UNITED STATES
SECURlTIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
OR
[ ] TRANSITION REPORT UNDER 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
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(State or other jurisdiction of I.R.S. Employer
Incorporation or organization) Identification No.)
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201-6591
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 459-3700
Securities registered under Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $0.01 per share
(Title of class)
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 a check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _______
The market value of the voting and non-voting common equity held by non-affiliates (i.e. persons other than directors and executive officers of the registrant) computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $63 million.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ___ No _X___
The number of shares of common stock outstanding as of December 30, 2002 was 4,171,525.
(1) Portions of the Annual Report to Shareholders for the year ended September 30, 2002 are incorporated by reference into Part
I, Part II and Part IV of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2002 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Form 10-K.
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FORM 10-K
TABLE OF CONTENTS
Part I Page
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Item 1 Business 1
Item 2 Properties 12
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 15
Part II
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Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial Condition and Results of 16
Operation
Item 7A Quantitative and Qualitative Disclosures About Market Risk 16
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 16
Part III
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Item 10 Directors and Executive Officers of the Registrant 17
Item 11 Executive Compensation 17
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 17
Item 13 Certain Relationships and Related Transactions 17
Item 14 Controls and Procedures 17
Part IV
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Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K 18
SIGNATURES 20
CERTIFICATES
21
Part I
Forward Looking Statements
In addition to historical information, our 10-K may include certain "forward-looking statements" within the meaning of the federal securities laws. Such forward-looking statements may be identified by the use of such words as "intend", "believe", "expect", "anticipate", "should", "planned", "estimated" and "potential". These forward-looking statements include, but are not limited to, estimates and expectations of future performance based on current management expectations. Northeast Pennsylvania Financial Corp.'s (the "Company") 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 regulation 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 Company'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. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. Subject to applicable law and regulation, the Company assumes no obligation to update any forward-looking statements.
Item 1. Business
General
The Company is a Delaware corporation and is the holding company for First Federal Bank (the "Bank"), a federally chartered capital stock savings bank regulated by the Office of Thrift Supervision ("OTS"). The Company's executive offices are located at 12 East Broad Street, Hazleton, Pennsylvania 18201.
The Company's operations are primarily conducted through the Bank. These operations have been and continue to be attracting retail deposits from the general public in the areas surrounding its 19 full service community offices and investing those deposits, together with funds generated from operations and borrowings, primarily in one- to four-family mortgage loans, consumer loans, and multi-family and commercial loans. The Company has attempted to diversify and expand its loan products to better serve its customer base by placing a greater emphasis on its consumer lending and commercial lending, primarily to small businesses and municipalities.
The Company's revenues are derived from its four principal lines of business; Banking, Insurance, Investments and Trust. First Federal Bank's revenues are derived principally from interest on its loans, and to a lesser extent, interest and dividends on its investment and mortgage-related securities and through other non-interest income. Insurance income is generated through Higgins Insurance Agency and Abstractors Inc., principally through their premiums earned on insurance policies written. Investment income is generated through Higgin's Insurance and Salomon Smith Barney through annuity sales and commissions on investment sales. Trust income is generated through Northeast Pennsylvania Trust Co., through its fees on trust assets managed. The Company's primary sources of funds are deposits, principal and interest payments on loans and mortgage related securities, FHLB advances and proceeds from the sale of loans.
In addition other business of the Company is conducted through its other subsidiaries, Abstractors, Inc., which is a title insurance agency, Northeast Pennsylvania Trust Co. (the "Trust Co."), which offers trust, estate and asset management services and products and Higgins Insurance Agency ("Higgins"), which provides insurance and investment products to individuals and businesses. Insurance premium income has increased significantly over the past year due to the addition of Higgins and the continued growth of Abstractors, Inc. The Trust Co. continues to expand its customer base with assets under management of $140.3 million at September 30, 2002.
Market Area and Competition
The Company is a community-oriented banking institution offering a variety of financial products and services to meet the needs of the communities it serves. The Company's lending and deposit gathering is concentrated in its market area consisting of Luzerne, Carbon, Columbia, Monroe, Montour, Northumberland and Schuylkill counties in Northeastern and Central Pennsylvania. The Company invests primarily in loans secured by first or second mortgages on properties located in areas surrounding its offices.
The Company maintains its headquarters in Hazleton. The Company's seven banking offices in Luzerne County, including Hazleton, accounted for $353.5 million or 58.4% of the Company's total deposits at September 30, 2002. Hazleton is situated approximately 100 miles from Philadelphia and New York City and approximately 50 miles from Allentown and the Wilkes-Barre/Scranton area. The Company also maintains two banking offices in Bloomsburg (Columbia County), one each in Lehighton and Weatherly (both in Carbon County), one in Brodheadsville (Monroe County), one in Danville (Montour County), one in Mount Carmel (Northumberland County) and one each in Frackville, Pottsville, Shenandoah, Ashland and Schuylkill Haven (all in Schuylkill County). The Company also operates a banking and a loan production office in Monroe County.
The economy of the greater Hazleton area is characterized by diversified light manufacturing and is the site of production facilities for several major manufacturers including Union Camp, Hershey-Cadbury Chocolates, Quebecor and Hazleton Pumps, Inc. As a consequence, the manufacturing sector employs more than one third of the area's work force. The Hazleton area has excellent access to major highway transportation routes including Interstates 80 and 81 as well as rail transportation. The population of Luzerne County has remained relatively static and has one of the oldest average ages for all counties in the United States. The southern end of Schuylkill County is proving to be a growth area as individuals and companies which were previously based in the Allentown-Berks county area are relocating to the southern end of Schuylkill County. The overall population in the Company's market area is relatively small and, in recent years, has grown slowly, and the unemployment rate in the area is greater than the national average.
Monroe County, the location of the Pocono Pines loan production office and the Brodheadsville banking branch, is dominated by the Pocono Mountains, making the area one of the Mid-Atlantic's most popular resort areas. The Company established its loan production office to take advantage of the market for vacation properties existing in Monroe County as well as to be involved in the growth in the number of permanent residents relocating into the county.
The Company faces significant competition both in generating loans and in attracting deposits. The Company's primary market area is highly competitive and the Bank faces direct competition from a significant number of financial institutions, many with a state wide or regional presence and, in some cases, a national presence. Many of these financial institutions are significantly larger and have greater financial resources than the Company. The Company's competition for loans comes principally from commercial banks, savings banks, credit unions, mortgage brokers, mortgage banking companies and insurance companies. Its most direct competition for deposits has historically come from savings banks and associations, commercial banks and credit unions. In addition, the Bank faces increasing competition for deposits from non-bank institutions such as brokerage firms and insurance companies in such instruments as short-term money market funds, corporate and government securities funds, mutual funds and annuities. Competition has also increased as a result of the lifting of restrictions on the interstate operations of financial institutions, as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to market entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. The Gramm-Leach-Bliley Act, which permits affiliation among banks, securities firms and insurance companies also changed the competitive environment in which the Bank conducts business.
In addition, the Company recognizes that its customer base increasingly focuses on convenience and access to services. The Company has addressed these customer desires through the implementation of PC banking and voice response capabilities, a computerized loan origination and document system and the issuance of debit cards. The Bank has entered into a relationship with Smith Barney, whereby Smith Barney will be placing licensed representatives in the Banking offices to facilitate investment sales. The Company intends to continue to evaluate and enhance its service delivery system.
LENDING ACTIVITIES
General. The information relating to the composition and maturity of the Bank's loan portfolio appears in "Loans" in the Company's 2002 Annual Report to Shareholders and is incorporated herein by reference.
Origination and Sale of Loans. The Bank's lending activities are conducted primarily by its loan personnel operating at its branch and loan origination offices. All loans originated by the Bank are underwritten pursuant to the Bank's policies and procedures. For fiscal 2002 and 2001, the Bank originated or purchased $217.2 million and $185.2 million in total loans, respectively. The Bank originates both adjustable-rate and longer-term and shorter-term fixed-rate loans. The Bank's ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future level of interest rates.
It currently is the policy of the Bank to retain for investment longer-term ( 15 years or greater to maturity at date of origination) fixed-rate one- to four- family loans originated during a fiscal year only up to 25% of its total loan originations during that year. In addition, the Bank generally retains the adjustable rate and shorter-term (maturities of less than 15 years) fixed-rate loans originated. The Company sells in the secondary market longer-term, fixed-rate one- to four-family loans which it originates in excess of its retention policy for such loans. In fiscal year 2002, the Company sold basically all loans originated with a maturity of 15 years or greater at date of origination.
During fiscal years 2002 and 2001, the Bank originated or purchased $34.2 million and $24.0 million, respectively, of one- to four-family mortgage loans. In addition, during fiscal years 2002 and 2001, the Bank originated $13.6 million and $13.1 million, respectively, of construction loans. All of such construction loans were for owner financing of single family properties, which, upon completion of the construction phase, generally would convert to permanent financing. Also, the Bank originated $15.8 million and $27.4 million, respectively, of multi-family and commercial real estate loans during fiscal 2002 and 2001.
Also, during fiscal 2002 and 2001, the Bank originated or purchased $132.1 million and $87.3 million of consumer loans, respectively. Such activity, during fiscal 2002 and 2001, consisted of $20.2 million and $17.5 million, respectively, of home equity loans,
$13.3 million and $6.2 million, respectively, of home equity lines of credit, $94.3 million and $57.6 million, respectively, of direct and indirect automobile loans, $10,000 and $1.9 million, respectively, of education loans, and $4.3 million and $4.2 million, respectively, of other consumer loans. The increase in automobile loans is a direct result of more participating auto dealers.
In addition, during fiscal 2002 and 2001 respectively, the Bank originated $21.6 million and $33.4 million of commercial loans. These originations consisted primarily of commercial business and municipal loans.
The following table sets forth the Bank's loan originations, purchases, sales and principal repayments for the periods indicated:
For the Fiscal Years Ended September 30, ---------------------------------------- (In Thousands) 2002 2001 2000 ---- ---- ---- Loans at beginning of period $511,320 $426,754 $372,799 Originations and Purchases: Real estate: One- to four-family 34,176 23,961 34,316 Multi-family and commercial 24,740 27,418 25,452 Construction 13,550 13,125 10,274 ------ ------ ------ Total real estate loans 72,466 64,504 70,042 ------ ------ ------ Consumer: Home equity loans and lines of credit 33,518 23,730 20,547 Automobile 94,254 57,596 39,300 Education 10 1,855 2,011 Unsecured lines of credit 1,490 586 484 Other 2,778 3,568 4,758 ----- ----- ----- Total consumer loans 132,050 87,335 67,100 Commercial 35,176 33,351 22,859 ------ ------ ------ Total loans originated and purchased 239,692 185,190 160,001 ------- ------- Deduct: Principal loan repayments and prepayments 156,611 96,470 109,346 Loan sales 65,938 9,859 1,806 Transfers to REO 2,174 1,281 614 ----- ----- --- Sub-total 224,723 107,610 111,766 ------- ------- ------- Net loan activity 14,969 77,580 48,235 ------ ------ ------ Loans at end of period (1) $496,351 $504,334 $421,034 ======= ======== ========
(1) Loans at end of period include loans in process of $6,448, $6,986 and $5,951 for fiscal years 2002, 2001 and 2000, respectively.
One- to Four-Family Mortgage Lending. The Bank currently offers both fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years secured by one- to four-family residences. One- to four-family mortgage loan originations are generally obtained from the Bank's in-house loan representatives, from existing or past customers, and through referrals from members of the Bank's local communities.
The origination of ARM loans, as opposed to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to increases in interest rates. However, adjustable-rate loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. Periodic and lifetime caps on interest rate increases help to reduce the credit risks associated with adjustable-rate loans but also limit the interest rate sensitivity of such loans.
Most one- to four-family mortgage loans are underwritten according to Fannie Mae and Freddie Mac guidelines. In recent years, the Bank began offering to borrowers one- to four-family mortgage loans which, when underwritten, did not fully meet established Fannie Mae or Freddie Mac standards, for example, the standard regarding income to debt ratios for the borrower . Mortgage loans originated by the Bank generally include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank's consent. Due-on-sale clauses are an important means of adjusting the yields on the Bank's fixed-rate mortgage loan portfolio and the Bank has generally exercised its rights under these clauses. The Bank requires fire, casualty, title and, in certain cases, flood insurance on all properties securing real estate loans made by the Bank.
Multi-Family and Commercial Real Estate Lending. The Bank originates fixed-rate and adjustable- rate multi-family and commercial real estate loans that generally are secured by properties used for business purposes or a combination of residential and retail purposes.
Pursuant to the Bank's underwriting policies a multi-family mortgage and commercial real estate loan may be made in an amount up to 80% of the lower of the appraised value or sales price of the underlying property with terms generally ranging from 15 to 25 years.
The factors considered by the Bank in granting these loans include: the net operating income of the mortgaged premises before debt service and depreciation; the debt coverage ratio (the ratio of net earnings to debt service); and the ratio of loan amount to appraised value. The Bank has generally required that the properties securing commercial real estate loans have debt service coverage ratios of at least 125%.
Construction Lending. The Bank also offers residential construction loans. Such loans have been for presold one- to four-family residences for the construction phase and convert into permanent financing. The Bank generates residential construction loans primarily through direct contact with the borrower or home builders, and these loans involve properties located in the Bank's market area. Such loans require that the Bank review plans, specifications and cost estimates and that the contractor be known to the Bank to be reputable. The amount of construction advances to be made, together with the sum of previous disbursements, may not exceed the percentage of completion of the construction. The maximum loan-to-value limit applicable to such loans is 80%.
Consumer Lending. The Bank offers consumer loans which include home equity loans, home equity lines of credit, direct and indirect automobile loans, education loans and other consumer loans. The Bank's home equity loans are generated primarily through the Bank's retail offices. The Bank generally offers home equity loans with a term of 180 months or less. The Bank also offers home equity lines of credit with terms up to 20 years, the last 10 years of which require full amortization of the principal balance. The maximum loan amount for both home equity loans and home equity lines of credit, is subject to a combined loans-to-value ratio of 80%.
The Bank also offers automobile loans, both on a direct and an indirect basis (through new and used car dealers). The indirect automobile loans are originated by dealers in accordance with underwriting standards pre-established by the Bank and are serviced by the Bank. During fiscal 2002, the Bank had a $50.0 million automobile loan securitization accounted for as a sale. The Bank also offers loans on recreational vehicles and boats and other consumer loans, including education loans which are federally guaranteed and originated under regulations of the Pennsylvania Higher Education Assistance Agency, deposit-secured loans, and other personal and unsecured loans. The Bank's policy is to sell its education loans upon origination to Sallie Mae with servicing released.
Consumer loans tend to bear higher rates of interest and have shorter terms to maturity than first lien residential mortgage loans. Nationally, consumer loans have historically tended to have a higher rate of default. Additionally, consumer loans entail greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Commercial Lending. The Bank makes commercial business loans primarily in its market area to a variety of professionals, sole proprietorships and small businesses. The Bank offers a variety of commercial lending products, including term loans for fixed assets and working capital, revolving lines of credit, letters of credit, and Small Business Administration guaranteed loans. Interest rates charged generally are based on the prime rate as published in the Wall Street Journal. Prior to making commercial business loans, the borrower is required to provide the Bank with sufficient information to allow a prudent loan decision to be made. Such information generally includes financial statements and projected cash flows, and is reviewed to evaluate debt service capability. Commercial business loans are generally secured by a variety of collateral, primarily real estate, and frequently are supported by personal guarantees. In addition, the Bank actively participates in industrial loans arranged through and with the Greater Wilkes-Barre Industrial Fund and CanDo, Inc. a Hazleton area industrial fund.
Commercial business loans generally involve higher credit risks than loans secured by real estate. Unlike mortgage loans, which generally are made on the basis of the borrowers ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Loan Approval Procedures and Authority. The Board of Directors establishes the lending policies and the levels of loan approval authority for employees of the Bank and oversees the Bank's lending activity. The Board of Directors has established a Loan
Committee comprised of the Bank's Chairman of the Board of Directors, President, Senior Vice President Lending, Senior Vice President/ Chief Financial Officer and three outside directors to assist them with these activities.
Non-Performing Assets, Impaired Loans, Real Estate Owned and Allowance for Loan Losses. The information relating to the Bank's non-performing assets, impaired loans, real estate owned and allowance for loan losses appears in "Non-Performing Assets and Impaired Loans" and "Allowance for Loan Losses" in the Registrant's 2002 Annual Report to Shareholders.
Investment Activities
The above captioned information appears in "Investment Activities" in the Registrant's 2002 Annual Report to Shareholders and is incorporated herein by reference.
Source of Funds
Information relating generally to the Bank's source of funds and a description of the Bank's deposits appears under "Sources of Funds" in the Registrant's 2002 Annual Report to Shareholders and is incorporated herein by reference.
Borrowings. The Bank utilizes advances from the FHLB of Pittsburgh as a supplement to retail deposits to fund its operations as part of its operating strategy. These FHLB advances are collateralized primarily by certain of the Bank's mortgage loans and mortgage-related securities and secondarily by the Bank's investment in capital stock of the FHLB of Pittsburgh. FHLB advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB of Pittsburgh will advance to member institutions, including the Bank, fluctuates from time to time in accordance with the policies of the FHLB of Pittsburgh. See "Regulation-Federal Home Loan Bank System." At September 30, 2002, the Bank had $208.4 million in outstanding FHLB advances, compared to $204.4 million at September 30, 2001. Other borrowings consist of overnight retail repurchase agreements and for the periods presented were immaterial.
The following table sets forth certain information regarding the Bank's borrowed funds at or for the periods ended on the dates indicated:
At or For the Fiscal Years Ended September 30,
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2002 2001 2000
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(Dollars in Thousands)
FHLB advances and other borrowings:
Average balance outstanding $211,552 192,981 $191,797
Maximum amount outstanding at any month-end
during the period 217,044 216,227 226,717
Balance outstanding at end of period 213,051 210,431 139,115
Weighted average interest rate during the period 5.70% 5.84% 5.85%
Weighted average interest rate at end of period 5.66% 5.63% 6.13%
Subsidiary Activities
The Company has six wholly-owned subsidiaries: the Bank, incorporated under the laws of the United States; Abstractors, Inc., Northeast Pennsylvania Trust Co., and Higgins Insurance Agency, each of which incorporated under Pennsylvania law; and NEP Capital Trust I and NEP Capital Trust II, each of which is incorporated under Delaware law. FIDACO, Inc. is an inactive subsidiary of First Federal Bank with the only major asset being an investment by FIDACO, Inc. in Hazleton Community Development Corporation. Abstractors, Inc. is a title insurance agency with total assets of $505,000 at September 30, 2002. Northeast Pennsylvania Trust Co., offers trust estate and asset management services and products and had total assets of $652,000 and $140.3 million of trust assets under management at September 30, 2002. At September 30, 2002, total assets of FIDACO, Inc. were $33,000. Higgins provides insurance and investment products to individuals and businesses and had total assets of $1.6 million at September 30, 2002.
Personnel
As of September 30, 2002, the Company had 249 full-time and 43 part-time employees, none of whom were covered by a collective bargaining agreement. Management believes that the Company has good relations with its employees and there are no pending or threatened labor disputes with its employees.
Regulation and Supervision
As a savings and loan holding company, the Company is required by federal law to file reports with and otherwise comply with, the rules and regulations of the OTS. The Bank is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and the Federal Deposit Insurance Corporation (the "FDIC"), as the deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to test the Bank's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank and their operations.
Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings associations and their holding companies set forth in this Form 10-K does not purport to be complete descriptions of such statutes and regulations and their effects on the Bank and the Company are qualified in its entirety by reference to such statutes and regulations.
Federal Savings Institution and Regulations
Business Activities. The activities of federal savings institutions are governed by the federal laws and regulations. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal associations, e.g., commercial, non-residential real property loans and consumer loans, are limited to a specified percentage of the institution's capital or assets.
Loans-to-One-Borrower. Federal law provides that, savings institutions are generally subject to the national bank limit on loans-to-one borrower. Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by specified readily marketable collateral. At September 30, 2002, the largest aggregate amount of loans-to-one borrower was $7.3 million, which was less than the Bank's general limit on loans-to-one borrower which was $10.0 million.
QTL Test. Federal law requires savings institutions to meet a qualified thrift lending ("QTL") test. Under the test, a savings association is required to either qualify as a "domestic building and loan association" under the Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least 9 months out of each 12-month period. A savings association that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of September 30, 2002, the Bank maintained 79.0% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered as "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OTS is required before any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under OTS regulations (generally, examination ratings in one of two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, the institution must still give advance notice to the OTS of the capital distribution, if, like the Bank, it is a subsidiary of a holding company. If the Bank's capital fell below its regulatory requirements or if the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution, which would otherwise be permitted by regulation, if the OTS determines that the distribution would be unsafe or unsound practice.
Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi-annual basis, are based upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly Thrift Financial Report. The assessments paid by the Bank for the year ended September 30, 2002 totaled $165,000.
Branching. OTS regulations permit federally-chartered savings associations to branch nationwide under certain conditions.
Generally, federal savings associations may establish interstate networks and geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by the federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most recent examination.
Transactions with Related Parties. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.
The recently enacted Sarbanes-Oxley Act generally prohibits loans by the Company to its executive officers and directors. However, the Act contains a specific exception from such prohibitions for loans by the Bank to its executive officers and directors in compliance with federal banking regulations restrictions on such loans. The Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is also governed by federal law. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. An exception exists for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed.
Enforcement. The OTS has primary enforcement responsibility over savings institutions and has the authority to bring action against the institution and all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that a savings institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard.
Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage (core capital) ratio for institutions receiving the highest examination rating on the CAMELS examination rating system (4% for others) and an 8% risk based capital ratio. Core capital is defined as common stockholder's equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights ("MSRs") and credit card relationships. The OTS regulations require that, in meeting the leverage ratio, tangible and risk-based capital standards institutions generally must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. In addition, the OTS prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 3% leverage ratio for institutions receiving the highest examination rating on the CAMELS examination rating system (4% for others), and, together with the risk-based capital standards itself, a 4% Tier I risk-based capital standard.
The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount
of risk-weighted assets, all assets, including certain off balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. The components of core capital are equivalent to those discussed earlier. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses, limited to a maximum of 1.25% of risk-weighted assets and equity up to 45% of unrealized gains on available-for-sale securities with readily determinable fair market value. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.
The OTS has adopted an interest rate risk component into its regulatory capital requirements. Savings associations with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. The OTS has deferred implementation of the interest rate risk capital charge and repealed the interest rate risk component in May 2002, concluding it was unnecessary in light of the other tools available to measure and control interest rate risk. At September 30, 2002, the Bank met each of its capital requirements. The following table presents the Bank's capital position at September 30, 2002. (Dollars in thousands)
Capital
---------------------------------------------
Excess
Actual Required (Deficiency)
Capital Capital Amount Actual % Required %
------- ------- ------------ -------- ----------
Tangible $51,628 $13,286 $38,342 5.8% >1.5%
Core (Leverage) 51,628 26,572 25,056 5.8 >3.0
Risk-based 56,828 43,569 13,259 10.4 >8.0
Prompt Corrective Regulatory Action. The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of under capitalization. Generally, a savings institution that has a total risk-based capital of less than 8% or a leverage ratio or a Tier 1 capital ratio that is less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the higher examination rating) is considered to be undercapitalized. A savings institution that has a total risk-based capital less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the OTS is required to appoint a receiver or conservator for an institution that is critically undercapitalized. The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is “undercapitalized,” significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions may become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators, restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on the institution’s capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution’s assessment rate depends on the categories to which it is assigned. Assessment rates for SAIF member institutions are determined semi-annually and range from 0 basis points, for the healthiest institutions to 27 basis points, for the riskiest institutions. The Bank’s assessment rate for the fiscal year 2002 was 1.75 basis points and the premium paid for this period was $95,000. The FDIC has authority to increase insurance assessments. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 2002, FICO payments for SAIF members approximated 1.7 basis points.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this requirement with an investment in FHLB stock at September 30, 2002, of $11.0 million.
FHLB advances must be secured by specified types of collateral and all long-term advances may only be obtained for the purpose of providing funds for residential housing finance. At September 30, 2002, the Bank had $208.4 million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the years ended September 30, 2002, 2001 and 2000 dividends from the FHLB to the Bank amounted to approximately $439,000, $673,000 and $687,000, respectively. If dividends were reduced, the Bank's net interest income would likely also be reduced. Recent legislation has changed the structure of the Federal Home Loan Banks' funding obligations for insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. Management cannot predict the effect that these changes may have with respect to its Federal Home Loan Bank membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $42.1 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $42.1 million, the reserve requirement is 10%. The first $6.0 million of otherwise reservable balances (subject to adjustment by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in compliance with these requirements.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company within the meaning of the federal law. The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Bliley Act specifies that, subject to a grandfather provision, existing savings and loan holding companies may only engage in such activities. The Company does qualify for the grandfathering. Permissible holding company activities include banking services such as lending, trust services, insurance activities and underwriting, investment banking and real estate investment.
A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution, or holding company thereof, without prior written approval of the OTS and from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies are not currently subject to specific capital requirements or specific restriction on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.
Acquisition of the Company. Under the Federal Change in Bank Control Act ("CIBCA"), a notice must be submitted to the OTS if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company's outstanding voting stock, unless the Office of Thrift Supervision has found that the acquisition will not result in a change of control of the Company. Under the CIBCA, the OTS has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a September 30 fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. Neither the Company nor the Bank has been audited by the IRS in the past five years.
Bad Debt Reserve. Historically, savings institutions such as the Bank which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrifts") were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank's deductions with respect to "qualifying real property loans," which are generally loans secured by certain interest in real property, were computed using an amount based on the Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. Due to the Bank's loss experience, the Bank generally recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the above thrift bad debt rules were passed by Congress as part of "The Small Business Job Protection Act of 1996." The new rules eliminated the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also required that all thrift institutions recapture all or a portion of their bad debt reserves added since the base year (the last taxable year beginning before January 1, 1988). The Bank had previously recorded a deferred tax liability equal to the bad debt recapture and as such, the new rules had no effect on net income or federal income tax expense. For taxable years that began after December 31, 1995, the Bank's bad debt deduction was equal to net charge-offs. The new rules allowed an institution to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the institution's lending activity for those years was equal to or greater than the institution's average mortgage lending activity for the six taxable years preceding 1996. For this purpose, only home purchase and home improvement loans were included and the institution could have elected to have the tax years with the highest and lowest lending activity removed from the average calculation. If an institution was permitted to postpone the reserve recapture, it had to begin its six year recapture no later than the 1998 tax year. The unrecaptured base year reserves were not subject to recapture as long as the institution continued to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continued to be subject to a provision of present law referred to below that required recapture in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "non-dividend distributions" to the Company that are considered as made: (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method, or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus if the Bank makes a "non-dividend distribution," then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers of which the Company currently has none. AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). In addition, for taxable years beginning after June 30, 1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Company, whether or not an Alternative Minimum Tax ("AMT") is paid. The Company does not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend then 80% of any dividends received may be deducted.
State and Local Taxation
The Company and its non-thrift Pennsylvania subsidiaries are subject to the Pennsylvania Corporation Net Income Tax and Capital Stock and Franchise Tax. The Corporate Net Income Tax rate for fiscal 2001 was 9.99% and was imposed on the Company's and its non-thrift subsidiaries' unconsolidated taxable income for federal purposes with certain adjustments. In general, the Capital Stock Tax is a property tax imposed at the rate of .724% of a corporation's capital stock value, which is determined in accordance with a fixed formula. The Company is also required to file an annual report with and pay an annual Franchise tax to the State of Delaware.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act (the "MTIT"), as amended, to include thrift institutions having capital stock. Pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the Bank from all other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The MTIT is a tax upon net earnings, determined in accordance with generally accepted accounting principals ("GAAP") with certain adjustments. The MTIT, in computing GAAP income, allows for the exclusion of interest earned on Pennsylvania and federal securities, while disallowing a percentage of a thrift's interest expense deduction in the proportion of interest income on those securities to the overall interest income of the Bank. Net operating losses, if any, thereafter can be carried forward three years for MTIT purposes. Neither the Company nor the Bank has not been audited by the Commonwealth of Pennsylvania in the last five years.
Additional Item. Executive Officers of the Registrant
- ----------------- ------------------------------------
The following table sets forth information regarding the executive officers of the Company and its subsidiaries of
September 30, 2002 who are not directors.
Name Age as of 9/30/02 Position
- ---- ----------------- --------
Patrick J. Owens, Jr. 59 Senior Vice President, Chief Financial
Officer of the Bank since 1993 and
Treasurer and Chief Financial Officer
of the Company since 1998. Resigned
effective December 31, 2002.
Thomas Burns 52 Trust business line manager. President
and Trust Officer of the Trust Company
since May 2000. Trust Officer for
financial institution in Hazleton, PA
prior to current position.
Allan Farias 55 Banking business line manager. Senior
Vice President, Corporate Retail
Division of the Bank since September
2000. President and Chief Executive
Officer of a financial institution and
consultant in California prior to
current position.
James McCann 43 Investment business line manager.
Senior Vice President, Investments,
Higgins Insurance Agency since 1987.
Item 2. Properties
The Company currently conducts its business through 19 full service community offices located in Luzerne, Carbon, Columbia, Montour and Schuylkill counties, three financial centers and one loan origination office in Monroe County in Northeast Pennsylvania. Abstractors, Inc. and Northeast Pennsylvania Trust Co. conduct their business in downtown Hazleton area. The following table sets forth the Company’s offices as of September 30, 2002.
Net Book Value
of Property or
Leasehold
Original Year Improvements Total Deposits
Leased or Leased or Date of Lease at September at September
Location Owned Acquired Expiration 30, 2002 30, 2002
- -------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Administrative/Home
Office:
12 E. Broad Street
Hazleton, PA 18201 Owned 1947 - $3,614 $203,767
Branch Offices:
Bloomsburg Office:
17 E. Main Street
Bloomsburg, PA 17815 Owned 1963 - 427 25,609
Shenandoah Office:
5-7 E. Main Street
Shenandoah, PA 17976 Owned 1968 - 405 46,407
Pottsville Office:
111 E. Norweigan Street
Pottsville, PA 17901 Owned 1968 - 561 39,606
Lehighton Office:
111 N. First Street
Lehighton, PA 18235 Owned 1977 - 80 33,875
Laurel Mall Office:
240 Laurel Mall
Hazleton, PA 18201 Leased 1994 2003 194 76,213
Mountaintop Office:
360 S. Mountain Boulevard
Mountaintop, PA 18707 Owned 1997 - 767 20,453
Scott Township Office:
PO Box 518
2691 New Berwick Highway
Bloomsburg, PA 17815 Owned 1998 - 954 31,843
Schuylkill Mall Office:
611 Schuylkill Mall
Frackville, PA 17976 Leased 1978 month-to-month 33 23,106
Gould's IGA Office: Route 93 Sugarloaf, PA 18249 Leased 1995 2005 54 18,228 Danville Office: 1519 Bloom Road Danville, PA 17821 Owned 1999 - 618 13,063 Back Mountain Office: 196 N. Main Street Shavertown, PA 18708 Owned 2001 1,174 20,425 Freeland Office: 402 Front Street Freeland, PA 18224 Leased 1999 2004 - 5,617 Brodheadsville Office: 760 Route 209 & Weirlake Road Brodheadsville, PA 18322 Leased 2000 2005 129 7,525 Weatherly Office: 140 Carbon Street Weatherly, PA 18255 Owned 2001 86 11,656 Drums Office: Route 309 Drums, PA 18222 Owned 2001 222 8,838 Ashland Office: 614 Centre Street Ashland, PA 17921 Owned 2002 64 1,888 Schuylkill Haven Office: 333 Center Avenue Schuylkill Haven, PA 17972 Owned 2002 377 15,317 Mount Carmel Office: 43 S. Oak Street Mt. Carmel, PA 17851 Owned 2002 196 1,530 Laurel Mall Drive-Thru: 345 Laurel Mall Hazleton, PA 18201 Leased 2001 2005 291 N/A Loan Production Origination Office: Pocono L.P.O. Office P.O. Box 1092 Pocono Pines, PA 18350 Leased 1997 month-to-month N/A Title Insurance Agency: Abstractors, Inc. 25 W. Broad Street Hazleton, PA 18201 Owned 2001 24 N/A Trust Company: Northeast Pennsylvania Trust Co. 31 W. Broad Street Hazleton, PA 18201 Owned 2001 28 N/A
Insurance Agency: Higgins Insurance Company 115 S. Centre Street Pottsville, PA 17901 Leased 2001 2010 - N/A
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information relating to the market for Registrant's common equity and related shareholder matters appears under "Market for Registrant's Common Equity and Related Stockholder Matters" in the Registrant's 2002 Annual Report to Shareholders on Part I - page 16 and is incorporated herein by reference. Information relating to dividend restrictions for Registrant's common stock appears under "Regulation and Supervision."
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Consolidated Financial and Other Data of the Company" in the Registrant's 2002 Annual Report to Shareholders and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The above-captioned information appears under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 2002 Annual Report to Shareholders and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The above-captioned information appears under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section "Management of Interest Rate Risk and Market Risk Analysis" in the Registrant's 2002 Annual Report to Shareholders and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of Northeast Pennsylvania Financial Corp. and its subsidiaries, together with the report thereon by KPMG LLP appears in the Registrant's 2002 Annual Report to Shareholders and are incorporated herein by reference.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors of the Registrant is incorporated herein by reference to the Section captioned "Proposal 1-Election of Directors" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on January 29, 2003. Reference is made to the section captioned "Additional Item. Executive Officers of the Registrant" in this Form 10-K for information relating to Executive Officers of the Registrant. Reference is made to the cover page of this Form 10-K and to the section captioned "Section 16 (a) Beneficial Ownership Reporting Compliance" in the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on January 29, 2003 for information regarding compliance into Section 16(a) of the Exchange Act.
Item 11. Executive Compensation
The information relating to executive compensation is incorporated herein by reference to the sections captioned "Executive Compensation and Directors' Compensation" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on January 29, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the section captioned "Stock Ownership" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on January 29, 2003.
Equity Compensation Plan Information
Number of securites Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding outstanding options, future issuance under
options, warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
(a) (b) (c)
Plan category
Equity compensation plans approved 686,960 $11.88 129,399
by security holders
Equity compensation plans not approved - - -
by security holders
Total 686,960 $11.88 129,399
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions is incorporated herein by reference to the section captioned "Transactions with Management" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on January 29, 2003.
Item 14. Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of this Annual report on Form 10-K, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act") are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules an forms.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report
(1) Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 2002
Annual Report to Shareholders:
Consolidated Statements of Financial Condition
as of September 30, 2002 and 2001...............................................................................17
Consolidated Statements of Operations
For the Years Ended September 30, 2002, 2001 and 2000...........................................................18
Consolidated Statements of Comprehensive Income
For the Years Ended September 30, 2002, 2001, and 2000..........................................................19
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 2002, 2001 and 2000...........................................................20
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2002, 2001 and 2000...........................................................21
Notes to Consolidated Financial Statements........................................................................23
Independent Auditors' Report......................................................................................43
(2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated
financial statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Northeast Pennsylvania Financial Corp. (1)
3.2 Bylaws of Northeast Pennsylvania Financial Corp.
4.0 Form of Stock Certificate of Northeast Pennsylvania Financial Corp. (1)
10.1 Employment Agreement between Northeast Pennsylvania Financial Corp. and E. Lee Beard (2)
10.2 Employment Agreement between Northeast Pennsylvania Financial Corp. and Thomas L.
Kennedy (2)
10.3 Employment Agreement between First Federal Bank and E. Lee Beard (2)
10.4 Employment Agreement between First Federal Bank and Thomas L. Kennedy (2)
10.5 Change in Control Agreement between Northeast Pennsylvania Financial Corp. and Patrick
J. Owens, Jr. (3)
10.6 Change in Control Agreement between First Federal Bank and Patrick J. Owens, Jr. (3)
10.7 Employment Agreement between Higgins Insurance Associates, Inc. And Joseph P. Schlitzer (4)
10.8 Change in Control Agreement between First Federal Bank and Allan Farias (4)
10.9 Form of First Federal Bank Supplemental Executive Retirement Plan (1)
10.10 Form of First Federal Bank Employee Severance Compensation Plan (1)
10.11 Form of First Federal Bank Management Supplemental Executive Retirement Plan (1)
10.12 Northeast Pennsylvania Financial Corp. 1998 Stock-Based Incentive Plan (5)
10.13 Northeast Pennsylvania Financial Corp. 2000 Stock Option Plan (6)
10.14 Registration Rights agreement, dated as of December 31, 2000, by and among Northeast Pennsylvania Financial Corp., James
Clark, James McCann, Joseph Schlitzer and John W. Sink (7)
11.0 Statement regarding Computation of Per Share Earnings (See Notes to Consolidated Financial Statements)
13.0 2002 Annual Report to Shareholders 21.0 Subsidiary information is incorporated by reference
to “Part I – Subsidiaries”
13.0 2002 Annual Report to Shareholders
21.0 Subsidary information is incorporated by reference to “Part I – Subsidiaries”
23.0 Consent of KPMG LLP
99.1 Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Incorporated herein by reference into this document from the Exhibits to the Form S- 1 Registration Statement,
and any amendments thereto, Registration No. 333-43281
(2) Incorporated herein by reference into this document from the Exhibits to the Company's Form 10-Q for the
quarter ended June 30, 2002.
(3) Incorporated herein by reference into this document from the Exhibits to the Company's Form 10-K for the
year ended September 30, 1998.
(4) Incorporated herein by reference into this document from the Exhibits to the Company's Form 10-K for the
year ended September 30, 2001.
(5) Incorporated herein by reference into this document from the Proxy Statement for the 1998 Special Meeting of
Shareholders dated September 9, 1998
(6) Incorporated herein by reference into this document from the proxy statement for the 2000 Annual Meeting of
Shareholders dated December 20, 1999.
(7) Incorporated herein by reference into this document from the Exhibits to the Company's Form 10-Q for the
quarter ended March 31, 2002.
(b) Reports on Form 8-K
On July 29, 2002, the Company filed a Form 8-K in which it announced under Item 5 that its stock would
begin trading on the Nasdaq National Market on Thursday, August 1, 2002 under the symbol "NEPF". The press release announcing the
appointment was attached by exhibit.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ E. Lee Beard December 23, 2002
E. Lee Beard
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ E. Lee Beard
E. Lee Beard
President, Chief Executive Officer and Director
(Principal Executive Officer)
December 23, 2002
/s/ Paul Conard
Paul Conard
Director
December 23, 2002
/s/ William R. Davidson
Dr. William R. Davidson
Director
December 23, 2002
/s/ Barbara Ecker
Barbara Ecker
Director
December 23, 2002
/s/ R. Peter Haentjens, Jr.
R. Peter Haentjens, Jr.
Director
December 23, 2002
/s/ Thomas L. Kennedy
Atty. Thomas L. Kennedy
Chairman of the Board
December 23, 2002
/s/ John P. Lavelle
Honorable John P. Lavelle
Director
December 23, 2002
/s/ Michael J. Leib
Michael J. Leib
Director
December 23, 2002
/s/_William J. Spear
William J. Spear
Director
December 23, 2002
/s/ Joseph Schlitzer
Joseph Schlitzer
Director
December 23, 2002
/s/ Patrick J. Owens, Jr.
Patrick J. Owens, Jr.
Treasurer, CFO
(Principal Accounting and Financial Officer)
December 23, 2002
I, E. Lee Beard, certify that:
I, Patrick J. Owens, Jr., certify that:
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth below is
derived in part from, and should be read in conjunction with, the Consolidated
Financial Statements of the Company and Notes thereto presented elsewhere in
this Annual Report.
At September 30,
---------------
(in thousands)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SELECTED CONSOLIDATED FINANCIAL DATA:
Total Assets $898,042 $808,830 $637,342 $612,225 $522,268
Cash and cash equivalents 25,302 9,060 6,295 4,177 3,053
Loans, net (1) 489,373 498,151 415,336 364,294 282,706
Securities held-to-maturity:
Investment securities, net 3,652 17,842 30,336 30,332 31,770
Securities available-for-sale:
Mortgage-related securities, net 225,287 138,467 53,076 56,333 75,651
Investment securities, net 102,599 105,181 104,398 133,502 113,443
Deposits 604,966 515,735 419,671 375,983 324,005
FHLB Advances 208,421 204,441 137,461 155,980 106,498
Total equity 68,385 75,837 72,975 75,476 87,434
Assets acquired through foreclosure 547 390 173 98 112
Non-performing assets and
troubled debt restructurings 4,747 5,113 3,672 1,469 1,351
For the Fiscal Years Ended September 30,
---------------------------------------
(in thousands)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SELECTED OPERATING DATA:
Total interest income $54,255 $54,330 $45,090 $37,674 $30,542
Interest expense 28,988 31,314 26,531 19,822 15,566
------ ------ ------ ------ ------
Net interest income 25,267 23,016 18,559 17,852 14,976
Provision for loan losses 2,766 1,681 1,467 747 1,059
----- ----- ----- --- -----
Net interest income after provision
for loan losses 22,501 21,335 17,092 17,105 13,917
Non-interest income:
Net gain on sale of securities 308 333 37 63 62
Other 8,083 4,982 1,859 1,805 894(2)
Non-interest expense 23,791 19,655 14,471 13,395 15,279(3)
------ ------ ------ ------ --------
Income (loss) before income taxes 7,101 6,995 4,517 5,578 (406)
Income tax expense (benefit) 2,603 2,188 581 1,013 (359)
----- ----- --- ----- ----
Net income (loss) $4,498 $4,807 $3,936 $4,565 ($47)
====== ====== ====== ====== ====
At or for the Fiscal Years Ended September 30,
---------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SELECTED OPERATING DATA (4):
Performance Ratios:
Average yield on interest-earning assets (5) 6.80% 7.65% 7.52% 7.34% 7.45%
Average rate paid on interest-bearing
liabilities 3.91 4.79 4.81 4.36 4.35
Average interest rate spread (6) 2.89 2.86 2.71 2.98 3.10
Net interest margin (7) 3.21 3.33 3.26 3.65 3.74
Ratio of interest-earning assets to
interest-bearing liabilities 109.17 111.05 112.74 118.00 117.35
Net-interest income after provision for loan
losses to non-interest expense 94.58 108.41 118.11 127.70 91.09
Non-interest expense as a percent of
average assets 2.80 2.63 2.24 2.42 3.53
Return on average assets .53 .63 .61 .83 (.01)
Return on average equity 6.39 6.31 5.44 5.78 (.08)
Ratio of average equity to average assets 8.34 10.02 11.22 14.72 13.40
Common stock dividend payout ratio (diluted) 44.23 37.62 37.97 25.81 N/A
Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION AND BUSINESS
The following discussion
and analysis is presented on a consolidated basis and focuses on the major
components of Northeast Pennsylvania Financial Corp.‘s (the
“Company”) operations and significant changes in the results of
operations for the periods presented. The discussion should be read in
conjunction with the Company’s consolidated financial statements and
accompanying notes thereto presented elsewhere in this Annual Report.
The Company serves
Northeastern and Central Pennsylvania through 19 full service community office
locations, three financial centers and a loan production office. The Company,
through its subsidiaries, provides a wide range of financial services to
individual and corporate customers. The Company is subject to competition from
other financial institutions and other companies that provide financial
services.
The Company is a business
corporation formed at the direction of the Bank under the laws of Delaware on
December 16, 1997. On March 31, 1998: (i) the Bank converted from a
Federally-chartered mutual savings and loan association to a Federally-chartered
stock savings bank; (ii) the Bank issued all of its outstanding capital stock to
the Company; and (iii) the Company consummated its initial public offering of
common stock, par value $.01 per share (the “common stock”), by
selling at a price of $10.00 per share, 5,437,062 shares of common stock to
certain eligible account holders of the Bank who had subscribed for such shares
(collectively, the “Conversion”), by selling 514,188 shares to the
Bank’s Employee Stock Ownership Plan and related trust (“ESOP”)
and by contributing 476,100 shares of common stock to The First Federal
Charitable Foundation (the “Foundation”), a charitable foundation
dedicated to the communities served by the Bank. The common stock contributed by
the Company to the Foundation at a value of $4.8 million was charged to expense.
The Conversion resulted in net proceeds of $52.1 million, after expenses of $2.2
million. Net proceeds of $25.0 million were invested in the Bank to increase the
Bank’s tangible capital to 13.3% of the Bank’s total adjusted assets.
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 as 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 significant segment of
the Company’s operations mainly due to fees earned by non-bank
subsidiaries. In addition to First Federal Bank, a federal savings bank, the
Company’s other subsidiaries are Abstractors, Inc., which is a title
insurance agency, Northeast Pennsylvania Trust Co. (the “Trust Co.”),
which offers trust, estate, and asset management services and products, and
Higgins Insurance Associates, Inc. (“Higgins”), which provides
insurance and investment products to individuals and businesses. FIDACO, Inc. is
an inactive subsidiary of the Bank. Also, the Company has a trust subsidiary
established in connection with trust preferred offerings. 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.
Forward Looking Statements
In addition to historical
information, our Annual Report may include certain forward-looking statements
based on current management expectations. The Company intends such
forward-looking statements to be covered by the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, and is including this
statement for purposes of these safe harbor provisions. The Company’s
actual results could differ materially from management expectations. Because of
general economic conditions, legislative and regulatory changes, monetary and
fiscal policies of the Federal government, changes in tax policies, rates and
regulation 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
Company’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 risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
Except as required by
applicable law and regulation, the Company does not undertake and specifically
disclaims any obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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 is also meeting 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’s
operating strategy has focused on: (i) maintaining strong asset quality by
originating one- to four-family loans located in its market area; (ii)
increasing profitability by emphasizing higher yielding consumer 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 its 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,
periodically the Company has had to limit its originations of such loans.
Additionally, the Company has implemented a program to sell in the secondary
market longer-term, fixed-rate one- to four-family loans which it could
originate in excess of its retention policy for such loans. The Company began
offering loan products which it has historically not offered, such as
nonconforming one- to four-family loans. These loan products are currently being
held in the Company’s portfolio, however they have been originated to be
saleable in the secondary market.
Management of Interest Rate Risk and Market Risk Analysis
The principal objective of
the Bank’s interest rate risk management is to evaluate the interest rate
risk included in certain balance sheet
accounts, determine the
level of risk appropriate given the Bank’s business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with the Board of Directors’ approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Board of Directors has
established an Asset Liability Committee (the “ALCO”), which is
responsible for reviewing the Bank’s asset/liability policies and interest
rate risk position. The ALCO meets on a quarterly basis and reports trends and
interest rate risk position to the Finance Committee of the Board of Directors.
The ALCO then reviews with the Finance Committee its activities and strategies,
the effect of those strategies on the Bank’s net interest margin, the
market value of the portfolio, and the effect changes in interest rates will
have on the Bank’s portfolio and exposure limits. The extent of the
movement of interest rates is an uncertainty that could have a negative impact
on the earnings of the Bank.
In recent years, the Bank
has utilized the following strategies to manage interest rate risk: (i)
emphasizing the origination and retention of fixed-rate mortgages having terms
to maturity of not more than 15 years, adjustable-rate and shorter-term loans,
commercial loans and consumer loans; (ii) limiting the retention for portfolio
of all fixed-rate mortgage loans greater than 15-years to no more than 25% of
the total originations in a given year; and (iii) selling, in the secondary
market, the excess of origination of fixed-rate mortgage loans with terms
greater than 15 years, which exceed the Bank’s retentio