<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the transition period from to
Commission File Number: 0-19345
PENNFIRST BANCORP, INC.
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1659846
----------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
600 Lawrence Avenue
ELLWOOD CITY, PENNSYLVANIA 16117
--------------------------------------
(Address of principal executive offices)
(412) 758-5584
-----------------------------
Registrant's telephone number,
including area code
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 requirement for the past 90 days. YES X NO
--- ---
Shares outstanding as of October 31, 1996: 3,896,828 shares Common Stock,
par value $.01 per share.
<PAGE>
PENNFIRST BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------------------------------------------------------
Item 1. Financial Statements
Consolidated Statements of Financial
Condition as of September 30, 1996 (Unaudited)
and December 31, 1995 3
Consolidated Statements of Income
for the Three and Nine Months Ended
September 30, 1996 and 1995 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1996 and 1995 (Unaudited) 5
Consolidated Statement of Changes in
Stockholders' Equity for the Nine Months
ended September 30, 1996 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for the Three and Nine Months
Ended September 30, 1996 8
PART II. OTHER INFORMATION
- ------------------------------------------------------------------------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE>
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED)
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
------
Cash on hand and due from banks $ 1,451 $ 2,195
Interest-earning deposits in other institutions 4,339 4,448
Federal funds sold 458 151
Investment securities held to maturity, at cost
(market value of $17,762 and $20,916) 18,083 20,757
Investment securities available for sale, at market
(cost of $100,734 and $42,733) 99,701 43,932
Mortgage-backed securities held to maturity, at cost
(market value of $78,395 and $89,806) 81,104 91,173
Mortgage-backed securities available for sale, at market
(cost of $254,097 and $286,273) 252,944 286,921
Loans receivable (net of unearned income of $380 and $467) 215,134 186,349
Less allowance for losses on loans 3,138 2,471
------- -------
Loans receivable, net 211,996 183,878
Accrued interest receivable 5,269 4,651
Real estate owned, net 68 52
Federal Home Loan Bank stock, at cost 15,278 12,473
Office properties and equipment, at cost, less accumulated
depreciation and amortization 2,791 2,841
Prepaid expenses and sundry assets 7,312 5,899
-------- --------
Total assets $ 700,794 $ 659,371
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Savings deposits:
Non-interest bearing $ 3,709 $ 3,776
Interest-bearing demand, passbook and money market 138,398 139,561
Certificate of deposit and other time deposits 183,732 195,157
-------- --------
Total deposits 325,839 338,494
Advances by borrowers for taxes and insurance 1,002 1,808
Borrowed funds 317,242 259,472
Federal and state income taxes -- 2
Accrued expenses and other liabilities 7,762 4,669
-------- --------
Total liabilities 651,845 604,445
-------- --------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock:
5,000,000 shares, par value $.01 per share, authorized;
None issued and outstanding -- --
Common stock:
10,000,000 shares, par value $.01 per share,
authorized; 4,364,023 shares issued 44 44
Additional paid-in capital 26,052 26,045
Retained income, substantially restricted 31,333 33,706
Unrealized gain (loss) on securities available for sale, net (1,443) 1,219
Unearned Employee Stock Ownership Plan shares (1,183) (1,205)
Treasury stock, at cost; (455,079 and 375,949 shares) (5,854) (4,883)
-------- --------
Total stockholders' equity 48,949 54,926
-------- --------
Total liabilities and stockholders' equity $700,794 $659,371
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
-------------------- ---------------------
1996 1995 1996 1995
------ ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 4,156 $ 3,730 $ 11,894 $ 10,918
Investment securities held to maturity 357 571 1,139 1,534
Investment securities available for sale 1,537 298 3,812 522
Mortgage-backed securities held to maturity 1,204 4,590 3,772 14,178
Mortgage-backed securities available for sale 4,420 1,648 13,486 4,901
Federal Home Loan Bank stock 239 208 663 609
------- ------- ------- -------
Total interest income 11,913 11,045 34,766 32,662
------- ------- ------- -------
Interest expense:
Savings deposits and escrow 3,557 3,829 10,863 10,935
Borrowed funds 4,806 3,940 13,377 11,463
------- ------- ------- -------
Total interest expense 8,363 7,769 24,240 22,398
------- ------- ------- -------
Net interest income 3,550 3,276 10,526 10,264
Provision for possible losses on loans 396 14 681 19
------- ------- ------- -------
Net interest income after provision
for possible losses on loans 3,154 3,262 9,845 10,245
------- ------- ------- -------
Non-interest income:
Fees and service charges 192 209 628 625
Gain (loss) on sale of securities
available for sale (9) -- (31) 54
Other income 15 8 42 29
------- ------- ------- -------
Total non-interest income 198 217 639 708
------- ------- ------- -------
Non-interest expense:
Salaries and personnel costs 1,064 947 3,182 3,150
Premises and occupancy costs 257 249 751 731
Federal insurance premiums 193 192 581 573
Special SAIF assessment 2,196 - 2,196 -
Data processing costs 88 86 273 269
Advertising 45 77 117 163
Gain on real estate owned -- (6) (1) (57)
Other 397 466 1,207 1,500
------- ------- ------- -------
Total non-interest expense 4,240 2,011 8,306 6,329
------- ------- ------- -------
Income (loss) before income taxes (888) 1,468 2,178 4,624
------- ------- ------- -------
Income taxes:
Federal (492) 472 306 1,456
State (110) 50 58 252
------- ------- ------- -------
Total income taxes (benefit) (602) 522 364 1,708
------- ------- ------- -------
Net income (loss) $(286) $946 $1,814 $2,916
------- ------- ------- -------
------- ------- ------- -------
Earnings per share $(.07) $.23 $.46 $.69
Cash dividends paid per share $ .09 $.09 $.77 $.27
Weighted average shares and share
equivalents outstanding 3,925,416 4,149,091 3,972,151 4,255,907
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(UNAUDITED)
-------------------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,814 $ 2,916
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 311 323
Provisions (recoveries) for loan and real estate owned losses 689 (31)
Amortization of premiums and accretion of discounts 791 444
(Gain) loss on sale of securities available for sale 31 (54)
Increase in accrued interest receivable (618) (790)
Increase in prepaid and sundry assets (669) (347)
Increase in accrued interest payable 1,884 2,208
Increase (decrease) in other liabilities 1,030 (113)
Other 85 75
------- -------
Net cash provided by operating activities 5,348 4,631
------- -------
Cash flows from investing activities:
Loans originated and purchased (75,252) (50,736)
Purchases of:
Investment securities held to maturity (8,489) (10,000)
Investment securities available for sale (65,952) (29,212)
Mortgage-backed securities held to maturity -- (6,819)
Mortgage-backed securities available for sale (75,317) (61,506)
Fixed assets (261) (630)
FHLB stock (2,805) (440)
Proceeds from repayments and maturities of:
Loans 46,529 30,185
Investment securities held to maturity 11,171 3,358
Investment securities available for sale 650 --
Mortgage-backed securities held to maturity 9,735 28,000
Mortgage-backed securities available for sale 47,253 13,023
Proceeds from sale of:
Loans -- 775
Investment securities available for sale 7,627 17,723
Mortgage-backed securities available for sale 59,290 50,071
Fixed assets -- 219
Real estate owned 26 364
------- -------
Net cash used by investing activities (45,795) (15,625)
------- -------
Cash flows from financing activities:
Net increase (decrease) in NOW, money market demand,
passbook and club accounts (1,230) 547
Net increase (decrease) in certificates of deposit (11,425) 3,313
Net increase in borrowed funds 57,770 10,701
Proceeds from issuance of common stock 611 63
Cash dividends paid on common stock (3,049) (1,148)
Purchase of treasury stock (2,805) (4,206)
Additional stock purchased by ESOP (146) -
Principal repayment of ESOP loan 175 161
------- -------
Net cash provided by financing activities 39,901 9,431
------- -------
Net decrease in cash and cash equivalents (546) (1,563)
Cash and cash equivalents at beginning of period 6,794 8,925
------- -------
Cash and cash equivalents at end of period $ 6,248 $ 7,362
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense $21,220 22,312
------- -------
Income taxes $ 1,082 1,450
------- -------
------- -------
Noncash item - foreclosed mortgage loans
transferred to real estate owned $ 55 63
------- -------
------- -------
Dividends declared but not paid $ 343 364
------- -------
------- -------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ADDITIONAL UNEARNED ON SECURITIES TOTAL
COMMON PAID IN ESOP RETAINED TREASURY AVAILABLE FOR STOCKHOLDERS'
STOCK CAPITAL SHARES INCOME STOCK SALE EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 44 $ 26,045 $ (1,205) $ 33,706 $ (4,883) $ 1,219 $ 54,926
Principal payment on Employee
Stock Ownership Plan (ESOP)
debt -- 7 168 -- -- -- 175
Additional stock acquired
by ESOP -- -- (146) -- -- -- (146)
Cash dividends declared on
Common Stock at $.77 per
share -- -- -- (2,964) -- -- (2,964)
Unrealized loss on securities
available for sale -- -- -- -- -- (2,662) (2,662)
Purchase of Treasury Stock, at
cost, (219,946 shares) -- -- -- -- (2,805) -- (2,805)
Common stock issued from Treasury
Stock for options exercised
(140,816 shares) -- -- -- (1,223) 1,834 -- 611
Net income -- -- -- 1,814 -- -- 1,814
Balance at September 30, 1996 $ 44 $26,052 $(1,183) $31,333 $(5,854) $ (1,443) $48,949
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions for Form 10-Q and
therefore do not include information or footnotes necessary for a
complete presentation of financial condition, results of operations,
and cash flows in conformity with generally accepted accounting
principles. However, all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation have been included. The results of
operations for the three and nine months ended September 30, 1996 are
not necessarily indicative of the results which may be expected for the
entire fiscal year.
2. RECLASSIFICATION OF PRIOR YEAR'S STATEMENTS
-------------------------------------------
Certain items previously reported have been reclassified to
conform with the current year's reporting format.
3. PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements of PennFirst Bancorp, Inc. (the
"Company") a thrift holding company, includes the accounts of the
Company and its direct and indirect wholly owned subsidiaries, ESB
Bank, F.S.B., PennFirst Financial Services, Inc., and AMSCO, Inc.
4. INCOME TAXES
------------
Income taxes are accounted for under the asset and liability method
pursuant to Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes."
5. BUSINESS COMBINATION
--------------------
On September 16, 1996, the Company entered into an Agreement and Plan
of Reorganization with Troy Hill Bancorp, Inc. ("Troy Hill"), pursuant
to which Troy Hill shall be merged with and into the Company, with the
Company as the surviving corporation.
7
<PAGE>
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
GENERAL
PennFirst Bancorp, Inc. ("PennFirst" or the "Company") is the
parent holding company of ESB Bank, F.S.B. ("ESB Bank" or the "Savings
Bank") and PennFirst Financial Services, Inc. ("PFSI"). PFSI, which
was incorporated on July 31, 1992 as a Delaware-chartered company, is
engaged in the management of investments on behalf of PennFirst. PFSI
had total assets of approximately $33.3 million as of September 30,
1996. The operating results of PennFirst depend primarily upon its net
interest income, which is determined by the difference between interest
and dividend income on interest-earning assets, principally loans,
mortgage-backed securities and investment securities, and interest
expense on interest-bearing liabilities, which consist of deposits and
borrowings. The Company's net income also is affected by its provision
for possible losses on loans, as well as the level of its non-interest
income, including loan origination and other fees, and its non-interest
expense, such as employee salaries and benefits, occupancy costs and
income taxes.
In general, thrift institutions are vulnerable to an increase in
interest rates to the extent that interest-bearing liabilities mature
or reprice more rapidly than interest-earning assets. The lending
activities of thrift institutions, including the Savings Bank, have
historically emphasized the origination of long-term, fixed-rate loans
secured by single-family residences, and the primary source of funds of
such institutions has been deposits. This factor has historically
caused the income earned by thrift institutions, including ESB Bank, on
their loan portfolios to adjust more slowly to changes in interest
rates than their cost of funds. While having liabilities that reprice
more frequently than assets is generally beneficial to net interest
income in times of declining interest rates such an asset/liability
mismatch is generally detrimental during periods of rising interest
rates. To reduce the effect of adverse changes in interest rates on
its operations, the Company has implemented the asset and liability
management policies described below.
8
<PAGE>
ASSET AND LIABILITY MANAGEMENT
PennFirst maintains a program designed to preserve the Company's
relatively low exposure to material and prolonged increases in interest
rates. The principal determinant of the exposure of PennFirst's
earnings to interest rate risk is the timing difference between the
repricing or maturity of PennFirst's interest-earning assets and the
repricing or maturity of its interest-bearing liabilities. PennFirst's
asset and liability management policies have increased the Company's
interest rate sensitivity primarily by shortening the maturities of
PennFirst's interest-earning assets while at the same time extending
the maturities of PennFirst's interest-bearing liabilities. The Board
of Directors of PennFirst continues to believe in strong
asset/liability management in order to insulate the Company from
material and prolonged increases in interest rates. As a result of
this policy, the Company emphasizes a larger, more diversified
portfolio of residential mortgage loans in the form of mortgage-backed
securities. The Company's mortgage-backed securities portfolio
consists of both adjustable-rate as well as fixed-rate securities that
have expected weighted average lives of between three and seven years.
The Company's Board of Directors has established an Asset and
Liability Management Committee consisting of two outside directors, the
President and Chief Executive Officer, Senior Vice President and Chief
Financial Officer, Senior Vice President of Operations and the Senior
Vice President of Lending of the Company. This committee, which meets
quarterly, generally monitors various asset and liability management
policies which were implemented by the Company over the past few years.
These strategies have included: (i) an emphasis on the investment in
adjustable-rate and shorter duration mortgage-backed securities and
(ii) an emphasis on the origination of single-family residential
adjustable-rate mortgages ("ARMs"), residential construction loans and
commercial real estate loans, which generally have adjustable or
floating interest rates and/or shorter maturities than traditional
single-family residential loans, and consumer loans, which generally
have shorter terms and higher interest rates than mortgage loans.
As of September 30, 1996, the implementation of these asset and
liability initiatives resulted in the following: (i) $128.9 million or
57.4% of the Company's total loan portfolio had adjustable interest
rates or maturities of 12 months or less; (ii) $81.2 million or 56.9%
of the Company's portfolio of single-family residential mortgage loans
(including residential construction loans) consisted of ARMs and (iii)
$131.5 million or 39.4% of the Company's portfolio of mortgage-backed
securities (including mortgage-backed securities available for sale)
were secured by ARMs.
9
<PAGE>
The implementation of the foregoing asset and liability strategies
has resulted in the Company being able to maintain a one-year interest
rate sensitivity GAP ranging between a positive 5.0% of total assets to
a negative 15.0% of total assets. The one-year interest rate
sensitivity GAP is defined as the difference between the Company's
interest-earning assets which are scheduled to mature or reprice within
one year and its interest-bearing liabilities which are scheduled to
mature or reprice within one year. At September 30, 1996, the
Company's interest-earning assets maturing or repricing within one year
totaled $280.5 million while the Company's interest-bearing
liabilities maturing or repricing within one-year totaled $326.2
million, providing a deficiency of interest-earning assets over
interest-bearing liabilities of $45.7 million or a negative 6.5% of
total assets. At September 30, 1996, the percentage of the Company's
assets to liabilities maturing or repricing within one year was 86.0%.
The Company's one-year GAP has not changed significantly when compared
to a negative 5.6% of total assets at December 31, 1995. The Company
does not presently anticipate that its one-year interest rate
sensitivity GAP will fluctuate beyond a range of a positive 5.0% of
total assets to a negative 15.0% of total assets.
The one year interest rate sensitivity GAP has been the most
common industry standard used to measure an institution's interest rate
risk position. PennFirst also utilizes income simulation modeling in
measuring its interest rate risk and managing its interest rate
sensitivity. The Asset and Liability Management Committee of PennFirst
believes that simulation modeling may more accurately estimate the
possible effects on net interest income due to the exposure to changing
market interest rates, the slope of the yield curve and different
prepayment and decay assumptions to maximize the stability of net
interest income under various interest rate scenarios. At September
30, 1996, PennFirst's simulation model indicated that the Company's
balance sheet is liability sensitive, and as such in a 300 basis point
rising rate environment, with minor changes in the balance sheet and
limited reinvestment changes, net interest income is projected to
decrease by approximately 7% over a 24-month period.
RESULTS OF OPERATIONS
PennFirst reported a net loss of $286,000 and net income of
$946,000 during the three months ended September 30, 1996 and 1995,
respectively. Net income decreased by $1.2 million or 130.2% during
the three months ended September 30, 1996 when compared to the same
period in 1995. The decrease was primarily the result of a
non-recurring charge, or one-time special assessment of $2.2 million by
the Federal Deposit Insurance Corporation ("FDIC") with respect to the
recapitalization of the Savings Association Insurance Fund ("SAIF") as
discussed in greater detail below, combined with an increase of
$382,000 in the provision for
10
<PAGE>
possible losses on loans, a $33,000
increase in non-interest expense (not including the special SAIF
assessment) and a $19,000 decrease in non-interest income which more
than offset a decrease in income tax expense of $1.1 million and an
increase in net interest income of $274,000. Without the one-time
special assessment, the Company would have recognized net income of
$1.1 million, for the three months ended September 30, 1996, an
increase of $114,000 or 12.1% when compared to the same period in the
prior year.
The Company reported net income of $1.8 million and $2.9 million
during the nine months ended September 30, 1996 and 1995, respectively.
Net income decreased by $1.1 million or 37.8% during the nine months
ended September 30, 1996 when compared to the same period in 1995. The
decrease was primarily the result of the one-time special SAIF
assessment of $2.2 million, combined with a $662,000 increase in the
provision for possible losses on loans and a $69,000 decrease in
non-interest income, which more than offset a $1.3 million decrease in
income tax expense, a $262,000 increase in net interest income, and a
$219,000 decrease in non-interest expense (not including the special
SAIF assessment). Without the one-time special assessment, the Company
would have recognized net income of $3.2 million, for the nine months
ended September 30, 1996, an increase of $244,000 or 8.4% when compared
to the same period in the prior year.
On September 30, 1996, President Clinton signed into law
legislation recapitalizing the SAIF resulting in a one-time special
assessment charge to all banks and thrifts (including ESB Bank) which
have SAIF-insured FDIC deposits. The one-time special assessment
requires payment of 65.7 cents for every $100 of SAIF insured deposits
held at March 31, 1995.
NET INTEREST INCOME. The Company's net interest income increased
by $274,000 or 8.4% during the three months ended September 30, 1996,
when compared to the same period in 1995. This increase resulted from
an increase in total interest income of $868,000 or 7.9%, which was
partially offset by an increase of $594,000 or 7.6% in total interest
expense for the three months ended September 30, 1996, when compared to
the same period in the prior year. For the nine months ended
September 30, 1996, net interest income increased $262,000 or 2.6%
compared to the same period in prior year. This increase resulted from
an increase in total interest income of $2.1 million or 6.4%, which was
partially offset by an increase of $1.8 million or 8.2% in total
interest expense for the nine months ended September 30, 1996, when
compared to the same period in the prior year. The increases in total
interest income were primarily attributable to increases in the average
balances of loans and investment securities during the respective
periods. The increases in total interest expense were due primarily to
increases in the average balance of interest-bearing liabilities,
primarily FHLB advances.
11
<PAGE>
INTEREST INCOME. Interest on loans increased by $426,000 or 11.4%
and $976,000 or 8.9% for the three and nine months ended September 30,
1996, when compared with the same periods in 1995. The increases were
primarily due to increases of $29.7 million and $22.9 million in the
average balance of loans outstanding during the respective periods.
The increases were primarily the result of $89.0 million in loan
originations during the last twelve months.
Interest on mortgage-backed securities (including mortgage-backed
securities available for sale) decreased by $614,000 or 9.8% and $1.8
million or 9.5% for the three and nine months ended September 30, 1996,
when compared with the same periods in 1995. The decreases were
primarily due to decreases of $47.3 million and $44.8 million in the
average balance of mortgage-backed securities outstanding during the
respective periods. The decreases in the average balance of
mortgage-backed securities during the three and nine month periods
ended September 30, 1996 was the result of the cash flows from the
portfolio being utilized to fund the increase in loan originations and
the purchase of investment securities. At September 30, 1996, the
Company had classified $252.9 million of its mortgage-backed securities
as available for sale. The Company has classified such securities as
available for sale due to expected interest rate changes, resultant
prepayment risk and other factors related to interest rate or
prepayment risk. The Company has occasionally sold securities from its
available for sale portfolio in accordance with its asset and liability
management strategies.
Interest and dividends on investment securities (including
investment securities available for sale) and other interest-earning
assets (consisting primarily of U. S. Government and agency
obligations, municipal obligations, interest-earning deposits and FHLB
of Pittsburgh stock) increased substantially by $1.1 million or 98.1%
and $2.9 million or 110.7% for the three and nine months ended
September 30, 1996, when compared with the same periods in 1995. The
increases resulted from increases of $62.2 million and $59.2 million
in the average balance of investment securities during the respective
periods. These increases were primarily the result of the purchase of
$43.9 million of callable U.S. Government agency securities, consisting
of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National
Mortgage Association ("FNMA") and Federal Home Loan Bank ("FHLB")
securities, and $33.4 million of municipal obligations during the last
twelve months.
INTEREST EXPENSE. Interest expense on deposits decreased by
$272,000 or 7.1% and decreased by $72,000 or 0.7% for the three and
nine months ended September 30, 1996, when compared with the same
periods in 1995. The decrease during the three month period ended
September 30, 1996 was primarily due to a decrease of 21 basis points
in the weighted average rate paid on deposits, and to a lesser extent,
a $7.7 million decrease in the average balance of deposits outstanding.
12
<PAGE>
The decrease during the nine month period ended September 30, 1996 was
nominal. The average rate paid on interest-bearing deposits decreased
during the three and nine months ended September 30, 1996, due to the
decline in interest rates offered by the Savings Bank.
Interest on borrowings (consisting of advances from the FHLB of
Pittsburgh, treasury tax and loan note payable and reverse repurchase
agreements) increased by $866,000 or 22.0% and $1.9 million or 16.7%
for the three and nine months ended September 30, 1996, when compared
to the same periods in 1995. The increases resulted primarily from
increases of $60.9 million and $41.1 million in the average balance of
the Company's borrowed funds during the respective periods. The
increases in the average balance of borrowed funds for the three and
nine months ended September 30, 1996, when compared with the same
periods in 1995, was primarily due to the purchase of $149.8 million in
mortgage-backed and investment securities, which were funded at a
positive interest rate spread through short-term advances from the FHLB
of Pittsburgh.
PROVISIONS FOR POSSIBLE LOSSES ON LOANS. Provisions for possible
losses on loans are charged to earnings to bring the total allowance to
a level considered appropriate by management based on historical
experience, the volume and type of lending conducted by the Company,
the status of past due principal and interest payments, general
economic conditions, particularly as they relate to the Company's
market area, and other factors related to the collectibility of the
Company's loan portfolio.
PennFirst established provisions for possible losses on loans of
$396,000 and $681,000 for the three and nine months ended September 30,
1996, respectively, as compared to $14,000 and $19,000 for the
comparable periods in the prior year. The provisions during the three
and nine months ended September 30, 1996 were primarily due to an
increase in general reserve provisions relating to financing lease
loans as discussed in greater detail below. The provisions during the
three and nine months ended September 30, 1995 were due to specific
provisions relating to single family home equity loans. As a result of
the provision during the nine months ended September 30, 1996, the
Company's total allowance for losses on loans at September 30, 1996
amounted to $3.1 million or 1.40% of the Company's total loan
portfolio, as compared to $2.5 million or 1.29% at December 31, 1995.
The Company's allowance for losses on loans as a percentage of
nonperforming loans at September 30, 1996 was 76.5%, as compared to
309.3% at December 31, 1995. The Company's nonperforming assets
totaled $4.2 million at September 30, 1996 or .59% of total assets as
compared to $2.4 million or .36% at September 30, 1995.
13
<PAGE>
The Company's non-performing assets increased as a result of the Company
placing $3.6 million of commercial equipment leases on nonaccrual status
during the first quarter of 1996. These leases were all originated by,
serviced by, and financially guaranteed by Bennett Funding Group and
affiliates which have filed for Chapter 11 bankruptcy. As a result of the
disruption of payment flows and the uncertainty regarding the status of our
servicer, the Savings Bank has classified all $3.6 million of the leases as
substandard, categorizing them as non-performing, and increased the Company's
loss reserves to 25 percent of the aggregate balance of the lease agreements
based on the substandard classification. There can be no assurance that
additional losses will not be incurred in connection with the lease
agreements. The Company continues to closely monitor the situation. As a
result of the leases, the Company increased the provision for possible losses
on loans by $662,000 for the nine months ended September 30, 1996.
NON-INTEREST INCOME. The Company's non-interest income decreased by
$19,000 or 8.8% and $69,000 or 9.7% during the three and nine months ended
September 30, 1996, when compared with the same periods in 1995. The
decrease for the three months ended September 30, 1996 was due to a decrease
in fees and service charges during the period, while the decrease for the
nine months ended September 30, 1996 was due primarily to the decline in
gains on the sale of securities available for sale. The sales of such
securities are discussed in greater detail below.
Fees and service charges decreased by $17,000 or 8.1% and increased by
$3,000 or .5% during the three and nine months ended September 30, 1996, when
compared to the same periods in 1995. The decrease for the three months
ended September 30, 1996 was primarily due to a decrease in loan origination
fees earned on construction loans. The increase for the nine months ended
September 30 ,1996 was nominal.
The $31,000 loss on sale of securities available for sale recognized
during the nine months ended September 30, 1996 was the result of the sale
of $66.9 million of mortgage-backed and investment securities within its
available for sale portfolio during the period. The Company's management
decided upon review of the securities within its available for sale
portfolio that, due to a projected increase in prepayment speeds on certain
fixed and adjustable-rate mortgage-backed securities, it was in the
Company's best interest to sell such securities within its portfolio. The
proceeds from the sale were invested in fixed-rate mortgage-backed
securities that have expected weighted average lives of between three and
seven years and callable U.S. Government agency securities with maturities
exceeding 5 years. The $54,000 gain on sale of securities available for sale
that was recognized during the nine
14
<PAGE>
months ended September 30, 1995 was the result of the sale of $67.8 million
of such securities within its available for sale portfolio during the period.
The securities sold during the first nine months of 1995 displayed similar
characteristics to those that were sold during the first nine months of 1996.
Miscellaneous other income increased by $7,000 or 87.5% and $13,000 or
44.8% during the three and nine months ended September 30, 1996,
respectively, when compared with the same periods in 1995. The increase
during the three month period was due primarily to an increase in income
associated with a subsidiary of ESB Bank. The increase during the nine month
period was due primarily to a fee paid to the Savings Bank as a result of
granting a right of way that was adjacent to a branch facility and to a
lesser extent from income associated with a subsidiary of ESB Bank.
NON-INTEREST EXPENSE. Non-interest expense increased by $2.2 million or
110.8% and $2.0 million or 31.2% during the three and nine months ended
September 30, 1996, when compared with the same periods in 1995. The
increases for the three month and nine months ended September 30, 1996 were
primarily attributable to the one time special SAIF assessment.
The largest component of the company's recurring non-interest expense is
salaries and personnel costs, which increased by $117,000 or 12.4% and
$32,000 or 1.0% during the three and nine months ended September 30, 1996,
when compared to the same periods in 1995. The increase during the three and
nine months ended September 30, 1996 were primarily due to normal salary
increases and staffing changes.
Premises and occupancy costs increased by $8,000 or 3.2% and $20,000 or
2.7% during the three and nine months ended September 30, 1996, when compared
to the same periods in 1995. The increases were primarily due to an increase
in repairs and maintenance costs of the Savings Bank's branch facilities.
Federal insurance premiums increased by 1,000 or .5% and 8,000 or 1.4%
during the three and nine months ended September 30, 1996, when compared to
the same periods in 1995. Federal insurance premiums are a function of the
size of the Company's deposit base.
On September 30, 1996, the Company accrued an expense for a
non-recurring charge or one-time special SAIF assessment of $2.2 million
($1.3 million net of taxes) to be paid on November 27, 1996. The assessment
was a one time charge of 65.7 cents for every $100 of SAIF insured deposits
held at March 31, 1995 by the Company. The assessment will be used to
recapitalize the SAIF fund allowing
15
<PAGE>
federal insurance premiums going forward to be reduced to approximately $.06
per $100 from $.23 per $100.
Data processing costs increased by $2,000 or 2.3% and $4,000 or 1.5%
during the three and nine months ended September 30, 1996, when compared to
the same periods in 1995. The increases were primarily due to an increase in
processing charges.
Advertising expenses decreased by $32,000 or 41.6% and $46,000 or 28.2%
during the three and nine months ended September 30, 1996, when compared to
the same periods in 1995. The decreases were primarily due to the absence of
costs associated with a marketing program initiated during 1995.
The Company experienced no gain or loss on real estate owned and a
nominal gain of $1,000 during the three and nine months ended September 30,
1996, respectively, as compared to gains of $6,000 and $57,000 for the
comparable periods in 1995. The gain realized during the nine months ended
September 30, 1995 was primarily due to a $58,000 profit on the sale of a
commercial real estate property.
Miscellaneous other expenses, which consist primarily of professional
fees, forms, supplies, bank charges, postage, insurance expenses,
organizational dues, automated teller machine ("ATM") expenses, amortization
of intangible assets, carrying costs associated with real estate owned, and
provisions for losses on fixed assets, decreased by $69,000 or 14.8% and
$293,000 or 19.5% for the three and nine months ended September 30, 1996,
when compared to the same periods in 1995. The decrease for the three months
ended September 30, 1996 was primarily due to a decrease of $62,000 in
professional legal fees associated with litigation matters. The decrease for
the nine months ended September 30, 1996, was primarily due to a $283,000
recovery relating to litigation expenses incurred in prior periods, as the
amount of the settlement recorded in the first half of 1996 was less than
those expenses originally estimated.
INCOME TAXES. The Company recognized a tax benefit of $602,000 and
income tax expense of $364,000 for the three and nine months ended September
30, 1996, respectively, as compared to $522,000 and $1.7 million of income
tax expense for the respective 1995 periods. The decreases in income tax
expense of $1.1 million or 215.3% and $1.3 million or 78.7% during the three
and nine months ended September 30, 1996, respectively, as compared to the
same periods in 1995 were primarily due to the decrease in income before
income taxes caused by the one time special SAIF assessment of $2.2 million.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The consolidated assets of PennFirst totaled $700.8 million at
September 30, 1996 as compared to $659.4 million at December 31, 1995.
The $41.4 million or 6.3% increase in total assets was due primarily to
an increase of $55.8 million in investment securities available for
sale. The Company's total consolidated liabilities increased by $47.4
million or 7.8% primarily as a result of an increase of $57.8 million
or 22.3% in the Company's borrowed funds.
Total consolidated stockholders' equity as of September 30, 1996
was $48.9 million, a decrease of $6.0 million or 10.9% when compared to
total consolidated stockholders' equity at December 31, 1995. The
decrease was primarily a result of cash dividends declared of $3.0
million (which incudes a special cash dividend of $.50 per share), the
purchase of $2.8 million of Treasury Stock and a $2.7 million decline
in the unrealized gain on securities available for sale, which were
partially offset by net income of $1.8 million for the nine months
ended September 30, 1996.
As of September 30, 1996, under federal regulations, the Savings
Bank was required to maintain: (1) tangible capital at least equal to
1.5% of adjusted total assets or $10.1 million; (2) core capital at
least equal to 3% of adjusted total assets or $20.2 million; and (3)
risk-based capital at least equal to 8.0% of risk-weighted assets or
$18.3 million. In measuring an institution's compliance with all three
capital standards, savings banks must deduct from their capital, with
several exceptions, their investments in, and advances to, subsidiaries
engaged (as principal) in activities not permissible for national
banks. At September 30, 1996, the Savings Bank had no significant
investments in, or advances to, subsidiaries engaged in nonpermissible
activities. Also, all equity investments in equity securities (except
for subsidiaries and service corporations) and real property (except
for real property used as offices for the conduct of business and
certain real estate owned) must be deducted from total capital for
purposes of the risk-based capital standard. At September 30, 1996,
the Savings Bank had approximately $135,000 that was deducted from its
capital calculation. Furthermore, supervisory goodwill and most other
intangible assets must also be deducted from the calculation of core
capital. The Savings Bank had no supervisory goodwill as of September
30, 1996, and, accordingly, none was included in its capital
calculation. However, the Savings Bank had approximately $4.6 million
in intangible assets which were deducted from its capital calculation
as of September 30, 1996.
17
<PAGE>
The following table demonstrates ESB Bank's compliance with each
of the three capital requirements as of September 30, 1996:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Tangible Capital:
Actual $39,588 5.87%
Required 10,123 1.50
------- ----
Excess $29,465 4.37%
------- ----
------- ----
Core Capital:
Actual $39,588 5.87%
Required 20,247 3.00
------- ----
Excess $19,341 2.87%
------- ----
------- ----
Risk-based Capital:
Actual $42,446 18.58%
Required 18,277 8.00
------- ----
Excess $24,169 10.58%
------- ----
------- ----
</TABLE>
The Savings Bank is required under applicable federal regulations to
maintain specified levels of "liquid" investments including United States
government and federal agency securities and other investments. Regulations
currently in effect require the Savings Bank to maintain liquid assets of not
less than 5% of its net withdrawable accounts plus short-term borrowings
("liquidity base") of which short-term liquid assets must consist of not less
than 1%. These levels are changed from time to time by the OTS to reflect
economic conditions. The Savings Bank's liquidity has recently been
influenced by general economic conditions, financial market conditions and
fluctuations in the interest rates and products offered by competing
entities. Although the Savings Bank has consistently maintained liquidity
well in excess of OTS requirements, the restructuring of the Company's asset
portfolio has generally reduced the Savings Bank's overall liquidity. At
September 30, 1996, the level of the Savings Bank's liquid assets as a
percentage of the liquidity base amounted to 12.8%.
PennFirst's primary source of funds generally have been deposits
obtained through the Savings Bank's offices, borrowings from the FHLB of
Pittsburgh and, to a lesser extent, amortization and prepayments of
outstanding loans and maturing investment securities. During the nine months
ended September 30, 1996, the
18
<PAGE>
Company used its sources of funds primarily to purchase mortgage-backed
securities and investment securities, and to a lesser extent, the funding of
loan commitments.
At September 30, 1996, PennFirst had $2.1 million in
outstanding commitments to purchase mortgage-backed securities and $770,000
in outstanding commitments to purchase investment securities. As of such
date, the Savings Bank had outstanding loan commitments totaling $8.2
million, unused lines of credit totaling $13.1 million and $9.0 million of
undisbursed loans in process.
At September 30, 1996, savings certificates
amounted to $183.7 million or 56.4% of the Company's total consolidated
deposits, including $118.9 million which were scheduled to mature by
September 30, 1997. At the same date, the total amount of FHLB advances
which were scheduled to mature by September 30, 1997 was $114.1 million.
Management of the Company believes that it has adequate resources to fund all
of these commitments, that all of these commitments will be funded by
September 30, 1997 and that, based upon past experience and current pricing
policies, it can adjust the rates of savings certificates to retain a
substantial portion of its maturing certificates and also, to the extent
deemed necessary, refinance the maturing FHLB advances.
PennFirst's nonperforming assets totaled $4.2 million at September 30,
1996 or .59% of total assets. Nonperforming assets consist of nonaccrual
loans and real estate owned. A loan is placed on a nonaccrual basis when it
becomes ninety days or more delinquent. Nonperforming assets at September
30, 1996 consisted primarily of $326,000 in single-family loans, $139,000 in
consumer loans, $3.6 million in commercial business loans and $68,000 in real
estate owned, net of reserves. Nonperforming assets totaled $851,000 at
December 31, 1995 or 0.13% of total assets and consisted primarily of
$599,000 in single-family loans, $86,000 in consumer loans, $114,000 in
commercial business loans and $52,000 in real estate owned, net of reserves.
The increase in nonperforming assets for the nine months ended September 30,
1996 was primarily the result of the thirteen financing lease loans being
placed on nonaccrual status, as was previously discussed. Approximately
$152,000 in additional gross interest income would have been recorded during
the nine months ended September 30, 1996, if the Company's nonaccrual loans
had been current in accordance with their original terms and outstanding
throughout the nine months ended September 30, 1996.
19
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to
a larger extent than interest rates. In the current interest rate
environment, liquidity and the maturity structure of PennFirst's assets and
liabilities are critical to the maintenance of acceptable performance levels.
20
<PAGE>
PART II - OTHER INFORMATION
- -----------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company is involved only in routine legal proceedings occurring
in the ordinary course of business which in the aggregate are believed
by management to be immaterial to the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
---------------------
NOT APPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
NOT APPLICABLE.
ITEM 5. OTHER INFORMATION
-----------------
NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
By letter dated September 18, 1996, the Company filed
with the SEC a Current Report on Form 8-K. The Form 8-K reported
under Item 5., the declaration of a $.09 dividend per common share
during the quarter.
By letter dated September 25, 1996, the Company filed
with the SEC a Current Report on Form 8-K. The Form 8-K reported
under Item 5., the execution of an Agreement and Plan of
Reorganization pursuant to which the Company will acquire Troy
Hill Bancorp, Inc. and its wholly owned subsidiary Troy Hill
Federal Savings Bank.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENNFIRST BANCORP, INC.
NOVEMBER 6, 1996 BY: /S/CHARLOTTE A. ZUSCHLAG
- ---------------- ----------------------------
Date Charlotte A. Zuschlag
President and Chief Executive
Officer
NOVEMBER 6, 1996 BY: /S/CHARLES P. EVANOSKI
- ---------------- ----------------------------
Date Charles P. Evanoski
Senior Vice President and
Chief Financial Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
the third quarter 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,451
<INT-BEARING-DEPOSITS> 4,339
<FED-FUNDS-SOLD> 458
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 352,645
<INVESTMENTS-CARRYING> 99,187
<INVESTMENTS-MARKET> 96,157
<LOANS> 215,134
<ALLOWANCE> 3,138
<TOTAL-ASSETS> 700,794
<DEPOSITS> 325,839
<SHORT-TERM> 130,063
<LIABILITIES-OTHER> 8,764
<LONG-TERM> 187,179
0
0
<COMMON> 44
<OTHER-SE> 48,905
<TOTAL-LIABILITIES-AND-EQUITY> 700,794
<INTEREST-LOAN> 11,894
<INTEREST-INVEST> 22,209
<INTEREST-OTHER> 663
<INTEREST-TOTAL> 34,766
<INTEREST-DEPOSIT> 10,863
<INTEREST-EXPENSE> 24,240
<INTEREST-INCOME-NET> 10,526
<LOAN-LOSSES> 681
<SECURITIES-GAINS> (31)
<EXPENSE-OTHER> 8,306
<INCOME-PRETAX> 2,178
<INCOME-PRE-EXTRAORDINARY> 1,814
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,814
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
<YIELD-ACTUAL> 2.27
<LOANS-NON> 4,101
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,471
<CHARGE-OFFS> 25
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 3,138
<ALLOWANCE-DOMESTIC> 3,138
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
