<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
[ ] 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: 0-24350
TROY HILL BANCORP, INC.
- - --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-0844150
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER)
1706 LOWRIE STREET
PITTSBURGH, PENNSYLVANIA 15212
- - --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(412) 231-8238
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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 REQUIREMENT FOR THE PAST 90 DAYS. YES X NO
SHARES OUTSTANDING AS OF MAY 8, 1996: 1,067,917 SHARES OF COMMON STOCK, PAR
VALUE $.01 PER SHARE.
<PAGE>
TROY HILL BANCORP, INC.
INDEX
Part I. Financial Information Page
- - -------------------------------------------------------------------------------
Item 1. Financial Statements
Consolidated Statements of Financial 1
Condition as of March 31, 1996
(Unaudited) and June 30, 1995
Consolidated Statements of
Earnings for the Three and Nine Months
Ended March 31, 1996 and 1995
(Unaudited) 2
Consolidated Statements of Cash Flows
for the Nine Months ended March 31,
1996 and 1995 (Unaudited) 3
Consolidated Statement of
Stockholders' Equity for the
Nine Months ended March 31,
1996 (Unaudited) 5
Notes to Unaudited Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations for the Three and Nine Months
Ended March 31, 1996 and 1995. 8
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Part II. Other Information Page
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Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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TROY HILL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
(In thousands) (In thousands)
ASSETS: (Unaudited)
----------- --------
<S> <C> <C>
Cash and due from banks $ 754 $ 1,469
Investment and mortgage-backed securities-available for sale 13,366 10,831
Investment securities- held to maturity (market value of
$7,134 at June 30,1995) - 7,301
Loans held for sale, at lower of cost or
market 654 272
Loans receivable 63,668 53,180
Office properties and equipment - at depreciated
cost 619 602
Federal Home Loan Bank stock - at cost 467 286
Accrued interest receivable 538 470
Deferred income tax benefits 325 288
Other 93 392
------- -------
Total assets $80,484 $75,091
------- -------
------- -------
LIABILITIES
Deposit accounts $52,775 $50,610
Advances from Federal Home Loan Bank 8,583 5,750
Accrued income taxes 94 83
Advances by borrowers for taxes and insurance 1,012 986
Other liabilities 155 446
------- -------
Total liabilities 62,619 57,875
------- -------
------- -------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized and unissued - -
Common stock, $.01 par value, 10,000,000 shares authorized,
1,124,125 shares issued 11 11
Additional paid-in-capital 10,608 10,591
Retained earnings 9,211 8,657
Treasury stock- at cost, 56,208 shares at June 30, 1995
and March 31, 1996 (703) (703)
Shares acquired by Recognition and Retention Plan (463) (543)
Unearned ESOP shares (779) (850)
Unrealized gain (loss) on investment and mortgage-
backed securities available for sale (20) 53
------- -------
Total stockholders' equity 17,865 17,216
------- -------
Total liabilities and stockholders' equity $80,484 $75,091
------- -------
------- -------
</TABLE>
1
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TROY HILL BANCORP, INC.
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
(In thousands, except for per share data) (In thousands, except for per share data)
(Unaudited) (Unaudited)
----------------------------------------- -----------------------------------------
1996 1995 1996 1995
----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $1,371 $1,036 $3,903 $2,856
Investment securities
Taxable 122 66 359 221
Exempt from federal income taxes - 39 77 117
Mortgage-backed securities 109 136 341 361
Interest-bearing deposits and other 43 62 110 169
------ ------ ------ ------
Total interest income 1,645 1,339 4,790 3,724
Interest expense:
Interest on deposit accounts 621 496 1,875 1,308
Interest on advances and other borrowings 140 80 428 189
------ ------ ------ ------
Total interest expense 761 576 2,303 1,497
------ ------ ------ ------
Net interest income 884 763 2,487 2,227
Provision for loan and lease losses 30 10 90 10
------ ------ ------ ------
Net interest income after provision for
loan and lease losses 854 753 2,397 2,217
Noninterest income:
Loan fees and service charges 12 8 34 35
Gain on sales of loans 32 10 91 59
Loss on sales of investments and mortgage-
Backed securities available for sale - (2) (11) (83)
Other 11 9 30 34
------ ------ ------ ------
Total noninterest income 55 25 144 45
Noninterest expense:
Salaries and employee benefits 226 210 646 558
Net occupancy expense 44 41 118 119
Federal deposit insurance 30 21 87 72
Other operating 137 152 372 458
------ ------ ------ ------
Total noninterest expense 437 424 1,223 1,207
------ ------ ------ ------
Earnings before income taxes 472 353 1,318 1,054
Income taxes 187 130 513 412
------ ------ ------ ------
NET EARNINGS $285 $223 $805 $642
------ ------ ------ ------
------ ------ ------ ------
Earnings and dividends per share:
Net earnings per share $0.29 $0.22 $0.81 $0.63
------ ------ ------ ------
------ ------ ------ ------
Cash dividends declared per share $0.10 $0.05 $0.26 $0.15
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
2
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TROY HILL BANCORP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
March 31,
(Dollars in thousands)
(Unaudited)
-----------------------
1996 1995
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 806 $ 642
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan and lease losses 90 10
Origination of loans for sale (7,704) (452)
Proceeds from sale of loans 7,322 452
Depreciation 53 53
Amortization of deferred loan origination
fees and accretion of discounts (68) (127)
Deferred income tax benefit 2 -
Increase in accrued interest
receivable (68) (59)
Increase (decrease) in interest payable (19) 53
Increase in other assets - (18)
Loss on sale of investment and mortgage-backed
securities available for sale (9) 83
Other 237 (572)
Increase (decrease) in accrued income taxes 11 (26)
-------- -------
Net cash provided by
operating activities 653 39
-------- -------
Cash flows from investing activities:
Purchases of investment securities - (750)
Purchases of mortgage-backed securities (2,000) (6,504)
Sale of investment and mortgage-backed securities
available for sale 5,926 3,746
Principal repayments of mortgage-backed securities 1,028 669
Net increase in loans (10,843) (11,117)
Purchases of office properties and equipment (70) (30)
Purchase of Federal Home Loan Bank Stock (181) 36
-------- -------
Net cash provided by
investing activities (6,140) (13,950)
-------- -------
(continued)
3
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TROY HILL BANCORP, INC
Cash flows from financing activities:
Net increase in deposit accounts 2,165 7,024
Net increase in advances from Federal Home Loan Bank 2,833 1,000
Net decrease in advances by borrowers for taxes and
insurance 26 (47)
Dividends declared (252) (157)
-------- -------
Net cash provided by
financing activities 4,772 7,820
-------- -------
Net (decrease) increase in cash (715) (6,091)
Cash and cash equivalents at beginning of period 1,469 7,473
-------- -------
Cash and cash equivalents at end of period $ 754 $ 1,382
-------- -------
-------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 1,875 $ 1,527
-------- -------
-------- -------
Income taxes $ 488 $ 426
-------- -------
-------- -------
Non-cash investing transactions:
Transfers from loans to real estate acquired
through foreclosure $ 25 $ 60
-------- -------
-------- -------
Unrealized loss on investment securities 136 (72)
Unrealized (gain) loss on mortgage-backed securities (106) 10
Deferred income taxes (10) 21
-------- -------
Net unrealized (gain) loss on investment and
mortgage-backed securities $ 20 $ (41)
-------- -------
-------- -------
</TABLE>
4
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TROY HILL BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized Gain on
Shares acquired Investment and Shares acquired
Additional by Employee Mortgage-backed by Recognition Total
Common Treasury Paid In Stock Ownership Retained securities available and Retention Stockholders'
(Dollars in thousands) Stock Stock Capital Plan Earnings for sale Plan Equity
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $11 (703) $10,591 ($850) $8,657 $53 ($543) $17,216
Purchase of Treasury Stock - - - - - - - -
Purchases of stock for
Recognition and Retention Plan - - - - - - 80 80
Accrual for Employee Stock
Ownership Plan (ESOP) - - 17 71 - - - 88
Cash dividends declared on
Common Stock at $.26 per
share - - - - (252) - - (252)
Increase in unrealized gain on
securities available for sale - - - - - (73) - (73)
Net income - - - - 806 - - 806
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 $11 $(703) $10,608 $(779) $9,211 $(20) $(463) $17,865
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>
5
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TROY HILL BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q and therefore do not include
information or footnotes necessary for a complete presentation of financial
condition, results of operations, cash flows and changes in stockholders' equity
in conformity with generally accepted accounting principles. However, all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation have been included.
The results of operations for the three and nine month periods ended March 31,
1996 are not necessarily indicative of the results which may be expected for the
entire fiscal year or any other interim period.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
In May 1993, the Financial Accounting Standards Board released SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values and all investments in debt securities.
Investments are to be classified into the following three categories: 1) debt
securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity securities and reported at amortized
cost; 2) debt and equity securities that are bought and held principally for
the purpose of resale in the near future are classified as trading securities
and reported at fair value, with unrealized gains and losses included in current
period earnings; and 3) debt and equity securities not classified as either held
to maturity securities or trading securities are classed as available for sale
securities and reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders' equity, net
of deferred taxes.
In December 1995, the Financial Accounting Standards Board provided financial
institutions and other companies with the opportunity to reclassify all of their
debt and equity securities to available for sale. At December 31, 1995, the
Company reclassified its entire portfolio of investment and mortgage-backed
securities amounting to $14.0 million as available for sale in order to
provide the Company with the flexibility to sell individual securities if it
chooses to do so. At March 31, 1996, the Company classified mortgage-backed
securities and investments of $13.4 million as available for sale.
Stockholders' equity decreased by $20,000 at March 31, 1996 as a result of the
net unrealized gain with respect to investment and mortgage-backed securities
held as available for sale, net of deferred income taxes.
6
<PAGE>
EARNINGS PER SHARE
Earnings per share have been calculated based on the weighted average number of
common and common equivalent shares outstanding for the three and nine months
ended March 31,1996 (998,161 and 994,564 shares, respectively) and for the three
and nine months ended March 31, 1995 (1,034,195 shares), during such respective
periods.
RECENT LEGISLATIVE DEVELOPMENTS
On November 14, 1995, the Federal Deposit Insurance Corporation ("FDIC")
approved a final rule regarding deposit insurance premiums. The final rule
reduced deposit insurance premiums for Bank Insurance Fund ("BIF") member
institutions from 23 to 0 basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for Savings Association Insurance Fund ("SAIF") members at their
current levels (23 basis points for institutions in the lowest risk category).
The reduction was effective with respect to the January 1, 1996 premium
assessment. Accordingly, in the absence of further legislative action, SAIF
members such as the Savings Bank will be competitively disadvantaged as compared
to commercial banks by the resulting premium differential.
The U.S. House of Representatives and Senate have provided for a resolution of
the recapitalization of the SAIF in the Balanced Budget Act of 1995 (the
"Reconciliation Bill") which was sent to the President on November 29, 1995.
The President recently vetoed the Reconciliation Bill for reasons unrelated to
the recapitalization of the SAIF. The Reconciliation Bill provides that all SAIF
member institutions will pay a special one-time assessment to recapitalize the
SAIF, which in the aggregate will be sufficient to bring the reserve ratio in
the SAIF to 1.25% of insured deposits. Based on the current level of reserves
maintained by the SAIF it is currently anticipated that the amount of the
special assessment required to recapitalize the SAIF will be approximately 80 to
85 basis points of the SAIF-assessable deposits. The special assessment would
be payable based on the amount of SAIF deposits on March 31, 1995. It is
anticipated that after the recapitalization of the SAIF, that premiums of SAIF-
insured institutions would be reduced comparable to those currently being
assessed BIF-insured commercial banks.
The Reconciliation Bill also provides for the merger of BIF and SAIF on January
1, 1998, with such merger being conditioned upon the prior elimination of the
thrift charter. The Banking Committees of the House of Representatives and the
Senate in adopting the Reconciliation Bill agreed that Congress should consider
and act upon separate legislation as early as possible in 1996 to eliminate the
thrift charter. If adopted, such legislation would require that the Savings Bank
as a federal savings
7
<PAGE>
bank, to convert to a bank charter. Such a requirement to convert to a bank
charter could cause savings institutions to lose favorable tax treatment for
their bad debt reserves that they currently enjoy under Section 593 of the
Internal Revenue Code of 1986, as amended (the "Code").
While the outcome of the proposed legislation cannot be predicted with
certainty, it is likely that some kind of legislative or regulatory action will
be undertaken that will impact the Savings Bank's insured deposits. A one-time
special assessment of 85 basis points would result in the Savings Bank paying
approximately $440,000, net of related tax benefits, if any. In addition, the
enactment of such legislation may have the effect of immediately reducing the
capital of SAIF-member institutions by the amount of the special assessment, net
of taxes.
In light of the different proposals currently under consideration and the
uncertainty of the legislative process generally, management cannot predict
whether legislation reducing SAIF premiums and/or imposing a special one-time
assessment will be adopted, or, if adopted, the amount of the assessment, if
any, that would be imposed on the Savings Bank.
TROY HILL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THREE AND NINE MONTHS ENDED MARCH 31, 1996
GENERAL
On June 24, 1994, Troy Hill Federal Savings and Loan Association successfully
completed its conversion from a federally chartered, mutual savings and loan
association to a federally chartered stock savings bank known as Troy Hill
Federal Savings Bank (the "Savings Bank") and the concurrent formation of Troy
Hill Bancorp, Inc. (the "Company" or "Troy Hill"), the parent holding company of
the Savings Bank. The operating results of the Company 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 principally consist of deposits and borrowings. The Company's
net income also is affected by its provision for loan and lease losses, as well
as the level of its noninterest income, including loan fees and service charges,
gain on sale of loans, and other income, and its noninterest expenses, such as
salaries and employee benefits, net occupancy expense, federal deposit insurance
and miscellaneous other expenses, and income taxes.
8
<PAGE>
In general, financial 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 financial
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, which
largely mature or are subject to repricing within a short period of time. This
has historically caused the income earned by Troy Hill on its loan portfolio to
adjust more slowly to changes in interest rates than its 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.
ASSET AND LIABILITY MANAGEMENT
Troy Hill maintains a program designed to monitor its exposure to material and
prolonged increases in interest rates. 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 the Company's interest-earning assets and the
repricing or maturity of its interest-bearing liabilities. The Company's Board
of Directors establishes and monitors the Company's asset and liability
management policies.
The Company has adopted a strategy designed to improve the interest rate
sensitivity of its assets relative to its liabilities. The primary elements of
this strategy include: (i) maintaining a high level of liquid assets that can be
reinvested in higher yielding investments should interest rates rise; (ii)
emphasizing investments in (A) shorter-term (15 years or less), fixed-rate
single-family residential loans and (B) residential construction loans, which
generally have adjustable or floating interest rates and/or shorter maturities
than traditional single-family residential loans; (iii) to the extent market
conditions permit, increasing the origination of adjustable-rate single-family
residential loans ("ARMs"); and (iv) maintaining the weighted average maturity
of the Company's investment portfolio at five years or less.
As of March 31, 1996, the implementation of the asset and liability initiatives
resulted in the following: (i) $12.9 million or 20.0% of the Company's total
loan portfolio had adjustable interest rates or maturities of less than 12
months; (ii) $4.6 million or 76.8% of the company's mortgage-backed securities
were secured by ARMs; and (iii) $6.1 million or 83.0% of the Company's
investment securities portfolio had scheduled maturities of five years or less.
9
<PAGE>
RESULTS OF OPERATIONS
GENERAL
The Company reported net earnings of $285,000 and $223,000 during the three
months ended March 31, 1996 and 1995, and $805,000 and $642,000 during the nine
months ended March 31, 1996 and 1995, respectively. The $62,000 or 27.8%
increase in net earnings for the three months ended March 31, 1996, as compared
to the same period in the prior year, is primarily due to a $121,000 increase in
net interest income and a $30,000 increase in total noninterest income, which
was partially offset by a $13,000 increase in the total noninterest expense, a
$20,000 increase in the provision for loan and lease losses and a $57,000
increase in income taxes. The $163,000 or 25.4% increase in net earnings for
the nine months ended March 31, 1996, as compared to the same period in the
prior year, is primarily the result of a $260,000 increase in net interest
income and a $99,000 increase in total noninterest income, which was partially
offset by a $16,000 increase in the total noninterest expense, an $80,000
increase in the provision for loan and lease losses and a $101,000 increase in
income taxes.
NET INTEREST INCOME
Net interest income is determined by the Company's interest rate spread (i.e.,
the difference between the yields earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities) and the relative amounts of
interest-earning assets and interest-bearing liabilities.
The Company's net interest income increased by $121,000 or 15.9% and $260,000 or
11.7% during the three and nine months ended March 31, 1996, respectively, when
compared to the respective periods in 1995.
INTEREST INCOME
Interest on loans increased by $335,000 or 32.3% and $1,047,000 or 36.7% for the
three and nine months ended March 31, 1996, respectively, when compared with the
same periods in 1995. The increase in interest on loans was due primarily to
increases in the weighted average yield earned on loans of 11 and 10 basis
points (1%=100 basis points) for the three and nine months ended March 31, 1996,
respectively, when compared to the same periods in 1995. The increases in the
weighted average yield was due to the adjusting of the interest rate on
adjustable-rate mortgages.
10
<PAGE>
Interest and dividends on investment securities and other interest-earning
assets (consisting primarily of U.S. Government and agency obligations,
corporate obligations, interest-bearing deposits and FHLB of Pittsburgh stock)
decreased by $2,000 or 1.2% and increased by $39,000 or 7.7% during the three
months and nine months ended March 31, 1996, respectively, when compared with
the same periods in 1995. The decrease was the result of the sale of municipal
bonds during the three month period ending March 31, 1996. The increase for the
nine month period ended March 31, 1996 resulted from the purchase of U.S.
Government agency obligations and corporate preferred stock which carry
increased yields.
Interest on mortgage-backed securities decreased $27,000 or 19.9% and $20,000
or 5.5% during the three and nine months ended March 31, 1996, respectively,
when compared with the same periods in 1995. The decreases were due primarily to
a decrease of $2.0 million and $904,000 in the average balance of mortgage-
backed securities outstanding for the three and nine months ended March 31, 1996
when compared to the same periods in 1995.
INTEREST EXPENSE
Interest expense on deposits, the largest component of the Company's interest-
bearing liabilities, increased by $125,000 or 25.2% and $567,000 or 43.3% for
the three and nine months ended March 31, 1996, respectively, when compared to
the same periods in 1995. The increases were due primarily due to an increase
of $6.7 million and $7.6 million in the average balance of deposits outstanding
for the three and nine months ended March 31, 1996, respectively, when compared
to the same periods in 1995.
Interest on borrowings (consisting of advances from the FHLB of Pittsburgh)
increased $60,000 or 75.0% and $239,000 or 126.5% during the three and nine
months ended March 31, 1996, when compared with the same periods in 1995. The
increases were due to increases in the average balance of such borrowings of
$3.1 million and $5.1 million during the three and nine months ending March 31,
1996, respectively, as compared to the same periods in 1995. The Savings Bank
reinvested these additional advances from the Federal Home Loan Bank of
Pittsburgh into permanent and construction loans secured by single-family
residences.
PROVISION FOR LOAN AND LEASE LOSSES
Provisions for loan and lease losses 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 Savings Bank, the
status of past due principal and interest payments, general economic conditions,
particularly as they relate to the Savings Bank's market area, and other factors
related to the collectibility of the Savings Bank's loan portfolio.
11
<PAGE>
The Savings Bank's provisions for loan and lease losses during the three and
nine month periods ended March 31, 1996, increased by $20,000 and $80,000,
respectively, when compared to the same periods in 1995. The provisions made for
the periods ending in 1996 were due to the increase in the average balance of
loans outstanding. The Company's total allowance for loan and lease losses
amounted to 1.11% of the Company's total loan portfolio at March 31, 1996, as
compared with 1.2% at March 31, 1995. As of March 31, 1996, the Company's total
allowance for loan and lease losses amounted to 30.3% of total nonperforming
loans.
NONINTEREST INCOME
The Company's noninterest income increased by $30,000 and $99,000 during the
three and nine months ended March 31, 1996, respectively, when compared with the
same periods in 1995. The increase during the three month period ended March 31,
1996 was primarily attributable to a $22,000 increase in gains on the sale of
loans as well as a $4,000 increase in loan fees and service charges. The
increase during the nine month period ended March 31, 1996 was primarily due to
a decrease of $72,000 in the loss on the sale of investments available for sale
as well as a $32,000 increase in gains on the sale of loans during the period.
NONINTEREST EXPENSE
Noninterest expense increased by $13,000 or 3.1% and $16,000 or 1.3% during the
three and nine months ended March 31, 1996, respectively, when compared with the
same periods in 1995. Salaries and employee benefits increased by $16,000 or
7.6% and $88,000 or 15.8% for the three and nine months ended March 31, 1996,
respectively, when compared to the same periods in 1995. The increases are
primarily due to normal salary increases for employees as well as the
contribution to its various employee stock benefit plans. Federal deposit
insurance increased $9,000 or 42.8% and $15,000 or 20.8% for the three and nine
months ended March 31, 1996, respectively, when compared to the same periods in
1995. The increases were primarily attributable to a $3.3 million increase in
deposit accounts for the period ended March 31, 1996, when compared to the same
period in 1995. Such increases were offset by decreases in miscellaneous other
operating expenses, which primarily consist of professional fees, forms, bank
charges, postage, insurance expense, and organizational dues, which decreased by
$15,000 or 9.9% and $86,000 or 18.8% for the three and nine months ended March
31, 1996, respectively, when compared to same periods in 1995.
INCOME TAXES
The Company recognized $187,000 in income tax expense which reflected an
effective rate of 39.6% for the three months ended March 31, 1996, as compared
to $130,000 with an effective tax rate of 36.8% for the comparable 1995 period.
The Company
12
<PAGE>
recognized $513,000 in income tax expense which reflected an effective tax rate
of 38.9% for the nine months ended March 31, 1996, as compared to $412,000 with
an effective tax rate of 39.1% for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Company's primary
sources of funds are deposits, borrowings, amortization, prepayment and
maturities of outstanding loans and mortgage-backed securities, sales of loans,
maturities of investment securities and other short-term investments and funds
provided from operations. While scheduled loan and mortgage-backed securities
amortization and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan and mortgage-
backed securities prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Company manages the pricing of its
deposits to maintain a steady deposit balance. In addition, the Company invests
excess funds in overnight deposits and other short-term interest-earning assets
which provides liquidity to meet lending requirements. The Company has been able
to generate enough cash through the retail deposit market, its traditional
funding source, to offset the cash utilized in investing activities. In
addition, the Company may, to the extent deemed necessary, utilize borrowings
for liquidity (primarily consisting of advances from the FHLB of Pittsburgh). At
March 31, 1996, the Company had $8.6 million of outstanding advances from the
FHLB of Pittsburgh and an unused line of credit of $1.4 million.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Company maintains a
strategy of investing in various lending products. The Company uses its sources
of funds primarily to meet its ongoing commitments, to pay maturing savings
certificates and savings withdrawals, fund loan commitments and maintain a
portfolio of investment and mortgage-backed securities.
At March 31, 1996, the total approved loan commitments outstanding amounted to
$2.0 million. At the same date, commitments under unused lines of credit
amounted to $3.6 million and the unadvanced portion of construction loans
approximated $5.0 million. Certificates of deposit scheduled to mature in one
year or less at March 31, 1996 totaled $19.9 million. Management believes that
a significant portion of maturing deposits will remain with the Savings Bank.
13
<PAGE>
The Company's total consolidated assets were $80.5 million at March 31, 1996, an
increase of $5.4 million or 7.2% over consolidated assets at June 30, 1995.
Total consolidated stockholders' equity totaled $17.9 million at March 31, 1996,
representing an increase of $649,000 or 3.8% from June 30, 1995.
Federally insured savings institutions are required to maintain minimum levels
of regulatory capital. Pursuant to the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA"), the Office of Thrift Supervision ("OTS")
has established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a case-
by-case basis.
Savings institutions must satisfy three different OTS capital requirements.
Under these standards, savings institutions must maintain "tangible" capital
equal to at least 1.5% of adjusted total assets, "core" capital equal to at
least 3% of adjusted total assets and "total" capital (a combination of core and
"supplementary" capital) equal to at least 8% of "risk-weighted" assets. For
purposes of the regulation, core capital is defined as common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, minority interest in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits
and qualifying supervisory goodwill. Core capital is generally reduced by the
amount of savings institutions intangible assets, although limited exceptions to
the deduction of intangible assets are provided for purchased mortgage servicing
rights, qualifying supervisory goodwill and certain other intangibles, all of
which are currently not relevant to the calculation of the Savings Bank's
regulatory capital. Tangible capital is core capital less all intangible
assets, with a limited exception for purchased mortgage servicing rights. The
following table sets forth the Savings Bank's compliance with each of the above
described regulatory capital requirements at March 31, 1996.
14
<PAGE>
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
(Dollars in Thousands)
Regulatory
capital $12,868 $12,868 $13,487
Minimum
required
regulatory
capital 1,146 2,291 3,957
------ ------ -----
Excess
regulatory
capital $11,722 $10,577 9,530
------ ------ -----
Regulatory
capital as
a percentage
of assets(1) 16.8% 16.8% 27.2%
Minimum capital
required as a
percentage 1.50% 3.00% 8.00%
----- ----- -----
Excess regulatory
capital as a
percentage in
excess of
requirement 15.30% 13.80% 19.20%
------ ------ ------
(1) Tangible and core capital are computed as a percentage of adjusted
total assets of $76.4 million. Risk-based capital is computed as a
percentage of total risk-weighted assets of $49.5 million.
IMPACT OF INFLATION AND CHANGING PRICES
The 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
15
<PAGE>
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
16
<PAGE>
PART II-OTHER INFORMATION
___________________________
ITEM 1. LEGAL PROCEEDINGS
THE COMPANY IS INVOLVED ONLY IN ROUTINE LEGAL PROCEEDINGS OCCURRING IN
THE ORDINARY COURSE OF BUSINESS WHICH IN THE 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
THE COMPANY FILED A FORM 8-K ON APRIL 17, 1996, AS AMENDED
ON APRIL 25, 1996, REPORTING A CHANGE OF INDEPENDENT AUDITORS
UNDER ITEM 4.
17
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TROY HILL BANCORP, INC.
MAY 8, 1996 BY: /S/ ELLRY DAVIS
----------------------------
ELLRY N. DAVIS
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
MAY 8, 1996 BY: /S/ LAWRENCE C. KERR
----------------------------
LAWRENCE C. KERR
TREASURER
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION AT MARCH 31,1996 AND JUNE 30, 1995
CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE AND NINE MONTHS ENDED MARCH
31, 1995 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-30-1996
<CASH> 754
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,366
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 63,668
<ALLOWANCE> 711
<TOTAL-ASSETS> 80,484
<DEPOSITS> 52,775
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 155
<LONG-TERM> 4,583
0
0
<COMMON> 8,674
<OTHER-SE> 9,191
<TOTAL-LIABILITIES-AND-EQUITY> 80,484
<INTEREST-LOAN> 3,903
<INTEREST-INVEST> 777
<INTEREST-OTHER> 110
<INTEREST-TOTAL> 4,790
<INTEREST-DEPOSIT> 1,875
<INTEREST-EXPENSE> 2,303
<INTEREST-INCOME-NET> 2,487
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 80
<EXPENSE-OTHER> 1,223
<INCOME-PRETAX> 1,318
<INCOME-PRE-EXTRAORDINARY> 1,318
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 805
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
<YIELD-ACTUAL> 8.38
<LOANS-NON> 389
<LOANS-PAST> 1,957
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 681
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 711
<ALLOWANCE-DOMESTIC> 198
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 513
</TABLE>
