<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to
Commission File Number: 0-24350
TROY HILL BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 25-0844150
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1706 Lowrie Street
Pittsburgh, Pennsylvania 15212
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(Address of pricipal executive offices, including zip code)
(412) 231-8238
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Issuer's Telephone number,
including area code
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
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SHARES OUTSTANDING AS OF FEBRUARY 6, 1997: 1,067,917 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE.
Transitional Small Business Disclosure Format (check one): Yes__ No x
---
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TROY HILL BANCORP, INC.
INDEX
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Part I. Financial Information Page
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Item 1. Financial Statements
Consolidated Statements of Financial 1
Condition as of December 31, 1996
(Unaudited) and June 30, 1996
Consolidated Statements of
Earnings for the Three and Six Months
Ended December 31, 1996 and 1995
(Unaudited) 2
Consolidated Statements of Cash Flows
for the Three and Six Months ended
December 31, 1996 and 1995 (Unaudited) 3
Consolidated Statement of
Stockholders' Equity for the
Six Months ended December 31,
1996 (Unaudited) 5
Notes to Unaudited Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations for the Three and Six Months
Ended December 31, 1996 and 1995. 8
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Part II. Other Information Page
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Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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TROY HILL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
1996 1996
(Dollars in Thousands)
ASSETS: (Unaudited)
------------ ---------
Cash and due from banks $ 2,012 $ 2,869
Investments and mortgage-backed
securities-available for sale 9,066 11,731
Loans receivable 87,999 74,552
Office properties and equipment - net of
accumulated depreciation 618 653
Federal Home Loan Bank stock - at cost 1,448 929
Real estate owned 487 462
Accrued interest receivable 631 546
Deferred income tax benefits 333 359
Other 34 82
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Total assets $ 102,628 $ 92,183
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LIABILITIES
Deposit accounts $ 53,253 $ 53,960
Advances from Federal Home Loan Bank 28,950 18,583
Advances by borrowers for taxes and insurance 1,279 1,185
Accrued expenses and other liabilities 680 415
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Total liabilities 84,162 74,143
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STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized and unissued -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 1,124,125 shares issued 11 11
Additional paid-in-capital 10,645 10,614
Retained earnings 9,556 9,395
Treasury stock- at cost, 56,208 shares at
June 30, 1996 and December 31, 1996 (703) (703)
Shares acquired by Recognition and Retention Plan (328) (463)
Unearned ESOP shares (708) (756)
Unrealized loss on investments and mortgage-
backed securities available for sale (7) (58)
Total stockholders' equity 18,466 18,040
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Total liabilities and stockholders' equity $ 102,628 $ 92,183
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1
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Troy Hill Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
(In thousands, (In thousands,
except for per share data) except for per share data)
(Unaudited) (Unaudited)
----------------------------------------- ----------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $1,843 $1,306 $3,543 $2,532
Investment securities
Taxable 119 132 214 237
Exempt from federal
income taxes -- 33 -- 77
Mortgage-backed securities 32 116 121 232
Interest-bearing deposits
and other 51 34 71 67
------ ------ ------ ------
Total interest
income 2,045 1,621 3,949 3,145
Interest expense:
Interest on deposit
accounts 625 639 1,239 1,254
Interest on advances and
other borrowings 421 165 743 288
------ ------ ------ ------
Total interest
expense 1,046 804 1,982 1,542
------ ------ ------ ------
Net interest income 999 817 1,967 1,603
Provision for loan and
lease losses 30 30 60 60
------ ------ ------ ------
Net interest income after
provision for loan and
lease losses 969 787 1,907 1,543
Noninterest income:
Loan fees and service
charges 15 7 35 22
Gain on sales of loans 12 27 30 59
Gain (loss) on sales of
investments and mortgage-
backed securities
available for sale -- (11) 6 (11)
Other 40 9 55 19
------ ------ ------ -------
Total noninterest
income 67 32 126 89
Noninterest expense:
Salaries and employee
benefits 314 211 528 420
Net occupancy expense 39 41 81 74
Federal deposit insurance 31 29 55 57
SAIF assessment -- -- 326 --
Other operating 174 121 482 235
------ ------ ------ --------
Total noninterest
expense 558 402 1,472 786
------ ------ ------ --------
Earnings before income taxes 478 417 561 846
Income taxes 170 159 201 326
------ ------ ------ --------
NET EARNINGS $ 308 $ 258 $ 360 $ 520
------ ------ ------ --------
------ ------ ------ --------
Earnings and dividends per share:
Net earnings per share $ 0.31 $ 0.26 $ 0.36 $ 0.52
------ ------ ------ ---------
------ ------ ------ ---------
Cash dividends declared
per share $ 0.10 $ 0.10 $ 0.20 $ 0.16
------ ------ ------ ---------
------ ------ ------ ---------
</TABLE>
2
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Troy Hill Bancorp, Inc.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Six months ended
December 31,
(Dollars in thousands)
(Unaudited)
----------------------
1996 1995
---- ----
Cash flows from operating activities:
Net earnings $ 360 $ 520
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan and lease losses 60 60
Origination of loans for sale (1,216) (4,803)
Proceeds from sale of loans 1,121 4,766
Depreciation 37 33
Amortization of deferred loan origination
fees and accretion of discounts (61) (46)
Increase in accrued interest
receivable (85) (33)
Increase in accrued income taxes and other
liabilities 373 345
Other 95 (92)
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Net cash provided by
operating activities 684 750
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Cash flows from investing activities:
Purchases of investment securities -- --
Purchases of mortgage-backed securities -- (1,500)
Sale of investment and mortgage-backed securities
available for sale 2,557 5,350
Principal repayments of mortgage-backed
securities 213 518
Net increase in loans (13,345) (8,702)
Purchases of office properties and equipment (2) (5)
Purchase of Federal Home Loan Bank Stock (519) (56)
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Net cash provided by
investing activities (11,096) (4,395)
-------- -------
(continued)
3
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Troy Hill Bancorp, Inc.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Cash flows from financing activities:
Net increase (decrease) in deposit accounts (707) 3,768
Net increase in advances from Federal Home Loan
Bank 10,367 833
Net decrease in advances by borrowers for
taxes and insurance 94 (7)
Dividends (199) (154)
-------- -------
Net cash provided by
financing activities 9,555 4,440
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Net increase in cash (857) 795
Cash and cash equivalents at beginning of period 2,869 1,469
-------- -------
Cash and cash equivalents at end of period $ 2,012 $ 2,264
-------- -------
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 1,239 $ 1,254
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Income taxes $ 151 $ 118
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-------- -------
Non-cash investing transactions:
Transfers from loans to real estate acquired
through foreclosure $ 47 $ 34
-------- -------
-------- -------
4
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Troy Hill Bancorp, Inc.
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized Gain on
Shares acquired Investment and Shares acquired
Additional by Employee Mortgage-backed by Recognition Total
Common Treasury Paid In Stock Ownership Retained securities available and Retention Stockholders'
(Dollars in thousands) Stock Stock Capital Plan Earnings for sale Plan Equity
- ---------------------- ------ -------- ---------- --------------- -------- -------------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
30, 1996 $ 11 $ (703) $ 10,614 $ (756) $ 9,395 $ (58) $ (463) $ 18,040
Purchase of
Treasury Stock -- -- -- -- -- -- --
Amortization of
Recognition and
Retention Plan awards -- -- -- -- -- -- 135 135
Accrual for Employee Stock
Ownership Plan (ESOP) -- 31 48 -- -- -- 79
Cash dividends declared on
Common Stock at $.20 per
share -- -- -- (199) -- -- (199)
Increase in unrealized
gain on securities
available for sale -- -- -- -- 51 -- 51
Net income -- -- -- 360 -- -- 360
---- ------ -------- ---------- -------- --------- -------- ---------
Balance at
December 31, 1996 $ 11 $ (703) $ 10,645 $ (708) $ 9,556 $ (7) $ (328) $ 18,466
---- ------ -------- ---------- -------- --------- -------- ---------
---- ------ -------- ---------- -------- --------- -------- ---------
5
</TABLE>
<PAGE>
TROY HILL BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do
not include information or footnotes necessary for a complete presentation of
financial condition, results of operations, cash flows and changes in
stockholders' equity in conformity with generally accepted accounting
principles. However, all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation have been included. The results of operations for the three and
six months ended December 31, 1996 are not necessarily indicative of the
results which may be expected for the entire fiscal year or any other interim
period.
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
will be held for the purpose of approving the Merger on March 18, 1997 and
March 17, 1997, respectively.
Earnings per share
Earnings per share for the three and six months ended December 31,1996 have
been calculated based on the weighted average number of common and common
equivalent shares outstanding (987,291 shares and 980,067 shares
respectively), and for the three and six months ended December 31, 1995
(990,163 and 992,765 shares respectively), during the period.
6
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Recent Accounting and Legislative Developments
In October 1995, the Financial Accounting Standards Board ("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.
On November 14, 1995, the Federal Deposit Insurance Corporation ("FDIC")
approved a final rule regarding deposit insurance premiums. The final rule
reduced deposit insurance premiums for Bank Insurance Fund ("BIF") member
institutions from 23 to 0 basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for Savings Association Insurance Fund ("SAIF") members at their
current levels (23 basis points for institutions in the lowest risk
category). 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. 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
7
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charter. Effective October 8, 1996, FDIC regulations imposed a one-time
special assessment equal to 65.7 basis points for all SAIF-assessable
deposits as of March 31, 1995, which was collected on November 27, 1996. Troy
Hill's one-time special assessment amounted to $326,000. Net of related tax
benefits, the one-time special assessment amounted to $214,000.
On October 16, 1996, the FDIC proposed to lower assessment rates for SAIF
members to reduce the disparity in the assessment rates paid by BIF and SAIF
members. Beginning October 1, 1996, effective SAIF rates range from zero
basis points to 27 basis points. From 1997 through 1999, SAiF members will
pay 6.4 basis points to fund the Financing Corporation while BIF member
institutions will pay approximately 1.3 basis points. Troy Hill's insurance
premiums, which have amounted to 23 basis points will be reduced to 6.4 basis
points. Based upon the $53.2 million of assessable deposits at December 31,
1996, Troy Hill would expect to pay $22,600 less in insurance premiums per
quarter during 1997.
TROY HILL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THREE AND SIX MONTHS ENDED DECEMBER 31, 1996
General
On June 24, 1994, Troy Hill Federal Savings and Loan Association successfully
completed its conversion from a federally chartered, mutual savings and loan
association to a federally chartered stock savings bank known as Troy Hill
Federal Savings Bank (the "Savings Bank") and the concurrent formation of
Troy Hill Bancorp, Inc. (the "Company" or "Troy Hill"), the parent holding
company of the Savings Bank. The operating results of the Company depend
primarily upon its net interest income, which is determined by the difference
between interest and dividend income on interest-earning assets, principally
loans, mortgage-backed securities and investment securities, and interest
expense on interest-bearing liabilities, which principally consist of
deposits and borrowings. The Company's net income also is affected by its
provision for loan and lease losses, as well as the level of its noninterest
income, including loan fees and service charges, gain on sale of loans, and
other income, and its noninterest expenses, such as salaries and employee
benefits, net occupancy expense, federal deposit insurance and miscellaneous
other expenses, and income taxes.
In general, financial institutions are vulnerable to an increase in interest
rates to the extent that interest-bearing liabilities mature or reprice more
rapidly than interest-earning assets. The lending activities of financial
institutions, including the Savings Bank, have historically emphasized the
origination of long-term, fixed-rate loans
8
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secured by single-family residences, and the primary source of funds of such
institutions has been deposits, which largely mature or are subject to
repricing within a short period of time. This has historically caused the
income earned by Troy Hill on its loan portfolio to adjust more slowly to
changes in interest rates than its cost of funds. While having liabilities
that reprice more frequently than assets is generally beneficial to net
interest income in times of declining interest rates, such an asset/liability
mismatch is generally detrimental during periods of rising interest rates.
To reduce the effect of adverse changes in interest rates on its operations,
the Company has implemented the asset and liability management policies
described below.
Asset and Liability Management
Troy Hill maintains a program designed to monitor its exposure to material
and prolonged increases in interest rates. The principal determinant of the
exposure of the Company's earnings to interest rate risk is the timing
difference between the repricing or maturity of the Company's
interest-earning assets and the repricing or maturity of its interest-bearing
liabilities. The Company's Board of Directors establishes and monitors the
Company's asset and liability management policies.
The Company has adopted a strategy designed to improve the interest rate
sensitivity of its assets relative to its liabilities. The primary elements
of this strategy include: (i) maintaining a high level of liquid assets that
can be reinvested in higher yielding investments should interest rates rise;
(ii) emphasizing investments in (A) shorter-term (15 years or less),
fixed-rate single-family residential loans and (B) residential construction
loans, which generally have adjustable or floating interest rates and/or
shorter maturities than traditional single-family residential loans; (iii) to
the extent market conditions permit, increasing the origination of
adjustable-rate single-family residential loans ("ARMs"), (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 December 31, 1996, the implementation of the asset and liability
initiatives resulted in the following: (i) $16.8 million or 19.0% of the
Company's total loan portfolio had adjustable interest rates or maturities of
less than 12 months; (ii) $1.1 million or 48.5% of the Company's
mortgage-backed securities were secured by ARMs; and (iii) $5.5 million or
82.1% of the Company's investment securities portfolio had scheduled
maturities of five years or less.
9
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RESULTS OF OPERATIONS
General
The Company reported net earnings of $308,000 and $258,000 during the three
months ended December 31, 1996 and 1995, and $360,000 and $520,000 during the
six months ended December 31, 1996 and 1995, respectively. The $50,000 or
19.4% increase in net earnings for the three months ended December 31, 1996,
as compared to the same period in the prior year, is primarily due to a
$182,000 increase in net interest income and a $35,000 increase in total
noninterest income, which were partially offset by a $156,000 increase in
total noninterest expense and an $11,000 increase in income taxes. The
$160,000 or 30.8% decrease in net earnings for the six months ended December
31, 1996, as compared to the same period in the prior year, is primarily the
result of the $686,000 increase in total noninterest expense, which includes
the special one-time assessment to recapitalize the SAIF of $326,000 (before
taxes) and a $440,000 increase in total interest expense which were partially
offset by an $804,000 increase in total interest income, a $37,000 increase
in total noninterest income and a $125,000 decrease in income taxes. If not
for this one-time assessment, net earnings for the six months ended December
31, 1996 would have been $574,000, or a 10.4% increase over the 1995 period.
Net Interest Income
Net interest income is determined by the Company's interest rate spread
(i.e., the difference between the yields earned on its interest-earning
assets and the rates paid on its interest-bearing liabilities) and the
relative amounts of interest-earning assets and interest-bearing liabilities.
The Company's net interest income increased by $182,000 or 22.3% and $364,000
or 22.7% during the three and six months ended December 31, 1996 when
compared to the respective periods in 1995.
Interest Income
Interest on loans increased by $537,000 or 41.1% and $1.0 million or 40.0%
for the three and six months ended December 31, 1996, when compared with the
same periods in 1995. The increase in interest on loans was due primarily to
an increase in the average balance of loans receivable for the three and six
months ended December 31, 1996 when compared to the same periods in 1995.
Interest and dividends on investment securities and other interest-earning
assets (consisting primarily of U.S. Government and agency obligations,
corporate obligations, interest-bearing deposits and FHLB of Pittsburgh
stock) decreased by $29,000 or 14.6% and $96,000 or 25.2% during the three
and six months ended December 31,
10
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1996 when compared with the same periods in 1995. The decrease was the
result of the sale of U.S. Government and agency obligations to fund newly
originated loans.
Interest on mortgage-backed securities decreased $84,000 or 72.4% and
$111,000 or 47.8% during the three and six months ended December 31, 1996,
respectively when compared with the same periods in 1995. The decrease during
the three month period was due primarily to a decrease of $4.2 million in the
average balance of mortgage-backed securities outstanding for the three
months ended December 31, 1996 when compared to the same period in 1995. The
decrease during the six month period was due to a decrease of $3.3 million in
the average balance of mortgage-backed securities outstanding for the six
months ended December 31, 1996 when compared to the same period in 1995. The
decrease was the result of the sale of mortgage-backed securities to fund
newly originated loans.
Interest Expense
Interest expense on deposits, the largest component of the Company's
interest-bearing liabilities, decreased by $14,000 or 2.2% and $15,000 or
1.2% for the three and six months ended December 31, 1996 when compared to
the same periods in 1995. The decreases were due primarily to decreases of
$453,000 and $991,000 in the average balance of deposits outstanding for the
three and six months ended December 31, 1996 when compared to the same
periods in 1995.
Interest on borrowings (consisting of advances from the FHLB of Pittsburgh)
increased $256,000 or 155.2% and $455,000 or 158.0% during the three and six
months ended December 31, 1996, when compared with the same periods in 1995.
The increases were due to an increase in the average balance of such
borrowings of $18.4 million and $16.7 milllion during the three and six
months ended December 31, 1996 as compared to the same periods in 1995. The
Savings Bank reinvested these additional advances from the Federal Home Loan
Bank of Pittsburgh into permanent and construction loans secured by
single-family residences.
Provision for Loan and Lease Losses
Provisions for loan and lease losses are charged to earnings to bring the
total allowance to a level considered appropriate by management based on
historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as they relate to the Savings Bank's market
area, and other factors related to the collectibility of the Savings Bank's
loan portfolio.
The Savings Bank's provisions for loan and lease losses during the three and
six month periods ended December 31, 1996 when compared to the same periods
in 1995 remained constant. The Company's total allowance for loan and lease
losses amounted
11
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to .82% of the Company's total loan portfolio at December 31, 1996, as
compared with 1.10% at December 31, 1995. As of December 31, 1996, the
Company's total allowance for loan and lease losses amounted to 53.3% of
total nonperforming loans as compared to 34.9% as of December 31, 1995.
Noninterest Income
The Company's noninterest income increased by $35,000 and $37,000 during the
three and six months ended December 31, 1996, when compared with the same
periods in 1995. The increases were primarily due to profits on the sale of
real estate owned and rental income on real estate owned.
Noninterest Expense
Noninterest expense increased by $156,000 or 38.8% and $686,000 or 87.3%
during the three and six months ended December 31, 1996 when compared with
the same periods in 1995. The increase during the three month period ended
was primarily due to a $103,000 increase in salaries and employee benefits
and a $32,000 increase in expenses incurred with respect to the merger with
PennFirst Bancorp, Inc. The increase during the six month period ended was
primarily due to a $108,000 increase in salaries and employee benefits, a
$326,000 one-time SAIF assessment and a $157,000 increase in expenses
incurred with respect to the merger with PennFirst Bancorp, Inc.
Income Taxes
The Company recognized $170,000 in income tax expense which reflected an
effective rate of 35.6% for the three months ended December 31, 1996, as
compared to $159,000 with an effective tax rate of 38.1% for the comparable
1995 period. The Company recognized $201,000 in income tax expense which
reflected an effective tax rate of 35.8% for the six months ended December
31, 1996, as compared to $326,000 with an effective tax rate of 38.5% for the
same period in 1995.
Liquidity and Capital Resources
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, borrowings, amortization, prepayment
and maturities of outstanding loans and mortgage-backed securities, sales of
loans, maturities of investment securities and other short-term investments
and funds provided from operations. While scheduled loan and mortgage-backed
securities amortization and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and
loan and mortgage-backed securities prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Company
manages
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the pricing of its deposits to maintain a steady deposit balance. In
addition, the Company invests excess funds in overnight deposits and other
short-term interest-earning assets which provides liquidity to meet lending
requirements. The Company has been able to generate enough cash through the
retail deposit market, its traditional funding source, to offset the cash
utilized in investing activities. In addition, the Company may, to the extent
deemed necessary, utilize borrowings for liquidity (primarily consisting of
advances from the FHLB of Pittsburgh). At December 31, 1996, the Company had
$29.0 million of outstanding advances from the FHLB of Pittsburgh. The
increased borrowings were used to fund newly originated loans.
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 December 31, 1996, the total approved loan commitments outstanding
amounted to $471,000. At the same date, commitments under unused lines of
credit amounted to $4.0 million and the unadvanced portion of construction
loans approximated $5.0 million. Certificates of deposit scheduled to mature
in one year or less at December 31, 1996 totaled $18.2 million. Management
believes that a significant portion of maturing deposits will remain with the
Savings Bank.
The Company's total consolidated assets were $102.6 million at December 31,
1996, an increase of $10.4 million or 11.3% over total consolidated assets
at June 30, 1996.
Total consolidated stockholders' equity was $18.5 million at December 31,
1996, an increase of $426,000 or 2.4% over total consolidated stockholders'
equity at June 30, 1996.
Federally insured savings institutions are required to maintain minimum
levels of regulatory capital. Pursuant to the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), the Office of Thrift
Supervision ("OTS") has established capital standards applicable to all
savings institutions. These standards generally must be as stringent as the
comparable capital requirements imposed on national banks. The OTS also is
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
Savings institutions must satisfy three different OTS capital requirements.
Under these standards, savings institutions must maintain "tangible" capital
equal to at least 1.5% of adjusted total assets, "core" capital equal to at
least 3% of adjusted total assets and "total" capital (a combination of core
and "supplementary" capital) equal to at least 8%
13
<PAGE>
of "risk-weighted" assets. For purposes of the regulation, core capital is
defined as common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority
interest in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and qualifying supervisory
goodwill. Core capital is generally reduced by the amount of savings
institutions intangible assets, although limited exceptions to the deduction
of intangible assets are provided for purchased mortgage servicing rights,
qualifying supervisory goodwill and certain other intangibles, all of which
are currently not relevant to the calculation of the Savings Bank's
regulatory capital. Tangible capital is core capital less all intangible
assets, with a limited exception for purchased mortgage servicing rights. The
following table sets forth the Savings Bank's compliance with each of the
above described regulatory capital requirements at December 31, 1996.
14
<PAGE>
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
(Dollars in Thousands)
Regulatory
capital $14,639 $14,639 $15,149
Minimum
required
regulatory
capital 1,480 2,959 4,897
------- ------- -------
Excess
regulatory
capital $13,159 $11,680 $10,252
------- ------- -------
------- ------- -------
Regulatory
capital as
a percentage
of assets(1) 14.84% 14.84% 24.75%
Minimum capital
required as a
percentage 1.50% 3.00% 8.00%
------- ------ ------
Excess regulatory
capital as a
percentage in
excess of
requirement 13.34% 11.84% 16.75%
------- ------ -------
------- ------ -------
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $98.6 million. Risk-based capital is computed as a percentage
of total risk-weighted assets of $61.2 million.
Impact of Inflation and Changing Prices
The financial statements of the Company and related notes presented herein
have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of
15
<PAGE>
historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to
a larger extent than interest rates. In the current interest rate
environment, liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
16
<PAGE>
PART II--OTHER INFORMATION
___________________________
ITEM 1. Legal Proceedings
The Company is involved only in routine legal proceedings
occurring in the ordinary course of business which in the
aggregate are believed by management to be immaterial to the
financial condition of the Company.
ITEM 2. Changes in Securities
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibit 27: Financial Data Schedule
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TROY HILL BANCORP, INC.
February 7, 1997 By: /s/ Ellry N. Davis
---------------------------
Ellry N. Davis
President and Chief Executive
Officer
February 7, 1997 By: /s/ Lawrence C. Kerr
----------------------------
Lawrence C. Kerr
Treasurer
18
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<PAGE>
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<NAME> TROY HILL BANCORP, INC.
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