SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission File No.: 0-24350
Troy Hill Bancorp, Inc.
(Name of Small Business Issuer in its charter)
Pennsylvania 25-0844150
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1706 Lowrie Street, Pittsburgh, Pennsylvania 15212
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (412) 231-8238
- --------------------------------------------------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
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Not Applicable
Securities registered under Section 12(g) of the Exchange Act
Common Stock (par value $.01 per share)
(Title of Class)
<PAGE>
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. Issuer's revenues for its most recent fiscal year: $6.7
million.
As of October 7, 1996, the aggregate value of the 926,053 shares of Common Stock
of the Registrant issued and outstanding on such date, which excludes 141,864
shares held by all directors and executive officers of the Registrant as a
group, was approximately $18.4 million. This figure is based on the last known
trade price of $19.875 per share of the Registrant's Common Stock on October 7,
1996.
Number of shares of Common Stock outstanding as of October 7, 1996: 1,067,917
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-KSB into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended June 30,
1996 are incorporated into Part II, Items 5 through 7 of this Form 10-KSB.
(2) Portions of the definitive proxy statement for the 1996 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 through 12 of this Form
10-KSB.
<PAGE>
PART I
Item 1. Description of Business.
General
Troy Hill Bancorp, Inc. (the "Company") is a Pennsylvania corporation
and a unitary thrift holding company registered under the Home Owners' Loan Act,
as amended. The Company is the parent company of Troy Hill Federal Savings Bank
(the "Savings Bank" or "Troy Hill"). At June 30, 1996, on a consolidated basis,
the Company had total assets of $92.2 million, total liabilities of $74.1
million, including deposits of $54.0 million, and stockholders' equity of $18.0
million.
Troy Hill is a federally chartered stock savings bank conducting
business from two full-service offices located in the Troy Hill section of
Pittsburgh and Wexford, Pennsylvania. In June 1994, the Savings Bank converted
from a mutual form savings and loan association to a stock form savings bank,
reorganized into the holding company form of organization and became a wholly
owned subsidiary of the Company (together, the "Conversion").
Troy Hill is primarily engaged in attracting deposits from the general
public through its offices and using such deposits, together with other funds,
primarily to originate loans secured by first liens on single-family
(one-to-four units) and multi-family (over four units) residential properties,
nonresidential real estate, construction loans on primarily residential
properties and consumer loans. Troy Hill also invests in securities issued by
the United States Government and agencies thereof, municipal debt securities and
corporate obligations. Troy Hill derives its income principally from interest
earned on loans, mortgage-backed securities and investments and, to a lesser
extent, from fees received in connection with the origination and sale of loans
and for other services. Troy Hill's primary expenses are interest expense on
deposits, FHLB advances and general operating expenses. Funds for activities are
provided primarily by deposits, amortization and prepayments of outstanding
loans and mortgage-backed securities, sales of loans and other sources.
Troy Hill conducts operations out of its home office in the Troy Hill
section of Pittsburgh, which is located just north of downtown Pittsburgh in
Allegheny County, Pennsylvania. In addition to its home office, Troy Hill
maintains a branch office in Wexford, Pennsylvania. Troy Hill has benefited from
the large volume of economic activity historically associated with Pittsburgh,
which is Pennsylvania's second largest metropolitan area and the 18th largest
market in the United States. The greater Pittsburgh metropolitan area has
experienced increasing diversity over the past decade. The increasing economic
diversity in Allegheny County has led to moderate economic and population growth
in the area. However, the large size and increasing economic stability of the
Allegheny County economy has also supported growth in competition.
The Company, as a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision
("OTS") and is subject to various reporting and other requirements of the
Securities and Exchange Commission ("SEC"). Troy Hill, as a federally chartered
savings bank, is subject to comprehensive regulation and examination by the OTS,
as its chartering authority and primary regulator, and by the Federal Deposit
Insurance Corporation ("FDIC"), which administers the Savings Association
1
<PAGE>
Insurance Fund ("SAIF"), which insures the Savings Bank's deposits to the
maximum extent permitted by law. The Savings Bank is a member of the Federal
Home Loan Bank ("FHLB") of Pittsburgh, which is one of the 12 regional banks
which comprise the FHLB System. The Savings Bank is further subject to
regulations of the Board of Governors of the Federal Reserve Board ("Federal
Reserve Board" or "FRB") governing reserves required to be maintained against
deposits and certain other matters.
At June 30, 1996, Troy Hill's net portfolio of loans receivable
totalled $74.6 million, representing approximately 80.9% of its $92.2 million of
total assets at that date. The principal lending activity of Troy Hill is the
origination of single-family residential loans and construction loans primarily
with respect to single-family residential properties. To a much lesser extent,
Troy Hill also originates multi-family residential and nonresidential real
estate loans, consumer loans and, prior to 1992, Troy Hill purchased commercial
leases from an investment consulting and loan servicing firm located in
Monroeville, Pennsylvania. Substantially all of Troy Hill's mortgage loan
portfolio consists of conventional mortgage loans, which are loans that are
neither insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Department of Veterans Affairs ("VA").
Historically, Troy Hill's lending activities have been concentrated in
single-family residential loans secured by properties located in its primary
market area of northern Allegheny and southern Butler counties, Pennsylvania.
Troy Hill has increased its emphasis in recent years in construction lending,
primarily on residential properties, in its primary market area. As discussed
under "- Construction Loans," construction lending generally, including
speculative lending to builders (where the property has not been pre-sold), is
generally considered to involve a higher level of risk as compared to
single-family residential lending. Troy Hill estimates that approximately 90% of
its mortgage loans are secured by properties located in Troy Hill's primary
market area.
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") imposed limitations on the aggregate amount of loans that a
savings institution could make to any one borrower, including related entities.
Under FIRREA, the permissible amount of loans-to-one borrower follows the
national bank standard for all loans made by savings institutions, which
generally does not permit loans-to-one borrower to exceed 15% of unimpaired
capital and surplus. Loans in an amount equal to an additional 10% of unimpaired
capital and surplus also may be made to a borrower if the loans are fully
secured by readily marketable securities. At June 30, 1996, Troy Hill's limit on
loans-to-one borrower under FIRREA was $2.0 million. At June 30, 1996, Troy
Hill's five largest loans or groups of loans-to-one borrower, including related
entities, ranged from an aggregate of $770,000 to $1.6 million, and are secured
primarily by single-family residential properties located in Troy Hill's primary
market area. All of Troy Hill's five largest loans or groups of loans were
performing in accordance with their original terms at June 30, 1996.
2
<PAGE>
Loan Portfolio Composition. The following table sets forth the
composition of Troy Hill's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
------------------------ ------------------------- -----------------------
1996 1995 1994
Amount % Amount % Amount %
---------- ------ ---------- ----- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family residential $ 50,587 62.38% $ 38,761 66.47% $ 29,389 61.00%
Multi-family residential 5,297 6.53 530 0.91 567 1.18
Nonresidential real estate 7,641 9.42 4,186 7.18 1,218 2.53
Construction(1) 13,678 16.87 11,629 19.94 14,548 30.20
--------- ----- ---------- ----- --------- -----
Total real estate loans 77,203 95.20 55,106 94.50 45,722 94.91
Consumer loans:
Loans secured by savings accounts 96 0.12 78 0.13 94 0.20
Home equity and improvement 3,187 3.93 2,585 4.43 1,284 2.67
Auto loans 8 0.01 17 0.03 34 0.07
--------- ----- ---------- ----- --------- -----
Total consumer loans 3,291 4.06 2,680 4.59 1,412 2.94
Commercial business loans(2) 597 0.74 525 0.91 1,043 2.15
--------- ----- ---------- ----- --------- -----
Total Loans 81,091 100.00% 58,311 100.00% 48,177 100.00%
--------- ====== ---------- ====== --------- ======
Less:
Loans in process 5,224 3,557 7,825
Deferred loan origination fees 655 635 578
Allowance for loan and lease
losses 660 667 700
--------- ---------- ---------
Net loans $ 74,552 $ 53,452 $ 39,074
========= ========== ==========
</TABLE>
- --------------------
(1) Consisted solely of loans for the construction of single-family residential
real estate at June 30, 1996 and 1995.
(2) Consists solely of commercial leases purchased from an investment
consulting and loan servicing firm located in Monroeville, Pennsylvania.
Troy Hill ceased purchasing such commercial leases in June 1992. See "-
Commercial Business Loans."
3
<PAGE>
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at June 30, 1996 regarding the dollar
amount of loans maturing in Troy Hill's portfolio, based on the contractual
terms to maturity, before giving effect to net items. Demand loans, loans having
no stated schedule of repayments and no stated maturity and overdrafts are
reported as due in one year or less.
<TABLE>
<CAPTION>
Due 1-3 Due 3-5 Due 5-10 Due 10-20 Due 20
years years years years years and
after after after after more after
1997 6/30/96 6/30/96 6/30/96 6/30/96 6/30/96 Total
---- ------- ------- ------- ------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
One-to-four family ...................... $ 943 $ 996 $ 5,740 $ 5,069 $16,640 $21,199 $50,587
residential
Multi-family residential ................ -- 109 1,227 238 3,341 382 5,297
Nonresidential real estate............... 44 1,426 1,398 1,185 3,588 -- 7,641
Construction ............................ 2,046 507 1,339 -- 1,640 8,146 13,678
Consumer ................................ 1,077 836 217 923 115 123 3,291
Commercial business ..................... 232 86 279 -- -- -- 597
------- ------- ------- ------- ------- ------- -------
Total ............................... $ 4,342 $ 3,960 $10,200 $ 7,415 $25,324 $29,850 $81,091
======= ======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans, before net
items, due after one year from June 30, 1996 which have fixed interest rates or
which have floating or adjustable-interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable-Rates Total
(In Thousands)
<S> <C> <C> <C>
Single-family residential ............ $39,743 $ 9,901 $49,644
Multi-family residential ............. 3,980 1,317 5,297
Nonresidential real estate ........... 7,096 501 7,597
Construction ......................... 10,090 1,542 11,632
Consumer ............................. 1,312 902 2,214
Commercial business .................. 365 -- 365
------- ------- -------
Total .............................. $62,586 $14,163 $76,749
======= ======= =======
</TABLE>
4
<PAGE>
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give Troy Hill
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to increase
when current mortgage loan rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgages are
substantially lower than current mortgage loan rates (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstances, the weighted average yield on loans decreases as higher yielding
loans are repaid or refinanced at lower rates.
Origination, Purchase and Sale of Loans. The lending activities of Troy
Hill are subject to the written, non-discriminatory, underwriting standards and
loan origination procedures established by Troy Hill's Board of Directors and
management. Loan originations are obtained by a variety of sources, including
referrals from real estate brokers, developers, builders, existing customers,
newspaper, radio, periodical advertising and walk-in customers. Loan
applications are taken by lending personnel, and the loan department supervises
the obtainment of credit reports, appraisals and other documentation involved
with a loan. Property valuations are generally performed by independent outside
appraisers approved by Troy Hill's Board of Directors. Title and hazard
insurance are required on all security property.
Loan applications are taken at either one of Troy Hill's offices. All
loan applications are required to be approved by Troy Hill's Loan Committee
which meets weekly. In addition, all loans committed or approved by Troy Hill
are reported to the full Board of Directors and ratified by such Board.
Historically, Troy Hill has originated substantially all of the loans
in its portfolio and has held them until maturity. Nevertheless, Troy Hill's
residential loans are generally made on terms, conditions and documentation
which permit the sale to the Federal Home Loan Mortgage Corporation ("FHLMC"),
the Federal National Mortgage Association ("FNMA"), the Government National
Mortgage Association ("GNMA") and other institutional investors in the secondary
market. Since May 1993, Troy Hill has sold a majority of all long-term (over 15
years), fixed-rate single-family residential loans to institutional investors in
the secondary market as a means of minimizing interest rate risk as well as
generating additional funds for lending and other purposes. As of April 1996,
Troy Hill has increased its purchasing of loans with maturities of less than 30
years and its selling of long term (30 year) loans. Sales of loans to date
generally have been under terms which do not provide any recourse to Troy Hill
by the purchaser in the event of default on the loan by the borrower.
5
<PAGE>
At June 30, 1996, loans purchased and serviced by others totalled $9.5
million. Such loans consist primarily of seasoned single-family residential
loans, a substantial portion of which are secured by properties located outside
of Troy Hill's primary market area.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
Single-family residential(1) ....... $ 20,660 $ 10,477 $ 12,432
Multi-family residential ........... 5,368 -- 517
Nonresidential real estate ......... 4,835 3,150 450
Construction ....................... 12,029 10,699 14,760
Consumer ........................... 2,316 2,661 1,263
Commercial business ................ 382 -- --
-------- -------- --------
Total loans originated ........... 45,590 26,987 29,422
Purchases ............................ -- 297 --
-------- -------- --------
Total loans originated
and purchased .................. 45,590 27,284 29,422
Sales and loan principal
reductions:
Loans sold(2) ...................... (8,902) (792) (7,921)
Loan principal reductions .......... (15,507) (11,918) (24,227)
-------- -------- --------
Total loans sold and
principal reductions ........... (24,409) (12,710) (32,148)
Increase (decrease) due to
other items, net ................... (81) (196) (92)
-------- -------- --------
Net increase (decrease) in
loan portfolio(1) .................. $ 21,100 $ 14,378 $ (2,818)
======== ======== ========
</TABLE>
- ---------------------
(1) Includes loans originated for sale in the secondary market.
(2) Consists solely of loans originated for sale in the secondary market.
6
<PAGE>
Real Estate Lending Standards. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by the federal banking
agencies in December 1992 ("Guidelines"). The Guidelines set forth uniform
regulations prescribing standards for real estate lending. Real estate lending
is defined as extension of credit secured by liens on interests in real estate
or made for the purpose of financing the construction of a building or other
improvements to real estate, regardless of whether a lien has been taken on the
property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being the
total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine all
senior liens when calculating this ratio. The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multi-family and nonresidential) (80%);
improved property (85%) and one-to-four family residential (owner occupied) (no
maximum ratio; however any LTV ratio in excess of 90% should require appropriate
insurance or readily marketable collateral).
Single-Family Residential Real Estate Loans. The primary lending
activity of Troy Hill is the origination of loans secured primarily by first
mortgage liens on existing single-family residences. At June 30, 1996, $50.6
million or 62.4% of Troy Hill's total loan portfolio consisted of single-family
residential real estate loans, substantially all of which are conventional
loans.
Historically, the single-family residential real estate loans
originated by Troy Hill have consisted primarily of fixed-rate loans. However,
such loans have generally been originated only under terms, conditions and
documentation which permit the sale thereof in the secondary market. At June 30,
1996, approximately $40.7 million or 80.4% of the permanent single-family
residential loans in Troy Hill's loan portfolio consisted of loans which provide
for fixed rates of interest. Although these loans provide for repayments of
principal over a fixed period of up to 30 years, it is Troy Hill's experience
that such loans remain outstanding for a substantially shorter period of time.
Since May 1993, Troy Hill has sold a majority of all long-term (over 15 years),
fixed-rate single-family residential loans to institutional investors in the
secondary market.
7
<PAGE>
As economic and market conditions permit, Troy Hill has continued to
offer single-family residential loans which provide for periodic adjustments to
the interest rate. The adjustable-rate loans currently being originated by Troy
Hill have up to 30-year terms and an interest rate which adjusts every year in
accordance with a designated index (the weekly average yield on U.S. Treasury
securities adjusted to a constant comparable maturity of one year, as made
available by the FRB). There is a cap on the amount of any increase or decrease
in the interest rate per year, and various caps, depending on when the loan was
originated, on the amount which the interest rate can increase or decrease over
the life of the loan. Certain of Troy Hill's adjustable-rate loans can, upon
payment of a fee, be converted into fixed-rate loans during certain specified
periods. Troy Hill's adjustable-rate loans currently being originated are not
assumable and do not contain prepayment penalties. Troy Hill has not engaged in
the practice of using a cap on the payments that could allow the loan balance to
increase rather than decrease, resulting in negative amortization.
The demand for adjustable-rate loans in Troy Hill's primary market area
has been a function of several factors, including the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the interest rates and loan fees offered for fixed-rate loans and
adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate
residential loans that can be originated at any time is largely determined by
the demand for each in a competitive environment. Due to the generally lower
rates of interest prevailing in recent periods, Troy Hill's originations of
adjustable-rate loans as a percentage of total loans have decreased as consumer
preference for fixed-rate loans has increased. At June 30, 1996, approximately
19.6% of the permanent single-family residential loans in Troy Hill's loan
portfolio had adjustable interest rates.
Troy Hill is permitted to lend up to 100% of the appraised value of the
real property securing a residential loan (referred to as the loan-to-value
ratio); however, if the amount of a residential loan originated or refinanced
exceeds 90% of the appraised value, Troy Hill is required by federal regulations
to obtain private mortgage insurance on the portion of the principal amount that
exceeds 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Board of Directors, Troy Hill will lend
up to 95% of the appraised value of the property securing a single-family
residential loan, and generally requires borrowers to obtain private mortgage
insurance on the portion of the principal amount of the loan that exceeds 80% of
the appraised value of the security property.
Property appraisals on the real estate and improvements securing Troy
Hill's single-family residential loans are made by independent appraisers
approved by Troy Hill's Board of Directors. Appraisals are performed in
accordance with federal regulations and policies. Troy Hill obtains title
insurance policies on the first mortgage real estate loans originated by it.
Borrowers also must obtain hazard insurance prior to closing and, when required
by the United States Department of Housing and Urban Development, flood
insurance. Borrowers may be required to advance funds, with each monthly payment
of principal and interest, to a loan escrow account from which Troy Hill makes
disbursements for items such as real estate taxes and mortgage insurance
premiums as they become due.
8
<PAGE>
Multi-Family Residential and Nonresidential Real Estate Loans. Troy
Hill originates mortgage loans for the acquisition and refinancing of existing
multi-family residential and nonresidential real estate properties. At June 30,
1996, $5.3 or 6.5% of Troy Hill's total loan portfolio consisted of loans
secured by existing multi-family residential real estate properties and $7.6
million or 9.4% of such loan portfolio consisted of loans secured by existing
nonresidential real estate properties. The $5.3 million increase in multi-family
residential loans is primarily due to Troy Hill obtaining higher yields and
shorter terms on these loans providing a better investment.
The majority of Troy Hill's multi-family residential loans are secured
primarily by five to 20-unit apartment buildings, while nonresidential real
estate loans are secured primarily by office buildings and small retail
establishments. These types of properties constitute the majority of Troy Hill's
nonresidential real estate loan portfolio. Troy Hill's multi-family residential
and nonresidential real estate loan portfolio consists primarily of loans
secured by properties located in its primary market area.
Although terms vary, multi-family residential and nonresidential real
estate loans generally are amortized over a period of up to 20 years and mature
in 15 years or less. Troy Hill will originate these loans either with fixed
interest rates or with interest rates which adjust in accordance with a
designated index, which generally is negotiated at the time of origination.
Loan-to-value ratios on Troy Hill's multi-family residential and nonresidential
real estate loans are currently limited to 85% or lower. As part of the criteria
for underwriting multi-family residential and nonresidential real estate loans,
Troy Hill generally imposes a specified debt coverage ratio (the ratio of net
cash from operations before payment of debt service to debt service). It is also
Troy Hill's general policy to obtain personal guarantees on its multi-family
residential and nonresidential real estate loans from the principals of the
borrower and, when this cannot be obtained, to impose more stringent
loan-to-value, debt service and other underwriting requirements.
At June 30, 1996, Troy Hill's multi-family residential and
nonresidential real estate loan portfolio consisted of approximately 17 loans
with an average principal balance of $312,000. At June 30, 1996, all but $78,000
of Troy Hill's multi-family residential and nonresidential real estate loans
were performing in accordance with their terms.
Multi-family residential, and nonresidential real estate lending
entails different and significant risks when compared to single-family
residential lending because such loans typically involve large loan balances to
single borrowers and because the payment experience on such loans is typically
dependent on the successful operation of the project or the borrower's business.
These risks can also be significantly affected by supply and demand conditions
in the local market for apartments, offices, warehouses or other commercial
space. Troy Hill attempts to minimize its risk exposure by limiting the extent
of the nonresidential lending generally. In addition, Troy Hill imposes
stringent loan-to-value ratios, requires conservative debt coverage ratios, and
continually monitors the operation and physical condition of the collateral.
9
<PAGE>
Construction Loans. In recent years, Troy Hill has been increasingly
active in originating loans to construct primarily single-family residences,
and, to a much lesser extent, loans to acquire and develop real estate for
construction of residential properties. These construction lending activities
generally are limited to Troy Hill's primary market area. At June 30, 1996,
construction loans amounted to $13.7 million or 16.9% of Troy Hill's total loan
portfolio. As of such date, Troy Hill's portfolio of construction loans
consisted solely of loans for the construction of single-family residences.
Construction loans are made to individuals for the purpose of
constructing a personal residence or to local real estate builders and
developers. Troy Hill will underwrite construction loans to individuals on a
construction/permanent mortgage loan basis. In addition, approximately 28.8% of
total outstanding construction loans at June 30, 1996 were made to local real
estate builders and developers for the purpose of constructing primarily
single-family homes for which there were no contracts for sale at the time of
origination. Upon application, credit review and analysis of personal and
corporate financial statements, Troy Hill may in the future grant local builders
with whom it has done business lines of credit up to designated amounts. These
credit lines may be used for the purpose of construction of speculative (or
unsold) residential properties. Troy Hill will generally limit the dollar amount
of speculative construction loans made to any one builder or developer to
$750,000. Troy Hill may also, on a case-by-case basis, grant a limited amount of
land acquisition loans.
Troy Hill intends to continue to increase its involvement in
construction lending within its primary market area. Such loans afford Troy Hill
the opportunity to increase the interest rate sensitivity of its loan portfolio.
Construction lending is generally considered to involve a higher level of risk
as compared to single-family residential lending, due to the concentration of
principal in a limited number of loans and borrowers and the effects of general
economic conditions on real estate developers and managers. Moreover, a
construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of these
loans is such that they are generally more difficult to evaluate and monitor. In
addition, speculative construction loans to a builder are not necessarily
pre-sold and thus pose a greater potential risk to Troy Hill than construction
loans to individuals on their personal residences.
Troy Hill has attempted to minimize the foregoing risks by, among other
things, limiting its construction lending primarily to residential properties.
In addition, Troy Hill has adopted underwriting guidelines which impose
stringent loan-to-value (85% with respect to single-family residential real
estate and 80% with respect to multi-family residential and nonresidential real
estate), debt service and other requirements for loans which are believed to
involve higher elements of credit risk, by limiting the geographic area in which
Troy Hill will do business and by working with builders with whom it has
established relationships.
10
<PAGE>
Consumer Loans. Troy Hill offers consumer loans, although such lending
activity has not historically been a large part of its business. Troy Hill has
been originating consumer loans in recent years in order to provide a full range
of financial services to its customers and because such loans generally have
shorter terms and higher interest rates than mortgage loans. At June 30, 1996,
$3.3 million or 4.1% of Troy Hill's total loan portfolio consisted of consumer
loans. The consumer loans offered by Troy Hill include home equity and
improvement loans, deposit account secured loans and, to a much lesser extent,
automobile loans. Most of Troy Hill's consumer loans are secured and are
primarily obtained through existing and walk-in customers.
In recent years, Troy Hill has placed increased emphasis on home equity
and improvement loans, which have increased from $1.3 million or 2.7% of total
loans receivable at June 30, 1994 to $3.2 million or 3.9% of total loans
receivable at June 30, 1996. Troy Hill intends to continue to increase its
origination of consumer loans, primarily home equity and improvement loans.
Commercial Business Loans. At June 30, 1996, $597,000 or .7% of Troy
Hill's total loan portfolio consisted of commercial lease financings. During
fiscal 1990, Troy Hill began to purchase participation interests in pools of
leases of general commercial chattel from an investment consulting and loan
servicing firm located in Monroeville, Pennsylvania. Such commercial leases
consisted generally of furniture and equipment financing loans. Such commercial
leases generally had shorter terms and higher interest rates than traditional
mortgage loans but also involved a higher level of credit risk because of the
type and nature of the collateral and, in certain cases, the absence of
collateral. In most cases, any repossessed collateral for a defaulted commercial
lease will not provide an adequate source of repayment because of improper
repair and maintenance of the underlying security. Troy Hill ceased purchasing
such participation interests in fiscal 1992 based on an increase in
delinquencies with respect to some of the pools and because some of the
participation interests in pools it had acquired began to sustain some losses.
At June 30, 1996, $147,000 of such commercial lease financings were delinquent
60 days or more. As of the third quarter 1996, Troy Hill began granting and
underwriting its own commercial lease loans.
Loan Fee Income. In addition to interest earned on loans, Troy Hill
receives income from fees in connection with loan originations, loan
modifications, late payments, prepayments and for miscellaneous services related
to its loans. Income from these activities varies from period to period with the
volume and type of loans made and competitive conditions.
Troy Hill charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees and all
incremental direct loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are accrued and amortized in the same
manner. In accordance with SFAS No. 91, Troy Hill has recognized $141,000,
$169,000 and $250,000 of amortized deferred loan fees in income during the years
ended June 30, 1996, 1995 and 1994, respectively.
11
<PAGE>
Asset Quality
General. When a borrower fails to make a required payment on a loan,
Troy Hill attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made on the twentieth day after a payment is
due. In most cases, deficiencies are cured promptly. If a delinquency extends
beyond 20 days, the loan and payment history is reviewed and efforts are made to
collect the loan. While Troy Hill generally prefers to work with borrowers to
resolve such problems, when the account becomes 90 days delinquent, Troy Hill
does institute foreclosure or other proceedings, as necessary, to minimize any
potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, Troy Hill does not accrue interest on loans past due 90
days or more except when the estimated value of the collateral and collection
efforts are deemed sufficient to ensure full recovery.
Real estate acquired by Troy Hill as a result of foreclosure or by
deed-in-lieu of foreclosure are classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3") issued by the American
Institute of Certified Public Accountants in April 1992, which provides guidance
on determining the balance sheet treatment of foreclosed assets in annual
financial statements for periods ending on or after December 15, 1992, there is
a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expenses and costs incurred for the
improvement or development of such property are capitalized up to the extent of
fair value. Troy Hill's accounting for its real estate owned complies with the
guidance set forth in SOP 92-3.
12
<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 30, 1996 in dollar amount and as a percentage of Troy
Hill's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
<TABLE>
<CAPTION>
Single-family Multi-family Nonresidential
Residential Residential Real Estate Construction
-------------------- -------------------- ------------------- --------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days $ 1,278 1.58% $ -- -- % $ -- -- % $ -- --%
60-89 days 61 .08 -- -- -- -- 184 .23
90 days and over 714 .88 105 .13 -- -- --
--------- ----- ------- ---- ------- ----- -- ---
Total delinquent loans $ 2,053 2.54% $ 105 .13% $ -- -- % $ 184 .23%
========= ===== ======= ==== ======= ===== ======= ===
Commercial
Consumer Business Total
------------------- ------------------- --------------------
(Dollars in Thousands)
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days $20 .02% $ 4 .01% $ 1,302 1.61%
60-89 days 35 .04 29 .04 309 .39
90 days and over 24 .03 146 .18 989 1.22
--- ---- ------ ---- -------- ----
Total delinquent loans $79 .09% $ 179 .23% $ 2,600 3.22%
=== ===== ====== === ======== ====
</TABLE>
13
<PAGE>
Non-Performing Assets. The following table sets forth the amounts and
categories of Troy Hill's non-performing assets at the dates indicated. Troy
Hill did not have any troubled debt restructurings at any of the dates
presented.
<TABLE>
<CAPTION>
June 30,
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Single-family residential ...................... $ -- $ 110 $ --
Multi-family residential ....................... -- -- --
Nonresidential real estate ..................... -- -- 104
Construction ................................... -- -- --
Consumer ....................................... 24 -- --
Commercial business ............................ 146 224 461
---- ------ -----
Total non-accruing loans ................... 170 334 565
Accruing loans greater than 90 days delinquent:
Single-family residential ...................... 714 1,541 708
Multi-family residential ....................... 105 112 --
Nonresidential real estate ..................... -- -- --
Construction ................................... -- -- --
Consumer ....................................... -- 1 14
Commercial business ............................ -- -- --
---- ------ -----
Total accruing loans greater
than 90 days delinquent .................... 819 1,654 722
Total non-performing loans ................... 989 1,988 1,287
Real estate owned ................................ 462 329 16
---- ------ -----
Total non-performing assets ................. $1,451 $2,317 $1,303
====== ====== ======
Total non-performing loans as a
percentage of total loans (1) .............. 1.22% 3.39% 2.67%
==== ==== ====
Total non-performing assets as a
percentage of total assets ................. 1.57% 3.09% 2.18%
==== ==== ====
</TABLE>
(1) Includes loans classified as held for sale.
14
<PAGE>
During the years ended June 30, 1996, 1995 and 1994 approximately $23,000,
$41,000 and $54,000, respectively, of interest would have been recorded on loans
accounted for on a non-accrual basis if such loans had been current according to
the original loan agreements for the entire period. These amounts were not
included in Troy Hill's interest income for the respective periods. The amount
of interest income on loans accounted for on a non-accrual basis and loans
greater than 90 days past due and still accruing that was included in income
during the same periods amounted to approximately $52,000, $6,000 and $13,000,
respectively.
Classified Assets. Federal regulations require that each insured
savings association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss.
At June 30, 1996, Troy Hill had $988,000 of assets classified
substandard, no assets classified doubtful, $177,000 of assets classified as
loss and no assets classified special mention.
Allowance for Loan and Lease Losses. Troy Hill's policy is to establish
reserves for estimated losses on delinquent loans and leases when it determines
that losses are expected to be incurred on such loans and leases. The allowance
for losses on loans and leases is maintained at a level believed adequate by
management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loss experience, current economic conditions, volume, growth and
composition of the portfolio, and other relevant factors. The allowance is
increased by provisions for loan and lease losses which are charged against
income.
Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency, the FDIC and the FRB, issued an Interagency
Policy Statement on the Allowance for Loan and Lease Losses ("Policy
Statement"). The Policy Statement, which effectively superseded the proposed
guidance issued on September 1, 1992, includes guidance (i) on the
responsibilities of management for the assessment and establishment of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful and with
respect to the remaining portion of an institution's loan portfolio.
Specifically, the Policy Statement sets forth the following quantitative
15
<PAGE>
measures which examiners may use to determine the reasonableness of an
allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the
portfolio that is classified substandard; and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available on the evaluation date. While the Policy Statement
sets forth this quantitative measure, such guidance is not intended as a "floor"
or "ceiling."
The following table sets forth an analysis of Troy Hill's allowance for
loan and lease losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Total loans outstanding ................. $ 81,091 $ 58,311 $ 48,177
======== ======== ========
Average net loans outstanding ........... $ 61,934 $ 46,194 $ 39,489
======== ======== ========
Balance at beginning of period .......... $ 667 $ 700 $ 629
Charge-offs ............................. (227) (43) (9)
Recoveries .............................. -- -- --
-------- -------- --------
Net charge-offs ......................... (227) (43) (9)
Provision for loan and lease losses ..... 220 10 80
-------- -------- --------
Balance at end of period ................ $ 660 $ 667 $ 700
======== ======== ========
Allowance for loan and lease losses as a
percent of total loans outstanding .... 0.81% 1.14% 1.45%
======== ======== ========
Ratio of net charge-offs to average loans
outstanding ........................... 0.37% 0.09% 0.02%
======== ======== ========
</TABLE>
16
<PAGE>
The following table sets forth information concerning the allocation of
Troy Hill's allowance for loan and lease losses by loan category at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
1996 1995 1994
----------------------- ----------------------- ---------------------------
Percent of Percent of Percent of
Loan to Loan to Loans to Total
Amount Total Loans Amount Total Loans Amount Loans
------ ----------- ------ ----------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential $ 315 62.38% $ 278 66.47% $168 61.00%
Multi-family residential 10 6.53 -- 0.91 -- 1.18
Nonresidential real estate 20 9.42 -- 7.18 -- 2.53
Construction 150 16.87 158 19.94 119 30.20
Consumer 20 4.06 15 4.59 5 2.94
Commercial business 145 0.74 216 0.91 408 2.15
------- ------ ------- ------ ---- ------
Total $ 660 100.00% $ 667 100.00% $700 100.00%
======= ====== ====== ====== ==== ======
</TABLE>
Management of Troy Hill believes that the reserves it has established
are adequate to cover any potential losses in the Company's loan and lease
portfolio. However, future adjustments to these reserves may be necessary, and
the Company's results of operations could be adversely affected if circumstances
differ substantially from the assumptions used by management in making its
determinations in this regard.
Mortgage-Backed Securities
Troy Hill invests in a portfolio of mortgage-backed securities which
are insured or guaranteed by the FHLMC, the FNMA and/or the GNMA. To a much more
limited extent, Troy Hill also invests in collateralized mortgage obligations
("CMOs"), which are securities collateralized by FNMA and FHLMC mortgage-backed
securities. Mortgage-backed securities and CMOs increase the quality of Troy
Hill's assets by virtue of the guarantees that back them, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of Troy Hill.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed- rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security thus approximates the life of the
underlying mortgages.
17
<PAGE>
As discussed above, Troy Hill's mortgage-backed securities include
CMOs, which include securities issued by entities which have qualified under the
Internal Revenue Code of 1986, as amended ("Code"), as Real Estate Mortgage
Investment Conduits ("REMICs"). CMOs and REMICs (collectively CMOs) have been
developed in response to investor concerns regarding the uncertainty of cash
flows associated with the prepayment option of the underlying mortgagor and are
typically issued by governmental agencies, government sponsored enterprises and
special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A CMO can
be collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders, the
cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the underlying
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.
At June 30, 1996, the carrying value of Troy Hill's mortgage-backed
securities amounted to $5.2 million, which represented 5.6% of Troy Hill's $92.2
million of total assets at that date. All of Troy Hill's $5.2 million of
mortgage-backed securities at June 30, 1996 was directly or indirectly insured
or guaranteed by federal agencies, and $1.3 million or 25.0% of the total
portfolio had fixed rates of interest and $3.9 million or 75.0% of the total
portfolio had adjustable rates of interest.
The following table sets forth the activity in Troy Hill's
mortgage-backed securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
---------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning
of period ................................ $ 7,069 $ 5,902 $ 3,254
Purchases .................................. -- 3,357 4,345
Sales ...................................... (937) (1,615) (250)
Repayments ................................. (1,014) (691) (1,442)
Amortization of premiums ................... (5) (2) (5)
Market value adjustment .................... 42 118 --
------- ------- -------
Mortgage-backed securities at end of
period(1) ................................ $ 5,155 $ 7,069 $ 5,902
======= ======= =======
Weighted average yield at end of period .... 6.98% 6.85% 5.86%
</TABLE>
(1) At June 30, 1996, 1995 and 1994, included $5,155, $7,069 and $5,902 of
mortgage-backed securities classified as available for sale.
18
<PAGE>
As of June 30, 1996, all of Troy Hill's $5.2 million of mortgage-backed
securities with a weighted average yield of 6.98% are scheduled to mature in
over ten years. Due to prepayments of the underlying loans, the actual
maturities of mortgage-backed securities are substantially less than the
scheduled maturities.
Investment Securities
Troy Hill invests in various types of securities, including U.S.
Government and agency securities, securities of various state and municipal
agencies and corporate obligations.
Troy Hill's investment securities portfolio is managed by the Treasurer
of Troy Hill in accordance with a comprehensive investment policy which
addresses strategies, types and levels of allowable investments and which is
reviewed and approved by the Board of Directors on an annual basis. The
management of the investment securities portfolio is set in accordance with
strategies developed by Troy Hill's Asset and Liability Committee.
The following table sets forth certain information relating to Troy Hill's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
U.S. agency securities ......................... $ -- $ -- $2,843 $2,737 $6,017 $5,861
Obligations of state and political
subdivisions ................................. -- -- 4,200 4,161 3,700 3,583
Corporate bonds ................................ -- -- 258 236 258 244
------ ------ ------ ------ ------ ------
Available-for-Sale: ............................ -- -- 7,301 7,134 9,975 9,688
------ ------ ------ ------ ------ ------
U.S. agency securities ......................... 2,452 2,452 1,012 1,012 -- --
------ ------ ------ ------ ------ ------
Total investment securities .................. $2,452 $2,452 $8,313 $8,146 $9,975 $9,688
====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE>
Information regarding the carrying values, contractual maturities and
weighted average yield of Troy Hill's investment securities portfolio at June
30, 1996 is presented below.
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------------------------------
One Year After One to After Five to Over 10
or Less Five Years 10 Years Years Total
------- ---------- -------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. agency securities ............................ $ -- $ 1,247 $ 1,205 $ -- $ 2,452
Collateralized mortgage obligations ............... -- -- -- 489 489
Mortgage-backed securities ........................ -- -- -- 4,666 4,666
Corporate equity securities ....................... -- -- 258 3,866 4,124
-------- ------- ------- ------- -------
Total ......................................... $ -- $ 1,247 $ 1,463 $ 9,021 $11,731
======== ======= ======= ======= =======
Weighted average yield ............................ 0.00% 4.51% 6.33% 7.29% 6.92%
======== ======= ======= ======= =======
</TABLE>
Sources of Funds
General. Troy Hill's principal source of funds for use in lending and
for other general business purposes has traditionally come from deposits
obtained through Troy Hill's office. Troy Hill also derives funds from
amortization and prepayments of outstanding loans and mortgage-backed
securities, from sales of loans, from maturing investment securities and from
advances from the FHLB of Pittsburgh. Loan repayments are a relatively stable
source of funds, while deposits inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources. They may also be used on a longer term basis for
general business purposes.
Deposits. Troy Hill's current deposit products include passbook
accounts, negotiable order of withdrawal ("NOW") accounts, money market deposit
accounts, and certificates of deposit ranging in terms from 180 days to ten
years. Included among these deposit products are $1.9 million of certificates of
deposit with balances of $100,000 or more, which amounted to 3.5% of Troy Hill's
total deposits at June 30, 1996. Troy Hill's deposit products also include
Individual Retirement Account certificates ("IRA certificates").
Troy Hill's deposits are obtained primarily from residents of northern
Allegheny County, Pennsylvania. Troy Hill attracts deposit accounts by offering
a wide variety of accounts, competitive interest rates, and convenient service
hours. Troy Hill utilizes traditional marketing methods to attract new customers
and savings deposits, including print media advertising and direct mailings.
Troy Hill does not advertise for deposits outside of its local market area or
utilize the services of deposit brokers, and management believes that an
insignificant number of deposit accounts were held by non-residents of
Pennsylvania at June 30, 1996.
20
<PAGE>
Troy Hill has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. With the significant
decline in interest rates paid on deposit products, Troy Hill has experienced
disintermediation of deposits into competing investment products. Troy Hill
intends to continue its efforts to attract deposits as a principal source of
funds for supporting its lending and investment activities. Although market
demand generally dictates which deposit maturities and rates will be accepted by
the public, Troy Hill intends to continue to promote longer term deposits to the
extent possible and consistent with its asset and liability management goals.
The following tables sets forth the dollar amount of deposits in the
various types of deposit programs offered by Troy Hill at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
( Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.00 - 4.00% $ 16 0.03% $ 1,162 2.30% $11,180 26.36%
4.01 - 6.00% 25,614 47.47 14,724 29.09 7,572 17.85
6.01 - 8.00% 9,464 17.54 15,214 30.06 1,897 4.47
8.01 - 10.00% 30 0.05 610 1.21 918 2.16
Greater than 10.00% -- -- 43 0.08 145 0.34
-------- ----- ------- ----- ------- -----
Total certificate accounts 35,124 65.09 31,753 62.74 21,712 51.18
Transaction accounts:
Passbook accounts 12,276 22.75 12,629 24.95 14,710 34.69
Money market accounts 2,359 4.37 3,542 5.31 3,105 7.32
NOW accounts 4,201 7.79 2,686 7.00 2,883 6.81
-------- ----- ------- ----- ------- -----
Total transaction accounts 18,836 34.91 18,857 37.26 20,698 48.82
-------- ----- ------- ----- ------- -----
Total deposits $53,960 100.00% $50,610 100.00% $42,410 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
21
<PAGE>
The following table sets forth the savings activities of Troy Hill
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Deposits ................................... $ 69,788 $ 57,230 $ 69,303
Withdrawals ................................ (68,468) (50,583) (74,912)
-------- -------- --------
Net increase (decrease) before
interest credited ...................... 1,320 6,647 (5,609)
Interest credited .......................... 2,030 1,553 1,294
-------- -------- --------
Net increase (decrease) in deposits ...... $ 3,350 $ 8,200 $ (4,315)
======== ======== ========
</TABLE>
The following table shows the interest rate and maturity information for
Troy Hill's certificates of deposit at June 30, 1996.
<TABLE>
<CAPTION>
Maturity Date
---------------------------------------------------------------------------
One Year Over Over Over
or Less 1-2 Years 2-3 Years 3 Years Total
------- --------- --------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 4.00% $ 16 $ -- $ -- $ -- $ 16
4.01 - 6.00% 19,544 3,034 2,850 186 25,614
6.01 - 8.00% 2,039 5,639 -- 1786 9,464
8.01 - 10.00% -- -- 30 -- 30
Greater than 10.00% -- -- -- -- --
------- ------- ----- ----- --------
Total $21,599 $ 8,673 2,880 1,972 $ 35,124
======= ======= ====== ====== ========
</TABLE>
22
<PAGE>
The following table sets forth the maturities of Troy Hill's
certificates of deposit having principal amounts of $100,000 or more at June 30,
1996.
<TABLE>
<CAPTION>
Certificates of deposit maturing in quarter ending:
(In Thousands)
<S> <C>
September 30, 1996 ..................................... $ 501
December 31, 1996 ...................................... 200
March 31, 1997 ......................................... --
June 30, 1997 .......................................... --
After June 30, 1997 .................................... 1,157
------
Total certificates of deposit with
balances of $100,000 or more ............................... $1,858
======
</TABLE>
Borrowings. Troy Hill may obtain advances from the FHLB of Pittsburgh
upon the security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to credit
worthiness have been met. Such advances are made pursuant to several credit
programs, each of which has its own interest rate and range of maturities. Such
advances are generally available to meet seasonal and other withdrawals of
deposit accounts and to permit increased lending. At June 30, 1996, Troy Hill
had $18.6 million of advances from the FHLB of Pittsburgh.
The following table sets forth the maximum month-end balance and average
balance of Troy Hill's FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance ......................... $18,583 $ 7,500 $ 4,000
Average Balance ......................... 9,695 3,978 3,083
Weighted average interest rate
of FHLB advances during period ........ 6.06% 6.20% 6.00%
</TABLE>
The following table sets forth certain information as to Troy Hill's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Advances ....................... $ 18,583 $ 5,750 $ 3,000
Interest rate on FHLB advances ...... 5.78% 6.05% 6.17%
</TABLE>
23
<PAGE>
Competition
Troy Hill faces significant competition in attracting deposits. Its most
direct competition for deposits has historically come from commercial banks and
other savings institutions located in its market area. Troy Hill faces
additional significant competition for investors' funds from other financial
intermediaries. Troy Hill competes for deposits principally by offering
depositors a variety of deposit programs, convenient hours and other services.
Troy Hill does not rely upon any individual group or entity for a material
portion of its deposits.
Troy Hill's competition for real estate loans comes principally from
mortgage banking companies, other savings institutions, commercial banks and
credit unions. Troy Hill competes for loan originations primarily through the
interest rates and loan fees it charges, the efficiency and quality of services
it provides borrowers, referrals from real estate brokers and builders, and the
variety of its products. Factors which affect competition include the general
and local economic conditions, current interest rate levels and volatility in
the mortgage markets. Troy Hill holds only a small portion of the large deposit
and lending market it shares with many other financial institutions, many of
whom are much larger, offer a wider array of products and services and have
substantially greater resources available as compared to Troy Hill.
FIRREA eliminated many of the distinctions between commercial banks and
savings institutions and holding companies and allowed bank holding companies to
acquire savings institutions. FIRREA has generally resulted in an increase in
the competition encountered by savings institutions and has resulted in a
decrease in both the number of savings institutions and the aggregate size of
the savings industry.
Employees
Troy Hill had 18 full-time employees and two part-time employees as of
June 30, 1996. None of these employees is represented by a collective bargaining
agent. Troy Hill believes that it enjoys good relations with its personnel.
Subsidiaries
As of June 30, 1996, Troy Hill had one subsidiary, THF, Inc., which is
currently inactive. At June 30, 1996, THF, Inc.'s sole asset was $6,000 in cash.
Recent Accounting Pronouncements
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable intangibles
to be disposed of. The standard requires an impairment loss to be recognized
when the carrying amount of the asset exceeds the fair value of the asset. The
fair value of an asset is the amount at which the asset could be brought or sold
in a current transaction between willing parties, that is, other than in a
forced liquidation sale. An entity that recognizes an impairment loss shall
disclose additional information in th financial statements related to the
impaired asset. All long-lived assets and certain identifiable intangibles to be
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disposed of and for which management has committed to a plan to dispose of the
assets, whether by sale or abandonment, shall be reported at the lower of the
carrying amount or fair value less cost to sell. Subsequent revisions in
estimates of fair value less cost to sell shall be reported as adjustments to
the carrying amount of assets to be disposed of, provided that the carrying
amount of the asset does not exceed the carrying amount of the asset before an
adjustment was made to reflect the decision to dispose of the asset. The
statement requires additional disclosure in the footnotes regarding assets to be
disposed of.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. This statement encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net income and, if presented, earnings per share, as if this Statement
had been adopted. The accounting requirements of this Statement are effective
for transactions entered into fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994. Management of the
Savings Bank has not completed an analysis of the potential effects of this
Statement on the Savings Bank's financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities." Pursuant
to SFAS No. 125, after a transfer of financial assets, an entity would be
required to recognize all financial assets and servicing it controls and
liabilities it has incurred and, conversely, would not be required to recognize
financial assets when control has been surrendered and liabilities when
extinguished. SFAS No. 125 provides standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
No. 125 will be effective with respect to the transfer and servicing of
financial assets and the extinguishement of liabilities occuring after December
31, 1996, with earlier application prohibited. The Savings Bank has not
completed an analysis of the potential effects of this Statement on the Savings
Bank's financial condition or results of operations.
REGULATION AND SUPERVISION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and Troy Hill. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
The Company
General. The Company, as a savings and loan holding company within the
meaning of the HOLA, is subject to OTS regulations, examinations, supervision
and reporting requirements. As a subsidiary of a savings and loan holding
company, Troy Hill is subject to certain restrictions in its dealings with the
Company and affiliates thereof.
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Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a QTL test, then
such unitary holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings association requalifies as a QTL within one year thereafter,
shall register as, and become subject to the restrictions applicable to, a bank
holding company. See "- Troy Hill - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with Troy Hill, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than Troy Hill or other subsidiary savings associations)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings association shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity, upon prior notice to, and no objection by the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
association; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association; (iv) holding or managing properties used or occupied by a
subsidiary savings association; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the FRB as permissible for
bank holding companies. Those activities described in (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
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<PAGE>
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings association, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the association's
loans to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings association to all
insiders cannot exceed the association's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At June 30, 1996, Troy Hill was in compliance with the above
restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
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FIRREA amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the FRB to approve an application by a bank holding
company to acquire control of a savings association. FIRREA also authorized a
bank holding company that controls a savings association to merge or consolidate
the assets and liabilities of the savings association with, or transfer assets
and liabilities to, any subsidiary bank which is a member of the Bank Insurance
Fund ("BIF") with the approval of the appropriate federal banking agency and the
FRB. As a result of these provisions, there have been a number of acquisitions
of savings associations by bank holding companies in recent years.
Troy Hill
General. The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
FIRREA imposed limitations on the aggregate amount of loans that a
savings association could make to any one borrower, including related entities.
See "Business of Troy Hill - Lending Activities - General" for a discussion of
such limitations.
The OTS' enforcement authority over all savings associations and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. FIRREA significantly
increased the amount of and grounds for civil money penalties. FIRREA requires,
except under certain circumstances, public disclosure of final enforcement
actions by the OTS.
Insurance of Accounts. The deposits of Troy Hill are insured up to
$100,000 per insured member (as defined by law and regulation) by the SAIF
administered by the FDIC and are backed by the full faith and credit of the
United States Government. As insurer, the FDIC is authorized to conduct
examinations of, and to require reporting by, FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious threat to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including Troy Hill, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
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the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of Troy Hill's deposit insurance.
The FDIC is authorized to establish separate assessment rates for
deposit insurance for members of the BIF and the SAIF. The FDIC may increase
assessment rates for either fund to restore the fund's ratio of reserves to
insured deposits to its statutorily set target level within a reasonable time,
and may decrease such assessment rates if such target level has been met. Until
the SAIF fund meets its target level, savings associations may not transfer to
the BIF fund. Furthermore, any such transfers, when permitted, would be subject
to exit and entrance fees. Under current FDIC regulations, institutions are
assigned to one of three capital groups which are based solely on the level of
an institution's capital- "well capitalized," "adequately capitalized," and
"undercapitalized" - which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the Federal
Deposit Insurance Act ("FDIA") as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates ranging from .23%
for well capitalized, healthy institutions to .31% for undercapitalized
institutions with substantial supervisory concerns. The insurance premiums for
Troy Hill for the first semi-annual period in calendar 1996 was .23%.
The BIF fund met its target reserve level in September 1995, but the
SAIF is not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance premiums
for SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category). Accordingly, in the absence of
further legislative action, SAIF members such as Troy Hill will be competitively
disadvantaged as compared to commercial banks by the resulting premium
differential. It is anticipated that, under present conditions, it will be at
least several years before the SAIF reaches a reserve ratio of 1.25% of insured
deposits.
On September 30, 1996, President Clinton signed into law legislation
which will eliminate the premium differential between SAIF-insured institutions
and BIF-insured institutions by recapitalizing the SAIF's reserves to the
required ratio. The legislation provides that all SAIF member institutions 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
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anticipated that the amount of the special assessment required to recapitalize
the SAIF will be approximately 65.7 basis points of SAIF-assessable deposits as
of March 31, 1995. It is anticipated that after the recapitalization of the
SAIF, premiums paid by SAIF-insured institutions will be reduced to match those
currently being assessed BIF-insured commercial banks. The legislation also
provides for the merger of the BIF and the SAIF, with such merger being
conditioned upon the prior elimination of the thrift charter.
Pursuant to the legislation, Troy Hill will be required to pay the
one-time special assessment, which is estimated to amount to $214,000, net of
related tax benefits, based upon its total SAIF deposits as of March 31, 1995,
on November 27, 1996. In addition, the payment of such special assessment will
have the effect of immediately reducing Troy Hill's capital by such an amount.
Nevertheless, management does not believe that this one-time special assessment
will have a material adverse effect on the Company's consolidated financial
condition or cause non-compliance with Troy Hill's regulatory capital
requirements.
Regulatory Capital Requirements. Federally insured savings associations
are required to maintain minimum levels of regulatory capital. Pursuant to
FIRREA, the OTS has established capital standards applicable to all savings
associations. 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
associations on a case-by-case basis.
Current OTS capital standards require savings associations to satisfy
three different capital requirements. Under these standards, savings
associations 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 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings association's intangible assets, with only a limited exception
for purchased mortgage servicing rights. Both core and tangible capital are
further reduced by an amount equal to a savings association's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). A savings association is allowed to
include both core capital and supplementary capital in the calculation of its
total capital for purposes of the risk-based capital requirement, provided that
the amount of supplementary capital does not exceed the savings association's
core capital. Supplementary capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
core capital; subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
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capital) for assets such as cash to 100% for repossessed assets or loans more
than 90 days past due. Single-family residential real estate loans which are not
past-due or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighting system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of calculating its risk-based capital requirement. As a
result, such an institution will be required to maintain additional capital in
order to comply with the risk-based capital requirement. An institution with
greater than "normal" interest rate risk is defined as an institution that would
suffer a loss of net portfolio value exceeding 2.0% of the estimated market
value of its assets in the event of a 200 basis point increase or decrease (with
certain minor exceptions) in interest rates. The interest rate risk component
will be calculated, on a quarterly basis, as one-half of the difference between
an institution's measured interest rate risk and 2.0%, multiplied by the market
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a three quarter "lag" time between the reporting date
of the data used to calculate an institution's interest rate risk and the
effective date of each quarter's interest rate risk component. However, in
October 1994 the Director of the OTS indicated that it would waive the capital
deductions for associations with a greater than "normal" risk until the OTS
publishes an appeals process. The OTS has recently indicated that no savings
association will be required to deduct capital for interest rate risk until
further notice.
Effective November 28, 1994, the OTS revised its interim policy issued
in August 1993 under which savings institutions computed their regulatory
capital in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under the revised OTS policy, savings institutions
must value securities available for sale at amortized cost for regulatory
capital purposes. This means that in computing regulatory capital, savings
institutions should add back any unrealized losses and deduct any unrealized
gains, net of income taxes, on debt securities reported as a separate component
of GAAP capital.
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The following table sets forth certain information concerning the
Savings Bank's regulatory capital at June 30, 1996.
<TABLE>
<CAPTION>
Required Actual Excess
------------------ --------------------- ----------------------
% Amount % Amount % Amount
---- ------ ----- ------- ----- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible (1) 1.50% $1,322 15.89% $14,010 14.39% $12,688
Core (1)(2) 3.00 2,646 15.89 14,010 12.89 11,364
Risk-based (3) 8.00 4,775 24.30 14,506 16.30 9,731
- -----------------
</TABLE>
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $88.1 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $59.7 million.
(2) Does not reflect the 4.0% requirement to be met in order for an institution
to be "adequately capitalized," under applicable regulations as discussed
below. See "- Prompt Corrective Action."
(3) Does not reflect the interest-rate risk component risk-based capital
requirement, the effective date of which has been postponed, as discussed
above.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. In early September 1992, the federal
banking agencies, including the OTS, adopted substantially similar regulations
which are intended to implement Section 38 of the FDIA. These regulations became
effective December 19, 1992. Under the regulations, an institution shall be
deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0%
or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I
leverage capital ratio of 5.0% or more and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any capital
measure, (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a
Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized," (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, a Tier I
risk-based capital ratio that is less than 4.0% or a Tier I leverage capital
ratio that is less than 4.0% (3.0% under certain circumstances), (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
Tier I leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Section 38 of the FDIA and the regulations
promulgated thereunder also specify circumstances under which a federal banking
agency may reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized). At June 30, 1996,
Troy Hill was in the "well capitalized" category.
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Safety and Soundness. FDICIA requires each federal banking regulatory
agency to prescribe, by regulation or guideline, standards for all insured
depository institutions and depository institution holding companies relating to
(i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interests rate risk exposure; (v)
asset growth; (vi) compensation, fees and benefits; and (vii) such other
operational and managerial standards as the agency determines to be appropriate.
The compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits or
could lead to material financial loss. In addition, each federal banking
regulatory agency must prescribe, by regulation or guideline, standards relating
to asset quality, earnings and stock valuation as the agency determines to be
appropriate. On July 10, 1995, the federal banking agencies, including the OTS,
adopted final rules and proposed guidelines concerning standards for safety and
soundness required to be prescribed by regulation pursuant to Section 39 of the
FDIA. In general, the standards relate to (1) operational and managerial
matters; (2) asset quality and earnings; and (3) compensation. The operational
and managerial standards cover (a) internal controls and information systems,
(b) internal audit system, (c) loan documentation, (d) credit underwriting, (e)
interest rate exposure, (f) asset growth, and (g) compensation, fees and
benefits. Under the proposed asset quality and earnings standards, Troy Hill
would be required to establish and maintain systems to (i) identify problem
assets and prevent deterioration in those assets, and (ii) evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
reserves. Finally, the proposed compensation standard states that compensation
will be considered excessive if it is unreasonable or disproportionate to the
services actually performed by the individual being compensated. If a savings
association fails to meet any of the standards promulgated by regulation, then
such institution will be required to submit a plan within 30 days to the OTS
specifying the steps it will take to correct the deficiency. In the event that a
savings association fails to submit or fails in any material respect to
implement a compliance plan within the time allowed by the federal banking
agency, Section 39 of the FDIA provides that the OTS must order the institution
to correct the deficiency and may (1) restrict asset growth; (2) require the
savings association to increase its ratio of tangible equity to assets; (3)
restrict the rates of interest that the savings association may pay; or (4) take
any other action that would better carry out the purpose of prompt corrective
action. Troy Hill believes that it has been and will continue to be in
compliance with each of the standards as they have been adopted by the OTS.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required minimum
liquid asset ratio is 5%. Troy Hill has consistently exceeded such regulatory
liquidity requirement and, at June 30, 1996, had a liquidity ratio of 8.67%.
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Qualified Thrift Lender Test. A savings association that does not meet
the QTL Test set forth in the HOLA and implementing regulations must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the association may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the association shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Effective December 19, 1991, the definition of Qualified Thrift
Investments ("QTIs") was amended in its entirety and the QTL Test was amended to
require that QTIs represent 65% of portfolio assets, rather than 60% and 70% of
tangible assets as previously required before and after July 1, 1991,
respectively. Portfolio assets are defined as total assets less intangibles,
property used by a savings association in its business and liquidity investments
in an amount not exceeding 20% of assets. Generally, QTIs are residential
housing related assets. At June 30, 1996, approximately 88.19% of Troy Hill's
assets were invested in QTIs, which was in excess of the percentage required to
qualify Troy Hill under the QTL Test in effect at that time.
Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long as
such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any capital
distributions.
Generally, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
association's capital requirement under the statutory and regulatory standards
to be applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association.
Tier 2 associations, which are associations that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions during any calendar year up to 75% of net income over
the most recent four-quarter period.
34
<PAGE>
In order to make distributions under these safe harbors, Tier 1 and Tier
2 associations must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association (a Tier 3 association is an association that does
not meet current minimum capital requirements or has been notified by the OTS
that it will be treated as a Tier 3 association because it is in need of more
than normal supervision and, consequently, a Tier 3 association cannot make any
capital distribution without obtaining prior OTS approval) as a result of such a
determination. Troy Hill currently is a Tier 1 institution for purposes of the
regulation dealing with capital distributions.
On December 5, 1994, the OTS published a notice of proposed rule making
to amend its capital distribution regulation. Under the proposal, associations
would be permitted to only make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized." An association is adequately capitalized if it has a total
risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of
4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more and does not
meet the definition of well capitalized. Because Troy Hill is a subsidiary of
the Company, the proposal would require Troy Hill to provide notice to the OTS
of its intent to make a capital distribution. Troy Hill does not believe that
the proposal will adversely affect its ability to make capital distributions if
it is adopted substantially as proposed.
OTS regulations also prohibit Troy Hill from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of Troy Hill would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with the Conversion. In addition, such regulations prohibit Troy
Hill from repurchasing any of its stock for a period of at least one year from
the date of the Conversion.
Policy Statement on Nationwide Branching. Effective May 11, 1992, the
OTS amended its policy statement on branching by federally chartered savings
associations to delete then-existing regulatory restrictions on the branching
authority of such associations and to permit nationwide branching to the extent
allowed by federal statute. (Prior OTS policy generally permitted interstate
branching for federally chartered savings associations only to the extent
allowed state-chartered savings associations in the states where the
association's home office was located and where the branch was sought or if the
branching resulted from OTS approval of a supervisory interstate acquisition of
a troubled institution.) Current OTS policy generally permits a federally
chartered savings association to establish branch offices outside of its home
state if the association meets the domestic building and loan test in Section
7701(a)(19) of the Code or the asset composition test of subparagraph (c) of
that section, and if, with respect to each state outside of its home state where
the association has established branches, the branches, taken alone, also
satisfy one of the two tax tests. An association seeking to take advantage of
this authority would have to have a branching application approved by the OTS,
which would consider the regulatory capital of the association and its record
under the Community Reinvestment Act of 1977, as amended, among other things.
35
<PAGE>
Federal Home Loan Bank System. Troy Hill is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, Troy Hill is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At June 30, 1996, Troy Hill had $929,000 in FHLB
stock, which was in compliance with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future. For the years ended June 30,
1996, 1995 and 1994 dividends paid by the FHLB of Pittsburgh to Troy Hill
totalled approximately $32,000, $20,000 and $22,000, respectively.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. At June 30, 1996, Troy
Hill was in compliance with applicable requirements. However, because required
reserves must be maintained in the form of vault cash or a noninterest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce an institution's earning assets.
FEDERAL AND STATE TAXATION
General. The Company and Troy Hill are subject to the generally
applicable corporate tax provisions of the Internal Revenue Code of 1986, as
amended ("Code"), as well as certain additional provisions of the Code which
apply to thrifts and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
Troy Hill.
Fiscal Year. The Company and Troy Hill file federal income tax returns
on the basis of a June 30 fiscal year.
Method of Accounting. Troy Hill maintains its books and records for
federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy, and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
36
<PAGE>
Bad Debt Reserves. Under applicable provisions of the Code, savings
institutions such as Troy Hill are permitted to establish reserves for bad debts
and to make annual additions thereto which qualify as deductions from taxable
income. The bad debt deduction is generally based on a savings institution's
actual loss experience (the "Experience Method"). In addition, provided that
certain definitional tests relating to the composition of assets and the nature
of its business are met, a savings institution through tax years beginning in
1995 could elect annually to compute its allowable addition to its bad debt
reserves for qualifying real property loans (generally loans secured by improved
real estate) by reference to a percentage of its taxable income (the "Percentage
Method").
Under the Experience Method, the deductible annual addition is the
amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years or (ii) the balance in the
reserve account at the close of Troy Hill's "base year," which was its tax year
ended December 31, 1987.
Under the Percentage Method, the bad debt deduction with respect to
qualifying real property loans was computed as a percentage of Troy Hill's
taxable income before such deduction, as adjusted for certain items (such as
capital gains and the dividends received deduction). Under this method, a
qualifying institution such as Troy Hill generally could deduct 8% of its
taxable income.
The Percentage Method deduction was limited to the excess of 12% of
savings accounts at year end over the sum of surplus, undivided profits and
reserves at the beginning of the year. For taxable years ended on or before
December 31, 1993, Troy Hill generally elected to use the Percentage Method to
compute the amount of its bad debt deduction with respect to its qualifying real
property loans.
The income of the Company would not be subject to the bad debt deduction
allowed Troy Hill, whether or not consolidated tax returns are filed; however,
losses of the Company or its subsidiaries included in the consolidated tax
returns may reduce the bad debt deduction allowed Troy Hill if a deduction is
claimed under the Percentage Method.
On August 20, 1996, President Clinton signed legislation which will
eliminate the percentage of taxable income bad debt deduction for thrift
institutions for tax years beginning after December 31, 1995. The new
legislation also requires a thrift to generally recapture the excess of its
current tax reserves over its 1987 base year reserves. As the Company has
previously provided deferred taxes on this amount, no additional financial
statement tax expense should result from this new legislation. The recapture
amount may be suspended for two years if Troy Hill meets certain residential
lending origination requirements.
37
<PAGE>
Distributions. If Troy Hill were to distribute cash or property to its
sole stockholder having a total fair market value in excess of its accumulated
tax-paid earnings and profits, or were to distribute cash or property to its
stockholder in redemption of its stock, Troy Hill would generally be required to
recognize as income an amount which, when reduced by the amount of federal
income tax that would be attributable to the inclusion of such amount in income,
is equal to the lesser of: (i) the amount of the distribution or (ii) the sum of
(a) the amount of the accumulated bad debt reserve of Troy Hill with respect to
qualifying real property loans (to the extent that additions to such reserve
exceed the additions that would be permitted under the experience method) and
(b) the amount of Troy Hill's supplemental bad debt reserve.
As of June 30, 1996, Troy Hill's accumulated bad debt reserve for
qualifying real property loans and its supplemental bad debt reserve balances
were approximately $1.7 million and $300,000, respectively. Troy Hill believes
it has approximately $16 million of accumulated earnings and profits as of June
30, 1996, which would be available for dividend distributions, provided
regulatory restrictions applicable to the payment of dividends are met.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The alternative minimum tax is
payable to the extent such AMTI is in excess of an exemption amount. The Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable years beginning after 1989, 75% of
the excess (if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). Net operating losses can offset no more than
90% of AMTI. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years.
Audit by IRS. Troy Hill's federal income tax returns for taxable years
through December 31, 1993 have been closed for the purpose of examination by the
Internal Revenue Service.
State Taxation. The Company is subject to the Pennsylvania Corporate Net
Income Tax and Capital Stock and Franchise Tax. The Corporate Net Income Tax
rate is currently 11.99% and is imposed on the Company's unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at the rate of 1.3% of a corporation's
capital stock value, which is determined in accordance with a fixed formula
based upon average net income and net worth.
38
<PAGE>
Troy Hill is taxed under the Pennsylvania Mutual Thrift Institutions
Tax Act (enacted on December 13, 1988 and amended in July 1989) (the "MTIT"), as
amended to include thrift institutions having capital stock. Pursuant to the
MTIT, Troy Hill's tax rate is 11.5%. The MTIT exempts Troy Hill from all other
taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes
and from all local taxation imposed by political subdivisions, except taxes on
real estate and real estate transfers. The MTIT is a tax upon net earnings,
determined in accordance with GAAP with certain adjustments. The MTIT, in
computing GAAP income, allows for the deduction of interest earned on state and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of those securities to the overall
investment portfolio. Net operating losses, if any, thereafter can be carried
forward three years for MTIT purposes.
Item 2. Description of Property.
At June 30, 1996, Troy Hill conducted its business from its headquarters
and main office at 1706 Lowrie Street, Pittsburgh, Pennsylvania 15212. Troy Hill
owns its office, which had a net book value at June 30, 1996, of $375,069. In
September 1993, Troy Hill leased an additional office located at 11279 Perry
Highway, Wexford, Pennsylvania 15090, which had leasehold improvements amounting
to $4,000 at June 30, 1996. The estimated net book value of the electronic data
processing equipment owned by Troy Hill was $44,000 at June 30, 1996.
Item 3. Legal Proceedings.
There are no material legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from page
36 of the Company's 1996 Annual Report to Stockholders attached hereto as
Exhibit 13 (the "1996 Annual Report").
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required herein is incorporated by reference from pages
6 to 13 of the Company's 1996 Annual Report.
Item 7. Financial Statements.
The information required herein is incorporated by reference from pages
4 and 5 and 14 to 35 of the Company's 1996 Annual Report.
39
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On April 10, 1996, by letter of same date, the Board of Directors of the
Company terminated the services of Grant Thornton LLP ("Grant Thornton") as the
Company's independent auditors. In connection with the termination of Grant
Thornton's services as independent auditors, the Board of Directors of the
Company selected the accounting firm of KPMG Peat Marwick LLP to serve as
independent auditors for the Company beginning during the fiscal year ended June
30, 1996.
In connection with their audit for the two most recent fiscal years and
during subsequent interim periods preceding the replacement of Grant Thornton
there have been no disagreements with Grant Thornton on any matter of accounting
principles or practices, financial statement disclosures, or auditing scope or
procedure.
Grant Thornton's report on the financial statements for the two most
preceding fiscal years did not contain an adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles.
During the Company's two most recent fiscal years and the subsequent
interim periods preceding Grant Thornton's replacement, Grant Thornton did not
advise, and has not indicated to the Company that it had reason to advise, the
Company of any of the following:
(a) that the internal controls necessary for the Company to develop
reliable financial statements did not exist;
(b) that information had come to Grant Thornton's attention that had
led it to no longer be able to rely on management's
representations, or that made it unwilling to be associated with
the financial statements prepared by management;
(c) (1) of the need to expand significantly the scope of the
Company's audit, or that information had come to Grant Thornton's
attention during such time period that if further investigated
might (i) materially impact the fairness or reliability of
either: a previously issued audit report or the underlying
financial statements, or the financial statements issued or to be
issued covering the fiscal periods subsequent to the date of the
most recent financial statements covered by an audit report
(including information that may prevent it from rendering an
unqualified audit report on those financial statements), or (ii)
cause it to be unwilling to rely on management's representation
or to be associated with the Company's financial statements, and
(2) that due to Grant Thornton's replacement or for another
reason, the issue has not been resolved to Grant Thornton's
satisfaction prior to its replacement.
40
<PAGE>
(d) (1) that information had come to Grant Thornton's attention that
it had concluded materially impacted the fairness or reliability
of either (i) a previously issued audit report or the underlying
financial statements, or (ii) the financial statements issued or
to be issued covering the fiscal periods subsequent to the date
of the then most recent financial statements covered by an audit
report (including information that, unless resolved to Grant
Thornton's satisfaction, would prevent it from rendering an
unqualified audit report on those financial statements, and (2)
due to Grant Thornton's replacement, or for any other reason, the
issue was not resolved to Grant Thornton's satisfaction prior to
its replacement.
During the Company's two most recent fiscal years and the subsequent
interim periods preceding the selection of KPMG Peat Marwick LLP, the Company
has not consulted KPMG Peat Marwick LLP regarding the application of accounting
principles, either contemplated or proposed, the type of audit opinion that
might be rendered on the Company's financial statement or any other matters that
would be required to be reported herein.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required herein is incorporated by reference from pages
2 to 7 of the definitive proxy statement of the Company ("Proxy Statement").
Item 10. Executive Compensation.
The information required herein is incorporated by reference from pages
11 to 14 of the Company's Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from pages
7 to 10 of the Company's Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from page
14 of the Company's Proxy Statement.
41
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Document Filed as Part of this Report
(1) The following consolidated financial statements are incorporated
by reference from Item 7 hereof (See Exhibit 13 attached hereto):
Independent Auditors' Report
Consolidated Statements of Financial Condition as of June 30, 1996 and
1995
Consolidated Statements of Earnings for the Years Ended June 30, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the
absence of conditions under which they are required or because
the required information is included in the Consolidated
Financial Statements and related notes thereto.
Report of predecessor accountant is attached as Exhibit 99.
42
<PAGE>
(3) The following exhibits are filed as part of this Form 10-KSB, and
this list includes the Exhibit Index.
No. Exhibits
--- --------
3(i) Articles of Incorporation *
3(ii) Bylaws *
4 Specimen Common Stock Certificate *
10(a) Employee Stock Ownership Plan *1
10(b) 1994 Stock Option Plan **1
10(c) Recognition and Retention Plan and Trust **1
13 1996 Annual Report to Stockholders
21 Subsidiaries of the Registrant - Reference is made to Item
1. "Business - Subsidiaries" for the required information
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Grant Thornton LLP
27 Financial Data Schedule
99 Report of Grant Thornton LLP
* Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-77350) filed by the Company with the SEC on April 5,
1994, as amended.
** Incorporated by reference to the Annual Report on Form 10-K for the year
ended June 30, 1995 filed by the Company with the SEC on September 28,
1995.
1 Management contract or compensatory plan or arrangement.
(b) On April 17, 1996, the Registrant filed a Form 8-K to report
that, by letter of same date, the Board of Directors of the
Registrant terminated the services of Grant Thornton as the
Registrant's independent auditors, and had selected the
accounting firm of KPMG Peat Marwick LLP to serve as independent
auditors for the Registrant for the fiscal year ending June 30,
1996. On April 25, 1996, the Registrant filed a Form 8-K/A which
included a letter of Grant Thornton as an exhibit.
(c) See (a) (3) above for all exhibits filed herewith and the exhibit
index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report which are
required to be included herein.
43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TROY HILL BANCORP, INC.
October 9, 1996 By:/s/ Ellry N. Davis
------------------
Ellry N. Davis
President and Chief Executive
Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
/s/ Ellry N. Davis October 9, 1996
- ------------------
Ellry N. Davis
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Harry B. Thaner October 9, 1996
- -------------------
Harry B. Thaner
Chairman of the Board
/s/ Lawrence C. Kerr October 9, 1996
- --------------------
Lawrence C. Kerr
Treasurer (Principal
Financial and Accounting Officer)
/s/ Joseph W. Snyder October 9, 1996
- --------------------
Joseph W. Snyder
Director
/s/ Raymond K. Aiken October 9, 1996
- --------------------
Raymond K. Aiken
Director
/s/ Edwin A. Thaner October 9, 1996
- -------------------
Edwin A. Thaner
Director
44
TROY HILL
BANCORP, INC.
ANNUAL
REPORT
1996
<PAGE>
Dear Stockholder:
We are pleased to report that the Company's net earnings increased from $919,000
in fiscal 1995 to $1.1 million in fiscal 1996. In addition, the Company's net
interest income increased from $3.0 million in fiscal 1995 to $3.4 million in
fiscal 1996. The Company's return on average assets during the 12 months ended
June 30, 1996 amounted to 1.34%, which compares favorably with other savings
institutions and thrift holding companies located in our market area. Total
assets of the Company increased to $92.2 million at June 30, 1996, up from $75.1
million at June 30, 1995.
During fiscal 1996, the Company significantly increased its origination of
permanent and construction loans secured by both residential and nonresidential
real estate. As a result, net loans receivable (not including loans held for
sale) increased from $53.2 million at June 30, 1995 to $74.6 million at June 30,
1996. The growth in the Company's total assets was primarily funded by an
increase in advances from the Federal Home Loan Bank of Pittsburgh and, to a
lesser extent, growth in the Company's deposit accounts. The Company was able to
accomplish its objective of controlled growth while maintaining the Savings
Bank's regulatory capital at a level which significantly exceeds all regulatory
capital requirements. At June 30, 1996, the ratio of the Company's stockholders'
equity to total assets amounted to 19.57%.
The Company has paid a quarterly dividend since its initial public offering in
June 1994. In addition, during fiscal 1995, the company repurchased 56,208
shares of its common stock. Since the initial public offering, the Company has
explored all available avenues in order to improve its operations and
profitability while maintaining the strict asset quality standards which have
been a tradition at Troy Hill.
The Board of Directors and management of the Company are committed to build and
enhance stockholder value. In that regard, on September 16, 1996, the Company
entered into an Agreement and Plan of Reorganization (the "Agreement") with
PennFirst Bancorp, Inc. ("PennFirst"), a Pennsylvania-chartered thrift holding
company which is headquartered in Ellwood City, Pennsylvania. Pursuant to the
Agreement, the Company will merge with and into PennFirst (the "Merger") and the
Savings Bank will operate as a separate subsidiary of PennFirst for a minimum
period of one year. Each shareholder of the Company will be entitled to receive
$21.15 in either cash or shares of PennFirst common stock for each share of
Company common stock, subject to an overall requirement that 40% of the
outstanding Company common stock be exchanged for cash. The Merger is subject
to, among other things, the receipt of all requisite regulatory approvals as
well as the approval of the respective shareholders of PennFirst and the
Company. In connection therewith, a Special Meeting of Shareholders of the
Company is expected to be called for the purpose of approving the Merger during
the second or third quarter of fiscal 1997.
We thank you for your continued support as stockholders of the Company. We also
thank our directors, officers and employees for their dedicated efforts in
accomplishing these results.
Sincerely,
/s/Ellry N. Davis
-----------------
Ellry N. Davis
President and Chief Executive Officer
<PAGE>
BUSINESS
General
Troy Hill Bancorp, Inc. (the "Company") is a Pennsylvania corporation and a
unitary thrift holding company registered under the Home Owners' Loan Act, as
amended. The Company is the parent company of Troy Hill Federal Savings Bank
("Troy Hill").
Troy Hill is a federally chartered, stock savings bank conducting business from
two full-service offices located in the Troy Hill section of Pittsburgh and in
Wexford, Pennsylvania. Its deposits are insured to the maximum extent permitted
by law by the Savings Association Insurance Fund ("SAIF"), which is administered
by the Federal Deposit Insurance Corporation ("FDIC").
At June 30, 1996, the Company had total consolidated assets of $92.2 million,
total consolidated deposits of $54.0 million and stockholders' equity of $18.0
million.
The Company is primarily engaged in attracting deposits from the general public
through its offices and using such deposits, together with other funds,
primarily to originate loans secured by first liens on single-family
(one-to-four units) and multi-family (over four units) residential properties,
nonresidential real estate, construction loans on primarily residential
properties and consumer loans. The Company also invests in securities issued by
the United States Government and agencies thereof, municipal debt securities and
corporate obligations. The Company derives its income principally from interest
earned on loans, mortgage-backed securities and investments and, to a lesser
extent, from fees received in connection with the origination and sale of loans
and for other services. The Company's primary expenses are interest expense on
deposits, FHLB advances and general operating expenses. Funds for activities are
provided primarily by deposits, amortization and prepayments of outstanding
loans and mortgage-backed securities, sales of loans and other sources. During
the years ended June 30, 1996, 1995 and 1994, the Company earned $1.1 million,
$919,000 and $1.1 million, respectively.
Troy Hill is a community oriented savings institution which emphasizes customer
service and convenience within its market area and has traditionally offered a
wide variety of products and services to its retail customers. Troy Hill
currently emphasizes the origination of single-family residential loans and
construction loans for single-family residential properties. Troy Hill has
focused on such traditional thrift lending, while emphasizing asset quality and
maintaining strong capital levels. Highlights of Troy Hill's strategy include
the following:
Strong Capital Levels--Troy Hill seeks to maintain high levels of regulatory
capital to give it maximum flexibility in the changing regulatory environment
and to respond to changes in market and economic conditions. At June 30, 1996,
Troy Hill's tangible, core and risk-based capital ratios were approximately
15.9%, 15.9% and 24.3%, respectively, which exceeded the minimum requirements of
1.5%, 3.0% and 8.0% by $12.7 million, $11.4 million and $9.8 million,
respectively.
Strong Earnings--For the years ended June 30, 1996, 1995, and 1994, the
Company's net earnings (which include Troy Hill as the Company's predecessor)
amounted to $1.1 million, $919,000 and $1.1 million, respectively. The increase
in net earnings since 1995 is due primarily to an increase of $401,000 in net
interest income.
2
<PAGE>
Noninterest Expense Ratios--For the years ended June 30, 1996, 1995 and 1994,
the Company's ratio of noninterest expense to average total assets was 2.09%,
2.35% and 2.31%, respectively. The decrease in such ratio during the year ended
June 30, 1996 was due primarily to a greater increase in average total assets
over the increase in noninterest expense.
Core Deposits--As of June 30, 1996, $18.8 million or 34.9% of Troy Hill's total
deposits consisted of passbook accounts, money market deposit accounts and NOW
accounts. Of this amount, approximately $12.3 million or 22.8% of total deposits
consisted of passbook accounts. Management considers these types of core
deposits to be more stable and lower cost funds than certificates of deposit and
outside borrowings.
Asset Quality--Troy Hill adheres to a lending strategy that emphasizes the
origination of permanent and construction loans secured by single-family
residential properties within it's primary market area. As of June 30, 1996,
1995 and 1994, Troy Hill's ratios of non-performing assets to total assets were
1.57%, 3.09% and 2.03%, respectively. The decrease in non-performing assets
since fiscal 1995 was primarily the result of an increase in loan volume and an
increase in charge-offs of non-performing construction loans during 1996. Total
net charge-offs for the past three fiscal years have aggregated $279,000 and at
June 30, 1996, Troy Hill's allowance for loan losses amounted to .81% of total
loans outstanding.
Regulation
The Company, as a registered savings and loan holding company, is subject to
examination and regulation by the Office of Thrift Supervision ("OTS") and is
subject to various reporting and other requirements of the Securities and
Exchange Commission ("SEC"). Troy Hill, as a federally chartered savings bank,
is subject to examination and comprehensive regulation by the OTS, which is Troy
Hill's chartering authority and primary regulator, and the FDIC, the
administrator of the SAIF. Troy Hill is also subject to certain reserve
requirements established by the Board of Governors of the Federal Reserve System
("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of Pittsburgh,
which is one of the 12 regional banks comprising the FHLB System.
3
<PAGE>
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands)
The following selected financial and other data of the Company does not purport
to be complete and is qualified in its entirety by reference to the more
detailed financial information contained elsewhere herein.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition and Other Data:
Total assets....................................... $92,183 $75,091 $64,087 $57,595 $59,904
Interest-bearing deposits in other financial
institutions..................................... -- -- -- 2,463 1,287
Investment and mortgage-backed securities-available
for sale......................................... 11,731 10,831 -- -- --
Investment securities-held to maturity............. -- 7,301 9,975 3,926 2,988
Mortgage-backed securities, net.................... -- -- 5,902 3,254 3,208
Loans receivable, net.............................. 74,552 53,180 39,074 41,205 46,353
Loans held for sale................................ -- 272 -- 687 --
Deposits........................................... 53,960 50,610 42,410 46,725 49,560
FHLB advances...................................... 18,583 5,750 3,000 3,000 3,000
Stockholders' equity............................... 18,040 17,216 17,600 6,873 5,976
Full service offices............................... 2 2 1 1 1
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income.............................. $6,469 $5,151 $4,490 $5,346 $4,988
Total interest expense............................. 3,072 2,155 1,935 2,409 2,813
------ ------ ------ ------ ------
Net interest income........................... 3,397 2,996 2,555 2,937 2,175
Provision for loan losses.......................... 220 10 80 380 102
------ ------ ------ ------ ------
Net interest income after provision for loan
losses..................................... 3,177 2,986 2,475 2,557 2,073
Noninterest income................................. 210 121 338 81 68
Noninterest expense................................ 1,700 1,599 1,323 999 868
------ ------ ------ ------ ------
Earnings before income taxes and cumulative effect
of accounting change............................. 1,687 1,508 1,490 1,639 1,273
Income taxes....................................... 599 589 611 742 487
------ ------ ------ ------ ------
Earnings before cumulative effect of accounting
change........................................... 1,088 919 879 897 786
Cumulative effect of change in accounting for
income taxes..................................... -- -- 200 -- --
------ ------ ------ ------ ------
Net earnings....................................... $1,088 $ 919 $1,079 $ 897 $ 786
====== ====== ====== ====== ======
Earnings per share(1).............................. $ 1.09 $ .89 -- -- --
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
----------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selected Operating and Other Ratios(2):
Performance Ratios:
Return on average assets(3)............................ 1.34% 1.35% 1.89% 1.53% 1.47%
Return on average equity(3)............................ 6.04 5.21 14.15 13.99 14.17
Interest rate spread(4)................................ 3.16 3.54 4.21 4.64 3.66
Net interest margin(4)................................. 4.27 4.61 4.67 5.09 4.17
Average interest-earning assets to average
interest-bearing liabilities......................... 128.54 133.15 113.36 110.90 109.30
Net interest income after provision for loan and lease
losses
to total noninterest expense......................... 186.88 186.74 187.07 255.96 238.82
Noninterest expense to average total assets............ 2.09 2.35 2.31 1.70 1.62
Asset Quality Ratios:
Non-performing loans to total loans at end of
period(5)............................................ 1.22 3.39 2.67 1.53 0.51
Non-performing assets to total assets at end of
period(5)............................................ 1.57 3.09 2.03 1.24 0.46
Allowance for loan and lease losses to total loans
outstanding
at end of period..................................... .81 1.15 1.45 1.34 0.50
Allowance for loan and lease losses to total
non-performing loans
at end of period..................................... 66.73 33.55 54.39 87.85 97.07
Capital Ratios:
Average equity to average assets....................... 22.14 25.94 13.32 10.91 10.37
Equity to assets at end of period...................... 19.57 22.93 27.46 11.93 9.98
</TABLE>
- ---------------
(1) Earnings per share have been stated only for fiscal 1995 and 1996 because
of Troy Hill's conversion to stock form on June 24, 1996. See Note 1 to
the Consolidated Financial Statements.
(2) With the exception of end of period ratios, all ratios are based on
month-end or quarter-end balances during the periods. Management does not
believe that the use of month-end or quarter-end balances instead of daily
average balances has caused any material differences in the information
presented.
(3) Return on average assets and return on average equity before cumulative
effect of accounting change amounted to 1.54% and 11.53%, respectively,
for the year ended June 30, 1994.
(4) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(5) Non-performing loans consist of non-accrual loans and loans that are
contractually past due 90 days or more but still accruing interest, and
non-performing assets consist of non-performing loans and real estate
acquired by foreclosure or deed-in lieu thereof.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
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 losses, as well as the level of its
noninterest income, including loan service charges, gain on sale of loans, and
other income, and its noninterest expenses, such as salaries and employee
benefits, occupancy expense, federal deposit insurance and miscellaneous other
expenses, and income taxes.
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 Troy Hill, 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 factor
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
The Company 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. As described below,
the Company's asset and liability management policies have increased the
Company's interest rate sensitivity primarily by shortening the maturities of
the Company's interest-earning assets. To the extent possible, the Company also
attempts to extend the maturities 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 investment in (A) shorter-term (15 years or less), fixed-rate
single-family residential loans and (B) residential construction and commercial
real estate loans, which generally have adjustable 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
7
<PAGE>
single-family residential loans ("ARMs"), (iv) maintaining the weighted average
maturity of the Company's investment portfolio at five years or less and (v)
selling of newly originated loans with maturities of greater than fifteen years.
As of June 30, 1996, the implementation of these asset and liability initiatives
resulted in the following: (i) $15.7 million or 21.0% of the Company's total
loan portfolio had adjustable interest rates or maturities of less than 12
months; (ii) $3.6 million or 69.5% of the Company's portfolio of mortgage-backed
securities were secured by ARMs; and (iii) $2.5 million or 21.3% of the
Company's investment securities portfolio had scheduled maturities of five years
or less.
Changes in Financial Condition
General. At June 30, 1996, the Company's assets totaled $92.2 million, as
compared to $75.1 million at June 30, 1995. Total assets increased by $17.1
million or 22.8% from June 30, 1995 to June 30, 1996. The increase is primarily
due to the increase of $21.4 million or 40.2% in loans receivable which was
primarily due to increased relationships with real estate brokers. This increase
was offset by a decrease of $6.4 million or 35.3% in investment and
mortgage-backed securities (including securities available for sale) which was
the result of the Company selling a portion of its investments to fund the
increase in loans.
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; 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. The
Company adopted SFAS No. 115 as of July 1, 1994.
In November 1995, the Financial Accounting Standards Board (FASB) issued "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities, Questions and Answers." This guide permitted a
one-time reassessment of the appropriateness of the classifications of
securities as available for sale or held for investment. In December 1995, the
Company transferred approximately $6.9 million of investment securities with a
market value of $6.8 million from the held to maturity category to the
securities available for sale category. Concurrent with this redesignation, all
but approximately $1.7 million of the securities transferred were sold at a
realized loss of $5,000.
8
<PAGE>
As a matter of policy, the Company generally emphasizes lending activities in
order to enhance the weighted average yield on its interest-earning assets and,
thus, its results of operations. Investment securities (excluding securities
available for sale), which consist of U.S. Government and agency obligations and
corporate obligations, decreased by $5.3 million or 72.0% during the year ended
June 30, 1996, due primarily to the one-time transfer of securities referred to
in the preceding paragraph.
Approximately $751,000 of equity securities were purchased by the Company during
the fiscal year ended June 30, 1996 due to the tax benefits and higher yields
associated with these items. The portfolio of equity securities primarily
consist of cumulative preferred equity stocks and are classified as available
for sale.
Mortgage-Backed Securities. Mortgage-backed securities, which consist primarily
of securities which are insured or guaranteed by the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") or the
Government National Mortgage Association ("GNMA"), were all classified as
available for sale at June 30, 1996. Such securities decreased by $1.9 million
or 28.7% during the year ended June 30, 1996. The decrease during fiscal 1996
reflected principal repayments and the selling of mortgage-backed securities to
finance the increase in loan volume.
Loans Receivable. Loans receivable (including loans classified as held for sale)
amounted to $74.6 million and $53.5 million at June 30, 1996 and 1995,
respectively. Loans receivable (including loans classified as held for sale)
increased by $21.1 million or 39.5% during the year ended June 30, 1996. The
increase is due to generally lower interest rates which produced a higher market
demand. The Company also increased its origination of nonresidential loans
secured primarily by undeveloped land due primarily to an increasing number of
relationships with real estate brokers.
Allowance for Loan Losses. At June 30, 1996, the Company's allowance for loan
losses totaled $660,000, which represented a $7,000 decrease from the level
maintained at June 30, 1995. At June 30, 1996, the Company's allowance
represented approximately .81% of the gross loan portfolio. At that date, the
ratio of total non-performing loans to total loans amounted to 1.22%, as
compared to 3.41% at June 30, 1995. This decrease in non-performing loans during
the year ended June 30, 1996 was due to an increase in loan volume and an
increase in charge-offs of non-performing construction loans. Although
management of the Company believes that its allowance for loan losses at June
30, 1996 was adequate based on facts and circumstances available to it, there
can be no assurances that future additions to such allowance will not be
necessary in future periods, which could adversely affect the Company's results
of operations.
Deposits. Deposits totaled $54.0 million at June 30, 1996, as compared to $50.6
million at June 30, 1995. Deposit accounts subject to daily repricing (passbook,
money market deposit and NOW accounts) decreased by $21,000 or .1% from June 30,
1995 to June 30, 1996. During the same period, certificates of deposit increased
by $3.4 million or 10.6%. This increase is primarily due to the opening of an
additional full-service branch office during fiscal 1995. Troy Hill has
generally not engaged in sporadic increases or decreases in interest rates paid
or offered the highest rates available in its deposit market except upon
specific occasions when market conditions have created opportunities to attract
longer-term deposits.
9
<PAGE>
Borrowings. Borrowings, which consist primarily of advances from the FHLB of
Pittsburgh, amounted to $18.6 million and $5.8 million at June 30, 1996 and
1995, respectively. The weighted average rate on FHLB advances was 6.06% and
5.40% during the years ended June 30, 1996 and 1995, respectively.
Stockholders' Equity. Stockholders' equity increased from $17.2 million at June
30, 1995 to $18.0 million at June 30, 1996. This increase was due to the $1.1
million of net earnings recognized during the year which was offset by $350,000
of dividends paid to the stockholders and a decrease in the market value of
$111,000 in securities available for sale.
Results of Operations
General. The Company reported net earnings of $1.1 million, $919,000 and $1.1
million for fiscal 1996, 1995 and 1994, respectively. Net earnings during fiscal
1996 increased by $169,000 or 18.4% when compared to June 30, 1995. This
increase in net earnings resulted primarily from an increase of $401,000 in net
interest income and a $89,000 increase in total noninterest income, which was
partially offset by a $210,000 increase in the provision for loan losses, a
$10,000 increase in income taxes and an increase of $101,000 in total
noninterest expense. Net earnings during fiscal 1995 increased $40,000 or 4.6%
(before the $200,000 cumulative effect of the change in accounting for income
taxes recognized during the fiscal year ended June 30, 1994). The increase in
net earnings resulted primarily from an increase of $441,000 in net interest
income, a $70,000 decline in the provision for loan losses and a $22,000
decrease in income taxes, which was partially offset by a $276,000 increase in
total noninterest expense. and a decrease of $217,000 in total noninterest
income.
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.
Average Balances, Net Interest Income and Yields Earned and Rates Paid. The
following table presents for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resultant yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. All average balances are
based on month-end or quarter-end balances. Management does not believe that the
use of month-end or quarter-end balances instead of daily average balances has
caused any material differences in the information presented.
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- --------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1) Balance Interest Rate(1)
-------- ------- ------- -------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(2)...... $61,934 $5,334 8.61 % $46,194 $3,957 8.57 % $39,489 $3,655 9.26 %
Mortgage-backed
securities(3)......... 6,360 443 6.97 7,857 493 6.27 4,069 256 6.29
Investment
securities(3)(4)...... 8,957 568 6.34 9,865 575 5.83 7,782 400 5.14
Interest bearing deposits
and other............. 2,396 124 5.18 2,823 126 4.46 4,547 179 3.94
------- ------ ---- ------- ------ ---- ------ ------ ----
Total interest-earning
assets................ 79,647 $6,469 8.12 % 66,739 $5,151 7.72 % 55,890 $4,490 8.03 %
------- ====== ==== ------- ====== ==== ------ ====== ====
Non-interest-earning
assets................... 1,665 1,284 1,330
------- ------- -------
Total assets............. $81,310 $68,023 $57,220
======= ======= =======
Interest-bearing
liabilities:
Deposits................. $52,269 $2,484 4.75 % $45,440 $1,902 4.19 % $45,561 $1,736 3.81 %
FHLB advances and
other................. 9,695 588 6.06 4,684 253 5.40 3,740 199 5.32
Total interest-bearing
liabilities........... 61,964 $3,072 4.96 % 50,124 $2,155 4.30 % 49,301 $1,935 3.92 %
------- ====== ==== ------- ====== ==== ------- ====== ====
Non-interest-bearing
liabilities.............. 1,342 251 296
------- ------- -------
Total liabilities........ 63,306 50,375 49,597
------- ------- -------
Stockholders' equity....... 18,004 17,648 7,623
------- ------- -------
Total liabilities and
stockholders'
equity................ $81,310 $68,023 $57,220
======= ======= =======
Net interest income;
interest
rate spread.............. $3,397 3.16 % $2,996 3.42 % $2,555 4.11 %
====== ==== ====== ==== ====== ====
Net interest margin(5)..... 4.27 % 4.49 % 4.57 %
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities.............. 128.54 % 133.15 % 113.36 %
====== ====== ======
</TABLE>
11
<PAGE>
- ---------------
(1) At June 30, 1996, the yields earned and rates paid were as follows: loans
receivable, 8.20%; mortgage-backed securities, 6.98%; investment securities,
6.05%; other interest-earning assets, 5.54%; total interest-earning assets,
7.87%; deposits, 4.63%; FHLB advances, 5.78%; total interest-bearing
liabilities, 4.92%; and interest rate spread, 2.95%.
(2) Includes non-accrual loans and loans classified as held for sale.
(3) Includes investment and mortgage-backed securities classified as available
for sale.
(4) Yields on investment securities have been computed on a tax-equivalent basis
utilizing a 34% federal income tax statutory rate.
(5) Net interest margin is net interest income divided by average
interest-earning assets.
12
<PAGE>
Rate/Volume Analysis. The following table describes the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1996 vs 1995 1995 vs. 1994
---------------------------- ---------------------------
Increase Increase
(Decrease) (Decrease)
Due To Total Due To Total
---------------- Increase --------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease)
------ ------ -------- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable(1)................... $ 22 $1,355 $1,377 $(236) $538 $302
Mortgage-backed securities(2)......... 50 (100) (50) (1) 238 237
Investment securities(2).............. 48 (55) (7) 58 117 175
Interest-bearing deposits in other
banks.............................. -- -- -- -- (47) (47)
Other interest-earning assets......... 19 (21) (2) 22 (28) (6)
----- ------ ------ ----- ----- ----
Total interest-earning assets... $ 139 $1,179 $1,318 $(157) $818 $661
===== ====== ====== ===== ==== ====
Interest-bearing liabilities:
Deposits.............................. $ 276 $ 306 $ 582 $ 171 $ (5) $166
FHLB advances......................... (7) 347 340 7 56 63
Other interest-bearing liabilities.... (3) (2) (5) (10) 1 (9)
------ ------ ------ ----- ---- ----
Total interest-bearing
liabilities.................. $ 266 $ 651 $ 917 $ 168 $ 52 $220
===== ====== ====== ===== ==== ====
Increase (decrease) in net interest
income................................ $(127) $ 528 $ 401 $(325) $766 $441
===== ====== ====== ===== ==== ====
</TABLE>
- ---------------
(1) Includes loans classified as held for sale.
(2) Includes investment and mortgage-backed securities classified as available
for sale.
13
<PAGE>
The Company's net interest income increased by $401,000 or 13.4% during fiscal
1996 and increased by $469,000 or 18.0% during fiscal 1995. The increase in net
interest income during fiscal 1996 was the result of an increase in interest
income primarily due to an increase in the average balance of loans receivable
which was offset by an increase in interest expense due primarily to an increase
in the average rate paid on deposits and on interest paid to the Federal Home
Loan Bank of Pittsburgh on borrowed money. The increase in net interest income
during fiscal 1995 was the result of an increase in interest income primarily
due to an increase in the average balance of loans receivable, mortgage-backed
securities and investment securities which offset an increase in interest
expense due primarily to an increase in the average rate paid on deposits.
Interest Income. Interest income on loans increased by $1.4 million or 34.8%
during fiscal 1996, and increased $302,000 or 8.3% during fiscal 1995. The
increase during fiscal 1996 was due to a $15.7 million increase in the average
balance of loans receivable and an increase of 4 basis points in the average
yield earned thereon (100 basis points equals 1%). The increase in interest
income on loans during fiscal 1995 was due to a $6.7 million increase in the
average balance of loans receivable which offset a decline of 69 basis points in
the average yield earned thereon.
Interest income on mortgage-backed securities decreased by $50,000 or 10.1%
during fiscal 1996, and increased by $237,000 or 92.6% during fiscal 1995. The
decrease during fiscal 1996 was due to a decrease in the average balance of
mortgage-backed securities of $1.5 million which was partially offset by a 70
basis point increase in the average yield earned thereon. The increase in
interest income on mortgage-backed securities during fiscal 1995 was due to the
reinvestment of a portion of the proceeds of the Company's stock offering into
mortgage-backed securities, which resulted in an increase in the average balance
of such securities of $3.8 million, which was partially offset by a 2 basis
point decline in the average yield earned thereon.
Interest and dividends on investment securities and other interest-earning
assets (consisting primarily of U.S. Government and agency obligations,
municipal debt securities, corporate obligations, interest-bearing deposits and
FHLB of Pittsburgh stock) decreased by $9,000 or 1.3% during fiscal 1996 and
increased by $122,000 or 21.1% during fiscal 1995. The decrease during fiscal
1996 was due primarily to a $1.3 million decrease in the average balance of such
investments, which was partially offset by an increase of 125 basis points in
the average yield earned thereon. The increase during fiscal 1995 was due
primarily to a $1.6 million increase in the average balance of such investments
together with an increase of 129 basis points in the average yield earned
thereon.
Interest Expense. Interest expense on deposits, the largest component of the
Company's interest-bearing liabilities, increased by $582,000 or 30.6% during
fiscal 1996 and increased by $166,000 or 9.6% during fiscal 1995. The increase
during fiscal 1996 was due to an increase of 57 basis points in the average rate
paid thereon, and a $6.8 million increase in the average balance of deposits
outstanding. The increase in interest expense on deposits during fiscal 1995 was
due to an increase of 37 basis points in the average rate paid thereon, which
offset a slight decline in the average balance of deposits outstanding. The
decrease in the average balance of deposits during fiscal 1995 was due primarily
to disintermediation (the outflow of deposits into competing investment
products), and the result of the customers of the Troy Hill withdrawing their
14
<PAGE>
deposit accounts to purchase common stock of the Company. The increase in the
average rate paid on deposits during fiscal 1996 and 1995 was due to a
competitive market and rising interest rates.
Interest expense on advances and other borrowings increased by $335,000 or
132.4% during fiscal 1996 and increased by $54,000 or 27.1% during fiscal 1995.
The increase during fiscal 1996 was due to a $5.7 million increase in the
average balance of FHLB advances and an increase of 4 basis points in the
average yield earned theron. The increase in such expense during fiscal 1995 was
due to an increase in the average balance of FHLB advances which were utilized
to fund the increase in loan demand.
Provisions for Loan Losses. Provisions for loan 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 Troy
Hill, the status of past due principal and interest payments, general economic
conditions, particularly as they relate to Troy Hill's market area, and other
factors related to the collectibility of Troy Hill's loan portfolio.
The Company established provisions for loan and lease losses of $220,000,
$10,000 and $80,000 during fiscal 1996, 1995 and 1994, respectively. The
provisions during fiscal 1996 and 1994 were due, in part, to losses experienced
with respect to certain commercial leases which Troy Hill had purchased and
losses on certain single-family construction loans during the fourth quarter of
1996. In addition, the Company determined to increase its allowance for loan and
lease losses due to its increased origination of residential construction loans,
which generally involve a higher level of risk as compared to single-family
residential lending (and therefore have the inherent risk of higher levels of
losses) and increased loan charge-offs by $184,000 in fiscal 1996.
Noninterest Income. Total noninterest income increased by $89,000 or 73.6%
during fiscal 1996 due primarily to a $51,000 increase in the gain on sale of
loans and a $31,000 decrease in loss on the sale of investment securities. Total
noninterest income decreased by $217,000 or 64.2% during fiscal 1995 due
primarily to a $189,000 decrease in gain on sale of loans and a $36,000 loss on
sales of investment securities recognized during the year. The increase in
noninterest income during fiscal 1996 was due primarily to an increase in sales
of loans to financial institutions. The decrease in gain on sales of loans
during fiscal 1995 was due to an increase in market rates of interest which
resulted in a decline in loan demand with respect to 30-year mortgage loans.
Noninterest Expense. Total noninterest expense increased by $101,000 or 6.3%
during fiscal 1996, as compared to the prior fiscal year. The primary reason for
the increase was due to a $92,000 increase in salaries and employee benefits.
This increase was partially offset by a $14,000 decrease in miscellaneous other
operating expenses (consisting primarily of office supplies and services and
legal and professional fees). Total noninterest expense increased by $276,000 or
20.9% during fiscal 1995, due primarily to a $161,000 or 26.8% increase in
salaries and employee benefits, and a $127,000 or 28.2% increase in
miscellaneous other operating expenses. The increase in employee compensation
and benefits during fiscal 1996 and 1995 was due to the hiring of additional
employees and the funding of the Company's employee stock benefit plans.
15
<PAGE>
Income Taxes. The Company incurred income tax expense of $599,000, $589,000 and
$611,000 during fiscal 1996, 1995 and 1994, respectively. The Company's
effective tax rate amounted to 35.5%, 39.1% and 41.0% during fiscal 1996, 1995
and 1994, respectively. The varied tax expense reflects, among other things, the
continued but varied profitability of the Company.
The Company adopted SFAS No. 109 as of July 1, 1993. The general objective of
SFAS No. 109 is to recognize annually the deferred tax assets and liabilities
which will arise from future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. As a result of
the adoption of SFAS No. 109, the Company recognized $200,000 in income during
the year ended June 30, 1994 representing the cumulative effect of this change
in accounting principle.
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, prepayments, maturities
of outstanding loans, mortgage-backed securities and investment securities,
sales of loans, available for sale 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
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 an increase in advances from the Federal Home Loan
Bank of Pittsburgh and to a lesser extent, growth in the Company's deposit
accounts. At June 30, 1996, the Company had $18.6 million of outstanding
advances from the FHLB of Pittsburgh and a line of credit of $4.9 million of
which $400,000 is unused. Furthermore, Troy Hill has access to the Federal
Reserve Bank discount window.
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 June 30, 1996, the
total approved loan commitments outstanding amounted to $3.4 million. At the
same date, commitments under unused lines of credit amounted to $7.8 million and
the unadvanced portion of construction loans approximated $5.2 million.
Certificates of deposit scheduled to mature in one year or less at June 30, 1996
totaled $21.6 million. Management believes that a significant portion of
maturing deposits will remain with Troy Hill.
Federally insured savings institutions are required to maintain minimum levels
of regulatory capital. The 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.
16
<PAGE>
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 interests 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 a savings institution's 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 Troy Hill's
regulatory capital. Tangible capital is core capital less all intangible assets,
with a limited exception for purchased mortgage servicing rights. Failure to
meet minimum capital requirements can initiate certain mandatory--and, possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require Troy Hill to maintain minimum amounts and ratios (set forth in the table
below) of Tangible and Core Capital (as defined in the regulations) to total
assets and of Total Capital (as defined) to risk-weighted assets (as defined).
Management believes, as of June 30, 1996, that Troy Hill meets all capital
adequacy requirements to which it is subject.
As of June 30, 1996, the most recent notification from the Office of Thrift
Supervision (OTS) categorized Troy Hill as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized," Troy Hill must maintain minimum Total Risk-based, Core and
Tangible ratios as set forth in the accompanying table. There are no conditions
or events since that notification that management believes have changed the
institution's category.
<TABLE>
<CAPTION>
To be well
capitalized
under
prompt
For capital corrective
adequacy action
Actual purposes provisions
---------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1996:
Risk-based Capital........... $14,506 24.30% $4,775 8.00% $5,969 10.00%
Core Capital................. 14,010 15.89 2,646 3.00 5,292 6.00
Tangible Capital............. 14,010 15.89 1,322 1.50 4,407 5.00
As of June 30, 1995:
Risked-based Capital......... 14,639 33.79 3,466 8.00 4,333 10.00
Core Capital................. 13,996 19.45 2,159 3.00 4,318 6.00
Tangible Capital............. 13,996 19.45 1,080 1.50 3,560 5.00
</TABLE>
17
<PAGE>
Corporate Reorganization
On September 16, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with PennFirst Bancorp, Inc. ("PennFirst"), a
Pennsylvania-chartered thrift holding company which is headquartered in Ellwood
City, Pennsylvania. Pursuant to the Agreement, the Company will merge with and
into PennFirst and Troy Hill will operate as a separate subsidiary of PennFirst
for a minimum period of one year. Each shareholder of the Company will be
entitled to receive $21.15 in either cash or shares of PennFirst common stock
for each share of Company common stock, subject to an overall requirement that
40% of the outstanding Company common stock be exchanged for cash. The Merger is
subject to, among other things, the receipt of all requisite regulatory
approvals as well as the approval of the respective shareholders of PennFirst
and the Company. In connection therewith, a Special Meeting of Shareholders of
PennFirst and the Company is expected to be called for the purpose of approving
the Merger during the second or third quarter of fiscal 1997.
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
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.
18
<PAGE>
KPMG Peat Marwick LLP
One Mellon Bank Center Telephone 412 391 9710 Telefax 412 391 8963
Pittsburgh, PA 15219 Telex 7106642199 PMM & CO PGH
Independent Auditors' Report
The Board of Directors
Troy Hill Bancorp, Inc.:
We have audited the accompanying consolidated statement of financial condition
of Troy Hill Bancorp, Inc. and subsidiary (the Company) as of June 30, 1996, and
the related consolidated statement of earnings, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
accompanying financial statements of the Company as of June 30, 1995, and for
each of the years in the two-year period then ended were audited by other
auditors whose report thereon dated August 11, 1995, expressed an unqualified
opinion with an explanatory paragraph for changes in accounting for investment
securities in 1995 and income taxes in 1994 on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly in all material respects, the financial position of Troy Hill
Bancorp, Inc. and subsidiary as of June 30, 1996, and the results of its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
August 16, 1996, except as to
note 18, which is as of
September 16, 1996
19
<PAGE>
<TABLE>
<CAPTION>
TROY HILL BANCORP, INC.
Consolidated Statements of Financial Condition
June 30, 1996 and 1995
(In thousands)
1996 1995
------- ------
<S> <C> <C>
Assets
Cash and due from banks.............................................. $ 2,869 1,469
Investment and mortgage-backed securities--available for sale
(amortized cost of $11,819 and $10,750) (note 2)................... 11,731 10,831
Investment securities--held to maturity (market value of $7,134)
(note 3)........................................................... -- 7,301
Loans held for sale.................................................. -- 272
Loans receivable, net (notes 1, 4 and 5)............................. 74,552 53,180
Premise and equipment, net (note 6).................................. 653 602
Federal Home Loan Bank stock at cost (note 8)........................ 929 286
Real estate owned.................................................... 462 330
Accrued interest receivable (notes 2 and 4).......................... 546 470
Deferred income tax benefit (note 10)................................ 359 288
Other assets......................................................... 82 62
------- ------
Total assets.................................................... $92,183 75,091
======= ======
Liabilities and Stockholders' Equity
Liabilities:
Savings deposits (note 7).......................................... 53,960 50,610
Advances from Federal Home Loan Bank (note 9)...................... 18,583 5,750
Advances by borrowers for taxes and insurance...................... 1,185 986
Accrued expenses and other liabilities............................. 415 529
------- ------
Total liabilities............................................... 74,143 57,875
Stockholders' equity (notes 1, 9, 10 and 13):
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......................................... 10,614 10,591
Retained earnings, substantially restricted........................ 9,395 8,657
Treasury stock--at cost, 56,208 shares at June 30, 1996 and 1995... (703) (703)
Shares acquired by the recognition and retention plan.............. (463) (543)
Unearned ESOP shares............................................... (756) (850)
Unrealized gain (loss) on investment and mortgage-backed securities
available for sale, net of taxes................................ (58) 53
------- ------
Total stockholders' equity................................... 18,040 17,216
------- ------
Total liabilities and stockholders' equity................... $92,183 75,091
======= ======
See accompanying notes to consolidated financial statements.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
TROY HILL BANCORP, INC.
Consolidated Statements of Earnings
Years Ended June 30, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
-------- ----- -----
<S> <C> <C> <C>
Interest income:
Loans.......................................................... $5,334 3,957 3,655
Investment securities.......................................... 568 575 400
Mortgage-backed securities..................................... 443 493 256
Interest-bearing deposits and other............................ 124 126 179
------ ----- -----
Total interest income....................................... 6,469 5,151 4,490
Interest expense:
Interest on savings deposits (note 7).......................... 2,484 1,902 1,736
Interest on advances and other borrowings...................... 588 253 199
------ ----- -----
Total interest expense...................................... 3,072 2,155 1,935
------ ----- -----
Net interest income......................................... 3,397 2,996 2,555
Provision for loan losses (note 4)............................... 220 10 80
------ ----- -----
Net interest income after provision for loan losses......... 3,177 2,986 2,475
Noninterest income:
Loan fees and service charges.................................. 47 45 39
Gain on sales of loans......................................... 126 75 264
Loss on sales of investment securities......................... (5) (36) --
Other.......................................................... 42 37 35
------ ----- -----
Total noninterest income.................................... 210 121 338
Noninterest expense:
Salaries and employee benefits (note 11)....................... 854 762 601
Premises and occupancy expense................................. 164 160 164
Federal deposit insurance...................................... 119 100 108
Other operating (note 12)...................................... 563 577 450
------ ----- -----
Total noninterest expense................................... 1,700 1,599 1,323
------ ----- -----
Earnings before income taxes and cumulative effect of change
in
accounting principle..................................... 1,687 1,508 1,490
Provision for income taxes (notes 1 and 10)...................... 599 589 611
------ ----- -----
Earnings before cumulative effect of change in accounting
principle................................................. 1,088 919 879
Cumulative effect of change in accounting principle (notes 1 and
10)............................................................ -- -- 200
------ ----- -----
Net earnings................................................ $1,088 919 1,079
====== ===== =====
Earnings per share (note 1)...................................... $ 1.09 .89 N/A
====== ===== =====
See accompanying notes to consolidated financial statements.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
TROY HILL BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1996, 1995 and 1994
(In thousands)
Shares acquired Unrealized
Additional by recognition Unearned gain (loss) Total
Common paid-in Retained Treasury and retention ESOP on investment stockholders'
stock capital earnings stock plan shares securities equity
------ ---------- -------- -------- ----------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1993.................... $ -- -- 6,873 -- -- -- -- 6,873
Net earnings.............. -- -- 1,079 -- -- -- -- 1,079
Common stock issued....... 11 10,581 -- -- -- (944) -- 9,648
---- ------ ----- ---- --- ---- --- ------
Balance at June 30,
1994.................... 11 10,581 7,952 -- -- (944) -- 17,600
Net earnings.............. -- -- 919 -- -- -- -- 919
Adoption of SFAS 115,
unrealized loss on
available for sale
securities net of tax... -- -- -- -- -- -- (150) (150)
Cash dividend declared at
$.21 per share.......... -- -- (214) -- -- -- -- (214)
Change in market value of
securities available for
sale, net of deferred
taxes................... -- -- -- -- -- -- 203 203
Stock acquired for
recognition and
retention plan.......... -- -- -- -- (543) -- -- (543)
Principal payment on ESOP
debt.................... -- 10 -- -- -- 94 -- 104
Acquisition of treasury
stock................... -- -- -- (703) -- -- -- (703)
---- ------ ----- ---- --- ---- --- ------
Balance at June 30,
1995.................... 11 10,591 8,657 (703) (543) (850) 53 17,216
Net earnings.............. -- -- 1,088 -- -- -- -- 1,088
Cash dividend declared at
$.36 per share.......... -- -- (350) -- -- -- -- (350)
Change in market value of
securities available for
sale, net of tax........ -- -- -- -- -- -- (111) (111)
Amortization of
recognition and
retention plan awards... -- -- -- -- 80 -- -- 80
Principal payment on ESOP
debt.................... -- 23 -- -- -- 94 -- 117
---- ------ ----- ---- --- ---- --- ------
Balance at June 30,
1996.................... $ 11 10,614 9,395 (703) (463) (756) (58) 18,040
==== ====== ===== ==== ==== ==== ==== ======
See accompanying notes to consolidated financial statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
TROY HILL BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended June 30, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................... $ 1,088 919 1,079
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Provision for loan losses................................... 220 10 80
Origination of loans for sale............................... (8,504) (1,064) (7,234)
Proceeds from sale of loans................................. 8,902 792 7,921
Depreciation and amortization............................... 70 72 67
Other....................................................... 81 140 (12)
Amortization of deferred loan origination fees and accretion
of discounts.............................................. (141) (161) (245)
Deferred income tax benefit................................. (24) (41) (196)
Decrease (increase) in accrued interest receivable.......... (76) (94) 42
(Increase) decrease in other assets......................... (20) 12 (35)
(Decrease) increase in other liabilities.................... (155) 81 119
---------- ------- -------
Net cash provided by operating activities............. 1,441 666 1,586
Cash flows from investing activities:
Net decrease in interest-bearing deposits in other financial
institutions................................................ -- -- 2,463
Purchases of investment securities held to maturity............ -- (766) (11,894)
Sale of investment securities available for sale............... 6,691 5,662 1,752
Purchases of investment securities available for sale.......... (2,647) (7,799) --
Principal repayments of mortgage-backed securities available
for sale.................................................... 2,189 691 1,442
Net decrease (increase) in loans............................... (21,897) (14,164) 2,285
Proceeds from sale of real estate owned........................ 314 -- --
(Purchase) redemptions of Federal Home Loan Bank stock......... (643) 36 5
Purchases of premises and equipment............................ (121) (59) (86)
---------- ------- -------
Net cash used in investing activities................. (16,114) (16,399) (4,033)
Cash flows from financing activities:
Net (decrease) increase in savings deposits.................... $ 3,350 8,200 (4,315)
Net (decrease) increase in advances by borrowers for taxes and
insurance................................................... 199 239 (29)
Proceeds from issuance of common stock, net.................... -- -- 9,648
Proceeds from FHLB advances.................................... 26,083 5,750 --
Payment of FHLB advances....................................... (13,250) (3,000) --
Dividends paid................................................. (309) (214) --
Purchase of shares for retention plan.......................... -- (543) --
Purchase of treasury stock..................................... -- (703) --
---------- ------- -------
Net cash provided by financing activities............. 16,073 9,729 5,304
---------- ------- -------
Net (decrease) increase in cash.................................. 1,400 (6,004) 2,857
Cash and cash equivalents at beginning of year................... 1,469 7,473 4,616
---------- ------- -------
Cash and cash equivalents at end of year......................... $ 2,869 1,469 7,473
=========== ======= =======
23
<PAGE>
<CAPTION>
TROY HILL BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended June 30, 1996, 1995 and 1994
(In thousands)
(continued)
1996 1995 1994
---------- ------- -------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings......................... $ 3,019 2,149 1,965
=========== ======= =======
Income taxes................................................ $ 690 545 658
=========== ======= =======
Noncash investing and financing transactions:
Transfers from loans to real estate acquired through
foreclosure............................................... $ 446 374 16
=========== ======= =======
Transfer of securities held to maturity to available for
sale...................................................... $ 6,950 -- --
=========== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
24
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
(1) Summary of Accounting Policies
Troy Hill Bancorp, Inc. and subsidiary (the Company) is primarily engaged in the
business of attracting retail deposits from the general public and using such
funds to invest in residential and commercial mortgage loans. The Company is
subject to competition from other financial institutions. The Company is also
subject to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
The following comprise the significant accounting policies which the Company
follows in preparing and presenting their consolidated financial statements:
Conversion to Stock Form
On June 24, 1994, Troy Hill Federal Savings and Loan Association (the
Association) 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 (Troy Hill), followed by the issuance of all of Troy
Hill's outstanding common shares to the Company, a newly formed holding company.
The financial statements for the periods prior to June 24, 1994, are those of
the Association prior to the conversion and reorganization.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Troy Hill. All significant intercompany
transactions have been eliminated.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Loans Held for Sale
Mortgage loans originated and intended for sale are carried at lower of cost or
market determined in the aggregate.
Investment and Mortgage-Backed Securities Available for Sale
On July 1, 1994, the Company adopted Statement of Financial Accounting Standards
No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity
Securities." SFAS 115 addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and all investments
in debt securities. Those investments are classified in three categories and
accounted for based on the respective classification. Debt securities that the
25
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
Company has the positive intent and ability to hold to maturity are classified
as held to maturity and reported at amortized cost. Debt and equity securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with
unrealized gains and losses included currently in income. Debt and equity
securities classified as neither held to maturity or trading securities are
classified as available for sale and reported at fair value, with unrealized
gains and losses excluded from income and reported as a separate component of
stockholders' equity, net of income taxes. The Company did not classify any debt
or equity securities as trading securities in 1996 or 1995. In periods prior to
July 1, 1994, investments securities and mortgage-backed securities are stated
at cost, adjusted for amortization of premiums and accretion of discounts using
the level yield method.
Gains and losses on sales of securities are recognized on the specific
identification method. Purchases and sales of securities are accounted for on a
settlement date basis which is not materially different than use of the trade
date basis.
Loans Receivables
Loans receivable are carried at unpaid principal balances, less the allowance
for loan losses and net deferred loan origination fees. Interest on loans is
credited to income as earned. Interest earned on loans for which no payments
were received during the month is accrued. Uncollectible interest on loans that
are contractually past due is charged off or an allowance is established based
on management's periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued. Income is subsequently
recognized only to the extent cash payments are received until, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal, in which case the loan is returned to accrual
status. If the collection of principal is in doubt in whole or in part, all
payments received on nonaccrual loans are credited to principal until such doubt
is eliminated. Monthly mortgage loan payments are adjusted annually to cover
insurance and tax requirements.
Loan origination fees received, net of certain direct origination costs are
deferred on a loan-by-loan basis and amortized to interest income using a method
which approximates the interest method, giving effect to actual loan
prepayments.
On July 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures," which provide guidelines for
measuring and reporting impairment losses on loans. A loan is considered to be
impaired when it is probable that the Company will be unable to collect all
principal and interest amounts due according to the contractual terms of the
loan agreement. All nonperforming loans, excluding consumer and lease loans, are
considered to be impaired loans. Impaired loans are required to be measured
based upon the present value of expected future cash flows, discounted at the
loan's initial effective interest rate, or at the loan's market price or fair
26
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
value of the collateral if the loan is collateral dependent. If the loan
valuation is less than the recorded value of the loan, an impairment reserve
must be established for the difference by either an allocation of the allowance
for loan losses or by a provision for loan losses, depending on the adequacy of
the allowance for loan losses. As of June 30, 1996, there were $170,000 of
nonperforming consumer, single family residential and lease loans that have been
collectively evaluated for impairment. Estimated impairment losses for the loans
are based on various factors including past loss experience, recent economic
conditions, portfolio delinquency rates and the fair value of the underlying
collateral. Impairment loans at June 30, 1996, were $105,000 that had a related
impairment reserve of $16,000. Average impaired loans during the year ended June
30, 1996, were $269,000. During the year, the Company recognized $15,000 of
interest revenue on impaired loans, all of which was recognized using the cash
basis method of income recognition.
Provision for Loan Losses
Provisions for estimated losses on loans are charged to earnings in an amount
that results in an allowance for loan losses sufficient, in management's
judgment, to cover anticipated losses based on management's periodic evaluation
of known and inherent risks in the loan portfolio, past and expected future loss
experience of the Company, current economic conditions, adverse situations which
may affect a specific borrower's ability to repay, the estimated value of any
underlying collateral and other relevant factors.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies can require the Company to adjust the allowance based on
their judgments about information available to them at the time of their
examination.
Real Estate Owned
Real estate owned (properties acquired by foreclosure or voluntarily conveyed by
delinquent borrowers in lieu of foreclosure) are recorded as of the acquisition
date at the lower of cost or fair value less estimated costs to sell as
established by a current appraisal. Costs relating to development and
improvement of the property are capitalized, whereas costs relating to the
holding of such real estate are expensed as incurred. Subsequent to acquisition,
valuations are periodically performed by management; and the carrying value of
the real estate acquired is subsequently adjusted by establishing a valuation
allowance and recording a charge to operations if the carrying value of a
property exceeds its estimated fair value less estimated costs to sell. Gains
and losses from the sale of real estate are recognized upon sale and are based
upon the net carrying value of the related property.
27
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation for financial reporting purposes is computed using the
straight-line method over the estimated useful lives of the related assets of
five to forty years. Accelerated methods are used for income tax purposes.
Interest on Savings Deposits
Interest on savings deposits is accrued and charged to expense monthly and is
paid or credited in accordance with the terms of the respective accounts.
Income Taxes
Deferred taxes are provided for under the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents consists of cash
and due from banks.
Earnings Per Share
Earnings per share (EPS) is computed by dividing net income by the weighted
average number of common shares and common stock equivalents outstanding during
the year. Such shares amounted to 995,480 and 1,035,235 at June 30, 1996 and
1995. Shares outstanding for 1996 and 1995, do not include ESOP shares that were
purchased and unallocated during 1996 and 1995 in accordance with SOP 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." Shares granted but
not yet issued under the Company's stock option plan are considered common stock
equivalents for earnings per share calculations.
For fiscal year ended June 30, 1994, the provisions of Accounting Principles
Board Opinion No. 15, "Earnings Per Share," are not applicable as the Company
converted to the stock form of ownership in June 1994.
28
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
Reclassifications
Certain items previously reported have been reclassified to conform to the
current year's reporting format.
(2) Investment and Mortgage-Backed Securities Available for Sale
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated market value of investment and mortgage-backed securities available
for sale are as follows at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ----------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
U.S. agency securities................... $ 2,532 -- (80) 2,452
Collateralized mortgage obligations...... 500 -- (11) 489
Mortgage-backed securities............... 4,613 68 (15) 4,666
Corporate equity securities.............. 4,174 46 (96) 4,124
------- --- ---- ------
$11,819 114 (202) 11,731
======= === ==== ======
1995
-------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ----------- ----------- ---------
(in thousands)
U.S. agency securities................... $ 1,000 12 -- 1,012
Collateralized mortgage obligations...... 500 -- (17) 483
Mortgage-backed securities............... 6,451 138 (3) 6,586
Corporate equity securities.............. 2,799 45 (94) 2,750
------- --- ----- ------
$10,750 195 (114) 10,831
======= === ==== ======
</TABLE>
29
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
The amortized cost and approximate market value of investment and
mortgage-backed securities available for sale by contractual maturities at June
30, 1996, are shown below. Actual maturities will generally differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1996
-------------------------
Estimated
Amortized market
cost value
--------- -----------
(in thousands)
<S> <C> <C>
After one but within five years......................... $ 1,285 1,247
After five but within ten years......................... 1,247 1,205
------- ------
2,532 2,452
Collateralized mortgage obligations..................... 500 489
Mortgage-backed securities.............................. 4,613 4,666
Corporate equity securities............................. 4,174 4,124
-------- ------
$11,819 11,731
======= ======
</TABLE>
Sale of investment and mortgage-backed securities available for sale during the
years ended June 30, 1996 and 1995, resulted in proceeds of $6,691,000 and
$5,662,000, respectively. Gross realized gains of $17,000 and $60,000 and gross
realized losses of $22,000 and $96,000, respectively, were recorded. There were
no sales of securities during the year ended June 30, 1994.
Accrued income receivable on securities available for sale and held to maturity
was approximately $108,000 and $166,000 at June 30, 1996 and 1995, respectively.
In November 1995, the Financial Accounting Standards Board (FASB) issued "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities, Questions and Answers." This guide permitted a
one-time reassessment of the appropriateness of the classifications of
securities as available for sale or held for investment. On December 31, 1995,
the Company transferred approximately $6.9 million of investment securities with
a market value of $6.8 million from the held to maturity category to the
securities available for sale category. Concurrent with this redesignation, all
but approximately $1.7 million of the securities transferred were sold at a
realized loss of $5,000.
30
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
(3) Investment Securities Held to Maturity
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate market value of investment securities held to maturity were as
follows at June 30, 1995:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ----------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
U.S. agency securities................... $ 2,843 -- (106) 2,737
Obligations of state and political
subdivisions........................... 4,200 11 (50) 4,161
Corporate bonds.......................... 258 -- (22) 236
--
------- ---- -----
$ 7,301 11 (178) 7,134
======= == ==== =====
</TABLE>
31
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
(4) Loans Receivable and Allowance for Loan Losses
Loans receivable at June 30, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------- ------
(in thousands)
<S> <C> <C>
First mortgage loans:
One- to four-family residential........................ $50,587 38,489
Multi-family residential............................... 5,297 530
Nonresidential......................................... 7,641 4,186
Construction........................................... 13,678 11,629
------- ------
77,203 54,834
Commercial leases........................................ 597 525
Consumer loans:
Loans secured by savings accounts...................... 96 78
Home equity and second mortgage........................ 3,187 2,585
Automobile............................................. 8 17
------- ------
3,291 2,680
Less:
Deferred loan origination fees......................... 655 635
Loans in process....................................... 5,224 3,557
Allowance for loan losses.............................. 660 667
------- ------
6,539 4,859
------- ------
$74,552 53,180
======= ======
</TABLE>
The Company's lending efforts have historically focused on one- to four-family
residential and construction real estate loans, primarily in the western
Pennsylvania area. Generally, such loans have been underwritten on the basis of
80% loan to value ratio or mortgage insurance was required. The Company, as with
any lending institution, is subject to the risk that real estate values could
deteriorate in its primary lending area thereby impairing collateral values.
Management believes, however, that real estate values in the Company's primary
lending area are currently stable.
32
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
In the normal course of business, the Company has made loans to directors and
officers. An analysis of aggregate loan activity with related parties is as
follows:
<TABLE>
<CAPTION>
Year ended
June 30, 1996
--------------
(in thousands)
<S> <C>
Loans outstanding at beginning of period:
Loans originated ........................................ $228
Repayments .............................................. 5
Loans outstanding at end of period ........................ 31
----
$202
====
</TABLE>
A summary of the activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
June 30,
---------------------------
1996 1995 1994
----- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year............................... $ 667 700 629
Charge-offs................................................ (227) (43) (9)
Provision charged to operations............................ 220 10 80
----- ---- ---
Balance at end of year..................................... $ 660 667 700
===== === ===
</TABLE>
There were no significant recoveries during any of the periods presented.
Nonaccrual loans totaled $170,000, $334,000 and $565,000 at June 30, 1996, 1995
and 1994, respectively. Interest income that would have been recorded under the
original terms of such loans approximated $23,000, $41,000 and $54,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
Accrued interest receivable at June 30, 1996 and 1995, was approximately
$438,000 and $306,000, respectively.
33
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
(5) Commitments and Contingencies
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit through loans
approved, but not yet funded, and lines of credit. The Company uses the same
credit policy in making commitments and conditional obligations as it does for
on-balance sheet instruments. The Company evaluates each customer's
credit-worthiness on an individual basis, and the amount of collateral is based
upon the credit evaluation. The commitments to extend credit generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. As some of the commitments may not be utilized, or utilized in amounts less
than the total committed, the total commitment amounts do not necessarily
represent future cash requirements. As of June 30, 1996, the Company had
outstanding commitments to originate and fund first mortgage and construction
loans of $3,407,000, of which $407,000 were at variable rates. Unused lines of
credit approximated $7,750,000 at June 30, 1996.
At June 30, 1996 and 1995, the Company had not entered into any derivative
instruments with significant off-balance-sheet risk, such as futures, swaps,
options or similar investments.
The undercapitalized status of the FDIC's Savings Association Insurance Fund has
resulted in the introduction of federal legislation to recapitalize the SAIF
which, if enacted, would require thrifts like Troy Hill Bancorp, Inc. to pay a
one-time charge of seventy-five to eighty cents for every one hundred dollars of
deposits to recapitalize the depleted insurance fund. Based on total deposits of
$49,434,000 at March 31, 1995, this could result in a one-time charge of
approximately $371,000 to $395,000 on a pre-tax basis ($245,000 to $261,000
after tax) to the Company during 1997.
(6) Premises and Equipment
Premises and equipment consist of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
------ -----
(in thousands)
<S> <C> <C>
Buildings and improvements................................. $ 626 566
Furniture, fixtures and equipment.......................... 456 390
Land and land improvements................................. 122 122
------ -----
1,204 1,078
Less accumulated depreciation......................... 551 476
------ -----
$ 653 602
====== =====
</TABLE>
34
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
(7) Savings Deposits
Savings deposits consisted of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
Weighted Weighted
average average
rate Amount rate Amount
-------- ------- -------- -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Deposit accounts:
Passbook accounts..................... 3.03% $12,276 3.05% $12,629
NOW accounts.......................... 1.24 4,201 2.52 3,542
Money market demand deposit........... 2.52 2,359 2.52 2,686
------- -------
Total transaction accounts...... 18,836 18,857
Certificates of deposit:
2.01 to 4.00.......................... 3.93 16 3.73 1,162
4.01 to 6.00.......................... 5.26 25,614 5.18 14,724
6.01 to 8.00.......................... 6.89 9,464 6.68 15,214
8.01 to 10.00......................... 9.00 30 8.90 610
10.01 and over........................ -- -- 10.18 43
------- -------
35,124 31,753
------- -------
Total........................... 4.63% $53,960 4.79% $50,610
======= =======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 totaled approximately $1.9 million and $1.7 million at June 30, 1996
and 1995, respectively.
Noninterest-bearing checking accounts included in NOW and money market accounts
amounted to $715,000 and $134,000 at June 30, 1996 and 1995, respectively.
The scheduled contractual maturities of certificates of deposit are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Within one year............................................ $21,599 18,767
Beyond one year but within two years....................... 8,673 3,350
Beyond two years but within three years.................... 2,880 7,107
Thereafter................................................. 1,972 2,529
------- ------
Total................................................. $35,124 31,753
======= ======
</TABLE>
35
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
June 30,
------------------------------
1996 1995 1994
------ ----- -----
(in thousands)
<S> <C> <C> <C>
Passbook accounts................................ $ 370 416 457
NOW accounts..................................... 70 72 71
Money market..................................... 62 72 87
Certificates of deposit.......................... 1,982 1,342 1,121
------ ----- -----
$2,484 1,902 1,736
====== ===== =====
</TABLE>
(8) Federal Home Loan Bank Stock
The Company is a member of the Federal Home Loan Bank System and, as a member,
maintains an investment in the capital stock of the Federal Home Loan Bank of
Pittsburgh. The investment is based on a predetermined formula and is carried at
cost.
(9) Advances from Federal Home Loan Bank
At June 30, 1996 and 1995, maturities and interest rates of advances from the
Federal Home Loan Bank of Pittsburgh are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- -------------------
Years of Interest Interest
maturity rates Amount rates Amount
--------------------------------- --------- ------- -------- ------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
1996............................ --% $ -- 6.69% $2,750
1997............................ 5.54-5.91 11,500 -- --
1998............................ 5.43-6.15 3,500 6.90 1,000
1999............................ 6.10 2,583 6.85 1,000
2000............................ 6.30 1,000 7.05 1,000
------- ------
$18,583 $5,750
======= ======
</TABLE>
36
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
The Company also has a line of credit of $4.9 million of which $400,000 is
unused with interest on borrowings computed at federal funds rate plus .34%
which matures in fiscal 1997. All borrowings are collateralized by investment
securities and mortgage loans.
(10) Income Taxes
The Company adopted SFAS No. 109 as of July 1, 1993. The cumulative effect of
this change in method on prior periods increased net earnings by $200,000 and is
reported separately in the consolidated statement of earnings for the year ended
June 30, 1994.
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Years ended June 30,
----------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current-federal......................................... $515 522 502
Current-state........................................... 108 107 105
Deferred................................................ (24) (40 ) 4
---- ---- ----
$599 589 611
==== === ===
</TABLE>
In addition to income taxes applicable to income before taxes, the following
income tax benefit (expense) was recorded:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Stockholders' equity for the tax effect of unrealized net
(gain) loss on securities available for sale............ $48 (28)
=== ===
</TABLE>
37
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
A reconciliation of income tax expense computed at the federal statutory rate of
34% and actual income tax expense is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Statutory income tax rate............................ 34.0% 34.0 34.0
State taxes, net of federal benefit.................. 4.2 4.7 4.6
Other, net........................................... (2.7) .4 2.4
---- ---- ----
35.5% 39.1 41.0
==== ==== ====
</TABLE>
The tax effects of temporary differences representing the components of the
Company's net deferred income tax assets at June 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Allowance for loan losses.................................... $240 167
Deferred loan fees........................................... 126 152
Accrued employee benefits.................................... 34 86
Securities available for sale................................ 20 --
---- ----
Total deferred income tax assets........................ 420 405
Securities available for sale................................ -- (28)
Accrued interest receivable.................................. (27) (53)
Depreciation................................................. (34) (36)
---- ----
Total deferred income tax liabilities................... (61) (117)
---- ----
Net deferred income tax assets.......................... $359 288
==== ====
</TABLE>
The Company has not established a valuation allowance as it is management's
belief that it has adequate current taxable income and carrybacks to realize the
net deferred income tax assets.
Under certain provisions of the Internal Revenue code (the Code), qualified
thrift institutions are permitted to deduct from taxable income a provision for
bad debts based on either actual bad debt experience or a percentage of taxable
income before such deduction. The deduction percentage, subject to certain
minimum tax provisions and other limitations, is 8%.
38
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
The Company and its subsidiaries file a consolidated federal income tax return
on a June 30 fiscal year end basis. The Company is permitted under the code to
deduct an annual addition to a reserve for bad debts in determining taxable
income, subject to certain limitations. Bad debt deductions for income tax
purposes are included in taxable income of later years only if the bad debt
reserve is used subsequently for purposes other than to absorb bad debt losses.
Because the Company does not intend to use the reserve for purpose other than to
absorb losses, no deferred income taxes have been provided prior to 1987.
Retained earnings at June 30, 1996, includes approximately $1.8 million
representing such bad debt deductions for which no deferred income taxes have
been provided.
On August 20, 1996, President Clinton signed legislation which will eliminate
the percentage of taxable income bad debt deduction for thrift institutions for
tax years beginning after December 31, 1995. This new legislation also requires
a thrift to generally recapture the excess of its current tax reserves over its
1987 base year reserves. As the Company has previously provided deferred taxes
on this amount, no additional financial statement tax expense should result from
this new legislation.
(11) Employee Benefit Plans
The Company maintains a defined benefit pension plan covering substantially all
of its employees. The Company makes contributions to the plan equal to the
amount that is tax deductible under the Internal Revenue Code. Plan assets
consist primarily of certificates of deposit issued by Troy Hill.
Pension cost for the years ended June 30 is comprised of the following
components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Service cost........................................ $ 29 31 28
Interest cost on projected benefit obligation....... 28 24 20
Return on plan assets............................... (20) (14) (14)
Net amortization and deferral....................... (12) (13) (12)
---- ---- ----
Pension cost........................................ $ 25 28 22
==== === ===
</TABLE>
39
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
The following sets forth the plan's funded status and the amounts recognized in
the Company's consolidated statements of financial condition at June 30, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
----- ----
(in thousands)
<S> <C> <C>
Vested benefit obligation................................... $ 272 205
Nonvested................................................... 1 6
----- ----
Accumulated benefit obligation.............................. 273 211
Future compensation increases............................... 133 150
----- ----
Projected benefit obligation................................ 406 361
Plan assets at fair value................................... (394) (313)
----- ----
Projected benefit obligation in excess of plan assets....... 12 48
Unrecognized net loss....................................... (47) (50)
Unrecognized transition asset............................... 76 81
----- ----
Pension liability recognized in consolidated statement of
financial condition....................................... $ 41 79
===== ====
Actuarial assumptions used in all periods presented were as follows:
Discount rate............................................... 8% 8
Rate of increase in future compensation levels.............. 6 6
Expected return on assets................................... 8 8
</TABLE>
In conjunction with the conversion to the stock form of ownership, the Company
implemented a tax qualified Employee Stock Ownership Plan (ESOP). The ESOP
provides retirement benefits for substantially all full-time employees who have
completed one year of service. The ESOP acquired 89,930 shares of the Company's
common stock at a cost of $944,000, which was financed through a loan with the
Company. The loan obligation of the ESOP is considered deferred compensation
and, accordingly, has been recorded as a reduction of stockholders' equity. The
loan from the Company will be repaid over a ten-year period from contributions
to the ESOP by the Company. The shares acquired by the ESOP are held in a
suspense account and will be released to the ESOP for allocation to the various
plan participants as the loan is reduced. There were 10,576 and 11,096 shares
committed to be released to the ESOP at June 30, 1996 and 1995, respectively.
Unallocated ESOP shares at June 30, 1996, amounted to 68,258 shares with a total
fair value of approximately $921,000.
The Company accounts for the ESOP in accordance with Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." As shares are
committed to be released, the Company reports compensation expense equal to the
current market price of the shares and the shares become outstanding for EPS
computations. Dividends on unallocated ESOP shares are recorded as a reduction
of debt and accrued interest.
40
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
Compensation expense for the ESOP was approximately $150,000 and $123,000 for
the years ended June 30, 1996 and 1995, respectively.
In connection with the conversion to the stock form of ownership, the Company
has adopted a Recognition and Retention Plan and Trust (RRP). The RRP has
acquired 44,965 shares of the Company's common stock. Shares of the common stock
granted to officers and directors generally vest over a five-year period and are
restricted until vested. The Company has granted, under the RRP, 32,597 shares
during the year ended June 30, 1995. No shares were awarded in 1996. The Company
accrues compensation expense for the shares granted over the respective vesting
periods. Compensation expense for the RRP for the years ended June 30, 1996 and
1995, amounted to approximately $80,000 and $56,000, respectively.
The Company has implemented stock option plans for officers, directors and key
employees. A total of 112,412 shares of the Company's common stock has been
reserved for future issuance. Options granted may be incentive or nonqualified,
and such options vest over periods ranging between six months (for options
granted to nonemployee directors) to five years (for employees of the Company)
and expire ten years after issuance. Options to purchase 25,290 shares and
44,963 shares were granted in fiscal 1995 at a price of $11.13 to nonemployee
directors and certain employees, respectively. At June 30, 1996, 34,286 options
were exercisable. No options have been exercised. There were no options granted
in fiscal 1996.
(12) Other Operating Expenses
The components of other operating expenses follows:
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Office supplies and services........................ $ 85 84 78
Legal and professional.............................. 66 168 89
Data processing..................................... 69 62 63
Advertising......................................... 33 45 41
Other............................................... 290 218 179
---- ---- ----
Total.......................................... $563 577 450
===== ==== ====
</TABLE>
41
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
(13) Regulatory Capital
Troy Hill is subject to various regulatory capital requirements administered by
the federal baking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and, possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on Troy
Hill's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Troy Hill must meet specific
capital guidelines that involve quantitative measures of Troy Hill's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. Troy Hill's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Troy Hill to maintain minimum amounts and ratios (set forth in the table
below) of Tangible and Core Capital (as defined in the regulations) to total
assets and of Total Capital (as defined) to risk-weighted assets (as defined).
Management believes, as of June 30, 1996, that Troy Hill meets all capital
adequacy requirements to which it is subject.
As of June 30, 1996, the most recent notification from the Office of Thrift
Supervision (OTS) categorized Troy Hill as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized," Troy Hill must maintain minimum Total Risk-based, Core and
Tangible ratios as set forth in the accompanying table. There are no conditions
or events since that notification that management believes have changed the
institution's category.
Troy Hill's actual capital amounts and ratios are also presented in the table.
There is no deduction from capital for interest rate risk.
<TABLE>
<CAPTION>
To be well
capitalized
under
prompt
For capital corrective
adequacy action
Actual purposes provisions
---------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1996:
Risk-based Capital........... $14,506 24.30% $4,775 8.00% $5,969 10.00%
Core Capital................. 14,010 15.89 2,646 3.00 5,292 6.00
Tangible Capital............. 14,010 15.89 1,322 1.50 4,407 5.00
As of June 30, 1995:
Risked-based Capital......... 14,639 33.79 3,466 8.00 4,333 10.00
Core Capital................. 13,996 19.45 2,159 3.00 4,318 6.00
Tangible Capital............. 13,996 19.45 1,080 1.50 3,560 5.00
</TABLE>
42
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
OTS regulations impose limitations on all capital distributions. The rule
establishes three tiers of institutions. An institution that exceeds all fully
phased-in capital requirements before and after a proposed capital distribution
("Tier 1 Bank"), may after prior notice but without the approval of the OTS,
make capital distribution during a calendar year up to 100 percent of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over fully phased-in
capital requirements) at the beginning of the calendar year. Troy Hill is a Tier
1 Bank and accordingly had available at June 30, 1996, approximately $4.2
million for available distribution. In October 1995, a capital distribution of
$1.0 million was made to the Company by Troy Hill.
(14) Disclosures About Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," (SFAS 107), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated statements of financial condition as of June 30, 1996. SFAS 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. The carrying amounts
reported in the consolidated statements of financial condition approximate fair
value for cash and due from banks.
Investment and mortgage-backed securities available for sale at June 30, 1996,
are carried at market value. Fair values are based on quoted market prices,
dealer quotes and prices obtained from independent pricing services. Refer to
note 2 of the financial statements for the detail on breakdowns by type of
investment products.
The estimated fair value of loans exceeded the net carrying value at June 30,
1996, by approximately $842,000. Loans with comparable characteristics including
collateral and repricing structures were segregated for valuation purposes. Each
loan pool was separately valued utilizing a discounted cash flow analysis.
Projected monthly cash flows were discounted to present value using a market
rate for comparable loans. Characteristics of comparable loans included
remaining term, coupon interest and estimated prepayment speeds. Delinquent
loans were evaluated separately given the impact delinquency has on the
projected future cash flow of the loan and the approximate discount or market
rate.
43
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
The carrying amounts and estimated fair values of deposits at June 30, 1996, are
as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Carrying fair
value value
-------- ---------
<S> <C> <C>
Password accounts....................................... $ 12,276 12,276
NOW accounts............................................ 4,201 4,201
Money market demand deposit(MMDA)....................... 2,359 2,359
Time deposits........................................... 35,124 34,764
-------- ---------
Total deposits..................................... $ 53,960 53,600
======= ========
</TABLE>
The carrying amounts of NOW and MMDA accounts and passbook accounts approximate
their fair values. The fair value estimates above do not include the benefit
that results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market. Fair values for time
deposits are estimated using a discounted cash flow calculation that applies
contractual cost currently being offered in the existing portfolio to current
market rates being offered locally for deposits of similar remaining maturities.
The mark-to-market valuation adjustment for the portfolio consists of the
present value of the difference of these two cash flows, discounted at the
assumed market rate of the corresponding maturity.
The estimated fair value of borrowed funds at June 30, 1996, was $18,594,000
with a carrying amount of $18,583,000. Variable rate advances were estimated to
approximate their carrying amounts. The fixed rate advances were valued by
comparing their contractual cost to the prevailing market cost.
At June 30, 1996, the Company had no off-balance-sheet commitments to purchase
investment securities or mortgage-backed securities.
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. For fixed rate loan commitments fair value also considers the
difference between current levels of interest rates and the committed rates. At
the reporting date, the carrying value and estimated fair value on commitments
to extend credit were not material.
(15) Reorganization and Conversion to Stock Form
During fiscal 1994, Troy Hill Federal Savings and Loan Association's Board of
Directors adopted a plan of conversion (the Plan) whereby the Association would
convert to the stock form of ownership, followed by the issuance of all of the
Association's outstanding stock to a newly formed holding company, Troy Hill
Bancorp, Inc. The conversion was completed on June 24, 1994, and the Company
issued 1,124,125 shares of its common stock. Costs of the common stock offering
of $649,000 were deducted from the offering proceeds.
44
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
At the completion of the conversion to stock form, Troy Hill established a
liquidation account in the amount of retained earnings set forth in the offering
prospectus utilized in the conversion. The liquidation account will be
maintained for the benefit of eligible savings account holders who maintain
deposit accounts in Troy Hill after conversion. In the event of a complete
liquidation (and only in such event), each eligible savings account holder will
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current adjusted balance of deposit accounts held,
before any liquidation distribution may be made with respect to the common
shares. Except for the repurchase of stock and payment of dividends by Troy
Hill, the existence of the liquidation account will not restrict the use or
further application of such retained earnings.
Troy Hill may not declare or pay a cash dividend on, or repurchase any of its
common shares if the effect thereof would cause Troy Hill's stockholders' equity
to be reduced below either the amount required for the liquidation account or
the regulatory capital requirements for insured institutions.
(16) Condensed Financial Information of Troy Hill Bancorp, Inc. (Parent Company
Only)
For 1994, the results of operations and cash flows are for the period of June 24
through June 30.
<TABLE>
<CAPTION>
Balance Sheets
June 30,
--------------------
1996 1995
------- ------
(in thousands)
<S> <C> <C>
Assets
Cash..................................................................... $ 99 104
Investments available for sale........................................... 3,877 2,750
Investment in subsidiary................................................. 14,005 14,080
Other assets............................................................. 255 466
------- ------
Total assets........................................................ $18,236 17,400
======= ======
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities................................... 196 184
Common stock............................................................. 11 11
Additional paid-in capital............................................... 18,547 18,523
Retained earnings........................................................ 1,462 725
Treasury stock, at cost.................................................. (703) (703)
Shares acquired by the recognition and retention plan.................... (463) (543)
Shares acquired by Employee Stock Ownership Plan......................... (756) (850)
Unrealized gain (loss) on available for sale investments................. (58) 53
------- ------
Total stockholders' equity.......................................... 18,040 17,216
------- ------
Total liabilities and stockholders' equity.......................... $18,236 17,400
======= ======
</TABLE>
45
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
Statements of Earnings
<TABLE>
<CAPTION>
For the period ended June
30,
----------------------------
1996 1995 1994
------ ---- ----
(in thousands)
<S> <C> <C> <C>
Interest and dividend income...................................... $ 355 376 4
Dividend from subsidiary.......................................... 235 -- --
Other income...................................................... 2 40 --
------ ---- ----
Total income................................................. 592 416 4
Operating expenses................................................ 188 185 --
------ ---- ----
Income before tax expense and equity in undistributed
net income of subsidiary..................................... 404 231 4
Income tax (benefit) expense...................................... (4) 61 --
------ ---- ----
Income before benefit in undistributed net income
of subsidiary............................................. 408 170 4
Equity in undistributed net income of subsidiary.................. 680 749 16
------ ---- ----
Net earnings................................................. $1,088 919 20
====== ===== =====
</TABLE>
46
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
<TABLE>
<CAPTION>
Statements of Cash Flows
For the period ended June 30,
---------------------------------
1996 1995 1994
------- ------ ------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................ $ 1,088 919 20
Shares committed to be released by ESOP..................... 94 104 --
Net gain on sale of investments............................. (3) (40) --
Decrease (increase) in other assets......................... 87 (447) (4)
Increase in accrued liabilities............................. 12 184 --
Equity in undistributed net income of subsidiary............ (680) (749) (16)
Other....................................................... 65 -- --
------- ------ ------
Net cash used in operating activities.................... 663 (29) --
Cash flows from investing activities:
Purchase of subsidiary stock................................ -- -- (5,296)
Dividend from subsidiary.................................... 765 -- --
Purchase of investment securities........................... (1,252) (3,397) --
Sale of investment securities............................... 128 638 --
------- ------ ------
Net cash used in investing activities.................... $ (359) (2,759) (5,296)
======= ====== ======
Cash flows from financing activities:
Proceeds from issuance of common stock, net................. $ -- -- 9,648
Purchase of shares for recognition and retention plan....... -- (543) --
Purchase of Treasury stock.................................. -- (703) --
Cash dividends paid......................................... (309) (214) --
------- ------ ------
Net cash provided by (used in) financing activities...... (309) (1,460) 9,468
------- ------ ------
Net increase (decrease) in cash............................... (5) (4,248) 4,352
Cash at beginning of period................................... 104 4,352 --
------- ------ ------
Cash at end of period......................................... $ 99 104 4,352
======= ====== ======
</TABLE>
47
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
(17) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1996:
Interest income................................. $1,523 1,621 1,645 1,698
Interest expense................................ 737 804 761 789
------ ----- ----- -----
Net interest income before provision for loan
losses....................................... 786 817 884 909
Provisions for loan losses...................... 30 30 30 130
Noninterest income.............................. 57 32 55 67
Noninterest expense............................. 384 402 437 477
------ ----- ----- -----
Earnings before income taxes.................... 429 417 472 369
Provision for income taxes...................... 167 159 187 86
------ ----- ----- -----
Net earnings................................. $ 262 258 285 283
====== ===== ===== =====
Earnings per share (1)............................ $ .25 .26 .29 .27
====== ====== ===== =====
1995:
Interest income................................. $1,159 1,226 1,339 1,428
Interest expense................................ 449 472 576 658
------ ----- ----- -----
Net interest income before provision for loan
losses....................................... 710 754 763 770
Provisions for loan losses...................... -- -- 10 --
Noninterest income.............................. 53 (33) 25 76
Noninterest expense............................. 370 413 425 392
------ ----- ----- -----
Earnings before income taxes.................... 393 308 353 454
Provision for income taxes...................... 145 137 130 177
------ ----- ----- -----
Net earnings................................. $ 248 169 223 277
====== ===== ===== =====
Earnings per share (1)............................ $ .24 .17 .22 .26
====== ===== ===== =====
</TABLE>
- ---------------
(1) Quarterly earnings per share may vary from annual earnings per share due to
rounding.
48
<PAGE>
TROY HILL BANCORP, INC.
Notes to Consolidated Financial Statements--Continued
(18) Corporate Reorganization
On September 16, 1996, the Company entered into a definitive agreement to be
acquired by PennFirst Bancorp, Inc. ("PennFirst"). Under the agreement,
PennFirst will pay $21.15 in cash and stock for each common share of the
Company. The acquisition is subject to various regulatory and shareholder
approvals and is expected to close in March 1997.
STOCK INFORMATION
The conversion of Troy Hill from the mutual to the stock form of organization
and the concurrent formation of the Company as the parent holding company of
Troy Hill (collectively, the "Conversion") was completed effective June 24,
1994. In connection with the Conversion, the Company issued 1,124,125 shares of
common stock to certain depositors and borrowers of Troy Hill, an employee
benefit plan of the Company and certain members of the general public.
At September 20, 1996, the Company had 1,067,917 shares of common stock
outstanding which were held by approximately 356 stockholders.
The Company's common stock is traded in the over-the-counter market and quoted
on the National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System under the symbol "THBC." The bid and ask quotations for
the common stock on September 20, 1996 were:
Bid Ask
------- -------
$19.75 $20.25
The following table set forth the high and low market prices for the periods
indicated.
<TABLE>
<CAPTION>
Market Price
-------------------
Quarter Ended High Low
------------------------------------------------- ------ ------
<S> <C> <C>
September 30, 1994............................... $11.88 $11.58
December 31, 1994................................ 11.18 11.11
March 31, 1995................................... 11.41 11.16
June 30, 1995.................................... 12.18 11.86
September 30, 1995............................... 13.25 11.50
December 31, 1995................................ 13.50 12.25
March 31, 1996................................... 13.75 13.00
June 30, 1996.................................... 14.00 12.75
</TABLE>
49
<PAGE>
Cash dividends have been reviewed, determined and paid on a quarterly basis. The
Company intends to continue to pay quarterly cash dividends subject to
determination and declaration by the Board of Directors, which will take into
account the Company's financial condition and results of operations, tax
considerations, industry standards, economic conditions and other factors,
including certain regulatory restrictions. The Company has paid cash dividends
on the following dates:
Cash Dividends
Record Date Payment Date Per Share
- -------------------- ------------------ --------------
September 15, 1994 October 14, 1994 $ 0.05
December 15, 1994 January 13, 1995 0.05
March 31, 1995 April 17, 1995 0.05
June 15, 1995 July 14, 1995 0.06
September 30, 1995 October 13, 1995 0.06
December 31, 1995 January 12, 1996 0.10
March 31, 1996 April 12, 1996 0.10
June 30, 1996 July 12, 1996 0.10
50
<PAGE>
DIRECTORS AND OFFICERS
Directors
Harry B. Thaner
Chairman of the Board of the Company and Troy Hill
Ellry N. Davis
President and Chief Executive Officer
of the Company and Troy Hill
Raymond K. Aiken
President and Chief Operating Officer
of Lockhart Chemical Co.
Joseph W. Snyder
Senior Buyer of Equitable Resources, Inc.
Edwin A. Thaner
Owner of E. A. Thaner & Associates
Executive Officers
Harry B. Thaner
Chairman of the Board
Ellry N. Davis
President and Chief Executive Officer
Marilyn Scripko
Vice-President
Lawrence C. Kerr
Treasurer
Nancy H. Kufner
Secretary
51
<PAGE>
OFFICE LOCATIONS
Main Office
1706 Lowrie Street
Pittsburgh, Pennsylvania 15212
Branch Office
11279 Perry Highway
Wexford, Pennsylvania 15090
CORPORATE INFORMATION
Corporate Headquarters
Troy Hill Bancorp, Inc.
1706 Lowrie Street
Pittsburgh, Pennsylvania 15212
(412) 231-8238
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Independent Auditors
KPMG Peat Marwick LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
Special Legal Counsel
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., 12th Floor
Washington, D.C. 20005
Annual Meeting
October 30, 1996, 10:00 a.m.
The Holiday Inn
4859 McKnight Road
Pittsburgh, Pennsylvania
Form 10-K
A copy of the Company's Annual Report
on Form 10-K, as filed with the Securities
and Exchange Commission, is available
without charge to all stockholders of
record by writing to:
Ellry N. Davis
President and Chief Executive Officer
Troy Hill Bancorp, Inc.
1706 Lowrie Street
Pittsburgh, Pennsylvania 15212
52
(GRAPHIC-LOGO) KPMG
Peat Marwick LLP
One Mellon Bank Center Telephone 412 391 9710 Telefax 412 391 8963
Pittsburgh, PA 15219 Telex 7106642199 PMM & CO PGH
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Troy Hill Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-98760) on Form S-8 of Troy Hill Bancorp, Inc. of our report dated August 16,
1996, except as to note 18, which is as of September 16, 1996, relating to the
consolidated statement of financial condition of Troy Hill Bancorp, Inc. and
subsidiary as of June 30, 1996, and the related consolidated statements of
earnings, stockholders' equity and cash flows for the year then ended, which
report appears in the June 30, 1996, annual report on Form 10-K of Troy Hill
Bancorp, Inc.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
October 9, 1996
Grant Thornton (GRAPHIC-LOGO)
GRANT THORNTON LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have issued our reports dated August 11, 1995 accompanying the June
30, 1995 consolidated statement of financial condition of Troy Hill Bancorp,
Inc. and subsidiary and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the two years in the period
ended June 30, 1995 incorporated by reference in the Annual Report of Troy Hill
Bancorp, Inc on Form 10-K for the year ended June 30, 1996. We hereby consent to
the incorporation by reference of said reports in the Registration Statements of
Troy Hill Bancorp, Inc on Form S-8 (File No. 33-98760, effective October 30,
1995)
s/sGrant Thornton LLP
---------------------
Grant Thornton LLP
Chicago, Illinois
October 10, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 2869
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11731
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 75212
<ALLOWANCE> (660)
<TOTAL-ASSETS> 92183
<DEPOSITS> 53960
<SHORT-TERM> 11500
<LIABILITIES-OTHER> 1600
<LONG-TERM> 7083
0
0
<COMMON> 11
<OTHER-SE> 18040
<TOTAL-LIABILITIES-AND-EQUITY> 92183
<INTEREST-LOAN> 5334
<INTEREST-INVEST> 1011
<INTEREST-OTHER> 124
<INTEREST-TOTAL> 6469
<INTEREST-DEPOSIT> 2484
<INTEREST-EXPENSE> 3072
<INTEREST-INCOME-NET> 3397
<LOAN-LOSSES> 220
<SECURITIES-GAINS> (5)
<EXPENSE-OTHER> 215
<INCOME-PRETAX> 1687
<INCOME-PRE-EXTRAORDINARY> 1687
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1088
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 8.12
<LOANS-NON> 170
<LOANS-PAST> 819
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 177
<ALLOWANCE-OPEN> 667
<CHARGE-OFFS> 7
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 660
<ALLOWANCE-DOMESTIC> 660
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Suite 550
Four Station Squar
Pittsburgh, PA 15219-1116
412 232-3100
FAX 412 391-8370
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Grant Thornton (GRAPHIC-LOGO)
GRANT THORNTON LLP Accountants and
Management Consultants
The U.S. Member Firm of
Grant Thornton International
Board of Directors and Stockholders
Troy Hill Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of Troy Hill Bancorp, Inc. and subsidiary as of June 30, 1995 and the
related statements of earnings, stockholders' equity and cash flows for each of
the two years in the period ended June 30, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Troy
Hill Bancorp, Inc. and subsidiary as of June 30, 1995 and the consolidated
results of their operations and cash flows for each of the two years in the
period ended June 30, 1995, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the
Company changed its method of accounting for investment securities in 1995 and
income taxes in 1994.
s/sGrant Thornton LLP
---------------------
Grant Thornton LLP
Pittsburgh, Pennsylvania
August 11, 1995
