<PAGE> 1
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 June 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 July 31, 1996: 3,933,712 shares Common Stock,
par value $.01 per share.
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PENNFIRST BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial
Condition as of June 30, 1996 (Unaudited)
and December 31, 1995 3
Consolidated Statements of Income
for the Three and Six Months Ended
June 30, 1996 and 1995 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 1996 and 1995 (Unaudited) 5
Consolidated Statement of Changes in
Stockholders' Equity for the Six Months
ended June 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 Six Months
Ended June 30, 1996 8
PART II. OTHER INFORMATION
- -----------------------------------------------------------------------------------------------------------------
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE> 3
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
ASSETS (UNAUDITED)
------ ------------ -----------
(Dollars in Thousands)
<S> <C> <C>
Cash on hand and due from banks $ 1,940 $ 2,195
Interest-earning deposits in other institutions 5,288 4,448
Federal funds sold 1,242 151
Investment securities held to maturity, at cost
(market value of $17,596 and $20,916) 18,079 20,757
Investment securities available for sale, at market
(cost of $90,944 and $42,733) 88,690 43,932
Mortgage-backed securities, at cost (market value of
$81,517 and $89,806) 84,550 91,173
Mortgage-backed securities available for sale, at market
(cost of $264,782 and $286,273) 262,518 286,921
Loans receivable (net of unearned income of $371 and $467) 206,542 186,349
Less allowance for losses on loans 2,745 2,471
------------ ------------
Loans receivable, net 203,797 183,878
Accrued interest receivable 5,556 4,651
Real estate owned, net 78 52
Federal Home Loan Bank stock, at cost 14,448 12,473
Office properties and equipment, at cost, less accumulated depreciation
and amortization 2,841 2,841
Prepaid expenses and sundry assets 7,440 5,899
------------ ------------
Total assets $ 696,467 $ 659,371
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings deposits:
Non-interest bearing $ 3,815 $ 3,776
Interest-bearing demand, passbook and money market 142,992 139,561
Certificate of deposit and other time deposits 188,841 195,157
------------ ------------
Total deposits 335,648 338,494
Advances by borrowers for taxes and insurance 2,724 1,808
Borrowed funds 304,742 259,472
Federal and state income taxes - 2
Accrued expenses and other liabilities 4,897 4,669
------------ ------------
Total liabilities 648,011 604,445
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 26,047 26,045
Retained income, substantially restricted 31,965 33,706
Unrealized gain (loss) on securities available for sale, net (2,982) 1,219
Unearned Employee Stock Ownership Plan shares (1,179) (1,205)
Treasury stock, at cost; (425,311 and 375,949 shares) (5,439) (4,883)
------------ ------------
Total stockholders' equity 48,456 54,926
------------ ------------
Total liabilities and stockholders' equity $ 696,467 $ 659,371
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
1996 1995 1996 1995
-------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans........................................ $ 3,916 $ 3,715 $ 7,738 $ 7,188
Investment securities held to maturity....... 341 487 783 963
Investment securities available for sale..... 1,428 149 2,275 224
Mortgage-backed securities held to maturity.. 1,253 4,776 2,567 9,587
Mortgage-backed securities available for sale 4,464 1,592 9,066 3,254
Federal Home Loan Bank stock................. 222 204 424 401
-------- -------- -------- --------
Total interest income.................... 11,624 10,923 22,853 21,617
-------- -------- -------- --------
Interest expense:
Savings deposits and escrow.................. 3,612 3,668 7,306 7,106
Borrowed funds............................... 4,432 3,811 8,571 7,523
-------- -------- -------- --------
Total interest expense................... 8,044 7,479 15,877 14,629
-------- -------- -------- --------
Net interest income.............................. 3,580 3,444 6,976 6,988
Provision for possible losses on loans........... - 7 285 6
-------- -------- -------- --------
Net interest income after provision
for possible losses on loans................. 3,580 3,437 6,691 6,982
-------- -------- -------- --------
Non-interest income:
Fees and service charges...................... 227 220 436 416
Gains (losses) on sale of securities
available for sale......................... (23) 32 (21) 54
Other income................................. 7 11 26 21
-------- -------- -------- --------
Total non-interest income................ 211 263 441 491
-------- -------- -------- --------
Non-interest expense:
Salaries and personnel costs................. 1,060 1,058 2,118 2,204
Premises and occupancy costs................. 238 245 494 482
Federal insurance premiums................... 193 190 387 381
Data processing costs........................ 91 83 186 182
Advertising.................................. 42 56 72 86
Gains on real estate owned................... (7) (47) (1) (51)
Other........................................ 561 526 811 1,034
-------- -------- -------- --------
Total non-interest expense............... 2,178 2,111 4,067 4,318
-------- -------- -------- --------
Income before income taxes............... 1,613 1,589 3,065 3,155
-------- -------- -------- --------
Income taxes:
Federal......................................... 439 490 798 984
State........................................... 90 104 168 202
-------- -------- -------- --------
Total income taxes..................... 529 594 966 1,186
-------- -------- -------- --------
Net income............................ $ 1,084 $ 995 $ 2,099 $ 1,969
======== ======== ======== ========
Earnings per share...................... $.27 $.24 $.53 $.46
Cash dividends paid per share .......... $.59 $.09 $.68 $.18
Weighted average shares and share
equivalents outstanding ................ 3,978,447 4,231,540 3,984,256 4,318,102
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(Unaudited)
----------------------------
1996 1995
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,099 $ 1,969
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 200 215
Provision (recovery) for loan and real estate owned losses 289 (47)
Amortization of premiums and accretion of discounts 589 243
Gain (loss) on sale of securities available for sale 21 (54)
Gain on sale of loans - (3)
Increase in accrued interest receivable (905) (227)
Increase in prepaid and sundry assets (4) (220)
Increase in accrued interest payable 1,164 1,374
Increase in other liabilities 607 1,015
Other 73 63
----------- -----------
Net cash provided by operating activities 4,133 4,328
----------- -----------
Cash flows from investing activities:
Loans originated and purchased (52,092) (33,187)
Purchases of:
Investment securities held to maturity (8,489) (8,000)
Investment securities available for sale (52,022) (24,838)
Mortgage-backed securities held to maturity - (5,929)
Mortgage-backed securities available for sale (41,619) (44,796)
Fixed assets (200) (583)
FHLB stock (1,975) (152)
Proceeds from repayments and maturities of:
Loans 31,933 19,351
Investment securities held to maturity 11,171 3,265
Investment securities available for sale 650 -
Mortgage-backed securities held to maturity 6,398 15,627
Mortgage-backed securities available for sale 34,073 7,177
Proceeds from sale of:
Loans - 412
Investment securities available for sale 3,284 17,723
Mortgage-backed securities available for sale 28,422 50,071
Fixed assets - 219
Real estate owned 26 357
---------- -----------
Net cash used by investing activities (40,440) (3,283)
----------- -----------
Cash flows from financing activities:
Net increase in NOW, money market demand,
passbook and club accounts 3,470 1,181
Net increase (decrease) in certificates of deposit (6,316) 2,658
Net increase in borrowed funds 45,270 910
Proceeds from issuance of common stock 562 14
Cash dividends paid on common stock (2,694) (782)
Purchase of treasury stock (2,337) (3,651)
Additional stock purchased by ESOP (96) -
Principal repayment of ESOP loan 124 108
----------- -----------
Net cash provided by financing activities 37,983 438
----------- -----------
Net increase in cash and cash equivalents 1,676 1,483
Cash and cash equivalents at beginning of period 6,794 8,925
----------- -----------
Cash and cash equivalents at end of period $ 8,470 $ 10,408
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense $ 14,740 14,671
=========== ===========
Income taxes $ 828 1,100
=========== ===========
Noncash item - foreclosed mortgage loans
transferred to real estate owned $ 55 47
=========== ===========
Dividends declared but not paid $ 345 366
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 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........................... ---- 2 122 ---- ---- ---- 124
Additional stock acquired
by ESOP........................ ---- ---- (96) ---- ---- ---- (96)
Cash dividends declared on
Common Stock at $.59 per
share.......................... ---- ---- ---- (2,621) ---- ---- (2,621)
Unrealized loss on securities
available for sale............. ---- ---- ---- ---- ---- (4,201) (4,201)
Purchase of Treasury Stock, at
cost, (186,128 shares)......... ---- ---- ---- ---- (2,337) ---- (2,337)
Common stock issued from Treasury
Stock for options exercised
(136,766 shares)............... ---- ---- ---- (1,219) 1,781 ---- 562
Net income..................... ---- ---- ---- 2,099 ---- ---- 2,099
----------------------------------------------------------------------------------------------
Balance at June 30, 1996....... $ 44 $ 26,047 $ (1,179) $ 31,965 $(5,439) $ (2,982) $ 48,456
==============================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
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 Form10-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 six months ended June 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.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."
7
<PAGE> 8
PENNFIRST BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 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 June 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> 9
ASSET AND LIABILITY MANAGEMENT
PennFirst maintains a program designed to preserve the Company's
relatively low exposure to material and prolongedincreases 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 June 30, 1996, the implementation of these asset and liability
initiatives resulted in the following: (i) $123.5 million or 57.0% of the
Company's total loan portfolio had adjustable interest rates or maturities of
12 months or less; (ii) $75.7 million or 54.9% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs and (iii) $108.5 million or 31.3% of the Company's
portfolio of mortgage-backed securities (including mortgage-backed securities
available for sale) were secured by ARMs.
9
<PAGE> 10
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 June
30, 1996, the Company's interest-earning assets maturing or repricing within
one year totaled $263.3 million while the Company's interest-bearing
liabilities maturing or repricing within one-year totaled $363.7 million,
providing a deficiency of interest-earning assets over interest-bearing
liabilities of $100.4 million or a negative 14.4% of total assets. At June 30,
1996, the percentage of the Company's assets to liabilities maturing or
repricing within one year was 72.4%. The Company's one-year GAP changed from a
negative 5.6% of total assets at December 31, 1995 to a negative 14.4% of total
assets at June 30, 1996 as a result of the Company's purchase of $60.5 million
in investment securities with maturities exceeding 5 years as well as the
maturing of long-term Federal Home Loan Bank ("FHLB") advances. The Company
expects to refinance a portion of its maturing and short-term advances in the
third quarter of 1996 into longer-term advances to improve its overall GAP
position. 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 June 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 10% over a 24-month
period.
RESULTS OF OPERATIONS
PennFirst reported net income of $1.1 million and $995,000 during the
three months ended June 30, 1996 and 1995, respectively. Net income increased
by $89,000 or 8.9% during the three months ended June 30, 1996 when compared to
the same period in 1995. The increase was primarily the result of an increase
in net
10
<PAGE> 11
interest income of $136,000, combined with decreases of $65,000 in income tax
expense and a $7,000 decrease in the provision for possible losses on loans,
which more than offset a $67,000 increase in non-interest expense and a $52,000
decrease in non-interest income. The Company reported net income of $2.1
million and $2.0 million during the six month periods ended June 30, 1996 and
1995, respectively. Net income increased $130,000 or 6.6%, as compared to the
same period in 1995. This increase was primarily the result of decreases of
$251,000 in non-interest expense and $220,000 of income tax expense, which more
than offset a $279,000 increase in the provision for possible losses on loans,
a $50,000 decrease in non-interest income and a $12,000 decrease in net
interest income.
NET INTEREST INCOME. The Company's net interest income increased by
$136,000 or 3.9% during the three months ended June 30, 1996, when compared to
the same period in 1995. This increase resulted from an increase in total
interest income of $701,000 or 6.4%, which was partially offset by an increase
of $565,000 or 7.6% in total interest expense for the three months ended June
30, 1996, when compared to the same period in the prior year. For the six
months ended June 30, 1996, net interest income decreased $12,000 or 0.2%
compared to the same period in prior year. This decrease resulted from an
increase in total interest expense of $1.2 million or 8.5%, which was offset by
an increase of $1.2 million or 5.7% in total interest income for the six months
ended June 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. PennFirst's net interest income was also decreased by the
Company's stock repurchase programs which have repurchased into treasury during
the last twelve months a total of approximately 280,000 shares of its common
stock, at a cost of $3.6 million. The repurchases reduced the level of the
Company's interest-earning assets during the last twelve months.
INTEREST INCOME. Interest on loans increased by $201,000 or 5.4% and
$550,000 or 7.7% for the three and six months ended June 30, 1996, when
compared with the same periods in 1995. The increases were primarily due to
increases of $21.1 million and $19.4 million in the average balance of loans
outstanding, which was a result of $83.4 million in loan originations during
the last twelve months.
Interest on mortgage-backed securities (including mortgage-backed
securities available for sale) decreased by $651,000 or 10.2% and $1.2 million
or 9.4% for the three and six months ended June 30, 1996, when compared with
the same periods in 1995. The decreases were primarily due to decreases of
$46.3 million and $43.5
11
<PAGE> 12
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 six month periods ended June 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 June 30,
1996, the Company had classified $262.5 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, corporate and municipal
obligations, interest-earning deposits and FHLB of Pittsburgh stock) increased
substantially by $1.2 million or 137.0% and $1.9 million or 119.3% for the
three and six months ended June 30, 1996, when compared with the same periods
in 1995. The increases resulted from increases of $67.6 million and $57.7
million in the average balance of investment securities during the respective
periods. These increases were primarily from the purchase of $42.4 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 $33.2 million of municipal
obligations during the last twelve months.
INTEREST EXPENSE. Interest expense on deposits, the largest component
of the Company's interest-bearing liabilities, decreased by $56,000 or 1.5% and
increased by $200,000 or 2.8% for the three and six months ended June 30, 1996,
when compared with the same periods in 1995. The decrease during the three
months period ended June 30, 1996 was primarily due to a decrease of 7 basis
points in the weighted average rate paid on deposits. The increase during the
six months period ended June 30, 1996 was primarily due to an increase of 7
basis points in the weighted average rate paid on deposits, and to a lesser
extent, a $2.9 million increase in the average balance of deposits outstanding.
The average rate paid on interest-bearing deposits decreased during the three
month period ended June 30, 1996, due to the decline in interest rates offered
by the Savings Bank. The average rate paid on interest-bearing deposits
increased during the six month period ended June 30, 1996, due to the increase
in the average balance of the Bank's higher yielding money market accounts.
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<PAGE> 13
Interest on borrowings (consisting of advances from the FHLB of
Pittsburgh, treasury tax and loan note payable and reverse repurchase
agreements) increased by $621,000 or 16.3% and $1.0 million or 13.9% for the
three and six months ended June 30, 1996, when compared to the same periods in
1995. The increases resulted primarily from increases of $45.1 million and
$31.2 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 six months ended June 30, 1996, when compared with the same
periods in 1995, was primarily due to the purchase of $102.1 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 did not establish any provisions for possible losses on
loans during the three months ended June 30, 1996 and established provisions
for possible losses on loans of $285,000 for the six month period ended June
30, 1996, as compared to $7,000 and $6,000 for the comparable periods in the
prior year. The provision during the six months ended June 30, 1996 was
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 six months ended June 30, 1995 were primarily attributable
to consumer loans. As a result of the provision during the six months ended
June 30, 1996, the Company's total allowance for losses on loans at June 30,
1996 amounted to $2.7 million or 1.27% 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 June
30, 1996 was 69.1%, as compared to 309.3% at December 31, 1995. The Company's
nonperforming assets totaled $4.1 million at June 30, 1996 or 0.58% of total
assets as compared to $2.2 million or 0.34% at June 30, 1995.
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
13
<PAGE> 14
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 15 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 $279,000 for the six
months ended June 30, 1996.
NON-INTEREST INCOME. The Company's non-interest income decreased by
$52,000 or 19.8% and by $50,000 or 10.2% during the three and six months ended
June 30, 1996, when compared with the same periods in 1995. The decreases for
the three and six months ended June 30, 1996 were due primarily to the declines
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 increased by $7,000 or 3.2% and $20,000 or
4.8% during the three and six months ended June 30, 1996, when compared to the
same periods in 1995. The increases were primarily due to increases in loan
origination fees earned on construction loans.
The $21,000 loss on sale of securities available for sale recognized
during the six months ended June 30, 1996 was the result of the sale of $31.7
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 six months ended
June 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 six months of 1995 displayed some similar characteristics to
those that were sold during the first six months of 1996.
14
<PAGE> 15
Miscellaneous other income decreased by $4,000 or 36.4% and increased
by $5,000 or 23.8% during the three and six months ended June 30, 1996,
respectively, when compared with the same periods in 1995. The decrease during
the three month period was due primarily to a decline in income associated with
a subsidiary of ESB Bank. The increase during the six month period was due
primarily to a fee paid to the Savings Bank as a result of a right of way that
was adjacent to a branch facility.
NON-INTEREST EXPENSE. Non-interest expense increased by $67,000 or
3.2% and decreased by $251,000 or 5.8% during the three and six months ended
June 30, 1996, when compared with the same periods in 1995. The increase for
the three months ended June 30, 1996 was primarily attributable to a decline in
the gains on sale of real estate owned. The decrease for the six months ended
June 30, 1996 was primarily attributable to a recovery relating to litigation
expenses incurred in prior periods, where as the amount of settlement in the
first quarter of 1996 was less than those expenses originally estimated, and
to a lesser extent, decreases in salaries and personnel costs for the period.
The largest component of the Company's non-interest expense is
salaries and personnel costs, which increased by $2,000 or 0.2% and decreased
by $86,000 or 3.9% during the three and six months ended June 30, 1996, when
compared to the same periods in 1995. The nominal change for the three months
ended June 30, 1996, was a result of normal salary increases being offset by
staffing changes due to attrition within the Savings Bank. The decrease during
the six months ended June 30, 1996 was primarily due to a decrease in
compensation expense due to the attrition within the Savings Bank.
Premises and occupancy costs decreased by $7,000 or 2.9% and increased
by $12,000 or 2.5% during the three and six months ended June 30, 1996, when
compared to the same periods in 1995. The decrease during the three months
ended June 30, 1996 was primarily due to a decline in depreciation expense.
The increase during the six months ended June 30, 1996 was primarily due to an
increase in repairs and maintenance costs of the Savings Bank's branch
facilities.
Federal insurance premiums increased by $3,000 or 1.6% and 6,000 or
1.6% during the three and six months ended June 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.
Data processing costs increased by $8,000 or 9.6% and $4,000 or 2.2%
during the three and six months ended June 30, 1996, when compared to the same
periods in 1995. The increases were primarily due to an increase in processing
charges.
15
<PAGE> 16
Advertising expenses decreased by $14,000 or 25.0% and $14,000 or
16.3% during the three and six months ended June 30, 1996, when compared to the
same periods in 1995. The decreases were primarily due to the absence of such
costs associated with a marketing program initiated during 1995.
The Company experienced gains on real estate owned of $7,000 and
$1,000 during the three and six months ended June 30, 1996, respectively, as
compared to gains of $47,000 and $51,000 for the comparable periods in 1995.
The gains realized during the three and six months ended June 30, 1996 were
primarily due to a $7,000 profit on the sale of a single-family residential
property. The gains realized during the three and six months ended June 30,
1995 were 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, increased by $35,000 or 6.7% and
decreased by $223,000 or 21.6% for the three and six months ended June 30,
1996, when compared to the same periods in 1995. The increase for the three
months ended June 30, 1996 was primarily due to an increase of $38,000 in
professional legal fees associated with litigation matters. The decrease for
the six months ended June 30, 1996, was primarily due to a $283,000 recovery
relating to litigation expenses incurred in prior periods, as the amount of
settlement in the first half of 1996 was less than those expenses originally
estimated.
INCOME TAXES. The Company recognized $529,000 and $966,000 in income
tax expense which reflected effective tax rates of 32.8% and 31.5% for the
three and six months ended June 30, 1996, as compared to $594,000 and $1.2
million with effective tax rates of 37.4% and 37.6% for the respective 1995
periods. The decreases in income tax expense of $65,000 or 10.9% and $220,000
or 18.5% during the three and six months ended June 30, 1996, respectively, as
compared to the same periods in 1995 were primarily due to the purchase of
$33.2 million in municipal obligations during the last twelve months ended June
30, 1996 which are exempt from federal income taxes and to a lesser extent the
decrease in income before income taxes during the six months ended June 30,
1996.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The consolidated assets of PennFirst totaled $696.5 million at June
30, 1996 as compared to $659.4 million at December 31, 1995. The $37.1 million
or 5.6% increase in total assets was due primarily to an increase of $44.8
million in investment securities available for sale. The Company's total
consolidated liabilities increased by $43.6 million or 7.2% primarily as a
result of an increase of $45.3 million or 17.4% in the Company's borrowed
funds.
Total consolidated stockholders' equity as of June 30, 1996 was $48.5
million, a decrease of $6.5 million or 11.8% when compared to total
consolidated stockholders' equity at December 31, 1995. The decrease was
primarily a result of a $4.2 million decline in the unrealized gain on
securities available for sale (to a $3.0 million unrealized loss), cash
dividends declared of $2.6 million (which incudes a special cash dividend of
$.50 per share) and the purchase of $2.3 million of Treasury Stock, which were
partially offset by net income of $2.1 million for the six months ended June
30, 1996.
As of June 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 $20.1 million; and (3) risk-based capital at least
equal to 8.0% of risk-weighted assets or $18.2 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 June 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 June 30, 1996, the Savings Bank had approximately
$207,000 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 June 30, 1996, and, accordingly, none was included in its
capital calculation. However, the Savings Bank had approximately $4.7 million
in intangible assets which were deducted from its capital calculation as of
June 30, 1996.
17
<PAGE> 18
The following table demonstrates ESB Bank's compliance with each of
the three capital requirements as of June 30, 1996:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Tangible Capital:
Actual $39,035 5.82%
Required 10,061 1.50
------- -----
Excess $28,974 4.32%
======= =====
Core Capital:
Actual $39,035 5.82%
Required 20,122 3.00
------- -----
Excess $18,913 2.82%
======= =====
Risk-based Capital:
Actual $41,730 18.37%
Required 18,172 8.00
------- ------
Excess $23,558 10.37%
======= ======
</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 June 30, 1996, the level of
the Savings Bank's liquid assets as a percentage of the liquidity base amounted
to 15.5%.
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
18
<PAGE> 19
investment securities. During the six months ended June 30, 1996, the 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 June 30, 1996, PennFirst had $2.0 million in outstanding commitments to
purchase mortgage-backed securities and $4.8 million in outstanding commitments
to purchase investment securities. As of such date, the Savings Bank had
outstanding loan commitments totaling $7.7 million, unused lines of credit
totaling $14.4 million and $9.9 million of undisbursed loans in process.
At June 30, 1996, savings certificates amounted to $188.8 million or
56.3% of the Company's total consolidated deposits, including $124.9 million
which were scheduled to mature by June 30, 1997. At the same date, the total
amount of FHLB advances which were scheduled to mature by June 30, 1997 was
$151.9 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 June 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 $4.1 million at June 30, 1996
or 0.58% of total assets. Nonperforming assets consist of nonaccrual loans and
real estate owned. A loan is placed on a nonaccrual basis when such loan
becomes ninety days or more delinquent. Nonperforming assets at June 30, 1996
consisted primarily of $247,000 in single-family loans, $90,000 in consumer
loans, $3.6 million in commercial business loans and $78,000 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 six months ended June 30, 1996 was primarily the
result of the thirteen financing lease loans being placed on nonaccrual status,
as was previously discussed. Approximately $70,000 in additional gross
interest income would have been recorded during the six months ended June 30,
1996, if the Company's nonaccrual loans had been current in accordance with
their original terms and outstanding throughout the six months ended June 30,
1996.
19
<PAGE> 20
PROPOSED DEPOSIT INSURANCE PREMIUMS
Deposits of ESB Bank are currently insured by the Savings Association
Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance Fund ("BIF"),
the deposit insurance fund that covers most commercial bank deposits, are
statutorily required to be recapitalized to a ratio of 1.25% of insured reserve
deposits. While the BIF has reached the required reserve ratio, the SAIF is
not expected to be recapitalized until 2002 at the earliest. The Resolution
Trust Corporation Completion Act authorized $8 billion in funding for the SAIF.
However, such funds only become available to the SAIF if the Federal Deposit
Insurance Corporation ("FDIC") determines that the funds are needed to cover
losses of the SAIF and several other stringent criteria are met.
The FDIC recently lowered the insurance rates for commercial banks and
certain savings banks through the BIF to zero to 4 basis points on insured
deposits (subject to a $2,000 minimum) as the commercial banks have reached the
required capitalization level of $1.25 for each $100 of insured deposits. The
disparity in SAIF and BIF insurance premiums places SAIF insured institutions,
such as the Savings Bank, at a significant competitive disadvantage.
In November 1995, the U.S. Senate and the U.S. House of
Representatives included provisions in the Balanced Budget Act of 1995 which
would recapitalize the SAIF with a one-time charge on SAIF-insured institutions
of at least approximately $.80 for every $100 of assessable deposits, and an
eventual merger of the SAIF and the BIF administered by the FDIC. The Balanced
Budget Act was vetoed by the President for reasons unrelated to the
recapitalization of the SAIF. In April 1996, the Congress and the President
agreed on a budget for fiscal 1996, however, the recapitalization of the SAIF
was not included in such legislation. The Savings Bank currently is unable to
predict the likelihood of final legislation related to the SAIF
recapitalization. If an assessment of $.80 per $100 of assessable deposits was
effected based on deposits as of March 31, 1995, as proposed, the Savings
Bank's pro rata share would amount to approximately $2.7 million on a pre-tax
basis.
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.
20
<PAGE> 21
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.
21
<PAGE> 22
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 May 21, 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 special $.50 dividend per common
share.
By letter dated June 19, 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.
22
<PAGE> 23
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.
August 5, 1996 BY: /s/Charlotte A. Zuschlag
- -------------- ----------------------------
Date Charlotte A. Zuschlag
President and Chief Executive
Officer
August 5, 1996 BY: /s/Charles P. Evanoski
- -------------- -----------------------------
Date Charles P. Evanoski
Senior Vice President and
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the second
quarter 10-Q and is qualified in its entirety by reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,940
<INT-BEARING-DEPOSITS> 5,288
<FED-FUNDS-SOLD> 1,242
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 351,208
<INVESTMENTS-CARRYING> 102,629
<INVESTMENTS-MARKET> 99,113
<LOANS> 206,542
<ALLOWANCE> 2,745
<TOTAL-ASSETS> 696,467
<DEPOSITS> 335,648
<SHORT-TERM> 167,722
<LIABILITIES-OTHER> 7,621
<LONG-TERM> 137,020
0
0
<COMMON> 44
<OTHER-SE> 48,412
<TOTAL-LIABILITIES-AND-EQUITY> 696,467
<INTEREST-LOAN> 7,738
<INTEREST-INVEST> 14,691
<INTEREST-OTHER> 424
<INTEREST-TOTAL> 22,853
<INTEREST-DEPOSIT> 7,306
<INTEREST-EXPENSE> 15,877
<INTEREST-INCOME-NET> 6,976
<LOAN-LOSSES> 285
<SECURITIES-GAINS> (21)
<EXPENSE-OTHER> 4,067
<INCOME-PRETAX> 3,065
<INCOME-PRE-EXTRAORDINARY> 2,099
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,099
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 2.28
<LOANS-NON> 3,690
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,471
<CHARGE-OFFS> 21
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 2,745
<ALLOWANCE-DOMESTIC> 2,745
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
