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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For Quarter Ended: March 31, 1998
Commission File Number: 0-19345
PENNFIRST BANCORP, INC.
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(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 No.)
600 Lawrence Avenue, Ellwood City, PA 16117
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(724) 758-5584
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(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
requirements for the past 90 days. X Yes No
Number of shares of common stock outstanding as of April 30, 1998:
Common Stock, $0.01 par value 5,202,021 shares
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(Class) (Outstanding)
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PENNFIRST BANCORP, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1998 (Unaudited) and December 31, 1997............1
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997 (Unaudited)..................2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 (Unaudited)..................3
Notes to Consolidated Financial Statements........................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................16
Item 2. Changes in Securities............................................16
Item 3. Defaults Upon Senior Securities..................................16
Item 4. Submission of Matters to a Vote of Security Holders..............16
Item 5. Other Information................................................16
Item 6. Exhibits and Reports on Form 8-K.................................16
Signatures.......................................................17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PennFirst Bancorp, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
As of March 31, 1998 (Unaudited) and December 31, 1997 (Dollar
amounts in thousands, except share data)
March 31, December 31,
1998 1997
(Unaudited)
----------- ------------
Assets
Cash on hand and in banks $ 2,329 $ 3,108
Interest-earning deposits 6,541 3,795
Federal funds sold 546 12,044
Securities available for sale; cost of $461,089 and $423,350 464,322 426,662
Securities held to maturity; market value of $87,558 and $90,585 88,042 91,359
Loans receivable, net 346,283 336,757
Accrued interest receivable 6,547 6,075
Federal Home Loan Bank (FHLB) stock 18,288 17,826
Premises and equipment, net 3,296 3,319
Real estate acquired through foreclosure, net 288 288
Prepaid expenses and other assets 9,068 9,537
--------- ---------
Total assets $ 945,550 $ 910,770
========= =========
Liabilities and Stockholders' equity
Liabilities:
Deposits $ 401,587 $ 399,568
Advance payments by borrowers for taxes and insurance 3,539 3,298
Borrowed funds 442,183 411,024
Guaranteed preferred beneficial interest in subordinated debt, net 23,996 24,146
Accrued expenses and other liabilities 6,198 4,225
--------- ---------
Total liabilities 877,503 842,261
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 10,000,000 shares authorized;
5,819,808 and 5,819,808 shares issued;
5,228,205 and 5,270,553 shares outstanding 58 58
Additional paid-in capital 48,703 48,646
Treasury stock, at cost; 591,603 and 549,255 shares (8,372) (7,363)
Unearned Employee Stock Ownership Plan (ESOP) shares (2,892) (2,551)
Unvested shares held by Management Recognition Plan (237) (237)
Retained earnings, substantially restricted 28,654 27,747
Other comprehensive income, net 2,133 2,209
--------- ---------
Total stockholders' equity 68,047 68,509
--------- ---------
Total liabilities and stockholders' equity $ 945,550 $ 910,770
========= =========
1
PennFirst Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the three months ended March 31, 1998 and 1997 (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended
March 31,
----------------------
1998 1997
---- ----
Interest income:
Loans receivable $ 6,816 $ 4,309
Securities available for sale 7,232 5,927
Securities held to maturity 1,346 1,438
FHLB stock 289 236
Deposits with banks and federal funds sold 69 41
------- -------
Total interest income 15,752 11,951
------- -------
Interest expense:
Deposits 4,288 3,593
Borrowed funds 6,518 4,742
Guaranteed preferred beneficial interest in subordinated debt 556 -
------- -------
Total interest expense 11,362 8,335
------- -------
Net interest income 4,390 3,616
Provision for loan losses - 200
------- -------
Net interest income after provision for loan losses 4,390 3,416
------- -------
Noninterest income:
Fees and service charges 315 194
Net realized loss on sales of securities available for sale (7) (37)
Other 10 16
------- -------
Total noninterest income 318 173
------- -------
Noninterest expense:
Compensation and employee benefits 1,481 1,112
Premises and equipment 257 246
Federal deposit insurance premiums 62 10
Data processing 128 104
Other 725 561
------- -------
Total noninterest expense 2,653 2,033
------- -------
Net income before provision for income taxes 2,055 1,556
Provision for income taxes 505 411
------- -------
Net income $ 1,550 $ 1,145
======= =======
Net income per share:
Prior to effect of 10% stock dividend declared April 17, 1998 (see note 8):
Basic $0.31 $0.27
Diluted $0.29 $0.27
After effect of 10% stock dividend declared April 17, 1998 (see note 8):
Basic $0.28 $0.25
Diluted $0.27 $0.24
See accompanying notes to consolidated financial statements.
2
PennFirst Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the three months ended March 31, 1998 and 1997 (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended
March 31,
--------------------
1998 1997
---- ----
Operating activities:
Net income $ 1,550 $ 1,145
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 86 84
Provision for losses 14 207
Amortization of premiums and accretion of discounts 440 117
Loss on sales of securities available for sale 7 37
Amortization of intangible assets 150 92
(Increase) decrease in accrued interest receivable (472) 378
Decrease (increase) in prepaid expenses and other assets 349 (127)
Increase in accrued expenses and other liabilities 1,973 1,226
Other 309 13
------- -------
Net cash provided by operating activities 4,406 3,172
------- -------
Investing activities:
Loan originations and purchases (30,801) (14,553)
Purchases of securities available for sale (83,808) (25,516)
Purchases of securities held to maturity (993) (5,970)
(Purchases) redemption of FHLB stock (462) 150
Principal repayments of loans receivable 21,189 11,343
Principal repayments of securities available for sale 26,216 11,540
Principal repayments of securities held to maturity 4,234 2,852
Proceeds from the sale of securities available for sale 19,459 9,774
Other (63) (49)
------- -------
Net cash used in investing activities (45,029) (10,429)
------- -------
Financing activities:
Net increase in deposits 2,019 3,635
Net increase in borrowed funds 31,159 4,308
Proceeds received from exercise of stock options 226 35
Dividends paid (474) (351)
Payments to acquire treasury stock (1,426) -
Stock purchased by ESOP (449) (242)
Other 37 47
------- -------
Net cash provided by financing activities 31,092 7,432
------- -------
Net (decrease) increase in cash equivalents (9,531) 175
Cash equivalents at beginning of period 18,947 7,284
------- -------
Cash equivalents at end of period $ 9,416 $ 7,459
======= =======
Continued.
3
PennFirst Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, (Continued)
For the three months ended March 31, 1998 and 1997 (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended
March 31,
--------------------
1998 1997
---- ----
Supplemental information:
Interest paid $ 12,118 $ 7,611
Income taxes paid 45 6
Non-cash transactions:
Transfers from loans receivable to real estate acquired
through foreclosure 48 -
Dividends declared but not paid 471 352
See accompanying notes to consolidated financial statements.
4
PennFirst Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
PennFirst Bancorp, Inc. (the "Company") is a thrift holding company.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary savings banks, ESB Bank, F.S.B.
("ESB") and Troy Hill Federal Savings Bank ("Troy Hill"),
(collectively, the "Banks"), and its other subsidiaries, PennFirst
Financial Services, Inc., PennFirst Capital Trust I and AMSCO, Inc.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting only of normal
recurring accruals, which are necessary, in the opinion of management,
to fairly reflect the Company's financial position and results of
operations. Additionally, these consolidated financial statements for
the interim periods have been prepared in accordance with instructions
for the Securities and Exchange Commission's Form 10-Q and therefore do
not include all information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash
flows in conformity with generally accepted accounting principles. For
further information, refer to the audited consolidated financial
statements and footnotes thereto for the year ended December 31, 1997,
as contained in the 1997 Annual Report to Stockholders.
The results of operations for the three month period ended March 31,
1998 are not necessarily indicative of the results that may be expected
for the entire year. Certain amounts previously reported have been
reclassified to conform with the current year's reporting format.
2. Securities
The Company's securities available for sale and held to maturity
portfolios are summarized as follows:
- - -------------------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- - -------------------------------------------------------------------------------------------------------------------------
Available for sale:
As of March 31, 1998:
U.S. Government securities $ 2,000 $ 23 $ - $ 2,023
Municipal securities 72,886 1,772 (265) 74,393
Corporate bond and equity securities 18,672 84 (48) 18,708
Mortgage-backed securities 367,531 2,317 (650) 369,198
--------- ------- ------ ---------
$ 461,089 $ 4,196 $ (963) $ 464,322
========= ======= ====== =========
As of December 31, 1997:
U.S. Government securities $ 4,015 $ 39 $ - $ 4,054
Municipal securities 53,782 1,864 (4) 55,642
Corporate bond and equity securities 1,265 29 - 1,294
Mortgage-backed securities 364,288 2,204 (820) 365,672
--------- ------- ------ ---------
$ 423,350 $ 4,136 $ (824) $ 426,662
========= ======= ====== =========
Held to maturity:
As of March 31, 1998:
U.S. Government securities $ 14,481 $ 41 $ (28) $ 14,494
Municipal securities 8,541 62 (13) 8,590
Mortgage-backed securities 65,020 35 (581) 64,474
--------- ------- ------ ---------
$ 88,042 $ 138 $ (622) $ 87,558
========= ======= ====== =========
As of December 31, 1997:
U.S. Government securities $ 15,479 $ 57 $ (58) $ 15,478
Municipal securities 7,536 96 (1) 7,631
Mortgage-backed securities 68,344 26 (894) 67,476
--------- ------- ------ ---------
$ 91,359 $ 179 $ (953) $ 90,585
========= ======= ====== =========
- - -------------------------------------------------------------------------------------------------------------------------
5
3. Loans Receivable
The Company's loans receivable as of the respective dates are summarized as
follows:
- - ---------------------------------------------------------------------------------------------------------
March 31, December 31,
(In thousands) 1998 1997
- - ---------------------------------------------------------------------------------------------------------
Mortgage loans:
Residential - single family $ 223,890 $ 222,994
Residential - multi family 11,105 8,685
Commercial real estate 30,134 31,489
Construction 34,601 29,710
--------- ---------
299,730 292,878
Other loans:
Consumer loans 53,758 51,718
Commercial business 10,496 8,359
--------- ---------
363,984 352,955
Less:
Allowance for loan losses 4,818 4,807
Deferred loan fees and net discounts 747 723
Loans in process 12,136 10,668
--------- ---------
$ 346,283 $ 336,757
========= =========
- - -------------------------------------------------------------------------------------------------------
4. Deposits
The Company's deposits as of the respective dates are summarized as
follows:
- - ------------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) March 31, 1998 December 31, 1997
----------------------------------- ------------------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
- - ---------------------------------------------------------------------------------- ------------------------------------------
Noninterest-bearing deposits - $ 4,957 1.2% - $ 4,675 1.2%
Interest-bearing demand deposits 2.42% 150,475 37.5% 2.47% 150,994 37.8%
Time deposits 5.70% 246,155 61.3% 5.81% 243,899 61.0%
--------- ----- --------- -----
4.40% $ 401,587 100.0% 4.48% $ 399,568 100.0%
========= ===== ========= =====
Time deposits mature as follows:
Within one year $ 143,961 35.8% $ 145,953 36.5%
After one year through two years 53,724 13.4% 46,005 11.5%
After two years through three years 28,180 7.0% 33,059 8.3%
Thereafter 20,290 5.1% 18,882 4.7%
--------- ----- --------- -----
$ 246,155 61.3% $ 243,899 61.0%
========= ===== ========= =====
- - ------------------------------------------------------------------------------------------------------------------------------------
6
5. Borrowed Funds
The Company's borrowed funds as of the respective dates are summarized as
follows:
(Dollar amounts in thousands) March 31, 1998 December 31, 1997
------------------------- ------------------------
Weighted Weighted
average rate Amount average rate Amount
- - ---------------------------------------------------------------------------------------------------------------------------------
FHLB advances:
Due within 12 months 5.99% $ 139,772 5.59% $ 175,272
Due beyond 12 months but within 5 years 6.30% 203,440 6.42% 179,065
Due beyond 5 years but within 10 years 8.92% 1,035 7.79% 440
Due beyond 10 years 6.40% 333 5.93% 274
--------- ---------
344,580 355,051
Reverse repurchase agreements:
Due within 90 days 5.59% $ 23,805 5.90% $ 13,400
Due beyond 90 days but within 5 years 5.77% 73,700 5.86% 42,400
--------- ---------
97,505 55,800
Treasury tax and loan note payable 98 173
--------- ---------
$ 442,183 $ 411,024
========= =========
- - ---------------------------------------------------------------------------------------------------------------------------------
6. Net Income Per Share
Net income per share is calculated by dividing net operating results
for the period by the weighted average number of shares of common
shares and equivalents outstanding during the period. Net income per
share and weighted average shares and equivalents outstanding for all
periods reported have been restated to reflect stock dividends and
splits, including the Company's stock dividend declared on April 17,
1998. For purposes of computing basic net income per share for the
three month periods ended March 31, 1998 and 1997, the weighted average
shares outstanding were 5,542,000 and 4,599,000, respectively. For
purposes of computing diluted net income per share for the three month
periods ended March 31, 1998 and 1997, the weighted average shares and
equivalents outstanding were 5,802,000 and 4,703,364, respectively. For
all periods, the difference between average basic and average diluted
shares represented the dilutive impact of stock options.
7. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income
is defined as "the change in equity of a business enterprise during a
period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions to
owners". The comprehensive income and related cumulative equity impact
of comprehensive income items will be required to be disclosed
prominently as part of the financial statements and related notes
thereto. Only the impact of unrealized gains or losses on securities
available for sale is necessary and applicable to be disclosed as an
additional component of the Company's total comprehensive income under
the requirements of SFAS No. 130.
On January 1, 1998, the Company adopted SFAS No. 130. For the three
months ended March 31, 1998 and 1997, total comprehensive income was
$1.6 million and $3.3 million, respectively, including other
comprehensive income which represented a decrease of $76,000 and an
increase of $2.2 million, respectively, in unrealized gains/losses on
securities available for sale, net of income taxes.
7
8. Subsequent Events
On April 17, 1998, the Board of Directors declared a 10% common stock
dividend to stockholders of record as of the close of business on May
15, 1998 and payable on May 29, 1998. Net income per share amounts for
the periods presented in the consolidated statements of operations have
been restated to reflect this stock dividend.
On April 24, 1998, the Company announced that effective May 1, 1998,
its name will be changed to ESB Financial Corporation, and its new
trading symbol on the Nasdaq National Stock Market will be "ESBF".
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CHANGES IN FINANCIAL CONDITION
General. The Company's total assets increased by $34.8 million or 3.8% to $945.6
million at March 31, 1998 from $910.8 million at December 31, 1997. This net
increase was primarily the result of increases in securities and loans
receivable of $34.3 million and $9.5 million, respectively, partially offset by
a decrease in cash equivalents of $9.5 million. The increase in total assets
reflects a corresponding increase in total liabilities of $35.2 million or 4.2%,
partially offset by a slight decrease in stockholders' equity of $462,000. The
increase in total liabilities was primarily the result of increases in deposits,
borrowed funds and accrued expenses and other liabilities of $2.0 million, $31.2
million and $2.0 million, respectively. The decrease in stockholders' equity was
the result of increases in treasury stock and unearned employee stock ownership
plan ("ESOP") shares of $1.0 million and $341,000, respectively, partially
offset by an increase in retained earnings of $907,000.
Cash on Hand, Interest-earning deposits and Federal funds sold. Cash on hand,
interest-earning deposits and federal funds sold represent cash equivalents and
decreased a combined $9.5 million or 50.3% to $9.4 million at March 31, 1998
from $18.9 million at December 31, 1997. These accounts are typically increased
by deposits from customers into savings and checking accounts, loan and security
repayments and proceeds from borrowed funds. Decreases result from customer
withdrawals, new loan originations, security purchases and repayments of
borrowed funds. The net decrease between March 31, 1998 and December 31, 1997
can be attributed primarily to security purchases and loan fundings during the
period.
Securities. The Company's securities portfolios increased by $34.3 million or
6.6 % to $552.4 million at March 31, 1998 from $518.0 million at December 31,
1997. This net increase was primarily the result of purchases of securities of
$84.8 million, consisting of purchases of municipal securities of $22.1 million,
corporate bond and equity securities of $18.2 million and mortgage-backed
securities of $44.5 million, during the three months ended March 31, 1998.
Partially offsetting the purchases of securities were sales of securities of
$19.5 million, consisting of sales of municipal securities of $3.5 million,
corporate bond and equity securities of $1.0 million and mortgage-backed
securities of $15.0 million, and repayments and maturities of securities of
$30.5 million, during the three months ended March 31, 1998.
Loans receivable. Net loans receivable increased $9.5 million or 2.8% to $346.3
million at March 31, 1998 from $336.8 million at December 31, 1997. Included in
this increase was an increase in mortgage loans of $6.9 million or 2.3% and
other loans of $4.2 million or 7.0%, partially offset by an increase in deferred
loan fees and loans in process of $1.5 million or 13.1%, during the three months
ended March 31, 1998.
Non-performing assets. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $4.1
million or 0.44% and $4.1 million or 0.45% of total assets at March 31, 1998 and
December 31, 1997, respectively.
Prepaid expenses and other assets. Prepaid expenses and other assets decreased
$469,000 or 4.9% to $9.1 million at March 31, 1998 from $9.5 million at December
31, 1997, primarily as a result of goodwill amortization and a decrease in
deferred taxes during the three months ended March 31, 1998.
Deposits. Total deposits increased $2.0 million to $401.6 million at March 31,
1998 from $399.6 million at December 31, 1997. This increase was primarily the
result of increases of $2.3 million and $282,000 in time deposits and
noninterest bearing deposits, respectively, partially offset by a decrease of
$519,000 in interest-bearing demand deposit accounts during the three months
ended March 31, 1998.
Borrowed funds. Borrowed funds increased $31.2 million or 7.6% to $442.2 million
at March 31, 1998 from $411.0 million at December 31, 1997. This increase is
primarily the result of the Company utilizing reverse repurchase agreement
borrowings to fund the increase in loans receivable and securities. FHLB
advances decreased $10.5 million or 2.9% and reverse repurchase agreement
borrowings increased $41.7 million or 74.7% during the three months ended March
31, 1998.
9
Stockholders' equity. Stockholders' equity decreased $462,000 to $68.0 million
at March 31, 1998 from $68.5 million at December 31, 1997. This decrease was
principally the result of net treasury stock purchases of $1.0 million, ESOP
stock purchases of $341,000, partially offset by an increase in retained
earnings of $907,000, comprised of net income for the quarter of $1.6 million
offset by dividends declared of $452,000 and the impact of stock options
exercised of $191,000, during the three months ended March 31, 1998.
RESULTS OF OPERATIONS
General. The Company recorded net income of $1.6 million for the three months
ended March 31, 1998, as compared to net income of $1.1 million for the same
period in the prior year. The $404,000 or 35.3% increase in net income for the
three months ended March 31, 1998, as compared to the three months ended March
31, 1997, was primarily attributable to an increase in net interest income and
noninterest income of $774,000 and $145,000, respectively, and a decrease in
provision for loan losses of $200,000, partially offset by increases in
noninterest expense and provision for income taxes of $620,000 and $94,000,
respectively.
Net interest income. Net interest income increased $774,000 or 21.4% to $4.4
million for the three months ended March 31, 1998, compared to $3.6 million for
the same period in the prior year. This increase in net interest income can be
attributed to an increase in interest income of $3.8 million, partially offset
by an increase in interest expense of $3.0 million.
Interest income. Interest income increased $3.8 million or 31.8% to $15.8
million for the three months ended March 31, 1998, compared to $12.0 million for
the same period in the prior year. This increase can be attributed primarily to
increases in interest earned on loans receivable, securities, FHLB stock and
interest-earning deposits of $2.5 million, $1.2 million, $53,000 and $28,000,
respectively.
Interest earned on loans receivable increased $2.5 million or 58.2% to $6.8
million for the quarter ended March 31, 1998, compared to $4.3 million for the
same period in the prior year. This increase was primarily attributable to an
increase in the average balance of loans outstanding of $125.3 million or 56.7%
to $346.4 million for the three months ended March 31, 1998, compared to $221.1
million for the same period in the prior year. This significant increase in the
average balance of loans receivable was principally associated with the
acquisition of Troy Hill during the second quarter of 1997. Also contributing to
the increase in interest income between the periods was a slight increase in the
yield of loans receivable to 7.87% for the three months ended March 31, 1998,
compared to 7.80% for the same period in the prior year.
Interest earned on securities increased $1.2 million or 16.5% to $8.6 million
for the three months ended March 31, 1998, compared to $7.4 million for the same
period in the prior year. This increase was primarily attributable to an
increase in the average balance of securities held of $87.1 million or 19.5% to
$533.5 million for the three months ended March 31, 1998, compared to $446.4
million for the same period in the prior year. The increase in the average
balance of securities between periods was primarily the result of net security
purchases during the last three quarters of 1997 and the first quarter of 1998.
Partially offsetting this volume increase, was a slight decline in the tax
equivalent yield on securities to 6.83% for the three months ended March 31,
1998, compared to 6.97% for the same period in the prior year.
Interest expense. Interest expense increased $3.0 million or 36.3% to $11.4
million for the three months ended March 31, 1998, compared to $8.3 million for
the same period in the prior year. This increase in interest expense can be
attributed to increases in interest incurred on deposits and borrowed funds of
$695,000 and $1.8 million, respectively. Also contributing to the increase in
total interest expense was interest incurred on subordinated debt of $556,000
during the three months ended March 31, 1998 associated with the December 1997
$25.3 million trust preferred security offering.
10
Interest incurred on deposits increased $695,000 or 19.3% to $4.3 million for
the three months ended March 31, 1998, compared to $3.6 million for the same
period in the prior year. This increase was primarily attributable to and
increase in the average balance of interest-bearing deposits of $62.5 million or
18.8% to $394.6 million for the three months ended March 31, 1998, compared to
$332.1 million for the same period in the prior year. This significant increase
in the average balance of deposits was principally associated with the
acquisition of Troy Hill during the second quarter of 1997. The cost of
interest-bearing deposits remained relatively consistent between periods at
4.35% and 4.33% for the quarters ended March 31, 1998 and 1997, respectively.
Interest incurred on borrowed funds increased $1.8 million or 37.5% to $6.5
million for the three months ended March 31, 1998, compared to $4.7 million for
the same period in the prior year. This increase was primarily attributable to
an increase in the average balance of borrowed funds of $111.2 million or 35.8%
to $422.2 million for the three months ended March 31, 1998, compared to $311.0
million for the same period in the prior year. This increase in borrowed funds
is a reflection of the increase in securities and loans receivables, as such
funds were utilized to provide for security and loan growth. Also contributing
to the increase in interest incurred on borrowed funds was an increase in the
cost of these funds to 6.18% for the three months ended March 31, 1998, compared
to 6.10% for the same period in the prior year.
Provision for loan losses. The decrease in the provision for loan losses between
the three months ended March 31, 1998 and the same period in the prior year,
reflects the adequacy of the Company's allowance for loan losses as of March,
31, 1998. In determining the appropriate level of allowance for loan losses,
management considers historical loss experience, the present and prospective
financial condition of borrowers, current and prospective economic conditions
(particularly as they relate to markets where the Company originates loans), the
status of non-performing assets, the estimated underlying value of the
collateral and other factors related to the collectability of the loan
portfolio. The Company's total allowance for losses on loans at March 31, 1998
amounted to $4.8 million or 1.32% of the Company's total loan portfolio, as
compared to $4.8 million or 1.36% at December 31, 1997. The Company's allowance
for losses on loans as a percentage of non-performing loans was 125.2% and
126.4% at March 31, 1998 and December 31, 1997, respectively.
Noninterest income. Noninterest income increased $145,000 or 83.8% to $318,000
for the three months ended March 31, 1998, compared to $173,000 for the same
period in the prior year. This increase can be attributed primarily to the
acquisition of Troy Hill and loan and deposit fees from Troy Hill customers
being included in the Company's consolidated operating results during the three
months ended March 31, 1998.
Noninterest expense. Noninterest expense increased $620,000 or 30.5% to $2.7
million for the three months ended March 31, 1998, from $2.0 million for the
same period in the prior year. This increase was the result of increases in
compensation and employee benefits, premises and equipment, federal deposit
insurance premiums, data processing and other expenses of $369,000, $11,000,
$52,000, $24,000 and $164,000, respectively. These increases are primarily the
result of the inclusion of Troy Hill's noninterest expense in the consolidated
results of the Company for the three months ended March 31, 1998.
Provision for income taxes. The provision for income taxes increased $94,000 or
22.9% to $505,000 for the three months ended March 31, 1998, from $411,000 for
the same period in the prior year. This increase was primarily attributable to
an increase in pre-tax net income, partially offset by a reduction in the
Company's effective tax rate as a result of an increase in the average balance
of tax exempt securities between the periods.
11
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resultant average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resultant average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average loan balances include non-accrual loans and exclude the
allowance for loan losses, and interest income includes accretion of net
deferred loan fees. Interest and yields on tax-exempt securities (tax-exempt for
federal income tax purposes) are shown on a fully tax equivalent basis. Yields
and rates have been calculated on an annualized basis utilizing monthly interest
amounts.
- - ------------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended March 31,
1998 1997
----------------------------------- -----------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- - ---------------------------------------------------------------------------------------- -----------------------------------------
Interest-earning assets:
Taxable securities available for sale $ 376,426 $ 6,311 6.71% $ 295,668 $ 5,139 6.95%
Tax-exempt securities available for sale 67,302 1,395 8.29% 54,145 1,193 8.81%
Taxable securities held to maturity 81,401 1,224 6.01% 96,049 1,430 5.96%
Tax-exempt securities held to maturity 8,368 185 8.84% 581 12 8.26%
--------- -------- ---- --------- -------- ----
533,497 9,115 6.83% 446,443 7,774 6.97%
--------- -------- ---- --------- -------- ----
Mortgage loans 284,737 5,610 7.88% 166,133 3,308 7.96%
Other loans 61,681 1,206 7.82% 54,943 1,001 7.29%
--------- -------- ---- --------- -------- ----
346,418 6,816 7.87% 221,076 4,309 7.80%
--------- -------- ---- --------- -------- ----
Cash equivalents 8,462 69 3.26% 5,388 41 3.04%
FHLB stock 18,053 289 6.40% 15,120 236 6.24%
26,515 358 5.40% 20,508 277 5.40%
--------- -------- ---- --------- -------- ----
Total interest-earning assets 906,430 16,289 7.19% 688,027 12,360 7.19%
Other noninterest-earning assets 17,367 - - 14,231 - -
--------- -------- ---- --------- -------- ----
Total assets $ 923,797 $ 16,289 7.05% $ 702,258 $ 12,360 7.04%
========= ======== ==== ========= ======== ====
Interest-bearing liabilities:
Interest-bearing demand deposits $ 150,633 $ 880 2.34% $ 139,149 $ 916 2.63%
Time deposits 243,996 3,408 5.59% 192,998 2,677 5.55%
--------- -------- ---- --------- -------- ----
394,629 4,288 4.35% 332,147 3,593 4.33%
--------- -------- ---- --------- -------- ----
FHLB advances 338,315 5,338 6.31% 297,192 4,553 6.13%
Reverse repo's & other borrowings 83,883 1,180 5.63% 13,797 189 5.48%
--------- -------- ---- --------- -------- ----
422,198 6,518 6.18% 310,989 4,742 6.10%
--------- -------- ---- --------- -------- ----
Preferred securities 24,085 556 9.23% - - -
--------- -------- ---- --------- -------- ----
Total interest-bearing liabilities 840,912 11,362 5.40% 643,136 8,335 5.18%
Noninterest-bearing demand deposits 8,573 - - 4,160 - -
Other noninterest-bearing liabilities 5,612 - - 3,608 - -
--------- -------- ---- --------- -------- ----
Total liabilities 855,097 11,362 5.31% 650,904 8,335 5.12%
Stockholders' equity 68,700 - - 51,354 - -
--------- -------- ---- --------- -------- ----
Total liabilities and equity $ 923,797 $ 11,362 4.92% $ 702,258 $ 8,335 4.75%
========= ======== ==== ========= ======== ====
Net interest income $ 4,927 $ 4,025
======== ========
Interest rate spread (difference between 1.79% 2.01%
weighted average rate on interest-earning ==== ====
assets and interest-bearing liabilities
Net interest margin (net interest 2.17% 2.34%
income as a percentage of average ==== ====
interest-earning assets)
- - ------------------------------------------------------------------------------------------------------------------------------------
12
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense, between the quarters ended
March 31, 1998 and 1997, in terms of: (1) changes in volume of interest-earning
assets and interest-bearing liabilities and (2) changes in yields and rates. The
table reflects the extent to which changes in the Company's interest income and
interest expense are attributable to changes in rate (change in rate multiplied
by prior period volume), changes in volume (changes in volume multiplied by
prior period rate) and changes attributable to the combined impact of
volume/rate (change in rate multiplied by change in volume). The changes
attributable to the combined impact of volume/rate are allocated on a consistent
basis between the volume and rate variances. Changes in interest income on
securities reflects the changes in interest income on a fully tax equivalent
basis.
- - ------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 versus 1997
Increase (decrease) due to
-------------------------------------------
Volume Rate Total
- - ------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 1,490 $ (149) $ 1,341
Loans 2,466 41 2,507
Cash equivalents 25 3 28
FHLB stock 47 6 53
------- -------
Total interest-earning assets 4,028 (99) 3,929
------- -------
Interest expense:
Deposits 679 16 695
FHLB advances 646 139 785
Reverse repurchases & other borrowings 986 5 991
Preferred securities 556 - 556
------- -------
Total interest-bearing liabilities 2,867 160 3,027
------- -------
Net interest income $ 1,161 $ (259) $ 902
======= =======
- - --------------------------------------------------------------------------------------------------------------
ASSET AND LIABILITY MANAGMENT
The primary objective of the Company's asset and liability management function
is to maximize the Company's net interest income while simultaneously
maintaining an acceptable level of interest rate risk given the Company's
operating environment, capital and liquidity requirements, performance
objectives and overall business focus. The principal determinant of the exposure
of the Company's earnings to interest rate risk is the timing difference between
the repricing or maturity of interest-earning assets and the repricing or
maturity of its interest-bearing liabilities. The Company's asset and liability
management policies have decreased interest rate sensitivity primarily by
shortening the maturities of interest-earning assets while at the same time
extending the maturities of interest-bearing liabilities. The Board of Directors
of the Company 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. Mortgage-backed securities generally increase the
quality of the Company's assets by virtue of the insurance or guarantees that
back them, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Company.
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.
13
As of March 31, 1998, the implementation of these asset and liability
initiatives resulted in the following: (i) $188.4 million or 51.8% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $135.3 million or 53.0% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs and (iii) $159.8 million or 36.8% of the Company's
portfolio of mortgage-backed securities (including mortgage-backed securities
available for sale) were secured by ARMs.
The implementation of the foregoing asset and liability initiatives and
strategies, combined with other external factors such as demand for the
Company's products and economic and interest rate environments in general, 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 March 31, 1998, the
Company's interest-earning assets maturing or repricing within one year totaled
$346.9 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $387.1 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $40.2 million or a
negative 4.25% of total assets. At March 31, 1998, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 89.6%.
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. The
Company also utilizes income simulation modeling in measuring its interest rate
risk and managing its interest rate sensitivity. The Asset and Liability
Management Committee of the Company believes that simulation modeling enables
the Company to more accurately evaluate and manage 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 under various
interest rate scenarios. At March 31, 1998, the Company's simulation model
indicated that the Company's statement of financial condition is liability
sensitive. Within the past 16 months, the Company has purchased interest rate
cap contracts with notional amounts totaling $120.0 million in order to insulate
against a rising interest rate environment. As such, in a 300 basis point
gradually rising rate environment over 24 months, with minor changes in the
statement of condition and limited reinvestment changes, net interest income is
projected to increase by approximately 4.0% over such 24 month period.
LIQUIDITY
The Banks are required by the Office of Thrift Supervision ("OTS") to maintain
minimum levels of liquidity to assure their ability to meet demands for
customers withdrawals and the repayment of short term borrowings. The liquidity
requirement is calculated as a percentage of deposits and short-term borrowings,
as defined by the OTS, and currently must be maintained at amounts not less than
4.0%. The Banks' liquidity ratios fluctuate depending primarily upon deposit
flows but have been consistently maintained at levels in excess of the required
percentage. At March 31, 1998, ESB's liquidity ratio was 14.2%, and Troy Hill's
liquidity ratio was 7.6%.
The Company's primary sources of funds generally have been deposits obtained
through the offices of the Banks, borrowings from the FHLB, reverse repurchase
agreement borrowings and amortization and prepayments of outstanding loans and
maturing investment securities. During the three months ended March 31, 1998,
the Company used its sources of funds primarily to purchase securities, and to a
lesser extent, the funding of loan commitments. As of such date, the Company had
outstanding loan commitments totaling $13.1 million, unused lines of credit
totaling $19.6 million and $12.1 million of undisbursed loans in process.
14
At March 31, 1998, certificates of deposits amounted to $246.2 million or 61.3%
of the Company's total consolidated deposits, including $144.0 million which
were scheduled to mature by March 31, 1999. At the same date, the total amount
of FHLB advances which were scheduled to mature by March 31, 1999 was $139.8
million. Management of the Company believes that it has adequate resources to
fund all of its commitments, that all of its commitments will be funded by March
31, 1999 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.
REGULATORY CAPITAL REQUIREMENTS
Current regulatory requirements specify that the Banks and similar institutions
must maintain tangible capital equal to 1.5% of adjusted totals assets, core
capital equal to 3% of adjusted total assets and risk-based capital equal to 8%
of risk-weighted assets. The Office of the Comptroller of the Currency and the
FDIC have adopted more stringent core capital requirements which require that
the most highly rated banks have a minimum core capital ratio of 3%, with an
additional 100 to 200 basis point cushion required for all other banks as
established by the regulator on a case-by-case basis. Both the FDIC and the OTS
reserve the right to apply this higher standard to any insured financial
institution when considering an institution's capital adequacy. At March 31,
1998, ESB was in compliance with all regulatory capital requirements with
tangible, core and risk-based capital ratios of 6.3%, 6.3% and 20.73%,
respectively. At March 31, 1998, Troy Hill was in compliance with all regulatory
capital requirements with tangible, core and risk-based capital ratios of 9.3%,
9.3% and 14.6%, respectively.
RECENT ACCOUNTING, REGULATORY AND OTHER MATTERS
The Management Discussion and Analysis section of this Form 10-Q contains
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may involve
significant risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially from the results in these forward-looking
statements.
The Company is aware of the issues associated with the programming code in
certain existing computer systems as the year 2000 approaches. The "year 2000"
problem is pervasive and complex as many computer operations will be affected in
some way by the rollover of the two digit year value to 00. The issue is whether
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such date
information could generate erroneous data or cause a system failure.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test systems for year 2000 compliance. It is
anticipated that all reprogramming efforts will be completed by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000. Management has
determined that the year 2000 compliance exposure expense will not have a
significant impact on the Company's consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risk are presented at
December 31, 1997 in Item 7A of the Company's Annual Report on Form 10-K, filed
with the SEC on March 30, 1998. Management believes there have been no material
changes in the Company's market risk since December 31, 1997.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that these matters will not materially
effect the Company's consolidated financial position or results of operations.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Form 8-K - The Company filed a Form 8-K dated March 18, 1998 to report a
$0.09 per share quarterly cash dividend payable April 24, 1998 to
stockholders of record at the close of business on March 31, 1998.
16
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.
Date: May 7, 1998 By: /s/ Charlotte A. Zuschlag
---------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: May 7, 1998 By: /s/ Charles P. Evanoski
-------------------------------
Charles P. Evanoski
Senior Vice President and
Chief Financial Officer
17