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 SEPTEMBER 30, 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.
-----------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-0844150
--------------- ------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
1706 LOWRIE STREET
PITTSBURGH, PENNSYLVANIA 15212
------------------------------
(ADDRESS OF PRICIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(412) 231-8238
--------------
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
--- ---
SHARES OUTSTANDING AS OF NOVEMBER 6, 1996: 1,067,917 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES NO X
--- ---
TROY HILL BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL 1
CONDITION AS OF SEPTEMBER 30, 1996
(UNAUDITED) AND JUNE 30, 1996
CONSOLIDATED STATEMENTS OF
EARNINGS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED) 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1996 AND 1995 (UNAUDITED) 3
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY FOR THE
THREE MONTHS ENDED SEPTEMBER 30,
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 MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995. 8
PART II. OTHER INFORMATION Page
- ------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
TROY HILL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, June 30,
1996 1996
(Dollars in Thousands)
(Unaudited)
------------ ---------
ASSETS:
Cash and due from banks $ 3,057 $ 2,869
Investment and mortgage-backed securities-available for sale 9,003 11,731
Loans receivable 83,882 74,552
Office properties and equipment - at depreciated
cost 634 653
Federal Home Loan Bank stock - at cost 1,348 929
Real estate owned 483 462
Accrued interest receivable 623 546
Deferred income tax benefits 366 359
Other 74 82
------- -------
Total assets $99,470 $92,183
------- -------
------- -------
LIABILITIES
Deposit accounts $52,655 $53,960
Advances from Federal Home Loan Bank 26,950 18,583
Advances by borrowers for taxes and insurance 742 1,185
Accrued expenses and other liabilities 1,110 415
------- -------
Total liabilities 81,457 74,143
------- -------
------- -------
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 10,624 10,614
Retained earnings 9,348 9,395
Treasury stock- at cost, 56,208 shares at June 30, 1996
and September 30, 1996 (703) (703)
Shares acquired by Recognition and Retention Plan (463) (463)
Unearned ESOP shares (732) (756)
Unrealized loss on investment and mortgage-
backed securities available for sale (72) (58)
------- -------
TOTAL STOCKHOLDERS' EQUITY 18,013 18,040
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $99,470 $92,183
------- -------
------- -------
1
TROY HILL BANCORP, INC.
CONSOLIDATED STATEMENT OF EARNINGS
Three months ended
September 30,
(In thousands, except for per share data)
(Unaudited)
----------------------------------------
1996 1995
------- -------
Interest income:
Loans $1,700 $1,226
Investment securities
Taxable 95 105
Exempt from federal income taxes -- 43
Mortgage-backed securities 89 116
Interest-bearing deposits and other 20 33
------- -------
Total interest income 1,904 1,523
Interest expense:
Interest on deposit accounts 614 615
Interest on advances and other borrowings 322 123
------- -------
Total interest expense 936 738
------- -------
Net interest income 968 785
Provision for loan and lease losses 30 30
------- -------
Net interest income after provision for
loan and lease losses 938 755
Noninterest income:
Loan fees and service charges 20 15
Gain on sales of loans 18 32
Gain on sales of investments and
Mortgage-backed securities available for sale 6 --
Other 15 10
------- -------
Total noninterest income 59 57
Noninterest expense:
Salaries and employee benefits 214 209
Net occupancy expense 42 33
Federal deposit insurance 24 28
SAIF assessment 326 --
Other operating 308 114
------- -------
Total noninterest expense 914 384
------- -------
Earnings before income taxes 83 429
Income taxes 31 167
------- -------
NET EARNINGS $ 52 $ 262
------- -------
------- -------
Earnings and dividends per share:
Net earnings per share $ 0.05 $ 0.25
------- -------
------- -------
Cash dividends declared per share $ 0.10 $ 0.06
------- -------
------- -------
2
TROY HILL BANCORP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Three months ended
September 30,
(Dollars in thousands)
(Unaudited)
----------------------
1996 1995
------ ------
Cash flows from operating activities:
Net earnings $ 52 $ 262
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan and lease losses 30 30
Origination of loans for sale -- (2,719)
Proceeds from sale of loans -- 2,712
Depreciation 21 16
Amortization of deferred loan origination
fees and accretion of discounts (25) (21)
Deferred income tax benefit (7) 1
Increase in accrued interest
receivable (77) (30)
Loss (gain) on sale of investment and
mortgage-backed securities available for sale (6) --
Other 8 283
Increase in accrued income taxes and other liabilities 695 114
------ ------
Net cash provided by
operating activities 691 648
------ ------
Cash flows from investing activities:
Purchases of investment securities -- --
Purchases of mortgage-backed securities -- --
Sale of investment and mortgage-backed securities
available for sale 2,548 749
Principal repayments of mortgage-backed securities 179 327
Net increase in loans (9,329) (5,388)
Purchases of office properties and equipment (2) (1)
Purchase of Federal Home Loan Bank Stock (419) (331)
------ ------
Net cash provided by
investing activities (7,023) (4,644)
------ ------
(continued)
3
TROY HILL BANCORP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Cash flows from financing activities:
Net increase in deposit accounts (1,305) 1,136
Net increase in advances from Federal Home Loan Bank 8,367 6,583
Net decrease in advances by borrowers for taxes and
insurance (443) (396)
Dividends declared (99) (57)
------ ------
Net cash provided by
financing activities 6,520 7,266
------ ------
Net increase in cash 188 3,270
Cash and cash equivalents at beginning of period 2,869 1,469
------ ------
Cash and cash equivalents at end of period $ 3,057 $ 4,739
------ ------
------ ------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 614 $ 615
------ ------
------ ------
Income taxes $ 35 $ 63
------ ------
------ ------
Non-cash investing transactions:
Transfers from loans to real estate acquired
through foreclosure $ -- $ 335
------ ------
------ ------
Unrealized loss on investment securities 90 --
Unrealized gain on mortgage-backed securities (21) (112)
Deferred income taxes 3 38
------ ------
Net unrealized (gain) loss on investment and
mortgage-backed securities $ 72 $ (74)
------ ------
------ ------
4
TROY HILL BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Shares acquired
Additional by Employee
Common Treasury Paid In Stock Ownership Retained
(Dollars in thousands) Stock Stock Capital Plan Earnings
- ----------------------------------------------------------------------------------------------------
Balance at June 30, 1996 $11 (703) $10,614 ($756) $9,395
Purchase of Treasury Stock -- -- -- --
Purchases of stock for
Recognition and Retention Plan -- -- -- --
Accrual for Employee Stock
Ownership Plan (ESOP) -- 10 24 --
Cash dividends declared on
Common Stock at $.26 per
share -- -- -- (99)
Increase in unrealized gain on
securities available for sale -- -- -- --
Net income -- -- -- 52
- ----------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $11 $(703) $10,624 $(732) $ 9,348
-----------------------------------------------------------------
-----------------------------------------------------------------
Unrealized Gain on
Investment and Shares acquired
Mortgage-backed by Recognition Total
securities available and Retention Stockholders'
(Dollars in thousands) for sale Plan Equity
- --------------------------------------------------------------------------------------------
Balance at June 30, 1996 ($58) ($463) $18,040
Purchase of Treasury Stock -- -- --
Purchases of stock for
Recognition and Retention Plan -- -- --
Accrual for Employee Stock
Ownership Plan (ESOP) -- -- 34
Cash dividends declared on
Common Stock at $.26 per
share -- -- (99)
Increase in unrealized gain on
securities available for sale (14) -- (14)
Net income -- -- 52
- ------------------------------------------------------------------------------------------
Balance at September 30, 1996 $(72) $(463) $18,013
-------------------------------------------------
-------------------------------------------------
5
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
months ended September 30, 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 the 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.
EARNINGS PER SHARE
- ------------------
Earnings per share for the three months ended September 30,1996 and September
30, 1995 have been calculated based on the weighted average number of common and
common equivalent shares outstanding (1,005,655 shares and 1,031,528 shares
respectively), during the period.
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
6
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).
The reduction was effective with respect to the January 1, 1996 premium
assessment. 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. It is 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 re-capitalization of the SAIF, premiums paid by SAIF-insured institutions
will be reduced to approximately $.064 per $100 of deposits for 1997
through 1999. The legislation also
7
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 as of November
27, 1996 the one-time special assessment, which is estimated to amount to
$326,000 or $214,000, net of related tax benefits, based upon its total SAIF
deposits as of March 31, 1995. 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. Based upon the $52.7 million of assessable deposits at
September 30, 1996, Troy Hill would expect to pay approximately $22,000 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 MONTHS ENDED SEPTEMBER 30, 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 secured by single-family residences,
and the primary source of funds of such
8
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 September 30, 1996, the implementation of the asset and liability
initiatives resulted in the following: (i) $18.6 million or 22.2% of the
Company's total loan portfolio had adjustable interest rates or maturities of
less than 12 months; (ii) $1.2 million or 48.6% of the Company's
mortgage-backed securities were secured by ARMs; and (iii) $5.1 million or 81.0%
of the Company's investment securities portfolio had scheduled maturities of
five years or less.
9
RESULTS OF OPERATIONS
GENERAL
- -------
The Company reported net earnings of $52,000 and $262,000 during the three
months ended September 30, 1996 and 1995, respectively. The $210,000 or
80.2% decrease in net earnings for the three months ended September 30, 1996,
as compared to the same period in the prior year, is primarily due to the
$530,000 increase in noninterest expense which is primarily attributable to
the $326,000 special one-time SAIF assessment and a $198,000 increase in
interest expense, which were partially offset by a $381,000 increase in total
interest income and a $136,000 decrease in income taxes. If not for this
one-time assessment, net earnings for the three months ended September 30,
1996 would have been $266,000, or a 1.5% increase over the 1995 quarter.
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 $183,000 or 23.3% during the
three months ended September 30, 1996 when compared to the respective period
in 1995.
INTEREST INCOME
- ---------------
Interest on loans increased by $474,000 or 38.7% for the three months ended
September 30, 1996, when compared with the same period in 1995. The increase
in interest on loans was due primarily to an increase in the balance on loans
receivable for the three months ended September 30, 1996 when compared to the
same period 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 $66,000 or 36.5% during the three months ended September
30, 1996 when compared with the same period 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 $27,000 or 23.3% during the
three months ended September 30, 1996 when compared with the same period in
1995. The decrease was due primarily to a decrease of $2.4 million in the
average balance of mortgage-backed securities outstanding for the three
months ended September 30, 1996 when compared to the same period in 1995.
10
INTEREST EXPENSE
- ----------------
Interest expense on deposits, the largest component of the Company's
interest-bearing liabilities, for the three months ended September 30, 1996
when compared to the same period in 1995 remained constant.
Interest on borrowings (consisting of advances from the FHLB of Pittsburgh)
increased $199,000 or 161.8% during the three months ended September 30,
1996, when compared with the same period in 1995. The increase was due to an
increase in the average balance of such borrowings of $8.9 million during the
three months ended September 30, 1996 as compared to the same period 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
month period ended September 30, 1996 when compared to the same period in
1995 remained constant. The Company's total allowance for loan and lease
losses amounted to .82% of the Company's total loan portfolio at September
30, 1996, as compared with 1.09% at September 30, 1995. As of September 30,
1996, the Company's total allowance for loan and lease losses amounted to
76.5% of total nonperforming loans.
NONINTEREST INCOME
- ------------------
The Company's noninterest income remained constant during the three months
ended September 30, 1996 when compared with the same period in 1995.
NONINTEREST EXPENSE
- -------------------
Noninterest expense increased by $530,000 or 138.0% during the three months
ended September 30, 1996 when compared with the same period in 1995. The
increase is primarily due to the $326,000 one-time SAIF assessment, expenses
incurred with respect to the merger with PennFirst Bancorp, Inc. and expenses
incurred for properties held in real estate owned through foreclosure.
Without the one-time SAIF assessment, noninterest expense would have
increased by $204,000 or 53.1%.
11
INCOME TAXES
- ------------
The Company recognized $31,000 in income tax expense which reflected an
effective rate of 37.3% for the three months ended September 30, 1996, as
compared to $167,000 with an effective tax rate of 38.9% for the comparable
1995 period, due to lower pretax income.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, borrowings, amortization, prepayment
and maturities of outstanding loans and mortgage-backed securities, sales of
loans, maturities of investment securities and other short-term investments
and funds provided from operations. While scheduled loan and mortgage-backed
securities amortization and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and
loan and mortgage-backed securities prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Company
manages the pricing of its deposits to maintain a steady deposit balance. In
addition, the Company invests excess funds in overnight deposits and other
short-term interest-earning assets which provides liquidity to meet lending
requirements. The Company has been able to generate enough cash through the
retail deposit market, its traditional funding source, to offset the cash
utilized in investing activities. In addition, the Company may, to the extent
deemed necessary, utilize borrowings for liquidity (primarily consisting of
advances from the FHLB of Pittsburgh). At September 30, 1996, the Company had
$26.9 million of outstanding advances from the FHLB of Pittsburgh.
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 September 30, 1996, the total approved loan commitments outstanding
amounted to $2.3 million. At the same date, commitments under unused lines of
credit amounted to $3.0 million and the unadvanced portion of construction
loans approximated $5.2 million. Certificates of deposit scheduled to mature
in one year or less at September 30, 1996 totaled $17.8 million. Management
believes that a significant portion of maturing deposits will remain with the
Savings Bank.
12
The Company's total consolidated assets were $99.5 million at September 30,
1996, an increase of $7.3 million or 7.9% over total consolidated assets at
June 30, 1996.
Total consolidated stockholders' equity was $18.0 million at September 30,
1996, remaining relatively constant compared to the balance 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% 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 September 30, 1996.
13
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
(Dollars in Thousands)
Regulatory
capital $14,254 $14,254 $15,022
Minimum
required
regulatory
capital 1,432 2,865 4,902
------- ------- ------
Excess
regulatory
capital $12,822 $11,389 10,120
------- ------- ------
------- ------- ------
Regulatory
capital as
a percentage
of assets(1) 14.93% 14.93% 24.51%
Minimum capital
required as a
percentage 1.50% 3.00% 8.00%
------- ------- ------
Excess regulatory
capital as a
percentage in
excess of
requirement 13.43% 11.93% 16.51%
------- ------- ------
------- ------- ------
(1) Tangible and core capital are computed as a percentage of adjusted
total assets of $95.5 million. Risk-based capital is computed as a
percentage of total risk-weighted assets of $61.3 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
14
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.
15
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
B) ON SEPTEMBER 25, 1996, THE COMPANY FILED A FORM 8-K TO REPORT THAT
IT HAD 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. SEE THE NOTE TO THE
CONSOLIDATED FINANCIAL STATEMENTS ON THE CORPORATE REORGANIZATION.
16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TROY HILL BANCORP, INC.
NOVEMBER 7, 1996 BY: /S/ ELLRY N. DAVIS
- ---------------- -----------------------
ELLRY N. DAVIS
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
NOVEMBER 7, 1996 BY: /S/ LAWRENCE C. KERR
- ---------------- -----------------------
LAWRENCE C. KERR
TREASURER
17