the terms of the loan.
Interest income on such loans is not accrued until the financial condition and
payment record of the borrower demonstrates the ability to service the debt.
Intangible Assets.Intangible assets include core deposits intangibles, deferrable acquisition
costs and goodwill from acquisitions, which represents the excess of cost over
fair value of assets acquired and liabilities assumed. The core deposit
intangibles are being amortized to expense over a 10- to 31- year life on an
accelerated basis, and other intangible assets are being amortized to expense on
an accelerated basis over a period of 3.7 years to 5 years. Upon adoption of
Statement No. 142, goodwill is no longer being amortized.
Income Taxes. The
Company accounts for income taxes under the asset/liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, as well as
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is established against deferred tax assets when in the
judgment of management, it is more likely than not that such deferred tax assets
will not become available. Because the judgment about the level of future
taxable income is dependent to a great extent on matters that may, at least in
part go beyond the Bank’s control, it is at least reasonably possible that
management’s judgment about the need for a valuation allowance for deferred
taxes could change in the near term.
D. Non-Performing Assets and Impaired Loans
The following table presents information regarding the Bank’s non-performing loans, real estate owned and other repossessed assets at the dates indicated (dollars in thousands) (unaudited):
June 30, September 30,
2002 2001
---- ----
Non-performing loans:
Non-accrual loans plus other impaired loans $4,262 $4,723
Real estate owned and other repossessed assets 506 390
--- ---
Total non-performing assets $4,768 $5,113
====== ======
Troubled debt restructurings $56 $60
Troubled debt restructurings and total non-performing assets $4,824 $5,173
====== ======
Total non-performing loans as a percentage of total loans 0.88% 0.95%
Total non-performing assets as a percentage of total assets 0.55% 0.64%
The decrease in non-performing assets was primarily the result of a charge-off in the quarter ended June 30, 2002 of a commercial loan that was non-performing at September 30, 2001.
E. Liquidity and Capital Resources
Liquidity is the ability to
meet current and future financial obligations. The Bank further defines
liquidity as the ability to respond to depositors as well as maintaining
flexibility to take advantage of investment opportunities. The Bank’s
primary sources of funds on a long-term and short-term basis are deposits,
principal and interest payments on loans, mortgage-backed and investment
securities, and FHLB advances. The Bank uses the funds generated to support its
lending and investment activities as well as any other demands for liquidity
such as deposit outflows. While maturities and scheduled amortization of loans
are predictable sources of funds, deposit flows, mortgage prepayments and the
exercise of call features are greatly influenced by general interest rates,
economic conditions and competition.
The Bank’s most liquid
assets are cash and cash equivalents and its investment and mortgage-related
securities available-for-sale. The levels of these assets are dependent on the
Bank’s operating, financing, lending and investing activities during any
given period. At June 30, 2002, cash and cash equivalents and investment and
mortgage-related securities available-for-sale totaled $342.4 million, or 39.2%
of total assets.
The Bank has other sources
of liquidity if a need for additional funds arises, including FHLB advances. At
June 30, 2002, the Bank had $208.4 million in advances outstanding from the
FHLB, and had an overall borrowing capacity from the FHLB of $289.4 million.
Depending on market conditions, the pricing of deposit products and FHLB
advances, the Bank may continue to rely on FHLB borrowings to fund asset growth.
At June 30, 2002, the Bank
had commitments to originate and purchase loans and unused outstanding lines of
credit and undisbursed proceeds of construction mortgages totaling $77.3
million. The Bank anticipates that it will have sufficient funds available to
meet these commitments. Certificate accounts, including Individual Retirement
Account (“IRA”) and KEOGH accounts, which are scheduled to mature in
less than one year from June 30, 2002, totaled $131.6 million. Based on past
experience, the Bank expects that substantially all of these maturing
certificate accounts, with the exception of jumbo certificates of deposit, will
be retained
by the Bank at maturity. At June 30, 2002, the Bank had $43.2
million in jumbo certificates, the majority of which are deposits from local
school districts and municipalities.
The primary source of
funding for the Company is dividend payments from the Bank, sales and maturities
of investment securities and, to a lesser extent, earnings on investments and
deposits of the Company. Dividend payments by the Bank have primarily been used
to fund the Company’s repurchase of its stock and payment of cash
dividends. The Bank’s ability to pay dividends and other capital
distributions to the Company is generally limited by the regulations of the
Office of Thrift Supervision.
At June 30, 2002, the Bank
exceeded all of its regulatory capital requirements with a tangible capital
level of $50.3 million, or 5.8% of total adjusted assets, which is above the
required level of $13.0 million, or 1.5 %; a core capital level of $50.3
million, or 5.8 % of total adjusted assets, which is above the required level of
$25.9 million, or 3.0%; and a risk-based capital of $55.2 million, or 10.6% of
risk-weighted assets, which is above the required level of $41.5 million, or
8.0%.
At June 30, 2002, the Bank
had total equity, determined in accordance with generally accepted accounting
principles, of $62.1 million, or 7.2%, of total assets, which approximated the
Bank’s regulatory tangible capital at that date of 5.8% of assets. An
institution with a ratio of tangible capital to total assets of greater than or
equal to 5% is considered to be “well-capitalized” pursuant to OTS
regulations.
F. Comparison of Financial Condition at June 30, 2002 and September 30, 2001
Total assets increased $65.7 million from $808.8 million at September 30, 2001 to $874.5million at June 30, 2002. The growth was
primarily in securities available-for-sale and bank owned life insurance ("BOLI"), offset by a decrease in loans and securities
held-to-maturity.
Securities classified as
available-for-sale increased $91.4 million, from $243.6 million at September 30,
2001 to $335.0 million at June 30, 2002. The increase was primarily attributable
to the purchase of mortgage backed securities from the reinvestment of the
proceeds from the sale of automobile loans. Securities classified as held to
maturity decreased $14.2 million due to securities being called.
Net loans decreased $22.9
to $475.3 million at June 30, 2002, primarily due to the sale of $50.0 million
of automobile loans, offset by new automobile loan originations. Residential
real estate loans decreased $14.1 million largely due to the $7.5 milion sale of
these loans. Construction loans decreased $8.5 million due to repayment of
construction loans which have matured. Offsetting these decreases was a $19.2
million increase in commercial real estate loans due to increased originations
as a result of marketing efforts.
In April 2002, the bank purchased bank owned life insurance in the amount of $10.0 million. The BOLI has a tax equivalent yield of
9.12%.
Total liabilities increased
$69.9 million from $733.0 million at September 30, 2001 to $802.9 million at
June 30, 2002 due primarily to deposit growth and to a lesser extent the
issuance of $7.0 million in trust preferred securities.
Deposits increased $56.3
million from $515.7 million as of September 30, 2001 to $572.0 million at June
30, 2002. The largest increase was in checking accounts, specifically money
market and NOW accounts due to continued marketing efforts of such accounts.
Contributing to the increase in deposits was a $6.9 million increase in savings
accounts due, in part, to the acquisition of deposits from Schuylkill Savings
and Loan. Offsetting these increases was a $2.5 million decrease in certificate
of deposits as a result of matured certificates being rolled into checking
accounts.
Federal Home Loan Bank advances increased $4.0 million as a result of management's utilization of FHLB borrowings to fund the
increase in assets.
In April 2002, the Company
issued $7.0 million of trust preferred securities. The interest rate on the
trust preferred securities is variable and adjusts semi-annually at 3.70% over
six-month LIBOR, with an initial rate of 6.02%. A rate cap of 11.00% is
effective through April 22, 2007. The Company used the
proceeds of the offering for general corporate purposes and to repurchase its
common stock.
Total equity decreased $4.2
million to $71.7 million at June 30, 2002. This decrease in equity resulted
primarily from the purchase of 505,557 shares of the Company’s common stock
at a cost of $8.9 million and dividend payments totaling $1.5 million.
Offsetting this decrease was the retention of earnings for the quarter combined
with an increase in accumulated other comprehensive income as a result of an
increase in unrealized gains on securities.
G. Comparison of Operating Results for the Three Months Ended June 30, 2002 and June 30, 2001
General. The Company had net income of $1.6 million for the three months ended June 30, 2002, compared to net income of $1.3
million for the three months ended June 30, 2001.
Interest Income. Net
interest income increased $412,000 primarily as a result of a greater decrease
in interest expense on deposits and advances as a result of the lower market
interest rate environment compared to the decrease in interest income. Total
interest income decreased $234,000 from $13.9 million for the three months ended
June 30, 2001 to $13.7 million for the three months ended June 30, 2002. This
was primarily due to a $654,000 decrease in the interest income on investment
securities as a result of a 226 basis point decrease on investment securities.
Interest income on loans decreased $296,000 primarily due to a $22.2 million
decrease in the average balance of real estate loans as well as an 81 basis
point decrease on such loans. Offsetting these decreases was a $716,000 increase
in mortgage related securities due to a $78.6 million increase in the average
balance of these securities.
Interest Expense.
Interest expense decreased $646,000 from $7.9 million for the three months ended
June 30, 2001 to $7.2 million for the three months ended June 30, 2002. The
decrease in interest expense was primarily the result of a $793,000 decrease in
interest expense on certificates of deposit, which was the result of a 127 basis
point decrease in the average rate paid on these accounts. Offsetting the
decrease was a $162,000 increase in interest expense on FHLB advances and other
borrowings due to a $9.2 million increase in the average balance.
Provision for Loan
Losses. The Bank’s provision for loan losses for the three months ended
June 30, 2002 was $726,000 compared to $623,000 for the three months ended June
30, 2001.
The increase in the provision for loan loss was attributable to
increased concentration in commercial and consumer lending. The allowance is
maintained at a level that represents management’s best estimate of known
and inherent estimated losses based upon an evaluation of the loan portfolio.
Loan losses, other than those incurred on loans held for sale, are charged
directly against the allowance and recoveries on previously charged-off loans
are credited to the allowance. Management’s evaluation is based upon, among
other things, delinquency trends, the volume of non-performing loans, prior loss
experience of the portfolio, current economic conditions, and other relevant
factors. Although management believes it has used the best information available
to it in making such determinations, and that the allowance for loan losses is
adequate, future adjustments to the allowance may be necessary, and net income
may be adversely affected if circumstances differ substantially from the
assumptions used in determining the level of the allowance. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank’s allowance for losses on loans. Such agencies
may require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
Non-interest Income.
Non-interest income increased $985,000, from $1.7 million for the three
months ended June 30, 2001 to $2.7 million for the three months ended June 30,
2002. The increase in non-interest income was primarily due to a $927,000
increase in gain on sale of loans as a result of the sale of automobile loans.
Other income increased $249,000 due to income related to the bank owned life
insurance, as well as, losses incurred in fiscal 2001 from the Company’s
investment in Buildersfirst Holdings, Inc. with no comparable losses recognized
in fiscal 2002. The Company continues to see growth in insurance premium income
derived from insurance related services. Gain on sale of available- for-sale
securities decreased $346,000 due to the sale of Freddie Mac and Sallie Mae
securities in the prior period with no similar sale in the current period.
Non-interest
Expense. Total non-interest expense increased from $5.2 million for the
three months ended June 30, 2001 to $6.0 million for the three months ended June
30, 2002, respectively. Salaries and employee benefits increased $420,000
primarily as a result of new employees to staff growing lines of business.
Professional fees increased $451,000, which is attributable to the engagement of
consultants to assist in the continuation of a campaign to integrate all our
lines of business, as well as increase customer relationship penetration. Other
non-interest expense increased $181,000, primarily due to cost incurred in the
current year quarter associated with foreclosed properties, compared to
reimbursements received in the prior year quarter for such costs. Also
contributing to the increase in other non-interest expense were increases in
operating expenses such as supplies, postage and telephone expense.
Income Taxes. The
Company had an income tax provision of $830,000 for the three months ended June
30, 2002, compared to a provision of $651,000 for the three months ended June
30, 2001 reflecting an effective tax rate of 34.9%, and 34.1%, respectively, for
those periods. The increase in the effective tax rate was a direct result of the
sale of tax-exempt municipal securities.
H. Comparison of Operating Results for the Nine Months Ended June 30, 2002 and June 30, 2001.
General.The Company reported net income of $4.1 million for the nine months ended June 30, 2002 compared to $3.6 million for the nine months ended June 30, 2001.
Interest Income. Net
interest income increased $2.7 million primarily due to a $1.9 million decrease
in interest expense as a result of the lower market interest rate environment.
Total interest income increased $772,000 from $40.4 million for the nine months
ended June 30, 2001 to $41.2 million for the nine months ended June 30, 2002,
primarily due to a $83.8 million, or 11.7%, increase in the average balance of
interest earning assets. Specifically, interest income on mortgage related
securities increased $2.2 million due to a $76.3 million increase in the average
balance of these securities. Interest income on investment securities decreased
$1.7 million for the nine months ended June 30, 2002 primarily due to a $12.7
million decrease in the average balance of such securities, as well as a 167
basis point decrease on investment securities due to the lower market interest
rate environment. Interest income on loans increased $338,000 due to a $29.1
million increase in the average balance of consumer loans, offset by a $15.2
million decrease in the average balance of taxable real estate loans.
Interest Expense.
Interest expense decreased $1.9 million from $23.7 million for the nine months
ended June 30, 2001 to $21.7 million for the nine months ended June 30, 2002,
primarily due to a $2.1 million decrease in certificates of deposit interest
expense due to a 121 basis point decrease on certificates. Interest expense on
FHLB advances and other borrowings increased $587,000 due to a $22.3 million
increase in the average balance.
Provision for Loan
Losses. The Bank’s provision for loan losses for the nine months ended
June 30, 2002 increased $925,000 compared to the comparable 2001 period. The
increase in the provision at June 30, 2002 reflects the Bank’s increased
concentration in commercial real estate and consumer lending which carries an
increased degree of risk compared to one- to four- family lending.
Non-interest Income.
The Company experienced a $2.2 million increase in non-interest income from
$3.7 million for the nine months ended June 30, 2001 to $5.9 million for the
nine months ended June 30, 2002. The primary reason for this increase was a
$960,000 increase in insurance premium income from insurance related services.
Gain on sale of loans increased $669,000 as a result of the automobile loan
sale. Other income increased $531,000 primarily due to losses incurred in fiscal
2001 from the Company’s investment in Buildersfirst Holding, Inc. with no
comparable losses recognized in fiscal 2002. Service charges and other fees
increased $286,000 due to additional branches and a larger customer base. Gain
on the sale of available for sale securities decreased $307,000 as a result of
the sale of Freddie Mac and Sallie Mae securities in the prior period with no
comparable sale in the current period.
Non-interest
Expense. Total non-interest expense increased $2.8 million, from $14.3
million for the nine months ended June 30, 2001 to $17.1 million for the nine
months ended June 30, 2002. The largest increase, $1.8 million, was in salary
and net employee benefits expense as a result of new employees to staff the
growing lines of business, as well as increased hospitalization expense. Other
non-interest expense increased $424,000 mainly due to costs associated with
foreclosed properties in the current year, compared to reimbursements received
in prior year for such costs. General operating expenses such as supplies and
postage also increased due to additional branch and company expansion.
Professional fees increased $375,000 due to the engagement of consultants to
assist in a campaign to create a unifying brand for the Company to integrate all
lines of business. Occupancy expense increased $214,000 as a result of
maintenance and depreciation expense associated with Company expansion.
Income Taxes. The Company had income tax expense of $2.2 million for the nine months ended June 30, 2002, compared to expense of $1.5 million for the nine months ended June 30, 2001, reflecting effective tax rates of 35.0%, and 29.1%, respectively. The increase in the effective tax rate was the result of a combination of the decrease in nontaxable income and a $120,000 increase in the valuation allowance relating to a deferred tax asset.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2002, there have been no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2001.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings, in the
aggregate, are believed by management to be immaterial to the
Company’s financial condition or results of operation.
Item 2. Changes in Securities and Use of Proceeds
The Company has the right, at one or more times, unless an event
of default exists under the floating rate junior subordinated
deferrable interest debentures due April 22, 2032 (the
“Debentures”), to defer interest payments on the
Debentures for up to ten consecutive semi-annual periods. During
this time, the Company will be prohibited from declaring or
paying cash dividends on its common stock.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Certificate of Incorporation of Northeast Pennsylvania Financial Corp.*
3.2 Bylaws (as amended effective December 29, 2000) of Northeast Pennsylvania Financial Corp.**
4.0 Form of Stock Certificate of Northeast Pennsylvania Financial Corp.**
10.1 Employment Agreement between Northeast Pennsylvania Financial Corp. and E. Lee Beard
10.2 Employment Agreement between Northeast Pennsylvania Financial Corp. and Thomas L. Kennedy
10.3 Employment Agreement between First Federal Bank and E. Lee Beard
10.4 Employment Agreement between First Federal Bank and Thomas L. Kennedy
11.0 Statement regarding Computation of Per Share Earnings (See Notes to Consolidated Financial Statements)
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, and any amendments thereto, Registration
No. 333-43281.
** Incorporated herein by reference into this document from Form 10-Q filed on
February 14, 2001.
(B) Reports on Form 8-K
None.
Pursuant to the requirements 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.
NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
Date: August 14, 2002 By:/s/ E. Lee Beard
--------------------------------------
E. Lee Beard
President and Chief Executive
Officer
Date: August 14, 2002 By:/s/ Patrick J. Owens, Jr.
--------------------------------------
Patrick J. Owens, Jr.
Treasurer and Chief Financial Officer
In connection with the Quarterly Report of Northeast Pennsylvania Financial Corp. (the “Company”) on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, E. Lee Beard, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.
/s/ E. Lee Beard
Chief Executive Officer
August 14, 2002
In connection with the Quarterly Report of Northeast Pennsylvania Financial Corp. (the “Company”) on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick J. Owens, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.
/s/ Patrick J. Owens, Jr.
Chief Financial Officer
August 14, 2002