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 December 31, 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
--------- -------
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes - No X
--------- -------
The Registrant had 4,176,594 shares of Common Stock outstanding as of February 13, 2003.
Item
No.
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Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition at
December 31, 2002 and September 30, 2002 (unaudited)......................... 1
Consolidated Statements of Operations for the Three Months Ended
December 31, 2002 and 2001 (unaudited)....................................... 2
Consolidated Statements of Comprehensive Income for the Three Months
Ended December 31, 2002 and 2001 (unaudited)................................. 3
Consolidated Statements of Changes in Equity for the Year Ended
September 30, 2002 and the Three Months Ended
December 31, 2002 (unaudited)................................................ 4
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 2002 and 2001 (unaudited)....................................... 5
Notes to Consolidated Financial Statements (unaudited)....................... 7
Item 2 Management Discussion and Analysis of Financial Condition
and Results of Operations................................................... 18
Item 3 Quantitative and Qualitative Disclosures about Market Risk.................. 26
Item 4 Controls and Procedures.................................................... 26
Part II - OTHER INFORMATION
1 Legal Proceedings............................................................ 27
2 Changes in Securities and Use of Proceeds.................................... 27
3 Defaults Upon Senior Securities.............................................. 27
4 Submission of Matters to a Vote of Security Holders.......................... 27
5 Other Information............................................................ 27
6 Exhibits and Reports on Form 8 - K........................................... 27
Signatures
Certifications
December 31, September 30,
2002 2002
---- ----
Assets (unaudited)
Cash and cash equivalents $49,252 $25,302
Securities available-for-sale (cost of 317,575 at December 31,
2002 and 322,307 at September 30, 2002) 322,635 327,886
Securities held-to-maturity (estimated fair value of $3,691 at
December 31, 2002 and $3,707 at September 30, 2002) 3,653 3,652
Loans (less allowance for loan losses of $5,275 at December 31, 2002
and $5,449 at September 30, 2002) 489,783 489,373
Accrued interest receivable 7,985 7,632
Assets acquired through foreclosure 836 547
Property and equipment, net 12,651 12,840
Goodwill 3,655 3,655
Intangible Assets 9,300 9,093
Bank-owned life insurance 10,460 10,303
Other assets 12,506 15,226
------ ------
Total assets $922,716 $905,509
======== ========
Liabilities and Equity
Deposits $612,516 $604,966
Federal Home Loan Bank advances 208,416 208,421
Other borrowings 2,721 4,630
Trust-preferred debt 22,000 7,000
Advances from borrowers for taxes and insurance 990 852
Accrued interest payable 1,499 1,458
Other liabilities 6,254 9,797
----- -----
Total Liabilities $854,396 $837,124
-------- --------
Preferred stock ($.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 61,937 62,047
Retained earnings - substantially restricted 39,125 38,672
Accumulated other comprehensive income, net 3,129 3,443
Common stock acquired by stock benefit plans (4,941) (4,847)
Treasury stock, at cost (2,257,125 shares at December 31, 2002
and at September 30, 2002) (30,994) (30,994)
-------- --------
Total Equity $68,320 $68,385
------- -------
Total liabilities and equity $922,716 $905,509
======== ========
For the Three months ended
December 31,
Interest Income: 2002 2001
---- ----
(unaudited)
Loans $9,224 $10,038
Mortgage-related securities 2,035 1,734
Investment securities:
Taxable 1,183 1,690
Non-taxable 233 242
--- ---
Total interest income 12,675 13,704
Interest Expense:
Deposits 3,711 4,405
Federal Home Loan Bank advances and other borrowings 3,243 2,907
----- -----
Total interest expense 6,954 7,312
Net interest income 5,721 6,392
Provision for loan losses 370 638
--- ---
Net interest income after provision for loan losses 5,351 5,754
Non-interest Income:
Service charges and other fees 655 509
Insurance premium income 924 720
Trust fee income 232 153
Other income 443 81
Gain (loss) on sale of:
Asset acquired through foreclosure 10 (9)
Loans 244 152
Available-for-sale securities 11 (35)
-- ----
Total non-interest income 2,519 1,571
Non-interest Expense:
Salaries and net employee benefits 3,224 2,854
Occupancy costs 804 665
Amortization of intangibles 260 243
Data processing 181 165
Professional fees 497 265
Advertising 264 128
Federal Home Loan Bank and other service charges 229 238
Other 1,086 895
----- ---
Total non-interest expense 6,545 5,453
Income before income taxes 1,325 1,872
Income taxes 382 594
--- ---
Net income $ 943 $ 1,278
===== =======
Earnings per share - basic $ 0.25 $ 0.29
====== ======
Earnings per share - diluted $ 0.24 $ 0.28
====== ======
For the Three Months Ended
December 31,
2002 2001
---- ----
(unaudited)
Net Income $943 $1,278
Other comprehensive income, net of tax
Unrealized losses on securities and on retained interest on
asset securitization: $(321) $(782)
Unrealized holding losses arising during the period
Less: Reclassification adjustment for gains included in net
income (7) (23)
------- -------
Other comprehensive loss $(314) $(759)
Comprehensive income $629 $519
==== ====
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, 2001 $ 64 $ 62,142 $ (5,213) $ 36,136 $ 894 $ (18,186) $ 75,837
ESOP shares committed to be released 243 515 758
Stock awards (46) 542 496
Stock employee compensation trust
(44,441 shares) (701) (701)
Stock compensation tax benefit 110 110
Stock options exercised (38,714 shares) (402) 10 816 424
Treasury stock reissuance (6,568 shares) 96 96
Net changes in gains on
securities available for sale, net of tax 2,439 2,439
Net change in gains on retained interest
on asset securitization, net of tax 110 110
Treasury stock at cost (768,426 shares) (13,720) (13,720)
Cash dividend paid (1,962) (1,962)
Net income 4,498 4,498
------- -------- -------- -------- -------- --------- --------
Balance, September 30, 2002 $ 64 $ 62,047 $ (4,847) $ 38,672 $ 3,443 $ (30,994) $ 68,385
ESOP shares committed to be released (98) 386 288
Stock awards (5) 63 58
Stock employee compensation trust
(37,742 shares) (581) (581)
Stock options exercised (2,400 shares) (7) 38 31
Net changes in loss on
securities available for sale, net of tax (311) (311)
Net change in gains on retained interest
on asset securitization, net of tax (3) (3)
Cash dividend paid (490) (490)
Net income 943 943
------- -------- -------- -------- -------- --------- --------
Balance, December 31, 2002 $ 64 $ 61,937 $ (4,941) $ 39,125 $ 3,129 $ (30,994) $ 68,320
For the Three Months Ended
December 31,
2002 2001
---- ----
Operating Activities: (unaudited)
Net Income $943 $1,278
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for foreclosed assets 93 252
Provision for loan losses 370 638
Depreciation 352 346
Amortization of intangibles 260 243
Deferred income tax provision (2,745) 154
ESOP expense 288 296
Stock award expense 58 128
Amortization and accretion on:
Held-to-maturity securities (1) (6)
Available-for-sale securities 753 (44)
Amortization of deferred loan fees (252) (124)
(Gain) loss on sale of:
Assets acquired through foreclosure (10) 9
Loans (244) (152)
Available-for-sale securities (11) 35
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (353) 186
Increase in other assets (749) (424)
Increase (decrease) in accrued interest payable 41 (506)
Increase (decrease) in accrued income taxes payable 3,002 383
Increase (decrease) in other liabilities (593) 1,066
----- -----
Net cash provided by operating activities $1,202 $3,758
Investing Activities:
Net increase in loans $(9,604) $(3,212)
Proceeds from sale of:
Available-for-sale securities - 7,784
Assets acquired through foreclosure 390 193
Loans 8,558 6,566
Proceeds from repayments of held-to-maturity securities - 8,000
Proceeds from repayments of available-for-sale securities 58,333 19,046
Purchase of:
Available-for-sale securities (53,757) (43,148)
Office properties and equipment (163) (331)
Bank-owned life insurance (157) -
Federal Home Loan Bank stock (586) -
----- -
Net cash used in (provided by) investing activities $3,014 $(5,102)
Financing Activities:
Net increase in deposit accounts $7,550 $8,795
Net decrease in Federal Home Loan Bank short-term advances - (1,000)
Repayments of Federal Home Loan Bank long-term advances (5) (5)
Net increase in advances from borrowers for taxes and insurance 138 1,874
For the Three Months
Ended December 31,
2002 2001
---- ----
(unaudited)
Net increase (decrease) in other borrowings $(1,909) $1,470
Proceeds from issuance of trust-preferred securities 15,000 -
Purchase of treasury stock - (2,435)
Purchase of stock for stock employee compensation trust (581) -
Cash dividend on common stock (490) (489)
Stock options exercised 31 348
-- ---
Net cash provided by financing activities $19,734 $8,558
Increase in cash and cash equivalents 23,950 7,214
Cash and cash equivalents, beginning of period 25,302 9,060
------ -----
Cash and cash equivalents, end of period $49,252 $16,274
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $6,941 $7,818
====== ======
Income taxes $345 $42
==== ===
Supplemental disclosure - non-cash and financing information:
Transfer from loans to real estate owned $1,129 $368
====== ====
Net change in unrealized losses on securities
available-for-sale, net of tax $(314) $(759)
====== ======
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
1. Summary of Significant Accounting Policies
Business
|
Northeast Pennsylvania Financial Corp. (the “Company”), through its subsidiaries, provides a wide range of financial products and services to individual, corporate, and municipal customers through its offices in Northeastern and Central Pennsylvania. These products include Banking, Insurance, Investment and Trust lines of business. Banking products, which are offered through the Company’s subsidiary First Federal Bank (the “Bank”), include checking accounts (interest and non-interest bearing), savings accounts, certificates of deposit, commercial and consumer loans, real estate loans and home equity loans. The Bank also serves its loan customers through a loan production office located in Monroe County, Pennsylvania. Insurance products, which are offered through the Company’s subsidiary, Higgins Insurance Associates, Inc. (“Higgins”), include property and casualty, life, long-term care and employee benefit programs. Investment products are offered through licensed Bank employees, Higgins agents and Smith Barney financial consultants who rent space from the Bank. Trust services, which are offered by the Company’s subsidiary Northeast Pennsylvania Trust Co. (the “Trust Co.”) include estate management and trustee services. The Company provides title insurance through Abstractors, Inc., its wholly-owned title agency. The Company is subject to competition from other financial institutions and other companies that provide financial services. The Company is subject to the regulations of certain federal regulatory agencies and undergoes periodic examinations by those regulatory authorities. The Trust Co. is subject to state regulations. |
|
The accompanying consolidated financial statements were prepared in accordance with 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 accounting principles generally accepted in the United States of America (“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, 2002. The results for the three months ended December 31, 2002 are not necessarily indicative of the results that may be expected for the year ended September 30, 2003. |
|
The accompanying financial statements of the Company include the accounts of the Bank, Higgins, Abstractors, Inc., Trust Co., FIDACO, Inc, NEP Capital Trust I and NEP Capital Trust II. The Bank, Higgins, Abstractors, Inc., the Trust Co., NEP Capital Trust I and NEP Capital Trust II are wholly-owned subsidiaries of the Company. Abstractors, Inc. is a title insurance agency. NEP Capital Trust I and NEP Capital Trust II are statutory business trusts created under the laws of the state of Delaware in connection with two issuances of trust-preferred securities on April 10 and October 29, 2002, respectively. FIDACO, Inc. is an inactive subsidiary of the Bank with the only major asset being an investment in Hazleton Community Development Corporation. All material inter-company balances and transactions have been eliminated in consolidation. Prior period amounts are reclassified, when necessary, to conform with the current year’s presentation. |
|
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 from 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. |
|
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 143, “Accounting for Asset Retirement Obligations.” This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement amends FASB Statement No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies”, and it applies to all entities. It is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. The adoption of this Statement on October 1, 2002 did not have an impact on the Company’s earnings, financial condition or equity. |
|
In August 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”. However, the Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business. However, this Statement retains the requirement of Opinion No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment or in distribution to owners) or is classified as held for sale. This Statement also amends ARB No. 51, “Consolidated Financial Statements”, to eliminate the exception to consolidation for a temporarily-controlled subsidiary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The adoption of this Statement on October 1, 2002 did not have an impact on the Company’s earnings, financial condition or equity. |
|
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. |
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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. The adoption of this statement did not have an impact on the Company’s earnings, financial condition or equity. |
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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 adoption of this Statement did not have an impact on its earnings, financial condition or equity. |
|
On October 1, 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions, effective for all business combinations initiated after October 1, 2002. This Statement addresses the financial accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. This Statement removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the scope of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method. The acquisition of all or part of a financial institution that meets the definition of a business combination shall be accounted for by the purchase method in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 was adopted on October 1, 2001. This Statement also provides guidance on the accounting for the impairment or disposal of acquired long-term customer-relationship intangible assets (such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets), including those acquired in transactions between two or more mutual enterprises. Upon early adoption of this statement, as of October 1, 2001, the carrying amount of the previously recognized unidentifiable intangible asset related to the Schuylkill Savings branch acquisitions that was reclassified to goodwill was $200,000, while the related 2002 amortization expense that was reversed was $81,000, pre-tax. The Company will continue to review the remaining goodwill on an annual basis for impairment. However, $10.9 million in core deposit intangible will continue to be amortized and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. |
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In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123.” This statement amends FASB Statement No.123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Statement also amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for fiscal years ending after December 15, 2002, except for financial reports containing condensed financial statements for interim periods for which disclosure is effective for periods beginning after December 15, 2002. This Statement announces, “in the near future, the Board plans to consider whether it should propose changes to the U.S. standards on accounting for stock-based compensation”. |
|
The following table represents the effect on net income and earnings per share had the stock-based employee compensation expense been recognized: |
Three months ended
December 31,
2002 2001
---- ----
Net income, as reported $ 943 $ 1,278
Less pro forma expense related to stock options (96) (120)
---- ----
Pro forma net income $ 847 $ 1,158
===== =======
Basic net income per common share:
As reported $ 0.25 $ 0.29
Pro forma 0.23 0.26
Diluted net income per common share:
As reported $ 0.21 $ 0.25
Pro forma 0.21 0.25
|
Earnings
per share (“EPS”), basic and diluted, were $0.25 and $0.24,
respectively, for the three months ended December 31, 2002 compared to $0.29 and
$0.28, respectively, for the three months ended December 31, 2001. The following table presents the reconciliation of the numerators and denominators of the basic and diluted EPS computations. |
Three months ended
December 31,
2002 2001
---- ----
(unaudited)
(Dollars in thousands, except per share data)
Basic:
Net Income $943 $1,278
==== ======
Weighted-average shares issued 6,427,350 6,427,350
Less: Treasury shares (2,257,125) (1,577,348)
Common stock acquired by stock
benefit plans:
Stock employee compensation trust (66,852) -
Stock awards unallocated, net (75,636) (117,814)
ESOP shares unallocated, net (263,518) (314,938)
--------- ---------
Basic weighted-average shares outstanding 3,764,219 4,417,250
========= =========
Earnings per share - basic $0.25 $0.29
===== =====
Three months ended
December 31,
2002 2001
---- ----
(unaudited)
(Dollars in thousands, except per share data)
Diluted (1):
Net Income $943 $1,278
==== ======
Basic weighted-average shares outstanding 3,764,219 4,417,250
Dilutive Instruments:
Dilutive effect of outstanding stock options 176,590 186,146
Dilutive effect of stock awards 14,476 26,430
------ ------
Dilutive shares outstanding 3,955,285 4,629,826
========= =========
Earnings per share - diluted $0.24 $0.28
===== =====
December 31, 2002
-----------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ---------
Available-for-sale securities:
Municipal securities $16,246 $135 $(9) $16,372
Obligations of U.S. Government agencies 23,003 468 - 23,471
Mortgage-related securities 211,851 3,789 (98) 215,542
Trust Preferred securities 12,599 310 (730) 12,179
Corporate Bonds 33,794 1,381 (18) 35,157
------ ----- ---- ------
Total debt securities 297,493 6,083 (855) 302,721
FHLB Stock 11,557 - - 11,557
Freddie Mac Stock 2,241 303 (483) 2,061
Fannie Mae Stock 6,000 155 (182) 5,973
Other equity securities 284 74 (35) 323
------ ----- ---- ------
Total equity securities 20,082 532 (700) 19,914
------ ----- ---- ------
Total $317,575 $6,615 $(1,555) $322,635
======== ====== ======== ========
Held-to-maturity securities:
Certificates of Deposit $ 99 $ - $ - $ 99
Municipal securities 3,554 38 - 3,592
------ ----- ---- ------
Total $3,653 $ - $ - $3,691
======== ====== ======== ========
September 30, 2002
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ---------
Available-for-sale securities:
Municipal securities $16,247 $197 $- $16,444
Obligations of U.S. Government agencies 24,032 414 - 24,446
Mortgage-related securities 221,383 4,047 (143) 225,287
Trust Preferred securities 12,604 336 (511) 12,429
Corporate Bonds 32,545 1,442 (18) 33,969
------ ----- --- ------
Total debt securities 306,811 6,436 (672) 312,575
FHLB Stock 10,971 - - 10,971
Freddie Mac Stock 2,241 151 (324) 2,068
Fannie Mae Stock 2,000 100 (108) 1,992
Other equity securities 284 24 (28) 280
--- -- --- ---
Total equity securities 15,496 275 (460) 15,311
Total $322,307 $6,711 $(1,132) $327,886
======== ====== ======= ========
Held-to-maturity securities:
Certificates of Deposit $99 $ - $ - $99
Municipal securities 3,553 55 - 3,608
----- --- -- -----
Total $3,652 $55 $ - $3,707
====== ===== ==== ======
|
Loans are summarized as follows: |
December 31, 2002 September 30, 2002
------------------ ------------------
(unaudited)
(in thousands)
Real Estate loans:
One- to four-family $184,695 $198,307
Multi-family and commercial 77,435 75,912
Construction 6,370 7,157
-------- --------
Total real estate loans $268,500 $281,376
-------- --------
Consumer Loans:
Home equity loans and lines of credit $77,367 $79,253
Automobile 91,898 80,035
Unsecured lines of credit 2,512 2,297
Other 10,290 10,376
-------- --------
Total consumer loans $182,067 $171,961
-------- --------
Commercial loans $46,016 $43,014
-------- --------
Total loans $496,583 $496,351
Less:
Allowances for loan losses (5,275) (5,449)
Deferred loan origination fees (1,525) (1,529)
-------- --------
Total loans, net $489,783 $489,373
======== ========
|
The activity in the allowance for loan losses is as follows (in thousands): |
For the three
months ended For the year ended
December 31, 2002 September 30, 2002
----------------- ------------------
(unaudited)
Balance, beginning of period $5,449 $4,497
Charge-offs (594) (1,993)
Recoveries 50 179
Provision for loan losses 370 2,766
--- -----
Balance, end of period $5,275 $5,449
====== ======
4. Asset Securitization|
In June 2002, the Bank sold $50.0 million in automobile loan receivables through a securitization transaction. In the transaction, automobile 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. |
| In connection with this June 2002 transaction, the Bank recorded a pre-tax gain on the sale of automobile loans of $854,000, which was included in gain on sale of loans in the consolidated statement of operations. The Bank has recognized a retained interest related to the loan sale, which, in aggregate, totaled $3.2 million at December 31, 2002. The retained interest includes an interest-only strip and cash reserve account. The cash reserve account is subject to liens by the providers of the credit enhancement facilities for the securitizations. |
|
The key assumptions used in measuring the fair value of the retained interest-only strip and cash collateral account for the transaction is shown in the following table: |
Retained interest December 2002 June 2002
-----------------------------
Average annual repayment rate 1.5% 1.5%
Average annual expected default rate 1.5% 1.5%
Discount rate 8.0% 18%
Weighted average life of underlying automobile
loans 42 months 48 months
|
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: |
December 31, 2002
(dollars in thousands)
Fair value of retained interest $ 3,207
Weighted-average repayment rate assumption:
Pre-tax decrease to earnings due to a 10% adverse change $ 45
Pre-tax decrease to earnings due to a 20% adverse change $ 84
Weighted-average expected default rate:
Pre-tax decrease to earnings due to a 10% adverse change $ 60
Pre-tax decrease to earnings due to a 20% adverse change $ 124
Weighted-average discount rate:
Pre-tax decrease to earnings due to a 10% adverse change $ 70
Pre-tax decrease to earnings due to a 20% adverse change $ 136
| As of December 31, 2002, the weighted-average life of the underlying automobile loans in the Trust was 42 months. The terms of the transaction included 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% 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 on a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. However, 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. |
|
Deposits consist of the following major classifications (in thousands): |
December 31, 2002 September 30, 2002
----------------- ------------------
(unaudited)
Percent Percent
Amount(1) of Total Amount of Total
------------- ------------- -------------- ------------
------------- ------------- -------------- ------------
Savings accounts (passbook, statement, clubs) $98,482 16.08% $95,779 15.83%
Money market accounts 107,727 17.59% 100,274 16.58%
Certificates of deposit less than $100,000 214,269 34.99% 227,868 37.66%
Certificates of deposit greater than $100,000 62,259 10.16% 71,379 11.80%
NOW Accounts 95,454 15.58% 77,238 12.77%
Non-interest bearing deposits 34,325 5.60% 32,428 5.36%
------ ----- ------ -----
Total deposits at end of period $612,516 100.00% $604,966 100.00%
======== ======= ======== =======
(1) Deposit balances in excess of $100,000 are not federally insured.
|
A summary of goodwill and intangible assets is as follows: |
As of December 31, 2002
-----------------------
(in thousands)
Gross Net
carrying Accumulated carrying
amount amortization amount
-------- ------------ ---------
Goodwill
- --------
Acquisition of:
Abstractors $248 $(160) $88
Security Savings Association of Hazleton 571 (28) 543
Higgins Insurance Associates, Inc. 2,519 (95) 2,424
Schuylkill Savings and Loan Association 200 - 200
DeAndrea Agency 400 - 400
------ ------ ------
Total goodwill $3,938 $(283) $3,655
====== ====== ======
Gross Net
carrying Accumulated carrying
amount amortization amount
-------- ------------ ---------
Other Intangible Assets
- ----- ---------- ------
Amortizing:
Omega core deposit intangible $1,537 $(842) $695
Security Savings Association of Hazleton
core deposit intangible 9,086 (1,611) 7,475
Schuylkill Savings and Loan Association
core deposit intangible 255 (30) 225
Other intangibles 885 (55) 830
Nonamortizing intangible assets
Other intangible assets 75 - 75
------ ------ ------
Total other intangibles $11,838 $(2,538) $9,300
====== ====== ======
Nonamortizing intangible assets consist of title plant of $75,000 at December 31, 2002 and 2001.
Amortization expense of other amortizing intangible assets for the three months ended December 31, 2002 is as follows:
For the three months ended December 31, 2002
--------------------------------------------
(in thousands)
--------------
Other Total
Core deposit amortizing amortizing
intangibles intangibles intangibles
------------ ------------ ---------
Amortization Expense: $210 $50 $260
- ------------ -------
The estimated amortization expense of amortizing intangible assets for each of the five succeeding fiscal years is as follows:
Other Total
Core deposit amortizing amortizing
Intangibles intangibles intangibles
------------ ------------ ---------
Estimated annual amortization expense:
- --------- ------ ------------ -------
(in thousands)
For the year ended September 30, 2003 $849 $176 $1,025
For the year ended September 30, 2004 750 176 926
For the year ended September 30, 2005 644 176 820
For the year ended September 30, 2006 586 145 731
For the year ended September 30, 2007 558 90 648
Intangible assets acquired during the three months ended December 31, 2002 are as follows:
(in thousands)
Weighted average
Amount Residual amortization
assigned value period in years
-------- -------- ----------------
Other intangibles $450 $ - 5
---- --- -
Total $450 $ - 5
==== === =
The adoption of SFAS No. 142 and SFAS No. 147 as of October 1, 2001 had no impact on December 31, 2002 or 2001 results.
7. Corporation Obligated Floating Rate Trust Preferred Securities
On October 15, 2002, the Company sponsored the creation of NEP Capital Trust II, a Delaware statutory business trust. The company is the owner of all of the common securities of the Trust. On October 29, 2002, the Trust issued $15.0 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 $464,000 capital contribution for the Trust’s common securities, were used to acquire $15.5 million aggregate principal amount of the Company’s floating rate junior subordinated deferrable interest debentures due November 7, 2032 (the “Debentures”), which constitute the sole asset of the Trust. The interest rate on the Debentures and the distribution rate on the capital securities is variable and adjustable quarterly at 3.54% over the three-month LIBOR, with an initial rate of 5.27%. A rate cap of 12.5% is effective through November 7, 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
December 31, Prepayment Payment
Name 2002 2001 Rate Option Date Maturity Frequency
----- ------------------------------- ----------- -------- ---------
NEP Capital Trust II $15,000,000 - 5.27% 8/7/07 11/7/32 Quarterly
|
The stated maturity of the Debentures is November 7, 2032. 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 August 7, 2007. The Debentures are also subject to redemption 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. The Company has the right, at one or more times, to defer interest payments on the Debentures for up to twenty consecutive quarterly periods. All deferrals will end on an interest payment date and will not extend beyond November 7, 2032, the stated maturity date of the Debentures. If the Company defers interest payments on the Debentures, the Trust will also defer distributions on the capital securities. During any deferral period, each installment of interest that would otherwise have been due and payable will bear additional interest (to the extent payment of such interest would be legally enforceable) at the applicable distribution rate, compounded quarterly. |
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this Form 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, Section C, Critical Accounting Policies, and Section E, Liquidity and Capital Resources.
A. General
The Company’s results of operations are dependent primarily on the results of operation of the Bank and thus are dependent to a significant extent on net interest income, which is the difference between the income earned on its loan and investment portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. However, non-interest income has become a meaningful component of the Company’s operations mainly due to fees earned by non-bank subsidiaries. Results of operations are also affected by the Company’s provision for loan losses, loan and security sales activities, service charges and other fee income, and non-interest expense. The Company’s non-interest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, data processing, professional fees, 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 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.On September 4, 2002, the Company announced the formation of a relationship with Smith Barney under which Smith Barney Investment Centers will provide retail brokerage products and services at all of the First Federal offices through Financial Consultants located in several key offices. Customers of the Investment Centers will be able to access professional and personalized investment service at the same location as they currently have available for banking, insurance and trust at the Bank. This is Smith Barney’s first relationship with a bank in the Commonwealth of Pennsylvania. Smith Barney, an independent, registered broker-dealer, is not affiliated with the Bank.
B. Management Strategy
The Company’s operating strategy is that of a community-based financial services company, offering a wide variety of financial products to its retail customers, while concentrating on residential and consumer lending and, to a lesser extent, construction lending and small business and municipal commercial lending. The Company also meets the needs of its customers through offering financial services, including insurance products and asset management services. In order to promote long-term financial strength and profitability, the Company has focused on: (i) maintaining strong asset quality by originating one- to four-family loans located in its market area; (ii) emphasizing higher yielding consumer, specifically indirect automobile lending, and commercial loans; (iii) managing its interest rate risk by emphasizing shorter-term, fixed-rate, one- to four-family loans, in addition to consumer and commercial loans; limiting its retention of newly originated longer-term fixed-rate one- to four-family loans; soliciting longer-term deposits; utilizing longer-term advances from the Federal Home Loan Bank of Pittsburgh (the “FHLB”); and investing in investment and mortgage-related securities having shorter estimated durations; (iv) meeting the financial needs of its customers through expanded products, such as personal and business insurance from Higgins, trust and investment management services from the Trust Co., title insurance from Abstractors, Inc., all with improved delivery systems through technological advances and integration of products; and (v) maintaining a strong regulatory capital position.
The Company has attempted to diversify and expand its loan products to better serve its customer base by placing a greater emphasis on consumer lending and commercial lending, primarily to small businesses and municipalities. As a result of its policy to limit its retention of newly originated longer-term, fixed-rate one- to four-family loans to 25% of total loan originations during a fiscal year, the Company sells mortgage loan originations with interest rate adjustments of fifteen years or more which it originates in excess of its retention policy. The Company also offers nonconforming one- to four-family loans. These loan products are sold at origination in the secondary market.
C. Critical Accounting Policies
Other Investment. The Company has a $1.5 million net 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. BuildersFirst Holdings, Inc. continue to experience losses while providing services to builders in the Eastern United States due to having insufficient funding sources to meet the product deviant that the operations are prepared to handle. At this time, BuildersFirst is seeking additional capital to allow them to have sufficient cash to fund an increased portion of the loan originations themselves.
Allowances for Loan Losses. The allowance for loan losses is maintained at a level representing management’s best estimate of known and inherent losses in the portfolio, based upon management’s evaluation of the portfolio’s collectibility. 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 Company’s allowance for losses on loans. Such agencies may require the Company 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 Company will be unable to collect all proceeds due according to the contractual terms of the loan agreement. For purposes of applying the measurement criteria for impaired loans, the Company excludes large groups of smaller balance homogeneous loans, primarily consisting of residential real estate and consumer loans, as well as commercial loans with balances of less than $100,000.
Impaired loans are charged off when the Company determines that foreclosure is probable, and the fair 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.
Intangible Assets. Intangible assets include core deposit intangibles and certain other miscellaneous intangibles. 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- to 5 years. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.
Goodwill. Goodwill is the excess of cost over the fair value of assets acquired in connection with business acquisitions and was being amortized on the straight-line method over 5, 6 and 20 years, prior to October 1, 2001. On October 1, 2001, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which eliminated the regularly scheduled amortization of goodwill and replaced this method with a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company's reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company, upon adoption of this Statement, stopped amortizing existing goodwill of $3.0 million. In addition, the Company performed its initial impairment analysis of goodwill and other intangible assets and determined that the estimated fair value exceeded the carrying amount.
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 Company’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):
December 31, September 30,
2002 2002
---- ----
Non-performing loans:
Non-accrual loans plus other impaired loans $4,512 $4,200
Real estate owned and other repossessed assets 836 547
--- ---
Total non-performing assets $5,348 $4,747
====== ======
Troubled debt restructurings $- $55
Troubled debt restructurings and total non-performing assets $5,348 $4,802
====== ======
Total non-performing loans as a percentage of total loans 0.91% 0.86%
Total non-performing assets as a percentage of total assets 0.58% 0.53%
The increase in non-performing assets was primarily the result of additional delinquencies associated with 1- to 4- family mortgages, and consumer loans, specifically automobile loans.
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 December 31, 2002, cash and cash equivalents and investment and
mortgage-related securities available-for-sale totaled $371.9 million, or 40.3%
of total assets.
The Bank has other sources
of liquidity if a need for additional funds arises, including FHLB advances. At
December 31, 2002, the Bank had $208.4 million in advances outstanding from the
FHLB, and had an overall borrowing capacity from the FHLB of $435.7 million. The
Company plans to use current investments to pay the $35.0 million fixed rate
FHLB borrowings that will mature within the next twelve months. 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. In addition to
these traditional funding sources, the Bank began utilizing alternative funding
sources such as the sale and securitization of automobile loans.
At December 31, 2002, the
Bank had commitments to originate and purchase loans and unused outstanding
lines of credit and undisbursed proceeds of construction mortgages totaling
$96.7 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 December 31, 2002, totaled $101.4 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 December 31, 2002, the Bank had $32.7
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. During 2002, the Company obtained $22.0 million
through two trust-preferred offerings. Of the total proceeds, $5.0 million was
used to further capitalize the Bank, while the remaining amount at the Company
level will be for general corporate purposes, as well as to fund the trust
established to purchase the Company’s stock to fund the future exercise of
stock options.
At December 31, 2002, the
Bank exceeded all of its regulatory capital requirements with a tangible capital
level of $57.9 million, or 6.5% of total adjusted assets, which is above the
required level of $13.4 million, or 1.5%; a core capital level of $57.9 million,
or 6.5% of total adjusted assets, which is above the required level of $26.8
million, or 3.0%; and a risk-based capital of $63.2 million, or 12.3% of
risk-weighted assets, which is above the required level of $41.2 million, or
8.0%.
At December 31, 2002, the
Bank had total equity, determined in accordance with generally accepted
accounting principles, of $70.4 million, or 7.6%, of total assets, which
approximated the Bank’s regulatory tangible capital at that date of 6.5% 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 December 31, 2002 and September 30, 2002
Total assets increased
$17.2 million from $905.5 million at September 30, 2002 to $922.7 million at
December 31, 2002. The growth was generated by a $24.0 million increase in cash
and cash equivalents that was primarily funded by a $15.0 million
trust-preferred offering coupled with deposit growth of $7.6 million. As
discussed previously, the Company anticipates utilizing these additional funds
to purchase stock for the stock option trust while evaluating other investment
opportunities. Asset growth was partially offset by a $5.3 million decline in
investment securities available-for-sale, specifically mortgage-backed
securities.
Securities classified as
available-for-sale decreased $5.3 million, from $327.9 million at September 30,
2002 to $322.6 million at December 31, 2002. The decrease was primarily
attributable to mortgage- backed securities repayments, offset by the purchase
of Fannie Mae stock and mortgage-backed securities. The Company is evaluating
opportunities to restructure a portion of its investment securities portfolio to
reduce the current risk of rapid prepayments.
Net loans remained
relatively steady at $490 million. Consumer loans increased $10.1 million due to
an $11.9 million increase in indirect auto loan originations within the
Company’s market area. Commercial loan demand generated a slight increase
during the quarter by $3.0 million. Total real estate loans decreased $12.9
million due to the $13.6 million decrease in one- to four- family loans as a
result of prepayments of mortgages.
Total liabilities increased
$17.3 million from $837.1 million at September 30, 2002 to $854.4 million at
December 31, 2002, due primarily to the issuance of $15.0 million in
trust-preferred securities and $7.5 million deposit growth.
Deposits increased $7.5
million from $605.0 million as of September 30, 2002 to $612.5 million at
December 31, 2002. The largest increase was in checking accounts, specifically
$18.2 million in NOW accounts and $7.5 million in money market accounts due to
continued focus by the Company on marketing such accounts to attract lower cost
deposits. Offsetting these increases was a $22.7 million decrease in certificate
of deposits as a result of matured certificates being rolled into checking
accounts. At December 31, 2002, the Company held $9.3 million of public funds.
In October 2002, the
Company issued an additional $15.0 million of trust-preferred securities. The
interest rate on the trust-preferred securities is variable and adjusts
quarterly at 3.45% over three-month LIBOR, with an initial rate of 5.27%, with a
rate cap of 12.5%. The Company used the proceeds of the offering for general
corporate purposes and to fund a trust established to purchase the
Company’s stock to fund future exercises of stock options.
Total equity decreased
slightly due to a $314,000 decrease in accumulated other comprehensive income as
a result of a decrease in unrealized gains on securities, offset by net income
for the quarter of $943,000 less dividend payments of $490,000. Because of
interest rate volatility, accumulated other comprehensive income could
materially fluctuate from period to period depending on economic and interest
rate conditions. Common stock acquired by stock benefit plans decreased $94,000
due to the purchase of 37,742 shares for the stock employee compensation trust
at a cost of $581,000, offset by the release of shares under the employee stock
ownership plan and the vesting of previously granted shares of restricted stock.
G. Comparison of Operating Results for the Three Months ended December 31, 2002 and December 31, 2001
General.The Company had net income of approximately $943,000 and $1.3 million for the three months ended December 31, 2002 and
December 31, 2001, respectively. Basic and diluted earnings per share decreased to $.25 and $.24 per share, respectively, for the
three months ended December 31, 2002 as compared to $.29 and $.28 per share, respectively, for the same period of year 2001.
Interest Income.
Total interest income decreased $1.0 million, or 7.5%, from $13.7 million for
the three months ended December 31, 2001 to $12.7 million for the three months
ended December 31, 2002. This decrease was primarily due to a 119 basis point
decline on the tax-equivalent yield on earning assets to 5.97% for the three
months ended December 31, 2002 as compared to 7.16% for the same period ended
2001. Interest income on loans decreased $814,000 primarily due to a 59 basis
point decrease in yield, combined with a slight decrease in the average balance
of loans. Interest income on taxable investment securities decreased $516,000 as
the yield on such securities declined 167 basis points. The decreases were
offset by an increase in interest income on mortgage related securities of
$301,000 due to a $91.8 million increase in the average balance of these
securities, offset by a 149 basis point decrease in yield. The inflow of
deposits coupled with the rapid repayment of mortgage-backed securities has
resulted in reinvestment options at substantially lower rates than the previous
year.
Interest Expense.
Interest expense decreased $358,000, or 4.9%, from $7.3 million for the three
months ended December 31, 2001 to $7.0 million for the three months ended
December 31, 2002. Interest expense incurred on deposits decreased $694,000 for
the three months ended December 31, 2002 as compared to the same period ended
2001, while offset, somewhat, by an increase in interest expense on
borrowings
of $336,000. The decrease in interest expense was primarily attributable to a
declining interest rate environment that resulted in the cost of funds
decreasing to 3.42% for the three months ended December 31, 2002 as compared to
4.13% for the same period ended 2001. Offsetting the declining rates was an
increase in the average balance of interest-bearing liabilities of $104.5
million to $806.6 million for the three months ended December 31, 2002. In
particular, the average balance of transaction accounts increased $83.4 million
to $196.1 million. This increase was the result of the addition of three branch
offices in 2002, as well as the competitively priced products being marketed
throughout the Company’s market area. Furthermore, core deposit growth also
was driven by a general shift in customer preference away from the equity
markets and into insured bank deposits. The decrease in interest expense was
also due to a $978,000 decrease in interest expense on certificates of deposit,
which was the result of a 118 basis point decrease in interest rates, and a
$10.4 million decrease in the average balance. Interest expense on checking
accounts increased $386,000 as a result of an $83.4 million increase in the
average balance on these accounts. Interest expense on FHLB advances and other
borrowings increased $336,000 due to $235,000 of interest expense associated
with the $22.0 million trust-preferred securities which the Company did not have
at December 31, 2001.
Provision for Loan
Losses. The provision for loan losses increases the allowance for loan
losses. The Bank’s provision for loan losses for the three months ended
December 31, 2002 decreased $268,000 compared to the comparable 2001 period. The
Bank’s success in maintaining asset quality was the basis for reduction of
the loan loss provision.
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 added 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 judgements about
information available to them at the time of their examination.
Non-interest Income.
Non-interest income increased $948,000 from $1.6 million for the three
months ended December 31, 2001 to $2.5 million for the three months ended
December 31, 2002. Other income, for the three months ended December 31, 2002,
increased $362,000 as a result of $157,000 of income from bank-owned life
insurance and $143,000 from income on the retained interest associated with the
sale and securitization of $50.0 million of automobile loans in June 2002.
Insurance premium income increased $204,000, or 28.3%, due to continued growth
in insurance related services. Service charges and other fees increased $146,000
due to a larger customer base that partially resulted from the acquisition of
three additional branches of another community financial institution during
2002. Gain-on-sale of loans increased $92,000 as $8.4 million of originations of
fixed-rate mortgages, in excess of the Bank’s retention policy, continue to
be sold. During the current period, the sale of $8.4 million of such loans
generated gains of $244,000, as compared to a gain of only $152,000 in the
comparable prior year period. Income from trust fees increased $79,000 as a
result of growth in assets under management. Such fees have progressively
increased as the number of accounts and volume of related transactions have
increased.
Non-interest
Expense. Total non-interest expense increased $1.1 million from $5.5 million
for the three months ended December 31, 2001 to $6.5 million for the three
months ended December 31, 2002. This increase was due primarily to an increase
in compensation and employee benefits of $370,000 for new staff associated with
the acquisitions of three additional branches as well as new ventures into other
business lines in 2002. Full-time equivalent employees have increased to 278 at
December 31, 2002 as compared to 201 at December 31, 2001. Also driving the
increased costs of employee benefits was an increase in hospitalization expense
of $372,000 for 2003 as compared to $244,000 for 2002. Professional fees
increased $232,000 as a result of accounting fees related to fiscal 2002 audit
matters coupled with an increase in consulting services during the transition
period between chief financial officers. Other non-interest expense increased
$191,000 due to costs associated with foreclosed properties combined with
general increases in operating expenses such as supplies and telephone and other
incremental increases that resulted from operating a larger organization.
Occupancy expenses increased $139,000 due to Company expansion. Advertising
costs increased to $136,000 over the previous year quarter as the Company began
the promotion of a new image campaign.
Income Taxes. The
Company had an income tax provision of $382,000 for the three months ended
December 31, 2002, compared to a provision of $594,000 for the three months
ended December 31, 2001 resulting in effective tax rates of 28.8%, and 31.7%,
respectively. The change in income tax expense was primarily attributable to a
decrease in pre-taxable income, while items of income that are tax-exempt remain
constant. Included in the income tax provision for the three months ended
December 31, 2002 was a $40,000 increase to a deferred tax asset valuation
allowance related to the charitable contribution carryforward.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| As of December 31, 2002, there have been no material changes in the quantative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002. |
|
(a) Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon her evaluation of those controls and procedures performed
within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of the
Company concluded that the Company's disclosure controls and procedures were adequate. (b) Changes in internal controls.The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive officer. |
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. |
| Not applicable. |
| Not applicable. |
| None. |
| Not applicable. |
(A) |
Exhibits |
3.1 |
Certificate of Incorporation of Northeast Pennsylvania Financial Corp.* | |
3.2 |
Bylaws of Northeast Pennsylvania Financial Corp.* | |
4.0 |
Form of Stock Certificate of Northeast Pennsylvania Financial Corp.* | |
11.0 |
Statement regarding Computation of Per Share Earnings (See Notes to Consolidated Financial Statements) | |
99.1 |
Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* |
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 the Exhibits to the Form 10-K/A as filed with the Securities and Exchange Commission on January 8, 2003. |
(B) |
Reports on Form 8-K |
On October 22, 2002, the Company filed a Form 8-K in which it announced under Item 5 that its 2003 annual meeting of stockholders would be held on January 29, 2003. The press release announcing the annual meeting was attached by exhibit.
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: February 14, 2003 | By: /s/ E. Lee Beard E. Lee Beard President, Chief Executive Officer, and Chief Financial Officer |
I, E. Lee Beard, certify that: