<PAGE>
Registration No. 33-_____ As filed with the Securities and Exchange
Commission on June 24, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
Peoples Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)
Federal To be applied for
(State of Incorporation) (IRS Employer Identification No.)
134 Franklin Corner Road
Lawrenceville, New Jersey 08648-0950
(Address of Principal Executive Offices)
---------------------------
Trenton Savings Bank FSB
and Peoples Bancorp, M.H.C.
1996 Stock Option Plan
(Full Title of the Plans)
Copies to:
Wendell T. Breithaupt Kenneth R. Lehman, Esquire
President and Chief Executive Officer Edward A. Quint, Esquire
Peoples Bancorp, Inc. Luse Lehman Gorman Pomerenk & Schick
134 Franklin Corner Road A Professional Corporation
Lawrenceville, New Jersey 08648-0950 5335 Wisconsin Ave., N.W., #400
(609) 844-3106 Washington, D.C. 20015
(202) 274-2000
(Name, Address and Telephone
Number of Agent for Service)
---------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. |X|
---------------------------
Pursuant to Rule 429 under the Securities Act of 1933, this
Registration Statement also relates to the Form S-4 Registration Statement of
Peoples Bancorp, Inc. (Registration No. 333-23029), originally filed with the
Securities and Exchange Commission on March 10, 1997, as amended on April 17,
1997.
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Title of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered (1) Per Share Offering Price Fee (5)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options to Purchase
Common Stock
Common Stock, par
value $.10 per share 234,000 shares (2) $13.50(3) $3,159,000 $ 958
Common Stock, par
value $.10 per share 77,650 shares (4) $19.50(3) $1,514,175 $ 459
Total: 311,650 shares $4,673,175 $1,417
============== ========= ======
</TABLE>
- --------------
(1) Together with an indeterminate number of additional shares which may be
necessary to adjust the number of shares reserved for issuance pursuant to
the Trenton Savings Bank FSB and Peoples Bancorp, M.H.C. 1996 Stock Option
Plan (the "1996 Stock Option Plan") as the result of a stock split, stock
dividend or similar adjustment of the outstanding Common Stock of Peoples
Bancorp, Inc. pursuant to 17 C.F.R. ss. 230.416(a).
(2) Represents the number of shares currently reserved for issuance underlying
options which have already been granted pursuant to the 1996 Stock Option
Plan.
(3) Determined by the exercise price of the options pursuant to 17
C.F.R. ss. 230.457(h)(1).
(4) Represents the number of shares currently reserved for issuance underlying
options which may be granted pursuant to the 1996 Stock Option Plan.
(5) Shares underlying options granted or to be granted pursuant to the 1996
Stock Option Plan were registered on the Form S-4 Registration Statement of
Peoples Bancorp, Inc. (Registration No. 333-23029), originally filed with
the Securities and Exchange Commission on March 10, 1997, as amended on
April 17, 1997. The registration of these 311,650 shares is being carried
forward to this Form S-8 Registration Statement. A filing fee of $1,275 was
previously paid in connection with the registration of these shares.
Accordingly, a fee of $132 has been transmitted in connection with this
filing.
------------------------------------
This Registration Statement shall become effective upon filing in
accordance with Section 8(a) of the Securities Act of 1933 and 17 C.F.R. ss.
230.462.
2
<PAGE>
PART I.
Items 1 and 2. Plan Information and Registrant Information and Employee Plan
Annual Information
This Registration Statement relates to the registration of (i) options
to purchase up to 311,650 shares Common Stock of Peoples Bancorp, Inc. (the
"Company") pursuant to the 1996 Stock Option Plan; and (ii) 311,650 shares of
Common Stock reserved for issuance and delivery upon the exercise of options
under the 1996 Stock Option Plan. Documents containing the information required
by Part I of the Registration Statement have been or will be sent or given to
participants in the 1996 Stock Option Plan, as appropriate, as specified by
Securities Act Rule 428(b)(1). Such documents are not filed with the Securities
and Exchange Commission (the "Commission" or "SEC") either as part of this
Registration Statement or as prospectuses or prospectus supplements pursuant to
Rule 424 in reliance on Rule 428.
PART II.
Item 3. Incorporation of Documents by Reference
All documents filed by the Company pursuant to Sections 13(a) and (c),
14 or 15(d) of the Exchange Act after the date hereof and prior to the filing of
a post-effective amendment which indicates that all securities offered hereby
have been sold or which deregisters all securities then remaining unsold, shall
be deemed to be incorporated by reference into this registration statement and
be part hereof from the date of filing of such documents. Any statement
contained in this Registration Statement, or in a document incorporated by
reference herein, shall be deemed to be modified or superseded for purposes of
this Registration Statement to the extent that a statement contained herein, or
in any other subsequently filed document which also is incorporated by reference
herein, modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Registration Statement.
The following document filed or to be filed with the Commission is
incorporated by reference in this Registration Statement:
(A) The description of the Common Stock contained in the Registration
Statement on Form S-4 (Commission File No. 333-23029), originally filed by the
Company's predecessor with the SEC under the Securities Act of 1933 on March 10,
1997, as amended on April 17, 1997.
Item 4. Description of Securities
Not applicable.
Item 5. Interests of Named Experts and Counsel
None.
Item 6. Indemnification of Directors and Officers
The Registrant's Charter defines areas for indemnity coverage, as
follows:
(a) Any person against whom any action is brought by reason of the fact
that such person is or was a director or officer of the Registrant shall be
indemnified by the Registrant for:
(i) Reasonable costs and expenses, including reasonable
attorney's fees, actually paid or incurred by such person in connection with
proceedings related to the defense or settlement of such action;
(ii) Any amount for which such person becomes liable by reason
of any judgment in such action;
3
<PAGE>
(iii) Reasonable costs and expenses, including reasonable
attorney's fees, actually paid or incurred in any action to enforce his rights
under this section if the person attains a final judgment in favor of such
person in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director only if the requirements of this subparagraph are met:
(i) The Registrant shall make the indemnification provided by
subparagraph (a) in connection with any such action which results in a final
judgment on the merits in favor of such officer or director.
(ii) The Registrant shall make the indemnification provided by
subparagraph (a) in case of settlement of such action, final judgment against
such director or officer or final judgment in favor of such director or officer
other than on the merits except in relation to matters as to which he shall be
adjudged to be liable for negligence or misconduct in the performance of his
duty, only if a majority of the directors of the Registrant determines that such
a director or officer was acting in good faith within what he was reasonably
entitled to believe under the circumstances was the scope of his employment and
authority and for a purpose which he was reasonably entitled to believe under
the circumstances was in the best interest of the Registrant or its
stockholders.
(c) As used in Section (a) and (b):
(i) "Action" means any action, suit or other judicial or
administrative proceeding, or threatened proceedings, whether civil, criminal,
or otherwise, including any appeal or other proceeding for review;
(ii) "Court" includes, without limitation, any court to which
or in which appeal or any proceeding for review is brought;
(iii) "Final Judgment" means a judgment, decree, or order
which is appealable and as to which the period for appeal has expired and no
appeal has been taken;
(iv) "Settlement" includes the entry of a judgment by consent
or by confession or upon a plea of guilty or nolo contendere.
The Registrant maintains a directors' and officers' liability policy
with Fidelity and Deposit Company of Maryland. Such policy provides for an
aggregate liability coverage of $10.0 million.
Item 7. Exemption From Registration Claimed.
Not applicable.
4
<PAGE>
Item 8. List of Exhibits.
The following exhibits are filed with or incorporated by reference into
this Registration Statement on Form S-8:
4.1 Trenton Savings Bank FSB and Peoples Bancorp, M.H.C. 1996
Stock Option Plan (Incorporated by reference to Exhibit 10.3
of the Registrant's Registration Statement on Form S-4
(Registration No. 333-23029) originally filed with the SEC on
March 10, 1997, as amended on April 17, 1997.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, A
Professional Corporation as to the legality of the Common
Stock registered hereby.
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, A
Professional Corporation (contained in the opinion included as
Exhibit 5).
23.2 Consent of KPMG Peat Marwick LLP.
99.1 Annual Report on Form 10-K of Trenton Savings Bank for the
fiscal year ended December 31, 1996.
99.2 Quarterly Report on Form 10-Q of Trenton Savings Bank for the
fiscal quarter ended March 31, 1997.
Item 9. Undertakings
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to include any
material information with respect to the Registration Statement not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement;
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the 1996 Stock Option Plan; and
4. That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the Registration Statement shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
5. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
5
<PAGE>
SIGNATURES
The Registrant. Pursuant to the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-8 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Lawrenceville, State of New Jersey, on this 20th
day of June, 1997.
Peoples Bancorp, Inc.
By: \s\ Wendell T. Breithaupt
----------------------------------------------
Wendell T. Breithaupt, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following person in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
<S> <C>
By: \s\ Wendell T. Breithaupt By: \s\ Robert Russo
------------------------------------- -------------------------------------------
Wendell T. Breithaupt, President and Robert Russo, Vice President and Treasurer
Chief Executive Officer (Chief Financial and Accounting Officer)
(Principal Executive Officer)
Date: June 20, 1997 Date: June 20, 1997
By: \s\ John B. Sill, Jr. By: \s\ Peter S. Longstreth
------------------------------------- -------------------------------------------
John B. Sill, Jr., Chairman Peter S. Longstreth, Director
Date: June 20, 1997 Date: June 20, 1997
By: \s\ George A. Pruitt By: \s\ George W. Reinhard
------------------------------------- -------------------------------------------
George A. Pruitt, Director George W. Reinhard, Director
Date: June 20, 1997 Date: June 20, 1997
By: \s\ Charles E. Stokes By: \s\ Raymond E. Trainer
------------------------------------- -------------------------------------------
Charles E. Stokes, Director Raymond E. Trainer, Director
Date: June 20, 1997 Date: June 20, 1997
By: \s\ Miles W. Truesdell, Jr.
-------------------------------------
Miles W. Truesdell, Jr., Director
Date: June 20, 1997
</TABLE>
<PAGE>
The Plan. Pursuant to the requirements of the Securities Act of 1933,
the Committee which administers the 1996 Stock Option Plan has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Lawrenceville, State of New Jersey, on this 20th
day of June, 1997.
Trenton Savings Bank FSB and
Peoples Bancorp, M.H.C. 1996 Stock
Option Plan
\s\ Wendell T. Breithaupt
-------------------------------------
Wendell T. Breithaupt, President and
Chief Executive Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, A
Professional Corporation as to the legality of the
Common Stock registered hereby.
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick,
A Professional Corporation (contained in the opinion
included as Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP.
99.1 Annual Report on Form 10-K of Trenton Savings Bank for
the fiscal year ended December 31, 1996.
99.2 Quarterly Report on Form 10-Q of Trenton Savings Bank for
the fiscal quarter ended March 31, 1997.
6
<PAGE>
EXHIBIT 5
OPINION OF LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.
<PAGE>
Exhibit 5
[LETTERHEAD OF LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.]
June 20, 1997 (202) 274-2000
Board of Directors
Peoples Bancorp, Inc.
134 Franklin Corner Road
Lawrenceville, New Jersey 08648-0950
Re: People Bancorp, Inc.
Registration Statement on Form S-8
------------------------------------
Ladies and Gentlemen:
You have requested the opinion of this firm as to certain matters in
connection with the offer and sale of Peoples Bancorp, Inc. (the "Company")
common stock, par value $.10 per share (the "Common Stock"), pursuant to the
Trenton Savings Bank and Peoples Bancorp, M.H.C. 1996 Stock Option Plan (the
"Plan"). We have reviewed the Company's Certificate of Incorporation,
Registration Statement on Form S-8 (the "Form S-8"), as well as applicable
statutes and regulations governing the Company and the offer and sale of the
Common Stock.
Based on the foregoing, we are of the following opinion:
Upon the effectiveness of the Form S-8, the Common Stock, when sold in
connection with the exercise of options granted pursuant to the Plan,
will be legally issued, fully paid and non-assessable.
This opinion has been prepared solely for the use of the Company in
connection with the preparation and filing of the Form S-8, and should not be
used for any other purpose or relied upon by any other person without the prior
written consent of this firm. We hereby consent to the use of this opinion in
the Form S-8.
Very truly yours,
/s/ Luse Lehman Gorman Pomerenk & Schick
-----------------------------------------
LUSE LEHMAN GORMAN POMERENK & SCHICK
A Professional Corporation
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP
<PAGE>
Exhibit 23.2
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Consent
The Board of Directors
Peoples Bancorp, Inc.:
We consent to the attachment as an exhibit in the registration statement on Form
S-8 of Peoples Bancorp, Inc. of our report dated January 21, 1997, relating to
the consolidated statements of condition of Trenton Savings Bank, FSB as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the December 31, 1996
Annual Report on Form 10-K of Trenton Savings Bank, FSB.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Short Hills, New Jersey
June 23, 1997
<PAGE>
OFFICE OF THRIFT SUPERVISION
1700 G Street, N.W.
Washington, D.C. 20552
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [FEE REQUIRED] For the Fiscal Year Ended December
31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from _______________ to __________________
OTS Docket Number 12559
TRENTON SAVINGS BANK FSB
------------------------------------------------------
(Exact name of registrant as specified in its charter)
United States 22-3408029
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
134 Franklin Corner Road, Lawrenceville, New Jersey 08648-0950
- ------------------------------------------------------- ----------
(Address of Principal Executive Offices) Zip Code
(609) 844-3100
-------------------------------
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par
value $.10 per share
--------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ].
As of February 28, 1997, there were issued and outstanding 9,037,160
shares of the Registrant's Common Stock, including 5,796,000 shares held by
Peoples Bancorp, MHC. The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, computed by reference to the closing sales
price of the Registrant's stock, as reported on the Nasdaq National Market on
February 28, 1997, was approximately $51.9 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1996 (Parts II and III).
2. Proxy Statement for the 1997 Annual Meeting of Stockholders (Parts I and
III).
<PAGE>
PART I
ITEM 1. BUSINESS
General
Chartered by the New Jersey State Legislature on March 7, 1844, the
Trenton Savings Fund Society was founded to promote thrift in the area of
Trenton, New Jersey. It adopted the name "Trenton Savings Bank" in the beginning
of 1990. Throughout its history, the Bank has been engaged in lending funds to
home buyers, consumers, and businesses within its local community. The Bank has
always maintained a commitment to conservative lending practices, community
service and control of operating expenses, resulting in a strong capital
position. This philosophy enabled the Bank to survive the Civil War, the Great
Depression, two World Wars, two stock market crashes and the recent crisis in
the banking and thrift industries. At December 31, 1996, the Bank had $601.0
million of total assets, $491.2 million of total deposits, and $103.4 million of
total stockholders' equity, representing 17.2% of total assets.
The Bank conducts its business from a corporate center located in
Lawrenceville, New Jersey and 14 branch offices located in Mercer, Burlington
and Ocean Counties, New Jersey. On January 1, 1995, the Bank completed a charter
change from a New Jersey chartered mutual savings bank to a federally chartered
mutual savings bank, permitting expansion of branch offices into adjacent market
areas in Pennsylvania. On August 3, 1995, the Bank's mutual predecessor
reorganized from a federally chartered mutual savings bank into a federally
chartered mutual holding company named Peoples Bancorp MHC (the "Holding
Company"), and concurrently formed the Bank, which succeeded to the name and
operations of the Bank's mutual predecessor.
The Bank is a community-oriented savings institution providing mortgage
loans and other traditional financial services to its local community. The Bank
is primarily engaged in attracting deposits from the general public through its
offices and using those funds to originate loans secured by one- to four-family
residences primarily located in Mercer and Burlington Counties where the Bank's
offices are located, as well as in neighboring Bucks County, Pennsylvania. Loans
secured by one- to four-family residences amounted to $239.5 million, or 62.5%,
of the Bank's total loan portfolio at December 31, 1996. The Bank also
originates other mortgage loans secured by multi-family and commercial real
estate, commercial business loans, consumer loans and home equity and property
improvement loans, which, in the aggregate, amounted to $143.5 million, or
37.5%, of the total loan portfolio at December 31, 1996. The Bank also has a
securities portfolio primarily consisting of U.S. Treasury and federal
government agency obligations, corporate and municipal bonds and mortgage-backed
securities which are insured by federal agencies, which portfolio amounted to
$174.2 million, or 29.0%, of the Bank's assets at December 31, 1996. At December
31, 1996, the Bank's equity securities had an amortized cost of $894,000 and an
estimated market value of $3.2 million. In addition, as of that same date,
aggregate cash and cash equivalents totaled $20.9 million, or 3.5%, of total
assets.
The Bank's executive offices are located at 134 Franklin Corner Road,
Lawrenceville, New Jersey, and its telephone number at that location is (609)
844-3100.
Acquisitions
On February 29, 1996, the Bank announced the execution of a definitive
Merger Agreement with Burlington County Bank ("BCB"), an $80.2 million
commercial bank located in Burlington Township, New Jersey. Under the terms of
the agreement, the Bank paid $12.5 million for all of the outstanding shares of
Burlington County Bank (the "Acquisition"). The Acquisition was accounted for
under the purchase accounting method and was consummated after the close of
business on September 30, 1996.
On the date of the Acquisition, BCB had $73.2 million in deposits,
$48.2 million in loans, $8.8 million in securities held to maturity, $5.4
million in securities available for sale, $15.8 million in cash and equivalents,
and $0.9 million in fixed assets. In accordance with the purchase method of
accounting, the Bank recorded $7.2 million in goodwill as a result of the
Acquisition. The Acquisition also added three branches in Burlington County to
the Bank's existing branch system.
<PAGE>
On March 6, 1997, the Bank announced the execution of a Letter of
Intent to acquire Manchester Trust Bank ("MTB"). MTB offers a full range of
trust products and manages over $125.0 million in trust assets.
Recent Development
On March 27, 1997, the Bank announced that the Office of Thrift
Supervision approved the Bank's application to reorganize into a two-tier mutual
holding company structure. The Bank anticipates that this restructuring will
provide enhanced ability to invest through a mid-tier stock holding company,
facilitate mergers and acquisitions, and facilitate stock repurchases.
Market Area
The Bank conducts business through its 14 branch offices located in the
central New Jersey counties of Mercer, Burlington and Ocean. The Bank's market
area for loans includes neighboring Bucks County, Pennsylvania which borders to
the west of Mercer County, New Jersey. Lawrenceville, New Jersey, where the Bank
is headquartered, is located in Mercer County which had a population of
approximately 326,000 according to the 1990 Census.
The Bank's market area is both urban and suburban. Trenton, which is in
Mercer County, is the capital of the State of New Jersey. The two largest
employers in Mercer County are the State of New Jersey and Princeton University.
Other large employers in the Bank's market area include Merrill Lynch & Co.
Inc., Bristol-Myers Squibb Company, David Sarnoff Research Center, American Home
Products (Cyanamid) and Dow Jones & Co., Inc.
The economy in the Bank's market area economy has remained relatively
stable in recent years. The unemployment rates in Mercer and Burlington Counties
were 5.7% and 5.2%, respectively during 1996.
Lending Activities
Loan Portfolio Composition. The principal components of the Bank's loan
portfolio are mortgage loans secured by one- to four-family residential real
estate and, to a lesser extent, commercial and multi-family residential real
estate. In addition, the Bank's loan portfolio includes non-mortgage loans which
include home equity loans, commercial business loans, and other consumer loans.
At December 31, 1996, the Bank's total loans receivable totalled $383.0 million,
of which $239.5 million, or 62.5%, were one- to four-family residential real
estate mortgage loans, $53.4 million, or 14.0%, were commercial and multifamily
residential real estate loans, $28.1 million, or 7.3%, were home equity loans,
$34.5 million, or 9.0%, were commercial business loans, and $27.5 million, or
7.2%, were other consumer loans.
As a federally chartered savings bank, the Bank has general authority
to originate and purchase loans secured by real estate located throughout the
United States. Notwithstanding this nationwide lending authority, the mortgage
loans of the Bank are primarily secured by properties located in Mercer,
Burlington and Ocean Counties, New Jersey, and Bucks County, Pennsylvania.
2
<PAGE>
Loan Portfolio Composition. The following table sets forth information
regarding the composition of the Bank's loan portfolio by type of loan at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1996 1995 1994
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family real estate...... $239,470 62.5% $227,717 74.0% $228,133 78.3%
Commercial real estate and multi-family 53,415 14.0 27,827 9.0 23,833 8.2
-------- ------ -------- ----- -------- ------
Total mortgage loans............. 292,885 76.5 255,544 83.0 251,966 86.5
Non-mortgage loans:
Home equity loans (1)................ 28,138 7.3 21,833 7.1 22,043 7.6
Commercial business loans............ 34,486 9.0 11,573 3.8 8,998 3.1
Other consumer loans (2)............. 27,478 7.2 18,783 6.1 8,256 2.8
-------- ------ -------- ----- -------- ------
Total non-mortgage loans........... 90,102 23.5 52,189 17.0 39,297 13.5
Total loans.................... 382,987 100.0% 307,733 100.0% 291,263 100.0%
===== ===== =====
Net deferred costs (fees)............ 226 104 (117)
Premiums (discounts)................. (24) 23 --
Allowance for possible loan losses... (2,901) (1,767) (1,642)
-------- -------- --------
Net loans.......................... $380,288 $306,093 $289,504
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1993 1992
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family real estate...... $206,585 80.2% $163,322 80.3%
Commercial real estate and multi-family 18,972 7.4 12,732 6.3
-------- ----- -------- -----
Total mortgage loans............. 225,557 87.6 176,054 86.6
Non-mortgage loans:
Home equity loans (1)................ 19,117 7.4 16,673 8.2
Commercial business loans............ 7,300 2.9 8,023 4.0
Other consumer loans (2)............. 5,513 2.1 2,488 1.2
-------- ----- -------- -----
Total non-mortgage loans........... 31,930 12.4 27,184 13.4
Total loans.................... 257,487 100.0% 203,328 100.0%
===== =====
Net deferred costs (fees)............ 360 715
Premiums (discounts)................. -- --
Allowance for possible loan losses... 1,471 634
-------- --------
Net loans.......................... $255,656 $201,889
======== ========
</TABLE>
- ------------------------------------
(1) Includes home equity credit lines and second mortgages.
(2) Includes student loans, installment loans and auto loans.
3
<PAGE>
The increase in commercial real estate and commercial business loans is
primarily due to the acquisition of the portfolio of BCB. It is the Bank's
intention to continue to gradually increase the percentage of the Bank's loan
portfolio comprising commercial loans and decrease the percentage of the Bank's
loan portfolio comprising one- to four-family residential mortgage loans.
Contractual Principal Repayments and Interest Rates. The following
table sets forth the maturity of the Bank's loan portfolio at December 31, 1996.
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 Within Due 1-3 Due 3-5 Due 5-10 Due 10+
One Year Years Years Years Years Total
----------- -------- ------- --------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total mortgage loans........................ $56,149 $57,318 $57,310 $41,892 $ 80,216 $292,885
Total non-mortgage loans.................... 31,647 29,433 22,296 3,475 3,251 90,102
------- ------- ------- ------- -------- --------
Total loans................................. $87,796 $86,751 $79,606 $45,367 $ 83,467 $382,987
======= ======= ======= ======= ======== ========
</TABLE>
Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth the dollar amount of total loans due after one year from December 31, 1996
which have fixed interest rates or which have floating or adjustable interest
rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates Total
----------- ----------- ----------
(Dollars In Thousands)
<S> <C> <C> <C>
Mortgage loans.............................. $ 120,483 $ 116,253 $ 236,736
Non-mortgage loans.......................... 34,511 23,944 58,455
----------- --------- ----------
Total loans................................. $ 154,994 $ 140,197 $ 295,191
=========== ========= ==========
</TABLE>
Scheduled contractual amortization of loans does not reflect the
anticipated actual term of the Bank's loan portfolio. The average life of loans
is substantially less than their contractual terms because of prepayments and
due on sale clauses, which give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that borrower
sells the real property subject to the mortgage.
Loan Originations and Underwriting. The lending activities of the Bank
are subject to written, non-discriminatory, underwriting standards and the loan
origination procedures established by the Bank's Board of Directors. 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 performed by one of a list of licensed independent certified
appraisers approved annually by the Board of Directors. The Bank generally
requires title insurance on all first mortgage loans secured by real estate.
Hazard insurance is also required on all secured property and flood insurance is
required if the property is within a designated flood plain.
The Bank's loan approval process assesses the borrower's ability to
repay the loan and the adequacy of the value of the property that will secure
the loan. A loan application file is first reviewed by a loan officer of the
Bank and then is submitted for approval to an officer with specific delegated
authority from the Board of Directors to approve that type n of loan up to a
certain amount. The legal lending limit of the Bank at December 31, 1996 was
$15.5 million. In March of 1996, the Board of Directors approved an increase in
the internal lending limit to one borrower to $5.0 million from $2.5 million,
and an increase in the maximum non-commercial mortgage loan limit to $1.0
million from $500,000. In general, the maximum home equity loan the Bank will
make is $100,000 and the maximum installment (automobile) loan the Bank will
make is $50,000.
4
<PAGE>
The following table shows loans originated, purchased, loan reductions
and the net change in the Bank's loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1996 1995 1994
--------- ----------- ----------
(Dollars In Thousands)
<S> <C> <C> <C>
Loans receivable at beginning of period.......... $ 307,733 $ 291,263 $ 257,487
Originations:
Residential.................................... 42,318 23,363 54,777
Commercial real estate and multifamily......... 4,142 8,811 8,025
Commercial business loans...................... 14,474 5,307 6,131
Home equity.................................... 11,578 6,662 10,055
Other.......................................... 16,787 16,375 6,555
--------- ---------- ----------
Total originations........................... 89,299 60,518 85,543
Purchased residential mortgage loans............. 1,534 5,038 --
Loans acquired................................... 48,229 -- --
Transfer of mortgage loans to foreclosed
real estate.................................... 682 -- 77
Repossession of assets in lieu of loans.......... 41 34 --
Net charge offs.................................. 52 25 9
Repayments....................................... 63,033 49,027 51,681
--------- ---------- ----------
Net loan activity................................ 75,254 16,470 33,776
--------- ---------- ----------
Total loans receivable at end of period...... $ 382,987 $ 307,733 $ 291,263
========= ========== ===========
</TABLE>
One- to Four-Family Real Estate Loans. The primary lending activity of
the Bank is the origination of loans secured by first mortgage liens on one- to
four-family residences. At December 31, 1996, $239.5 million, or 62.5%, of the
Bank's total loan portfolio consisted of one- to four-family real estate loans.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Bank generally have reflected the policy of making less than the
maximum loan permissible under regulations in accordance with sound practices,
market conditions and underwriting standards established by the Bank. The Bank's
lending policies on one- to four-family owner occupied real estate loans
generally limit the maximum loan-to-value ratio to 80% of the lesser of the
appraised value or purchase price of the property and 75% of the appraised value
or purchase price on condominiums.
As of December 31, 1996, the Bank offered 30-year fixed and adjustable
rate mortgage loans on one- to four-family residences. The Bank began to
originate 30-year fixed-rate mortgage loans in early 1996. All residential
mortgage loans are amortized on a monthly basis with principal and interest due
each month. These loans include "due on sale" clauses, which are provisions
giving the Bank the right to declare a loan immediately due and payable in the
event the borrower sells or otherwise disposes of the real property subject to
the mortgage. The Bank enforces due on sale clauses to the extent permitted
under applicable laws. Substantially all of the Bank's residential mortgage loan
portfolio consists of conventional loans.
The Bank offers adjustable rate one- to four-family real estate loans,
originated directly, which are fully amortizing loans with contractual
maturities of up to 30 years. These loans have interest rates which are
scheduled to adjust in accordance with designated indices. Initial rates are
fixed for one, three, five or seven years before adjusting annually. The Bank
currently offers its adjustable rate mortgage loans with a 2% cap on the rate
adjustment per year and a 6% rate adjustment cap over the life of the loan. The
Bank's underwriting standards for one year adjustable rate mortgages requires
that it assess a potential borrower's ability to make principal and interest
payments based on the initial note rate or the current index rate, whichever is
greater at the time of application. Adjustable rate mortgages with initial
payment periods greater than one year utilize the initial note rate. The Bank's
5
<PAGE>
adjustable rate mortgage loans are not convertible by their terms into fixed
rate loans, do not contain prepayment penalties and do not produce negative
amortization.
Multi-Family and Commercial Mortgage Loans. At December 31, 1996, $53.4
million, or 14.0%, of the Bank's total loan portfolio consisted of loans secured
by multi-family and commercial real estate. The Bank's multi-family and
commercial mortgage loans include primarily loans secured by apartment
buildings, small office buildings and small retail establishments. Substantially
all of the Bank's multi-family and commercial mortgage loans are secured by
properties located in the Bank's primary market area. Management believes that
multi-family and commercial mortgage loans will continue to be an integral
component of the Bank's loan portfolio. Originations of multi-family and
commercial mortgage loans amounted to $4.1 million, $8.8 million and $8.0
million, or 4.6%, 14.6% and 9.4% of total loan originations in 1996, 1995 and
1994, respectively.
The Bank originates both fixed and adjustable rate multi-family and
commercial mortgage loans. The Bank currently offers multi-family and commercial
mortgage loans with terms generally up to ten years amortizing over no more than
a 20-year period, with no more than five years at a fixed rate of interest.
Pursuant to the Bank's underwriting standards, it offers multi-family and
commercial mortgage loans with loan-to-value ratios generally up to 70% of the
lower of the purchase price or an independent appraisal. Those standards also
require that the cash flow from the collateral, after consideration of expense
and vacancy assumptions, be generally at least 120% of the debt service.
The Bank requires appraisals of substantially all properties securing
multi-family and commercial real estate loans. All appraisals are performed by
an independent licensed appraiser from a list of appraisers approved by the
Bank. In originating multi-family and commercial mortgage loans, the Bank
considers the value of the property, the credit history of the borrower, cash
flow of the project, location of the real estate and the quality of management
involved with the property. Multi-family and commercial mortgage loans to
corporations are generally guaranteed by the principals. The Bank may also
require an environmental audit on such loans.
Multi-family and commercial mortgage lending is generally considered to
involve a higher degree of credit risk than one- to four-family residential
lending. Such lending typically involves large loan balances concentrated in a
single borrower or groups of related borrowers. In addition, the payment
experience on loans secured by income-producing properties is typically
dependent on the successful operation of the related real estate project and
thus may be subject to a greater extent to adverse conditions in the real estate
market or in the economy generally.
The Bank also offers construction loans on commercial real estate
properties. Construction financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate because of the uncertainties of construction, including the possibility
of costs exceeding the initial estimates. Construction lending is generally
limited to the Bank's primary lending area. Construction loans are structured to
be converted to permanent loans at the end of the construction phase, which
typically is no more than nine months. Construction loans have terms which
generally match the non-construction loans then offered by the Bank except that
during the construction phase the borrower only pays interest on the loan.
Home Equity Loans. The Bank offers home equity fixed rate, home equity
credit line and FHA title I property improvement loans. The home equity
portfolio amounted to $28.1 million, or 7.3%, of the total loan portfolio as of
December 31, 1996. Of this amount, $19.7 million, or 70.1%, were in the form of
home equity fixed rate loans; $6.6 million, or 23.5% were in the form of home
equity credit lines; and $1.8 million, or 6.4% were in the form of second
mortgages.
The home equity fixed rate loan is available on any owner-occupied one-
to four-family home, townhouse, or condominium in the Bank's lending area. It is
a fixed-rate mortgage which is based on the equity in the home, and is generally
secured by a first or second mortgage on the residence. Loan amounts currently
range from $5,000 to $100,000 (up to 75% of the appraised value of the home less
any outstanding senior mortgage/lien). The current maximum term is 180 months.
6
<PAGE>
The home equity credit line is available on any owner-occupied one- to
four-family home, townhouse, or condominium in the Bank's lending area. It is a
variable rate mortgage which is based on the equity in the home, and is
generally secured by a first or second mortgage on the residence. Loan amounts
currently range from $5,000 to $100,000 (up to 75% of the appraised value of the
home less any outstanding senior mortgage/lien).
The FHA Title I property improvement loan is a fixed-rate installment
loan available on any owner-occupied one- to four-family home in the Bank's
lending area. Under the Title I program, the Bank makes loans from their own
funds to eligible borrowers to finance property improvements, and the U.S.
Department of Housing and Urban Development ("HUD") insures the Bank against
loss if the borrower(s) defaults. Title I loans are not government loans or
grants, and are not low interest-rate loans. HUD does not lend money or regulate
interest rates. Currently, the maximum loan amount is $25,000, and the maximum
term is 180 months. Any loan amount over $7,500 is secured by e a mortgage on
the property. The Bank conducts an on-site inspection on any property
improvement loan where the e principal obligation is $7,500 or more, and where
the borrower(s) fails to submit a completion certificate.
The second mortgage portfolio consists of purchased notes secured by
second mortgages on real estate located throughout New Jersey. The purchases
occurred between 1983 and 1991; however, the consumer lender is still servicing
the portfolio, pursuant to the original agreement. The portfolio is 100%
guaranteed by the consumer lender.
Other Consumer Loans. Subject to the restrictions contained in federal
laws and regulations, the Bank also is authorized to make loans for a wide
variety of personal or consumer purposes. As of December 31, 1996, $27.5
million, or 7.2%, of the Bank's total loan portfolio, consisted of consumer
loans (this figure does not include home equity fixed-rate, home equity credit
line and second mortgage loans). The primary component of the Bank's consumer
loan portfolio was $26.0 million of indirect and direct automobile loans. The
indirect automobile loan portfolio is currently being outsourced for servicing.
The servicer establishes dealer agreements, application processing and credit
underwriting, documentation and legal support, loan billing and accounting,
customer service, full collection support, and management reporting. The
servicer does the preliminary underwriting and makes recommendations according
to the Bank's underwriting criteria. However, the final credit decision is made
by the Bank. Originations of such auto loans was $15.3 million during 1996.
Automobile loans generally involve more credit risk than mortgage loans
because of the type and nature of the 3 collateral. In addition, consumer
lending collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness, and personal bankruptcy. In many cases, any repossessed
collateral resulting from a defaulted consumer loan will not provide an adequate
source of repayment of the outstanding loan balance because of depreciation and
improper repair and maintenance of the underlying security. The remaining
deficiency usually does not warrant further substantial collection efforts
against the borrower.
The Bank also has collateral loans secured by deposits, which as of
December 31, 1996 amounted to $784,000. The collateral deposit loans are
originated through the branches. The minimum loan amount is $1,000, and the
maximum loan-to-value is 90% of the principal deposit balance. The loan is
priced at 3% over the savings instrument rate. Deposit loans are payable on
demand. However, payment of interest is due quarterly and payment to the loan
principal can be made at any time provided the quarterly interest has been paid.
Commercial Business Loans. Commercial business loans are generally
provided to various types of closely held businesses located principally in the
Bank's primary market area. The Bank's commercial business loans may be
structured as short-term self-liquidating time notes and term loans. Time notes
generally have terms of less than one year to accommodate seasonal peaks and
valleys in the borrower's business cycle. Commercial business term loans
generally have terms of seven years or less and interest rates which float in
accordance with the prime rate, although the Bank also originates commercial
business loans with fixed rates of interest. The Bank's commercial time notes
and commercial term loans generally are secured by equipment, machinery or other
corporate assets including real estate and receivables. The Bank generally
obtains personal guarantees from the principals of the borrower with respect to
all commercial business loans.
7
<PAGE>
The Bank, through its subsidiary, TSBusiness Finance Corporation
("TSBF"), provides secured lines of credit for businesses where conventional
financing is unavailable or inadequate. TSBF's borrowing relationships include
companies involved in manufacturing, wholesaling, distribution and service
companies. Credit accommodations range from $500,000 to $5,000,000 for
businesses in New Jersey and the greater Delaware Valley.
Commercial business loans generally are deemed to entail significantly
greater credit risk than that which is involved with residential real estate
lending. The repayment of commercial business loans typically is dependent on
the successful operations and income of the borrower. Such risks can be
significantly affected by economic conditions. In addition, commercial business
lending generally requires substantially greater oversight efforts compared to
residential real estate lending.
As of December 31, 1996, the Bank had $34.5 million of commercial
business loans outstanding.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank generally receives loan origination fees or "points" for
originating loans. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the origination
of the loan. In accordance with SFAS No. 91, which deals with the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as an
adjustment to the yield of such loans over their contractual life. The increase
in net deferred costs is a result of substantial originations of auto loans
which have a net cost associated with their origination and minimal loan points
being generated from mortgage loans.
Asset Quality
Delinquent Loans. The following table sets forth information regarding
number and total balance of loans delinquent 30 days to 59 days, 60 days to 89
days and 90 days or more as of December 31, 1996.
<TABLE>
<CAPTION>
Commercial
Mortgage Business Consumer Total Loans
----------------- ----------------- ----------------- ------------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days..................... 25 $1,755 62 $ 1,708 52 $ 347 139 $ 3,810
60-89 days..................... 6 459 10 231 20 98 36 788
90 days and over............... 37 2,277 19 1,183 20 244 76 3,704
-- ------ -- --------- -- ------- --- -------
Total delinquent loans....... 68 $4,491 91 $ 3,122 92 $ 689 251 $ 8,302
== ====== == ========= == ======= === =======
</TABLE>
Non-Performing Assets. The loan portfolio is reviewed on a regular
basis by management and, in addition, the commercial business loan portfolio is
reviewed periodically by an independent loan review consulting firm. The loans
are placed on a non-accrual status when, in the opinion of management, there is
reasonable probability of loss or principal or the collection of additional
interest is deemed insufficient to warrant further accrual. Generally, the
Bank's loans are placed on a non-accrual status when a default of principal or
interest has existed for a period of 90 days except when, in the opinion of
management, the collection of the principal or interest is reasonably
anticipated or adequate collateral exists. In addition, the Bank places any loan
on non-accrual if any part of it is classified as doubtful or loss or if any
part has been charged to the allowance for loan losses. When a loan is placed on
non-accruing status, total interest accrued and unpaid to date is reversed.
Real estate owned consists of property acquired through formal
foreclosures and acquired by deed in lieu of foreclosure, and is recorded at the
lower of cost or fair value. Write-downs from cost to fair value which are
required at the time of foreclosure are charged to the allowance for loan
losses. After transfer, the property is carried at the lower of cost or fair
value as determined by an independent appraisal, less estimated selling
expenses. Adjustments to the carrying value of such properties that result from
subsequent declines in value are charged to operations in the period in which
the declines occur. At December 31, 1996, the Bank had three properties
classified as real estate owned.
8
<PAGE>
As part of the acquisition of BCB, the Bank acquired BCB's loan
portfolio. BCB's underwriting standards and related risk characteristics of the
loan portfolio differed from those of the Bank. The addition of this portfolio
has increased the Bank's non-performing portfolio and negatively effected
certain coverage ratios. However, management believes that the Bank's asset
quality remains strong. Management believes that the allowance for loan losses
is adequate based on historical experience, the volume and type of lending
conducted by the Bank, the amount of non-performing loans, general economic
conditions and other factors relating to the Bank's loan portfolio. However,
there can be no assurance that actual losses will not exceed estimated amounts.
As of December 31, 1996, the Bank's total non-performing loans and
foreclosed assets amounted to $3.4 million, or 0.89% of net loans, compared to
$2.2 million, or 0.72% of net loans at December 31, 1995.
The following table sets forth information as of December 31, 1996,
1995 and 1994 concerning non-performing assets in dollar amounts and as a
percentage of the Bank's net loans and total assets.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1996 1995 1994
--------- -------- ---------
(Dollars In Thousands)
<S> <C> <C> <C>
Accruing loans 90 days or greater (1).............. -- $ 10 $ 448
Non-accruing loans:
Mortgage loans................................... 1,756 1,008 994
Non-mortgage loans............................... 1,195 114 31
Troubled debt restructured loans................... 206 1,052 1,044
Total non-performing loans......................... $ 3,157 $ 2,184 $ 2,517
--------- -------- ---------
Foreclosed assets.................................. 253 34 77
Total non-performing assets........................ $ 3,410 $ 2,218 $ 2,594
========= ======== =========
Total non-performing loans as a percentage
of net loans..................................... 0.83% 0.71% 0.87%
========= ======== =========
Total non-performing assets as a percentage
of total assets.................................. 0.57% 0.43% 0.59%
========= ======== =========
</TABLE>
- --------------------
(1) Excludes $753,000 of loans at December 31, 1996 which are greater than 90
days past maturity, but current as to interest.
Classified Assets. Federal regulations require that each insured
savings institution classify its assets on a regular basis. 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 some
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," although not a "classification," 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. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific loan losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. General loss allowances established
to cover possible losses related to assets classified substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses do not qualify as regulatory
capital. Federal examiners may disagree with an insured institution's
classifications and amounts reserved and have the authority to require a savings
institution to classify additional assets, or to change the classification of
existing classified assets, and, if appropriate, to establish additional
reserves. At December 31, 1996, the Bank had $1.4 million of loans classified as
special mention, $4.3 million classified as substandard and $0.6 million
classified as doubtful or loss. As of December 31, 1996, total classified
assets, which includes repossessed assets, amounted to 1.1% of total assets.
9
<PAGE>
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated loan losses based upon an assessment (1) in the case of
residential loans, management's review of delinquent loans, loans in foreclosure
and market conditions, (2) in the case of commercial business loans and
commercial mortgage loans, when a significant decline in value can be identified
and (3) in the case of consumer loans, based on the assessment of risks inherent
in the loan portfolio. Although management uses available information to make
such determinations, future adjustments to allowances may be necessary based on
economic and market conditions and as a result of future examinations by
regulatory authorities, and net earnings could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial determinations. At December 31, 1996, the Bank's allowance for loan
losses, which includes a general valuation allowance, amounted to $2.9 million
compared to $1.8 million at December 31, 1995.
The following table sets forth an analysis of the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding................. $ 382,987 $ 307,733 $ 291,263 $ 257,487 $ 203,238
========== ========= ========== ========== =========
Average loans outstanding............... $ 337,780 $ 297,043 $ 282,068 $ 231,375 $ 187,839
========== ========= ========== ========== ==========
Balance at beginning of period.......... $ 1,767 $ 1,642 $ 1,471 $ 634 $ 100
Charge-offs:
Mortgage loans........................ (67) -- -- -- --
Consumer loans........................ (34) (32) (23) -- --
Commercial business loans............. (9) -- -- (43) --
Recoveries.............................. 58 7 14 -- 14
---------- --------- ---------- ---------- ----------
Net charge-offs......................... (52) (25) (9) (43) 14
Provision for loan losses............... -- 150 180 880 520
---------- --------- ---------- ---------- ----------
Acquired allowance...................... 1,186 -- -- -- --
---------- --------- ---------- ========== ==========
Balance at end of period................ $ 2,901 $ 1,767 $ 1,642 $ 1,471 634
========== ========= ========== ========== ==========
Allowance for loan losses as a percentage
of total loans outstanding............ 0.76% 0.57% 0.56% 0.57% 0.31%
========== ========= ========== ========== ==========
Net charge-offs as a percentage of average
loans outstanding..................... 0.02% 0.01% 0.00% 0.02% 0.00%
========== ========= ========== ========== ==========
Allowance for loan losses to
non-performing loans.................. 91.89% 80.91% 65.24% 80.65% 38.35%
========== ========= ========== ========== ==========
</TABLE>
The following table sets forth the allocation of allowance for loan
losses by loan category for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- ----------------------
% of % of % of
Total Total Total
Amount Loans (1) Amount Loans (1) Amount Loans (1)
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
Mortgage loans............................ $ 906 0.31% $ 591 0.23% $ 593 0.24%
Consumer loans............................ 877 1.58 610 1.50 453 1.50
Commercial business loans................. 813 2.36 116 1.00 90 1.00
Unallocated............................... 305 0.08 450 0.15 506 0.17
-------- ------ -------- ----- -------- ------
Total allowance for loan losses......... $ 2,901 0.76% $ 1,767 0.57% $ 1,642 0.56%
======== ====== ======== ===== ======== ======
</TABLE>
- ------------------------------------
(1) Represents percentage of loans in each category to total loans.
10
<PAGE>
Investment Activities
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposit at federally insured banks and savings institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest a portion of their
assets in commercial paper, corporate debt securities and mutual funds, the
assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. In addition, the Bank
has certain additional investment authority under OTS regulations as a result of
certain grandfathered powers permitted under the terms of the approval of its
conversion from state to federal charter.
The following table sets forth certain information relating to the
Bank's investment securities and mortgage-backed securities held to maturity and
securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------------------
Amortized Market Amortize Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------- -------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
United States Government Agency obligations..... 17,042 16,907 24,934 24,928 5,826 5,666
Obligations of State and political subdivisions. 3,400 3,497 1,055 1,156 1,055 1,081
Federal Home Loan Bank stock.................... 3,089 3,089 2,864 2,864 2,495 2,495
Mortgage-backed securities...................... 48,618 48,587 54,316 55,032 35,087 34,096
Other corporate bonds........................... 17,493 17,521 10,955 11,041 20,136 19,991
------- -------- -------- -------- -------- --------
Total investments held to maturity including
Federal Home Loan Bank stock................. 89,642 89,601 94,124 95,021 64,599 63,329
------- -------- -------- -------- -------- --------
Securities available for sale: (1)
United States Treasury securities............... 65,336 65,507 -- -- -- --
United States Government and Agency obligations. 9,924 9,767 75,955 76,653 51,958 50,866
Equity securities............................... 894 3,201 2,536 7,123 8,375 14,095
Other bonds..................................... 9,151 9,172 -- -- -- --
------- -------- -------- -------- -------- --------
Total securities available for sale........... 85,305 87,647 78,491 83,776 60,333 64,961
------- -------- -------- -------- -------- --------
Total investments............................... $174,947 $177,248 $172,615 $178,797 $124,932 $128,290
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------
(1) The Bank adopted FASB No. 115 "Accounting for Investments" as of January 1,
1994 and transferred certain securities held to maturity to available for
sale. See the notes to the audited financial statements.
As of December 31, 1996, the Bank's investment securities held to
maturity portfolio had a carrying value of $41.0 million, of which $17.0 million
were securities issued by U.S. Agencies and other governmental subdivisions and
$20.9 million were corporate and municipal bonds. As of that same date, the
Bank's securities available for sale portfolio had an estimated market value of
$87.6 million, of which $75.3 million were securities issued by the U.S.
Treasury and federal government agencies, $3.2 million were common stocks and
$9.2 million were other bonds.
At December 31, 1996, $9.2 million, or 10.3%, of the $89.6 million of
total securities held to maturity by the Bank were scheduled to mature within
one year and had a weighted average yield of 5.8%. At December 31, 1996, $40.4
million, or 47.4%, of the $85.3 million of securities available for sale by the
Bank were scheduled to mature within one year and had a weighted average yield
of 6.1%.
The investment portfolio on December 31, 1996 included $8.1 million of
holdings acquired as a result of the acquisition of BCB. This portfolio consists
of Treasury and Agency obligations, obligations of state and political
subdivisions, and corporate bonds.
11
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, amortized cost, market values and weighted average yields for the Bank's
investment portfolio at December 31, 1996.
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years
--------------------- -------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities.......... $ 3,014 6.2% $ 28,776 6.3% $ 1,405 9.5%
Federal Home Loan Bank stock........ -- -- -- -- -- --
United States Agency obligations -- -- 17,042 6.1% -- --
Obligations of State and political
subdivisions...................... 1,515 4.1% 799 4.9% 285 4.8%
Corporate bonds..................... 4,687 6.0% 11,513 5.9% 1,293 7.0%
------- ------- -------
Total investments held to maturity $ 9,216 $58,130 $ 2,983
======= ======= =======
Securities available for sale:
United States Treasury
securities........................ $39,425 6.2% $25,911 5.8% $ -- --
United States agency obligations 50 6.0% 598 6.2% 9,276 6.7%
Equity securities................... 894 2.1% -- -- -- --
Other bonds......................... 55 4.0% 8,124 6.1% 972 6.3%
------- ------- -------
Total securities available for sale $40,424 $34,633 $10,248
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
------------------------------------------------------
More than Ten Years Total
-------------------- ---------------------------------
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- --------- --------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities.......... $15,423 7.5% $48,618 $48,587 6.7%
Federal Home Loan Bank stock........ 3,089 6.4% 3,089 3,089 6.4%
United States Agency obligations -- -- 17,042 16,907 6.1%
Obligations of State and political
subdivisions...................... 801 6.9% 3,400 3,497 5.0%
Corporate bonds..................... -- -- 17,493 17,521 6.0%
------- ------- -------
Total investments held to maturity $19,313 $89,642 $89,601
======= ======= =======
Securities available for sale:
United States Treasury
securities........................ $ -- -- $65,336 $65,507 6.0%
United States agency obligations -- -- 9,924 9,767 6.6%
Equity securities................... -- -- 894 3,201 2.1%
Other bonds......................... -- -- 9,151 9,172 6.1%
------- ------- -------
Total securities available for sale $ -- $85,305 $87,647
======= ======= =======
</TABLE>
12
<PAGE>
Cash and Cash Equivalents. The Bank also had cash and cash equivalents
consisting primarily of cash due from banks and federal funds sold totalling
$20.9 million and $16.3 million at December 31, 1996 and December 31, 1995,
respectively.
Mortgage-Backed Securities
The Bank has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by Freddie Mac, the Government National Mortgage
Association ("GNMA") or Fannie Mae. Mortgage-backed securities increase the
liquidity and the quality of the Bank's assets by virtue of their greater
liquidity compared to individual mortgage loans, the guarantees that back the
securities themselves and their ability to be used to collateralize borrowings
or other obligations of the Bank, including repurchase agreements. In addition,
at December 31, 1996, 24.8% of the Bank's mortgage-backed securities portfolio
consisted of pools of adjustable rate mortgages. Mortgage-backed securities of
this type serve to reduce the interest rate risk associated with changes in
interest rates. Also, 70.3% of the Bank's mortgage-backed securities consist of
five- to seven-year balloon maturities, providing further protection against
interest rate increases.
The following table sets forth the activity in the Bank's
mortgage-backed securities portfolio including mortgage-backed securities
available for sale category during the periods indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1996 1995 1994
------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities at beginning of period .... $ 55,069 113.3% $ 36,161 66.6% $ 33,169 94.5%
Purchases............................................. 6,065 12.5 25,495 46.9 9,540 27.2
Repayments............................................ (12,177) (25.0) (6,700) (12.3) (6,576) (18.7)
Net discount (premium) amortization................... 94 0.2 113 0.2 28 0.1
Amortized cost of mortgage backed securities
at end of period.................................. 49,051 100.9 55,069 101.4 36,161 103.1
Carrying value adjustment (1)......................... (433) (0.9) (753) (1.4) (1,074) (3.1)
-------- -------- --------
Carrying value of mortgage-backed securities
at end of period.................................. $ 48,618 100.0% $ 54,316 100.0% $ 35,087 100.0%
======== ========= ========
</TABLE>
- --------------------------
(1) During 1994, the Bank transferred mortgage-backed securities from available
for sale to held to maturity at market value and is amortizing this
adjustment over the estimated remaining life of the related securities.
At December 31, 1996, the Bank's mortgage-backed securities in the held
to maturity category had a carrying value and estimated market value of $48.6
million. Of the $48.6 million portfolio, $31.8 million was scheduled to mature
in five years or less and $15.4 million was scheduled to mature after ten years.
Due to prepayments of the underlying loan, the actual maturities of
mortgage-backed securities generally are substantially less than the scheduled
maturities. The mortgage-backed securities held to maturity include a valuation
allowance of $0.4 million at December 31, 1996. These securities were designated
as available for sale portfolio on January 1, 1994 upon the adoption of SFAS No.
115 and were subsequently transferred to held to maturity on October 1, 1994.
The October 1, 1994 transfer was designed to more accurately reflect the Bank's
then current intent to hold these securities to maturity. The unrealized loss at
the time of the October 1, 1994 transfer is being amortized to equity over the
estimated life of the related mortgage-backed securities.
The $31.8 million of mortgage-backed securities which were scheduled to
mature in five years or less at December 31, 1996 qualify for regulatory
liquidity and have fixed interest rates. Of the Bank's total investment in
mortgage-backed securities at December 31, 1996, $47.0 million consisted of
Freddie Mac certificates and $1.6 million consisted of GNMA certificates. See
Note 7 to the Financial Statements for additional information.
13
<PAGE>
Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments. Loan repayments are a relatively stable
source of funds, while deposit 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. The Bank's deposits are attracted principally from within the
Bank's primary market area through the offering of a broad selection of deposit
instruments, money market accounts, regular savings accounts, and term
certificate accounts. Deposit account terms vary, with the principal differences
being the minimum balance required, the time periods the funds must remain on
deposit and the interest rate.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal regulations. The Bank does
not advertise for deposits outside its primary market area and does not utilize
the services of deposit brokers.
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1996 1995 1994
--------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit................. $ 296,546 60.4% $ 261,797 63.7% $ 224,518 59.5%
Transaction accounts:
Savings, passbook statement and
club accounts........................ 104,479 21.3 92,965 22.6 99,652 26.4
Demand deposits and NOW accounts...... 90,221 18.3 56,008 13.7 53,389 14.1
---------- ----- ---------- ----- ---------- -----
Total transaction accounts.......... 194,700 39.6 148,973 36.3 153,041 40.5
---------- ----- ---------- ----- ---------- -----
Total deposits...................... $ 491,246 100.0% $ 410,770 100.0% $ 377,559 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
14
<PAGE>
The following table sets forth the change in dollar amounts of the
various types of deposit accounts offered by the Bank between the dates
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- ----------------
Amount Percent $ Change Amount Percent $ Change Amount Percent
------ ------- -------- ------ ------- -------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit:
Maturing within 12 months...... $ 188,744 38.4% $ 5,086 $183,658 44.7% $57,884 $125,774 33.3%
Maturing within 13-24 months... 39,803 8.2 11,883 27,920 6.7 (8,517) 36,437 9.7
Maturing within 25-36 months... 20,298 4.1 (7,455) 27,753 6.8 (2,341) 30,094 8.0
Maturing beyond 36 months...... 47,701 9.7 25,235 22,466 5.5 (9,747) 32,213 8.5
--------- ----- --------- -------- ----- ------- -------- -----
Total certificates of deposit 296,546 60.4 34,749 261,797 63.7 37,279 224,518 59.5
--------- ----- --------- -------- ----- ------- -------- -----
Transaction accounts:
NOW............................ 16,431 3.3 6,876 9,555 2.3 38 9,517 2.5
Noninterest-bearing demand..... 25,366 5.2 14,566 10,800 2.6 1,405 9,395 2.5
Passbook statement............. 104,210 21.2 11,464 92,746 22.6 (6,694) 99,440 26.3
Club accounts.................. 269 0.1 50 219 0.1 7 212 0.1
Money market demand deposits... 44,794 9.1 11,899 32,895 8.0 1,349 31,546 8.3
Other.......................... 3,630 0.7 872 2,758 0.7 (173) 2,931 0.8
--------- ----- --------- -------- ----- ------- -------- -----
Total transaction accounts... 194,700 39.6 45,727 148,973 36.3 (4,068) 153,041 40.5
--------- ----- --------- -------- ----- ------- -------- -----
Total deposits............. $ 491,246 100.0% $ 80,476 $410,770 100.0% $33,211 $377,559 100.0%
========= ===== ========= ======== ===== ======= ======== =====
</TABLE>
The following table shows the interest rate and maturity information
for the Bank's certificates of deposit at December 31, 1996.
<TABLE>
<CAPTION>
Over 1 Over 2
1 Year Through Through Over 3
Interest Rate or Less 2 Years 3 Years Years Total
--------- --------- --------- --------- --------
(Dollars in Thousands)
<C> <C> <C> <C> <C> <C>
3-4% .............................. $ 1,718 $ -- $ -- $ -- $ 1,718
4.01-5%............................. 5,999 -- -- -- 5,999
5.01-6%............................. 181,027 39,803 20,298 31,795 272,923
6% and above........................ -- -- -- 15,906 15,906
-------- ------- -------- -------- --------
Total............................. $188,744 $39,803 $ 20,298 $ 47,701 $296,546
======== ======= ======== ======== ========
</TABLE>
The following table sets forth the scheduled maturities of the Bank's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1996.
Certificates
Maturity Period of Deposit
--------------
(In Thousands)
Three months or less...................... $ 8,671
Over three through six months............. 490
Over six through twelve months............ 407
Over twelve months........................ 16,525
----------
Total................................... $ 26,093
==========
15
<PAGE>
The following table sets forth the savings activities of the Bank
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Net (decrease) increase before
interest credited and assumption
of liabilities........................... $ (10,642) $ (17,773) $ (19,132)
Deposit liabilities acquired............... 73,177 33,974 --
Interest credited.......................... 17,941 17,010 12,851
---------- ----------- --------------
Net (decrease) increase in deposits........ $ 80,476 $ 33,211 $ (6,281)
========== =========== ===============
</TABLE>
The following table sets out the average balances in the main
categories of the Bank's deposit base, for the periods indicated.
<TABLE>
<CAPTION>
1996 1995 1994
------------------ -------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Average certificates of deposit $271,362 5.18% $251,932 5.16% $220,873 4.04%
Interest-bearing savings deposits............... 94,569 2.54 112,269 2.59 106,435 2.50
Money market accounts........................... 33,841 3.54 28,162 3.09 32,466 3.26
Demand deposit accounts......................... 16,971 1.74 12,479 1.85 12,221 1.50
Other deposit accounts.......................... 15,195 -- 11,303 -- 9,143 --
Average core deposits........................... 160,576 2.43 164,213 2.44 160,265 2.44
Total average deposits........................ $431,938 4.15% $416,145 4.09% $381,138 3.37%
======== ======== ========
</TABLE>
Borrowings. The Bank may obtain advances from the FHLB of New York upon
the security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness 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. The Bank has
never obtained advances from the FHLB. However, in January of 1997, the Board of
Directors approved a specific borrowing in the amount of $30 million for
reinvestment in federal agency securities. Management may periodically recommend
to the Board similar borrowing opportunities.
16
<PAGE>
Quarterly Financial Information. The following table summarizes certain
1996 and 1995 quarterly financial data.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
1996 1996 1996 1996
------------ -------------- ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income........................... $ 10,241 $ 8,970 $ 8,850 $ 8,842
Interest expense.......................... 5,076 4,356 4,217 4,292
Net interest income....................... 5,165 4,614 4,633 4,550
Provision for loan losses................. -- -- -- --
Gain on security transactions............. 650 -- 617 1,572
Operating expenses........................ 3,235 2,369 2,002 2,063
Income before tax expense................. 3,037 2,430 3,410 4,234
Net income for the quarter................ 1,943 1,556 2,183 2,709
Earnings per share........................ 0.22 0.17 0.25 0.30
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
1995 1995 1995 1995
------------ -------------- ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income........................... $ 8,852 $ 8,898 $ 8,185 $ 7,583
Interest expense.......................... 4,420 4,593 4,301 3,696
Net interest income....................... 4,432 4,305 3,884 3,887
Provision for loan losses................. 15 45 45 45
Gain (loss) on security transactions...... 884 937 1,525 847
Operating expenses........................ 2,085 1,843 2,017 1,847
Income before tax expense................. 3,402 3,546 3,505 3,059
Net income for the quarter................ 2,178 2,269 2,244 1,957
Earnings per share........................ 0.24 N/A N/A N/A
</TABLE>
Competition
The Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, commercial banks and credit
unions located in central New Jersey, including many large financial
institutions which have greater financial and marketing resources available to
them. The Bank has eight branches in Mercer County, five in Burlington County
and one in Ocean County. In addition, the Bank has faced additional competition
for investors' funds from short-term money market securities and corporate
stocks and bonds. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank competes for loans principally from other savings
institutions, commercial banks, and mortgage banking companies. The Bank
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers. TSBF
also markets asset-based lending products within the same geographic areas.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.
17
<PAGE>
Personnel
The Bank and its subsidiary TSBF had 121 full-time employees and 31
part-time employees at December 31, 1996. None of these employees is party to a
collective bargaining agreement, and the Bank believes that it enjoys good
relations with its personnel.
REGULATION AND SUPERVISION
As a federally chartered BIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the BIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Holding Company and the Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act"). The federal banking
statutes, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by
savings institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings institutions. The description of statutory provisions and regulations
applicable to savings associations set forth herein does not purport to be a
complete description of such statutes and regulations and their effect on the
Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the Bank's unimpaired capital
and surplus on an unsecured basis. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate. The Bank's maximum
legal loan-to-one-borrower limit was $15.5 million at December 31, 1996. The
Bank's internal lending limit is $5.0 million to any one borrower. As of
December 31, 1996, the Bank was in compliance with its loans-to-one-borrower
limitations.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly average basis in 9 out of every 12 months. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. As of December 31, 1996, the Bank maintained
79.25% of its portfolio assets in qualified thrift investments and, therefore,
met the QTL test.
18
<PAGE>
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. See "--Holding Company
Regulation--Waiver of Dividends."
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified U.S.
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposit
accounts plus borrowings payable in one year or less. This liquidity requirement
which is currently 5%, may be changed from time to time by the OTS to any amount
within the range of 4% to 10% depending upon economic conditions and the savings
flow of member institutions. OTS regulations also require each savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet these liquidity requirements. The Bank's
average liquidity ratio for the quarter ended December 31, 1996 was 38.26%,
which exceeded the then applicable requirements. The Bank has never been subject
to monetary penalties for failure to meet its liquidity requirements.
Community Reinvestment. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings institution has a
continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA rating system identifies four levels
of performance that may describe an institution's record of meeting community
needs: outstanding, satisfactory, needs to improve and substantial
non-compliance. The CRA also requires all institutions to make public disclosure
of their CRA ratings. The CRA regulations were recently revised. Effective July
1, 1995, the OTS will assess the CRA performance of a savings institution under
s lending, service and investment tests, and based on such assessment, will
assign an institution in one of the four above-referenced ratings. The Bank
received an outstanding CRA rating under the current CRA regulations in its most
recent federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and any non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
19
<PAGE>
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. The federal banking agencies
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement the safety and soundness
standards required under the FDI Act. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The standards set forth in the Guidelines address internal controls
and information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. The agencies also adopted a proposed rule which proposes asset
quality and earnings standards which, if adopted, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain
purchased mortgage servicing rights ("PMSRs"). Tangible capital is defined as
core capital less all intangible assets (including supervisory goodwill) plus a
specified amount of PMSRs. The OTS regulations also require that, in meeting the
tangible ratio, leverage and risk-based capital standards, institutions must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank, and unrealized gains (losses) on certain
available for sale securities.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
20
<PAGE>
At December 31, 1996, the Bank exceeded each of the three OTS capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of December 31, 1996.
<TABLE>
<CAPTION>
OTS Requirements
-------------------------------------------
Minimum For Classification
Actual Capital Adequacy as Well Capitalized
-------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996:
Tangible capital......... $92,302 15.6% $ 8,860 1.50% $ -- --%
Tier I (core) capital.... 92,302 15.6 17,721 3.00 29,534 5.00
Risk-based capital:
Tier I................. 92,302 27.5 -- -- 20,119 6.00
Total.................. 95,200 28.4 26,825 8.00 33,531 10.00
December 31, 1995:
Tangible capital......... 91,838 18.1 7,627 1.50 -- --
Tier I (core) capital.... 91,838 18.1 15,253 3.00 25,422 5.00
Risk-based capital:
Tier I................. 91,838 35.5 -- -- 15,528 6.00
Total.................. 93,605 36.2 20,704 8.00 25,880 10.00
</TABLE>
An OTS regulatory capital rule also incorporates an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the excess change. The OTS has deferred, for
the present time, the date on which the interest rate component is to be
deducted from total capital. The rule also provides that the Director of the OTS
may waive or defer an institution's interest rate risk component on a
case-by-case basis.
The following table presents the Bank's NPV as of December 31, 1996, as
calculated by the OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
Change in Change in NPV
Interest Rates Net Portfolio Value as a percentage of
in Basis Points ------------------------------------------- Estimated Market
(Rate Shock) Amount $ Change % Change Value of Assets
--------------- -------- -------- -------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
400 $ 73,736 $ (26,603) (27.0%) (4.54%)
200 $ 89,010 $ (11,329) (11.0%) (1.93%)
Static $ 100,339 -- -- --
(200) $ 109,583 $ 9,244 9.0% 1.57%
(400) $ 117,183 $ 16,844 14.0% 2.87%
</TABLE>
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core
21
<PAGE>
capital ratio that is less than 4.0% is considered to be undercapitalized. A
savings institution that has the total risk-based capital less than 6.0%, a Tier
1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is
less than 3.0% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB-New York stock, at December 31, 1996, of
$3.1 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. Dividends paid by the FHLB to the Bank for the year
ended December 31, 1996 totaled $197,340.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $54.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $54.0
million. The first $4.2 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS.
Holding Company Regulation
General. The Holding Company is a non-diversified mutual savings and
loan holding company within the meaning of the HOLA, as amended. As such, the
Holding Company is registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Holding Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution.
Restrictions Applicable to Mutual Holding Companies. Pursuant to
Section 10(o) of the HOLA and OTS regulations, a mutual holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company; one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
22
<PAGE>
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
The HOLA prohibits a savings and loan holding company, including the
Holding Company, directly or indirectly, or through one or more subsidiaries,
from acquiring another savings institution or holding company thereof, without
prior written approval of the OTS. It also prohibits the acquisition or
retention of, with certain exceptions, more than 5% of a non-subsidiary savings
institution, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by the HOLA; or acquiring or
retaining control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources, future prospects of the company
and institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Waiver of Dividends. In addition, OTS regulations require the Holding
Company, which owns the majority of the Bank's common stock, to notify the OTS
of any proposed waiver of its right to receive dividends. It is the OTS' recent
practice to review dividend waiver notices on a case-by-case basis, and, in
general, not object to any such waiver if: (i) the mutual holding company's
board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
TAXATION
Income Taxes
Income taxes are accounted for under the asset and liability method
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
23
<PAGE>
The Federal tax bad debt reserve method available to thrift
institutions was repealed in 1996 for tax years beginning after 1995. As a
result, the Bank must change from the reserve method to the specific charge-off
method to compute its bad debt deduction. In addition, the Bank is required
generally to recapture into income the portion of its bad debt reserve (other
than the supplemental reserve) that exceeds its base year reserves,
approximately $2.5 million.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable income
ratably (on a straight-line basis) over a six-year period. If the Bank meets a
"residential loan requirement" for a tax year beginning in 1996 or 1997, the
recapture of the reserves will be suspended for such tax year. Thus, recapture
can potentially be deferred for up to two years. The residential loan
requirement is met if the principal amount of housing loans made by the Bank
during the year at issue (1996 and 1997) is at least as much as the average of
the principal amount of loans made during the six most recent tax years prior to
1996. Refinancings and home equity loans are excluded.
Retained earnings as of December 31, 1996 include approximately $3.5
million for which no provision for s Federal income tax has been made. This
reserve (base year and supplemental) is frozen/not forgiven as certain events
could trigger a recapture such as stock redemption or distributions to
shareholders in excess of current or accumulated earnings and profits.
Immediately after the Reorganization, the Bank had no accumulated
earnings and profits for tax purposes which would be available for dividend
distributions, and no assurance can be given as to whether the Bank will have
current or accumulated profits in future periods.
The Holding Company and the Bank file separate federal tax returns on a
calendar year basis.
State Taxation
The Bank is subject to the New Jersey Savings Institution Tax which
imposes a tax in an annual amount equal to 3% of taxable income.
For additional information relating to taxation of the Bank, see Note
12 to the Financial Statements.
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Age as of
Name December 31, 1996 Position
- ---- ----------------- --------
<S> <C>
Wendell T. Breithaupt............... 63 Director, President and Chief Executive Officer
Leo J. Bellarmino.................. 48 Executive Vice President
Richard L. Gallaudet................ 53 Vice President-- Senior Lending Officer
Dean H. Lippincott.................. 44 Vice President-- Mortgage Officer
Robert Russo........................ 42 Vice President and Treasurer
Robert C. Hollenbeck................ 52 Vice President and Corporate Secretary
</TABLE>
Set forth below is a brief description of the background of each person
who serves as an executive officer of the Bank and who is not a director of the
Bank. All executive officers who are not directors have held their present
position for at least five years unless otherwise stated.
Wendell T. Breithaupt, age 63, is President and Chief Executive Officer
of the Bank and serves also as a Director. Mr. Breithaupt serves on all
Committees except the Examining (Audit) Committee and Compensation Committee. He
has served as President since 1981 and as Chief Executive Officer since 1982. He
has been a Director since 1979. He is a Director, member of the Executive
Committee, and Vice President of the Mercer County Chamber of Commerce, and is
on the Board of Trustees and a member of the Finance Committee of the Mercer
Medical Center. He is a member of the Mercer County Development Commission and
serves as a trustee of the Drumthwacket Foundation, Inc. Mr. Breithaupt serves
as director of RSI Retirement Systems, a New York corporation.
24
<PAGE>
Leo J. Bellarmino, age 48, is Executive Vice President, responsible for
the Bank's Human Resources, Marketing, Branch Network, Project Planning, and
Information Services. He joined the bank in October of 1995. He was a former
Senior Vice President with CoreStates New Jersey National Bank where he served
in various management capacities, including division manager of their 140 New
Jersey branch offices.
Richard L. Gallaudet, age 53, is Vice President and Senior Lending
Officer, responsible for the direct management of all the Bank's lending
activities. He joined the Bank in 1990, prior to which he held a number of
management positions with other banks, including three years of service
(1986-1989) as President and Chief Executive Officer of Cherry Hill National
Bank and thirteen years of service (1973-1986) as a Senior Vice President with
MidLantic National Bank/South (formerly Heritage Bank).
Dean H. Lippincott, age 44, has been Vice President in charge of the
Bank's Mortgage Department since 1988 and has served the Bank in a number of
other capacities since joining it in 1970. His responsibilities include home
mortgage loan originations. He participates as a member of the West Ward
Community Partnership Corp.
Robert Russo, age 42, is Vice President and Treasurer, responsible for
all bank investment and operations activities, including branch administration,
financial reporting, and accounting systems. He joined the Bank in 1985 as an
Assistant Vice President. He has held other positions in the thrift industry
since 1978.
Robert C. Hollenbeck, age 52, is Vice President and Corporate Secretary
responsible for investor relations, bank investments, budgeting and corporate
regulatory matters. He joined the Bank in November 1994. He has 28 years of
banking experience including 10 years as Executive Vice President and Director
of New Brunswick Savings Bank and five years as Executive Vice President of
Constellation Bank.
ITEM 2. PROPERTIES
At December 31, 1996, the Bank conducted its business from its
corporate center in Lawrenceville, New Jersey and 14 full service branch offices
located in Mercer and Burlington Counties, New Jersey. The aggregate net book
value of the Bank's premises and equipment was $7.0 million as of December 31,
1996. The following table sets forth certain information regarding the corporate
center and the 14 branch offices of the Bank at December 31, 1996.
<TABLE>
<CAPTION>
Year Leased Lease Expiration
Description/Address Opened Owned Date
- ------------------- ------ ------ ----------------
<S> <C> <C> <C>
Administrative Office
134 Franklin Corner Road 1993 Owned
Lawrenceville, New Jersey
Branch Offices
Trenton Branch 1994 Leased July 31, 1999
33 West State Street Three 5-year options
Trenton, New Jersey
Ewing Branch 1976 Leased August 31, 1996
1980 North Olden Avenue Two 10-year options
Trenton, New Jersey
Hamilton Branch 1977 Leased April 30, 1997
2465 South Broad Street Two 10-year options
Trenton, New Jersey
Robbinsville Branch 1980 Owned
2371 Route 33 & 526
Robbinsville, New Jersey
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Year Leased Lease Expiration
Description/Address Opened Owned Date
- ------------------- ------ ------ ----------------
<S> <C> <C> <C>
Lawrenceville Branch 1990 Leased January 31, 2000
2495 Brunswick Avenue Two 5-year options
Lawrenceville, New Jersey
Pennington Branch 1991 Owned
2583 Pennington Road
Pennington, New Jersey
Burlington Branch 1983 Owned
332 High Street
Burlington, New Jersey
Mt. Holly Branch 1989 Leased December 20, 2004
501 High Street Three 5-year options
Mt. Holly, New Jersey
Mercerville Branch 1991 Leased March 31, 2001
1750 Whitehorse-Mercerville Road One 5-year option
Mercerville, New Jersey
Leisure Village East 1995 Leased June 30, 2005
1 Dumbarton Drive Two 5-year options
Lakewood, NJ 08701
West Windsor Branch 1996 Leased August 31, 2006
1349 Princeton-Highstown Road Three 5-year options
Cranbury, NJ 08512
Burlington Branch 1988 Owned
1660 Beverly Road
Burlington, NJ 08016
Delanco Branch 1989 Leased August 31, 1999
Burlington Avenue & Coopertown Road Three 5-year options
Delanco, NJ 08075
Springside Branch 1996 Leased January 31, 2011
2001 Burlington--Mt. Holly Road Two 5-year options
Burlington, NJ 08016
Leisure Village West Branch 1997 Leased February 28, 2007
3--C Buckingham Drive Two 5-year options
Lakehurst, NJ 08733
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business the Bank may be a party to various
outstanding legal proceedings and claims. In the opinion of management, the
financial position of the Bank will not be materially affected by the outcome of
such legal proceedings and claims.
26
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal year
ended December 31, 1996 to a vote of security holders.
PART II
ITEM 5. MARKET FOR BANK'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
For information concerning the market for the Bank's common stock, the
section captioned "Common Stock and Related Matters" of the Bank's Annual Report
to Stockholders for the Period Ended December 31, 1996 (the "Annual Report to
Stockholders") is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The "Selected Financial and Other Data" section of the Bank's Annual
Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Bank's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants with respect
to the Bank's accounting and financial disclosures during the year ended
December 31, 1996.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE BANK
Information concerning Directors of the Bank is incorporated herein by
reference from the Bank's definitive Proxy Statement dated March 14, 1997 (the
"Proxy Statement"), specifically the section captioned "Proposal I--Election of
Directors." In addition, see Item 1. "Executive Officers of the Bank" for
information concerning the Bank's executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Bank's Proxy Statement, specifically the sections captioned
"Proposal I--Election of Directors."
27
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain owners and
management is incorporated herein by reference from the Bank's Proxy Statement.
ITEM 13. CERTAIN TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from the Bank's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(1) Financial Statements
o Independent Auditors' Report
o Consolidated Statements of Condition (as of December 31,
1996 and 1995)
o Consolidated Statements of Income (for the years ended
December 31, 1996, 1995 and 1994)
o Consolidated Statements of Stockholders' Equity (for the
years ended December 31, 1996, 1995 and 1994)
o Consolidated Statements of Cash Flows (for the years ended
December 31, 1996, 1995 and 1994)
o Notes to Consolidated Financial Statements (for the years
ended December 31, 1996, 1995 and 1994)
(a)(2) Financial Statement Schedules
No financial statement schedules are filed because the required
information is not applicable or is included in the financial
statements or related notes.
(a)(3) Exhibits
3.1 Charter of Trenton Savings Bank FSB (Incorporated by
reference to Exhibit C of the Bank's Form MHC-1, as filed
on March 20, 1995 (the "Form MHC")).
3.2 Bylaws of Trenton Savings Bank FSB (Incorporated by
reference to Exhibit D of the Bank's Form MHC-1).
4 Common Stock Certificate of the Bank (Incorporated by
reference to Exhibit 2B of the Bank's Form MHC-1).
10.1 Supplemental Executive Retirement Plan (Incorporated by
reference to Exhibit 10.1 of the Bank's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1996).
10.2 Employment Agreement between the Bank and Wendell T.
Breithaupt (Incorporated by reference to Exhibit 2D of the
Bank's Form MHC-1).
28
<PAGE>
13 1996 Annual Report to Stockholders
21 Subsidiaries of the Registrant
(b) Reports on Form 8-K:
On October 16, 1996, the Registrant filed a Current Report on
Form 8-K announcing the consummation of the acquisition of BCB.
On March 11, 1997, the Registrant filed a Current Report on
Form 8-K announcing the execution of a Letter of Intent to acquire Manchester
Trust Bank.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TRENTON SAVINGS BANK FSB
Date: March 26, 1997 By: /s/ Wendell T. Breithaupt
-------------------------
Wendell T. Breithaupt
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Robert Russo By: /s/ John B. Sill, Jr.
--------------------------------------------- -------------------------------
Robert Russo, Vice President and Treasurer John B. Sill, Jr., Chairman
(Principal Financial and Accounting Officer)
Date: March 26, 1997 Date: March 26, 1997
By: /s/ Miles W. Truesdell, Jr. By: /s/ Peter S. Longstreth
---------------------------------------------- -------------------------------
Miles W. Truesdell, Jr., Director Peter S. Longstreth, Director
Date: March 26, 1997 Date: March 26, 1997
By: /s/ George A. Pruitt By: /s/ George W. Reinhard
---------------------------------------------- ------------------------------
George A. Pruitt, Director George W. Reinhard, Director
Date: March 26, 1997 Date: March 26, 1997
By: /s/ Charles E. Stokes By: /s/ Raymond E. Trainer
--------------------------------------------- ------------------------------
Charles E. Stokes, Director Raymond E. Trainer, Director
Date: March 26, 1997 Date: March 26, 1997
</TABLE>
<PAGE>
EXHIBIT 13
1996 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
At Year End (000's) 1996 1995 1994
- -------------------------------------------------------------------------------
Total Assets $601,016 $514,218 $441,019
Total Loans, net 380,288 306,093 289,504
Total Deposits 491,246 410,770 377,559
Stockholders' Equity 103,352 97,542 58,769
- -------------------------------------------------------------------------------
For The Year (000's)
- -------------------------------------------------------------------------------
Interest Income $36,903 $33,518 $29,468
Interest Expense 17,941 17,010 12,851
Net Income 8,391 8,648 7,675
- -------------------------------------------------------------------------------
Key Ratios
- -------------------------------------------------------------------------------
Return on Average Assets 1.56% 1.73% 1.72%
Return on Average Equity 8.34% 11.33% 13.45%
Equity Ratio 18.67% 15.27% 12.78%
Efficiency Ratio 46.53% 43.84% 42.95%
Nonperfoming Assets as a % of
Total Assets 0.57% 0.43% 0.59%
- -------------------------------------------------------------------------------
Total Assets Stockholders Equity
- -------------------------------- -------------------------------------
[GRAPH] [GRAPH]
1
<PAGE>
Trenton Savings Bank
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To Our Stockholders, Customers And Friends;
In our 152nd year of operation we concentrated on implementing the bank's
strategic plan. We adopted the theme of moving forward together as our corporate
credo for 1997, as we believe this action phrase best describes our commitment:
maximizing our resources to succeed in the changing financial services
environment.
Before we discuss the future, it is only fitting that we review the
accomplishments of the past year.
Highlights and Accomplishments
- ------------------------------
In late September, we merged the Burlington County Bank into Trenton Savings
Bank and during the same month we also opened our West Windsor branch. These two
events increased our number of branch locations to 14 while increasing assets at
year end to $601 million.
In late summer, we announced the formation of our first wholly-owned subsidiary
corporation, TSBusiness Finance Corporation. This company was established based
upon the results of a business survey indicating that small- to medium-size
businesses had a growing need for asset based extensions of credit. In addition,
our loan officers interviewed customers and prospects in the area to verify the
need for this credit product.
The bank selected an experienced executive, Frank Sannella, Jr., to head this
endeavor. His career, spans 25 years in this specialized lending field, and he
is a valuable addition to our organization.
In last year's report, we discussed the creation of a formal marketing
department, and we are very pleased with its progress to date. The department
launched our first ATM awareness campaign and conducted a successful
introduction of our MAC card program. Other notable accomplishments included
establishing a marketing central information file, introducing a tiered rate
Money Market Plus account, selecting a new full service advertising agency, and
expanding our use of direct mail and branch merchandising.
Our Human Resources Department enhanced its PC functionality as part of our
technology plan of action and re-established a 40-hour work week for all
employees. A recommended change in health care carriers resulted in substantial
savings for the bank.
As part of our strategic plan, our Branch Administration Group received approval
from the Office of Thrift Supervision to open our second retirement community
branch in Leisure Village West. We have also selected a branch site in Yardley,
Pennsylvania, and expect to execute a lease for the property by the time this
report is published. Both locations should be operable by the fourth quarter of
this year.
The Lending Division grew its outstandings by $74.2 million during the year and
increased its lending level for one borrower to $5 million. It developed a
program of reverse mortgages for the benefit of our senior market and
established a 24-hour turnaround on mortgage loan applications.
2
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Trenton Savings Bank
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Providing all of the support and backup for these accomplishments was our
Corporate Services Group, which spearheaded the conversion task force overseeing
the acquisition of Burlington County Bank.
One of the important lines of business we acquired with the Burlington merger is
Trust Services. Based upon the combined banks' demographics and our penetration
of the senior market, we anticipate considerable growth in this area over the
next several years.
As a result of the aforementioned activities, the bank's earnings continued to
be strong. Net income before security gains was $6.6 million compared to $6.0
million in 1995. This represents an increase of 10.2% in our core earnings.
Security gains in 1995 were $4.2 million and in 1996 they were $2.8 million. Our
net income for the year was $8.4 million.
With the assistance of our Stockholder Relations Department, we have been
actively meeting with institutional investors and have appeared at several
meetings hosted by market makers. The overall interest in our stock, as
evidenced by the numbers of shares traded, remains at an above average level for
mutual holding companies.
Our decision to convert the corporate structure from its present format to a
two-tier mutual holding company structure provides us with several advantages.
Management believes that the two-tier reorganization will provide enhanced
ability to invest through the mid-tier stock holding company, facilitate mergers
and acquisitions, and facilitate stock repurchases.
At the beginning of the year, the bank's stock was trading at $13, and during
1996 it reached a high of $16.375. We closed on December 31, 1996, at a price of
$16.
Building on Our Success
- -----------------------
We believe that the tactics identified in our strategic plan will play a major
role in maintaining and increasing shareholder value over the next several
years. By effectively utilizing our pool of resources, we will meet the
challenges of the coming years by concentrating on five major areas: products,
technology, delivery channels, personnel, and customer service.
Products that provide value-added benefits to our customers will be the focus of
our product development efforts in 1997. Our recently introduced Prime-for-Life
Home Equity Credit Line has been very well received and we are currently working
on refining our overdraft protection product. We will also enhance our cash
management services for commercial customers.
In the area of technology, we will continue to leverage our outsourcing
partnerships in an effort to improve operating efficiencies. We will also be
expanding the functionality of our branch automation system in order to better
service our customers and maximize our recent investment in this platform.
As we look to the year 2000, the need for convenience-oriented services will
become an absolute necessity. We will be enlarging our ATM network and
implementing 24-hour telephone banking capabilities. Additionally, we will
maintain a watchful eye on the home banking environment, as well as any other
alternative delivery channels that may develop.
Working smarter is our goal as we continue to selectively hire only those
talented individuals who will add value to this organization. A complete review
of our compensation practices will be completed in 1997 as we focus on
performance
3
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Trenton Savings Bank
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based rewards. And, as in the past, we will provide our employees with ongoing
training and career development opportunities to allow them to be the best they
can be.
Lastly, a recent customer satisfaction survey demonstrated that our customers
enjoy and affirm our attention to customer service. As a nimble and responsive
organization, we will continue to raise the bar of customer service and find new
and better ways to please our customers, because we realize that service is our
true strength.
It is our opinion that the expenses associated with these initiatives are
necessary and will be more than offset by future earnings.
We have endeavored to keep in close touch with our investors, and I invite you
to visit or talk with us personally should you have any questions regarding our
future plans.
From all indicators, our positioning as a community-based financial institution,
coupled with the initiatives and enhancements as previously discussed, should
continue to reward you for your confidence in Trenton Savings Bank.
Sincerely,
/s/ Wendell T. Breithaupt
- --------------------------
Wendell T. Breithaupt
President and Chief Executive Officer
/s/ John B. Sill, Jr.
- ---------------------------
John B. Sill, Jr.
Chairman
- -------------------------------------------------------------------------------
[PICTURE]
{CAPTION}
Board of Directors: (Back from left to right) Charles E. Stokes, Miles W.
Truesdell, Jr., Raymond E. Trainer, Peter S. Longstreth, George A. Pruitt,
George W. Reinhard, Harry W. Van Sciver (Seated from left to right) Wendell T.
Breithaupt, John B. Sill Jr.
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4
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Trenton Savings Bank
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SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
At December 31,
- -----------------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets ............................ $601,016 $514,218 $441,019 $ 435,746 $ 409,227
Cash and cash equivalents ............... 20,938 16,253 12,665 15,763 11,983
Securities available for sale ........... 87,648 83,776 64,961 -- --
Securities held to maturity:
Investment securities .................. 37,935 36,945 27,017 121,814 161,923
Mortgage-backed securities ............. 48,618 54,316 35,087 33,169 23,800
Federal Home Loan Bank stock ........... 3,089 2,864 2,495 -- --
Loans, net .............................. 380,288 306,093 289,504 255,656 201,889
Real estate owned, net .................. 253 -- 77 -- --
Deposits ................................ 491,246 410,770 377,559 383,840 366,069
Stockholders equity ..................... 103,352 97,542 58,769 49,123 40,624
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income .................. $ 36,903 $ 33,518 $ 29,468 $ 30,754 $ 31,440
Total interest expense .................. 17,941 17,010 12,851 13,253 16,179
- -----------------------------------------------------------------------------------------------------------
Net interest income .................... 18,962 16,508 16,617 17,501 15,261
Provision for loan losses ............... -- 150 180 880 520
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses ........................... 18,962 16,358 16,437 16,621 14,741
Other income ............................ 3,818 4,946 3,150 3,819 1,172
Operating expenses ...................... 9,669 7,792 7,475 6,536 6,010
- -----------------------------------------------------------------------------------------------------------
Income before income taxes and cumu-
lative effect of accounting change...... 13,111 13,512 12,112 13,904 9,903
Income taxes ............................ 4,720 4,864 4,437 4,876 3,369
- -----------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change ...................... 8,391 8,648 7,675 9,028 6,534
Cumulative effect of accounting change... -- -- -- (529) --
- -----------------------------------------------------------------------------------------------------------
Net income ............................. $ 8,391 $ 8,648 $ 7,675 $ 8,499 $ 6,534
- -----------------------------------------------------------------------------------------------------------
</TABLE>
5
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Trenton Savings Bank
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SELECTED OPERATING RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets.................... 1.56% 1.73% 1.72% 2.00% 1.64%
Return on average equity.................... 8.34% 11.33% 13.45% 18.75% 17.52%
Interest rate spread (1) ................... 2.98% 2.96% 3.49% 3.94% 3.62%
Net interest margin (1) .................... 3.66% 3.47% 3.87% 4.26% 3.97%
Net interest income after provision for
loan losses to total operating expense..... 196.11% 209.93% 219.89% 254.30% 245.27%
Operating expenses to average total
assets .................................... 1.80% 1.56% 1.67% 1.54% 1.51%
Asset Quality Ratios:
Nonperforming loans to net loans at
end of period ............................. 0.83% 0.71% 0.87% 0.71% 0.82%
Nonperforming assets to total assets at
end of period ............................. 0.57% 0.43% 0.59% 0.42% 0.40%
Allowance for loan losses to nonper-
forming loans at end of period............. 91.89% 80.91% 65.24% 80.65% 38.35%
Average interest-earning assets to aver-
age interest-bearing liabilities........... 119.80% 114.32% 112.72% 109.92% 108.36%
Capital and Equity Ratios:
Average equity to average assets ........... 18.67% 15.27% 12.78% 10.67% 9.38%
Equity to assets at end of period ......... 17.20% 18.97% 13.33% 11.27% 9.93%
Per Share Data:
Book value per share ....................... $ 11.44 $ 10.94 N/A N/A N/A
Earnings per share ......................... $ 0.94 N/A N/A N/A N/A
Other Data:
Full service offices ....................... 14 10 9 9 9
</TABLE>
- ---------
(1) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average costs of
average interest-bearing liabilities, and net interest margin represents
net interest income as a percentage of average interest-earning assets.
6
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Trenton Savings Bank
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The profitability of the Bank depends primarily on its net interest income,
which is 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 deposits. The
Bank's net income also is dependent, to a lesser extent, on the level of its
other operating income (including service charges) and operating expenses, such
as salaries and employee benefits, net occupancy expense, deposit insurance
premiums, professional fees, data processing and miscellaneous other expenses,
as well as federal and state income tax expenses.
BUSINESS STRATEGY
The Bank's current business strategy is to continue to serve its market area as
a full service community-oriented financial institution dedicated to financing
home ownership and commercial activity and providing financial services to its
customers in an efficient manner. The principal components of its strategy are
discussed below.
Emphasis on Traditional Lending and Investment Activities. The Bank is a
community-oriented savings institution operating primarily in Mercer,
Burlington and Ocean Counties, New Jersey. The Bank's lending emphasis has been
the origination of one- to four-family residential mortgage loans, multi-
family and commercial mortgage loans, home equity and property improvement
loans, commercial business loans and consumer loans. The Bank generally
originates loans for its own portfolio and, with limited exceptions, has not
engaged in the purchase or sale of loans. The Bank generally limits its lending
activities to Mercer and Burlington Counties, New Jersey, and Bucks County,
Pennsylvania. The Bank does not engage in securities trading and limits its
investments to U.S. Treasury and federal government agency obligations,
mortgage-backed securities issued by federal government agencies or sponsored
corporations, municipal securities and corporate obligations which are rated A
or higher by a national rating agency. By investing in these types of assets,
the Bank's strategy has been to supplement its loan portfolio and reduce
significantly the credit and interest rate risk of its asset base in exchange
for lower rates of return than would typically be available through lending
activities. During fiscal 1996, the Bank sold $4.4 million in equity securities
with an amortized cost of $1.6 million. On December 31, 1996, the Bank had $3.2
million of market value invested in equity securities with an amortized cost of
$894,000, which the Office of Thrift Supervision ("OTS") has required to be
divested by December 31, 1997 pursuant to regulations governing the Bank's
conversion from a state to a federally-chartered institution.
Profitability. The Bank has been profitable for each of the last five years.
Net income excluding net securities gains totalled $6.6 million, $6.0 million,
and $6.2 million for the years ending December 31, 1996, 1995, and 1994,
respectively. Net income totaled $8.4 million, $8.6 million and $7.7 million
for the years ended December 31, 1996, 1995 and 1994, respectively. The Bank's
return on average assets for the years ended December 31, 1996, 1995 and 1994
was 1.56%, 1.73% and 1.72%. Included in net income for the years ended December
31, 1996, 1995 and 1994 is pre-tax gain on sale of securities of $2.8 million,
$4.2 million and $2.4 million, respectively. The bank's interest margin
increased to 3.66% in 1996 from 3.47% for 1995 as the average cost of deposits
increased slower than the increase in yields on interest-earning assets.
Strong Retail Deposit Base. The Bank has 14 full-service offices located in
Mercer, Burlington and Ocean Counties, New Jersey. The Bank believes it has a
stable community retail deposit base. The Bank believes its market share of
deposits is approximately 4.9% in Mercer County, New Jersey and 3.4% in
Burlington County, New Jersey. The Bank does not solicit for deposits outside
its primary market area, and does not utilize the services of deposit brokers.
7
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Trenton Savings Bank
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ACQUISITION OF BURLINGTON COUNTY BANK
On February 29, 1996, the Bank announced the execution of a definitive Merger
Agreement with Burlington County Bank ("BCB"), an $80.2 million commercial bank
located in Burlington Township, New Jersey. Under the terms of the agreement,
the Bank paid $12.5 million for all of the outstanding shares of Burlington
County Bank (the "Acquisition"). The Acquisition was accounted for under the
purchase accounting method and was consummated after the close of business on
September 30, 1996.
On the date of the Acquisition, Burlington County Bank had $73.2 million in
deposits, $48.2 million in loans, $8.8 million in securities held to maturity,
$5.4 million in securities available for sale, $15.8 million in cash and
equivalents, and $0.9 million in fixed assets. In accordance with the purchase
method of accounting, the Bank recorded $7.2 million in goodwill as a result of
the Acquisition. The Acquisition also added three branches in Burlington County
to the Bank's existing branch system.
ASSET AND LIABILITY MANAGEMENT
General. It is the objective of the Bank to minimize, to the degree prudently
possible, its exposure to interest rate risk, while maintaining an acceptable
interest rate spread. Interest rate spread is the difference between the Bank's
yield on its interest-earning assets and its cost of interest-bearing
liabilities. Interest rate risk is generally understood to be the sensitivity
of the Bank's earnings, net asset values, and stockholders' equity to changes
in market interest rates.
Changes in interest rates affect the Bank's earnings. The effect on earnings of
changes in interest rates generally depends on how quickly the Bank's yield on
interest-earning assets and cost of interest-bearing liabilities react to the
changes in market rates of interest. If the Bank's cost of deposit accounts
reacts more quickly to changes in market interest rates than the yield on the
Bank's mortgage loans and other interest-earnings assets, then an increasing
interest rate environment is likely to adversely affect the Bank's earnings and
a decreasing interest rate environment is likely to favorably affect the Bank's
earnings. On the other hand, if the Bank's yield on its mortgage loans and other
interest-earnings assets reacts more quickly to changes in market interest rates
than the Bank's cost of deposit accounts, then an increasing interest rate
environment is likely to favorably affect the Bank's earnings and a decreasing
interest rate environment is likely to adversely affect the Bank's earnings.
Interest rate sensitivity is managed by the Asset/Liability Management Committee
("ALCO"). The principal objective of ALCO is to maximize income within
acceptable levels of established risk policy.
The table set forth on the following page shows that the Bank's
interest-bearing liabilities which mature or reprice within short periods
exceed its interest-earning assets with similar characteristics. Accordingly, a
material and prolonged increasing interest rate environment generally would
adversely affect net interest income, while a material and prolonged decreasing
interest rate environment generally would have a positive effect on net
interest income.
The Bank's current investment strategy is to maintain an overall securities
portfolio that provides a source of liquidity and that contributes to the
Bank's overall profitability and asset mix within given quality and maturity
considerations. The securities portfolio is concentrated in U.S. Treasury and
federal government agency securities providing high asset quality to the
overall balance sheet mix. Securities classified as available for sale provide
management with the flexibility to make adjustments to the portfolio given
changes in the economic or interest rate environment, to fulfill unanticipated
liquidity needs, or to take advantage of alternative investment opportunities.
This table presents the difference between the Bank's interest-earning assets
and interest-bearing liabilities at December 31, 1996 expected to reprice or
mature, based on certain assumptions, in each of the future time periods shown.
This table does not necessarily indicate the impact of general interest rate
movements on the Bank's net interest income because the repricing of certain
assets and liabilities is subject to competitive and other limitations. As a
result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may in fact mature or reprice at different
times and at different volumes.
8
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Trenton Savings Bank
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<TABLE>
<CAPTION>
More than More than
Within One Year to Three Years Over
One Year Three Years to Five Years Five Years Total
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans:
Fixed-rate .......................................... $ 15,260 $ 25,884 $ 11,682 $ 68,459 $121,285
Adjustable-rate .................................... 69,297 57,713 39,402 5,188 171,600
Non-mortgage loans:
Fixed-rate ......................................... 10,328 16,413 12,375 4,649 43,765
Adjustable rate .................................... 29,281 12,303 4,161 592 46,337
Securities available for sale:(1)
Debt securities ..................................... 39,530 31,993 2,640 10,248 84,411
Equity securities ................................. 3,201 0 0 0 3,201
Securities held to maturity:
Investment securities ............................... 6,202 17,964 11,390 2,379 37,935
Mortgage-backed securities .......................... 20,159 20,103 6,696 1,660 48,618
Federal Home Loan Bank stock ........................ 0 0 0 3,089 3,089
Federal funds sold .................................... 8,000 0 0 0 8,000
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ........................ $ 201,258 $ 182,373 $ 88,346 $ 96,264 $568,241
===============================================================================================================================
Interest-bearing liabilities:
Deposits:
Demand accounts ..................................... 33,382 18,188 6,571 32,080 90,221
Savings accounts .................................... 17,761 14,742 11,516 60,460 104,479
Certificates of deposit ............................. 188,744 60,101 47,687 14 296,546
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ................ $ 239,887 $ 93,031 $ 65,774 $ 92,554 $491,246
===============================================================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ............. $ (38,629) $ 89,342 $ 22,572 $ 3,710
===============================================================================================================================
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities .......................................... $ (38,629) $ 50,713 $ 73,285 $ 76,995
===============================================================================================================================
Cumulative ratio of excess (deficiency) of
interest-earning assets as a percentage of
total assets ......................................... (6.4%) 8.4% 12.2% 12.8%
===============================================================================================================================
</TABLE>
- -----------
(1) Debt securities available for sale are reflected in this table at amortized
cost, while equity securities are reflected at estimated market value.
9
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Trenton Savings Bank
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In preparing the previous table, it has been assumed, in assessing the interest
rate sensitivity of the Bank, that: (i) mortgage loans will prepay at a rate of
12.0% per year, (ii) fixed maturity deposits will not be withdrawn prior to
maturity; and (iii) Demand and Savings accounts will decay at the following
rates:
Over 1 Over 3
1 Year Through Through Over 5
or Less 3 Years 5 Years Years
- --------------------------------------------------------------------------------
Demand accounts ............... 37.0% 32.0% 17.0% 17.0%
Savings accounts ............... 17.0% 17.0% 16.0% 14.0%
Certain shortcomings are inherent in the method of analysis presented in the
preceding table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. In addition, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and
over the life of the assets. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to make payments on their adjustable-rate debt may decrease
in the event of an interest rate increase.
Net Portfolio Value. The OTS has adopted a final rule that incorporates an
interest rate risk ("IRR") component into the risk-based capital rules. The IRR
component is a dollar amount that will be deducted from total capital for the
purpose of calculating an institution's risk-based capital requirement and is
measured in terms of the sensitivity of its net portfolio value ("NPV") to
changes in interest rates. NPV is the difference between discounted incoming
and outgoing cash flows from assets, liabilities, and off-balance sheet
contracts. An institution's IRR is measured as the change to its NPV as a
result of a hypothetical 200 basis point change in market interest rates. A
resulting change in NPV of more than 2% of the estimated market value of its
assets will require the institution to deduct from its capital 50% of that
excess change. The rule provides that the OTS will calculate the IRR component
quarterly for each institution from the institution's Thrift Financial Reports.
The following table presents the Bank's NPV as of December 31, 1996, as
calculated by the OTS, based on information provided to the OTS by the Bank.
Change in Change in NPV
Interest Rates Net Portfolio Value as a percentage of
in Basis Points ---------------------------------- Estimated Market
(Rate Shock) Amount $ Change % Change Value of Assets
- -------------------------------------------------------------------------------
(Dollars in Thousands)
400 $ 73,736 $26,603 27.0% (4.54%)
200 $ 89,010 $11,329 11.0% (1.93%)
Static $100,339 -- -- --
(200) $109,583 $ 9,244 9.0% 1.57%
(400) $117,183 $16,844 14.0% 2.87%
As shown by the table above, increases in interest rates will result in net
decreases in the Bank's NPV, while decreases in interest rates will result in
smaller net increases in the Bank's NPV. The table suggests that in the event
of a 200 basis point change in interest rates, the Bank would experience a 1.9%
decrease in NPV in a rising interest rate environment, and a 1.6% increase in
NPV in a decreasing interest rate environment.
10
<PAGE>
Trenton Savings Bank
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Certain shortcomings are inherent in the methodology used in the above table.
Modeling changes in NPV requires the making of certain assumptions that may
tend to oversimplify the manner in which actual yields and costs respond to
changes in market interest rates. First, the models assume that the composition
of the Bank's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured. Second,
the models assume that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. Accordingly, although the NPV
measurements do provide an indication of the Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to provide a
precise forecast of the effect of changes in market interest rates on the
Bank's net interest income.
COMPARISON OF FINANCIAL CONDITION
Total assets increased $86.8 million, or 16.9%, to $601.0 million at December
31, 1996 from $514.2 million at December 31, 1995. Deposit growth from the
branch system and net earnings after dividend payments generated $12.0 million
of asset growth. The acquisition of BCB added an additional $74.8 million in
assets. Deposits increased by $80.5 million, or 19.6%, to $491.2 million at
December 31, 1996 from $410.8 million at December 31, 1995. Deposit growth
consisted of $7.3 million from the Bank's branch system and $73.2 million from
the acquisition of BCB. Cash and cash equivalents increased by $4.7 million, or
28.8%, to $20.9 million on December 31, 1996 from $16.3 million at December 31,
1995. Securities available for sale increased $3.9 million, or 4.6%, to $87.6
million at December 31, 1996 from $83.8 million at December 31, 1995.
Securities held to maturity increased $1.0 million, or 2.7%, to $37.9 million
at December 31, 1996 from $36.9 million at December 31, 1995. Net loans
increased $74.2 million, or 24.2%, to $380.3 million at December 31, 1996 from
$306.1 million at December 31, 1995. These portfolios also increased as loan
and mortgage backed securities principal payment, and deposit flows were
reinvested in these asset categories and as a result of the acquisition of BCB.
Mortgage backed securities decreased $5.7 million, or 10.5%, to $48.6 million
at December 31, 1996 from $54.3 million at December 31, 1995. The bank's
investment in Federal Home Loan Bank ("FHLB") stock increased $225,000, or
7.9%, to $3.1 million at December 31, 1996 from $2.9 million at December 31,
1995, as the Bank's larger mortgage loan portfolio permitted additional
investment in FHLB stock.
Stockholders equity increased by $5.8 million, or 6.0%, to $103.4 million at
December 31, 1996 from $97.5 million at December 31, 1995. The increase in
stockholders equity was due to net income of $8.4 million, offset by $1.1
million of dividends and a decline in the net unrealized gain on sale of
securities of $1.6 million.
COMPARISON OF RESULTS OF OPERATIONS
Average Balance Sheet. 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 dollar and rates, and the net
interest margin. Dividends received are included as interest income. The table
does not reflect any effect of income taxes. All average balances are based on
month-end balances. Management believes that using month-end balances, as
opposed to daily balances, has not caused any material differences in the
information presented.
11
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Trenton Savings Bank
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
At December 31,
1996 1996
- ---------------------------------------------------------------------------------------------------------------------
Average Average
Actual Yield/ Average Yield/
(Dollars in Thousands) Balance Cost Balance Interest Cost
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:(1)
Interest-earning assets:
Mortgage loans ..................................... $292,654 7.39% $264,984 $19,489 7.35%
Consumer loans ..................................... 53,453 8.15 47,823 3,727 7.79
Commercial business loans .......................... 34,181 8.89 24,973 2,287 9.16
Securities available for sale: (2)
Debt securities ................................... 84,411 6.16 74,817 4,601 6.15
Equity securities ................................ 894 10.90 1,367 161 11.78
Investments held to maturity:
Investment securities and
Federal Home Loan Bank stock ..................... 41,024 6.18 40,858 2,627 6.43
Mortgage-backed securities ........................ 48,618 6.78 47,990 3,234 6.74
Federal funds sold ................................ 8,000 5.32 14,650 777 5.30
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets .................. 563,235 7.20 517,462 36,903 7.13
Non-interest earnings assets (3) ................... 37,781 21,195
- ---------------------------------------------------------------------------------------------------------------------
Total assets ................................... $601,016 $538,657
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities and
retained earnings:
Certificates of deposits ........................ $296,546 5.35% $271,362 $14,045 5.18%
Core deposits ................................... 194,700 2.15 160,576 3,896 2.43
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ............. 491,246 4.08 431,938 17,941 4.15
Non-interest bearing liabilities ................... 6,418 6,166
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities .............................. 497,664 438,104
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity .............................. 103,352 100,553
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity.......... $601,016 $538,657
- ---------------------------------------------------------------------------------------------------------------------
Net interest income ................................ $18,962
- ---------------------------------------------------------------------------------------------------------------------
Net interest spread (4)............................. 3.12% 2.98%
- ---------------------------------------------------------------------------------------------------------------------
Net interest margin (5) ............................ 3.37% 3.66%
- ---------------------------------------------------------------------------------------------------------------------
Ratio of average interest-earning assets
to average interest-bearing liabilities ........... 114.65% 119.80%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Average balances and rates include non-accrual loans.
(2) Securities available for sale are reflected in this table at amortized
cost.
(3) Includes market value adjustment on securities available for sale.
(4) Interest rate spread represents the difference between the weighted average
rates earned on interest-earning assets and the weighted average rates
paid on interest-bearing liabilities.
(5) Net yield on average interest-earning assets represents net interest income
as a percentage of average interest-earning assets.
12
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
1995 1994
- -------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
- -------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$251,520 $18,558 7.38% $247,697 $17,926 7.24%
35,662 2,866 8.04 23,885 1,789 7.49
9,861 922 9.35 10,486 854 8.14
67,938 4,076 6.00 51,438 2,849 5.54
4,944 409 8.27 9,861 684 6.94
29,331 1,910 6.51 42,994 2,849 6.63
51,323 3,273 6.38 34,707 2,162 6.23
25,175 1,504 5.97 8,533 355 4.16
- -------------------------------------------------------------------------------
475,754 33,518 7.05 429,601 29,468 6.86
24,175 16,863
- -------------------------------------------------------------------------------
$499,929 $446,464
- -------------------------------------------------------------------------------
$251,932 $13,006 5.16% $220,873 $ 8,918 4.04%
164,213 4,004 2.44 160,265 3,933 2.45
- -------------------------------------------------------------------------------
416,145 17,010 4.09 381,138 12,851 3.37
7,437 8,279
- -------------------------------------------------------------------------------
423,582 389,417
- -------------------------------------------------------------------------------
76,347 57,047
- -------------------------------------------------------------------------------
$499,929 $446,646
- -------------------------------------------------------------------------------
$16,508 $16,617
- -------------------------------------------------------------------------------
2.96% 3.49%
- -------------------------------------------------------------------------------
3.47% 3.87%
- -------------------------------------------------------------------------------
114.32% 112.72%
- -------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
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 Bank'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 to the change due to volume.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
- -----------------------------------------------------------------------------------------------------------------------
Increase/(Decrease) Due to Increase/(Decrease) Due to
- -----------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- -----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans .......................... $ 1,006 $ (75) $ 931 $ 285 $ 347 $ 632
Consumer loans .......................... 950 (89) 861 946 131 1,077
Commercial business loans ............... 1,384 (19) 1,365 (59) 127 68
Securities available for sale:
Debt securities ........................ 423 102 525 990 237 1,227
Equity securities ...................... (422) 174 (248) (406) 131 (275)
Securities held to maturity:
Debt securities and Federal Home
Loan Bank stock ...................... 740 (23) 717 (887) (52) (939)
Mortgage-backed securities ............. (224) 185 (39) 1,059 52 1,111
Federal funds sold ...................... (558) (169) (727) 995 154 1,149
- -----------------------------------------------------------------------------------------------------------------------
Total ................................ 3,299 86 3,385 2,923 1,127 4,050
- -----------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Certificates of deposit ................. 989 50 1,039 1,614 2,474 4,088
Interest-bearing savings deposits ...... (92) (16) (108) 87 (16) 71
- -----------------------------------------------------------------------------------------------------------------------
Total ................................. 897 34 931 1,701 2,458 4,159
- -----------------------------------------------------------------------------------------------------------------------
Net change in net interest income ........ $ 2,402 $ 52 $ 2,454 $ 1,222 $ (1,331) $ (109)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Comparison of Result of Operations
General. The Bank reported net income of $8.4 million, $8.6 million and $7.7
million for the years ended December 31, 1996, 1995 and 1994, respectively. Net
income for 1996 includes gross gains from the sale of equity securities of $2.8
million compared to gross gains from the sale of equity securities of $4.2
million and $2.4 million for 1995 and 1994, respectively. Net operating income
net of securities gains for the year ended 1996 was $6.6 million, which
represents a 10.2% increase as compared to $6.0 million for the year ended
1995.
Net Interest and Dividend Income. The Bank's net interest income is determined
by its 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. Total interest income increased by $3.4 million, or 10.1%,
to $36.9 million for the year ended December 31, 1996 from $33.5 million for
the year ended December 31, 1995, as the Bank increased its interest income
from all loan categories, debt securities available for sale, investment
securities and FHLB stock, which increases were partially offset by decreases
in interest income from equity securities available for sale, federal funds
sold, and mortgage-backed securities. The increase in interest income resulted
primarily from a $41.7 million, or 8.8%, increase in average interest-earning
assets to $517.5 million from $475.8 million and an 8 basis point increase in
yield on the Bank's average interest-earnings assets to 7.13% from 7.05%. The
increase in average interest-earning assets resulted from the Bank's
acquisition of BCB and deposit inflows.
14
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
Interest income from mortgage loans increased by $931,000, or 5.0%, to $19.5
million for the year ended December 31, 1996, from $18.6 million for the year
ended December 31, 1995. This increase was due to a $13.5 million, or 5.4%,
increase in average mortgage loans to $265.0 million from $251.5 million, which
offset a decrease in the yield on average mortgage loans to 7.35% from 7.38%.
Interest income from consumer loans increased by $861,000, or 30.0%, to $3.7
million from $2.9 million as a result of a $12.1 million increase in average
consumer loans to $47.8 million from $35.7 million, which was partially offset
by a 25 basis point decrease in the yield on average consumer loans. Interest
income from commercial business loans increased by $1.4 million, or 148%, to
$2.3 million for the year ended December 31, 1996, from $922,000 for the year
ended December 31, 1995. This increase was due to a $15.1 million, or 153.3%
increase in average commercial business loans to $25.0 million from $9.9
million which offset a 19 basis point decrease in the yield on average
commercial business loans to 9.16% from 9.35%. The increase in average
commercial business loan balances was due to the acquisition of BCB and
increased commercial business loan activity. The Bank intends to focus its
efforts on increasing its portfolio of commercial business loans in the future.
Interest income from debt securities available for sale increased by $525,000,
or 12.9%, to $4.6 million from $4.1 million due to a 15 basis point increase in
the yield on average debt securities available for sale to 6.15% from 6.00%,
and a $6.9 million, or 10.1%, increase in average debt securities available for
sale to $74.8 million from $67.9 million. Interest income from mortgage-backed
securities remained at $3.2 million, as a $3.3 million, or 6.5%, decrease in
the average balance of mortgage-backed securities to $48.0 million from $51.3
million was offset by an increase in the yield on average mortgage-backed
securities to 6.74% from 6.38%.
Income from equity securities available for sale decreased by $248,000, or
60.6%, to $161,000 from $409,000 due to a $3.6 million, or 72.4%, decrease in
average equity securities available for sale to $1.4 million from $4.9 million.
This decline in income was partially offset by a 351 basis point increase in
the yield on average equity securities available for sale to 11.78% from 8.27%.
The decrease in average equity securities available for sale resulted from the
Bank's continuing strategy of liquidating such securities, as required in
connection with the Bank's conversion to a federally-chartered savings bank,
while the increase in yield resulted from the favorable market conditions for
equities that existed during 1996.
Interest income from debt securities and FHLB stock increased by $717,000, or
37.5%, to $2.6 million from $1.9 million due to an $11.5 million, or 39.3%
increase in the average balance of debt securities to $40.9 million for 1996
from $29.3 million for 1995. This increase offset an 8 basis point decrease in
yield to 6.43% from 6.51% . Interest income from federal funds sold decreased
$727,000 to $777,000 from $1.5 million due to a $10.5 million decrease in
average federal funds sold to $14.7 million from $25.2 million, and a 67 basis
point decrease in the yield on average federal funds sold to 5.30% from 5.97%.
The increase in the Bank's average balance of mortgage, commercial loans,
consumer loans, debt securities available for sale, and investment securities
resulted from the acquisition of BCB and internal loan growth. The decrease in
yields on mortgage loan, consumer loans, commercial loans, investment
securities and federal funds sold resulted from the purchase of
interest-earning assets at market yields which were lower in 1996 than in 1995.
15
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
Total interest income increased by $4.1 million, or 13.7%, to $33.5 million for
the year ended December 31, 1995 from $29.5 million for the year ended December
31, 1994, as the Bank increased its interest income from mortgage and consumer
loans, debt securities available for sale, mortgage-backed securities, and
federal funds sold, which increases were partially offset by decreases in
interest income from equity securities available for sale, and investment
securities and FHLB stock. The increase in interest income resulted primarily
from a $46.2 million, or 10.7%, increase in average interest-earning assets to
$475.8 million from $429.6 million and a 19 basis point increase in the yield
on the Bank's average interest-earnings assets to 7.05% from 6.86%. The
increase in average interest-earning assets resulted from the Bank's deployment
of the $29.6 million of net proceeds from the Bank's August 1995 stock offering
(the "Stock Offering"), assumption of $34.0 million of deposits from the RTC,
and retained earnings over the period.
Interest income from investment securities and FHLB stock decreased by
$939,000, or 33.0%, to $1.9 million in 1995 from $2.8 million in 1994 primarily
due to a decrease in average investment securities as a result of maturities of
such securities and the Bank's strategy of deploying the proceeds of such
maturities into higher-yielding assets. Interest income from federal funds sold
increased by $1.1 million, to $1.5 million in 1995 from $355,000 in 1994 due to
a $16.6 million increase in average federal funds sold to $25.2 million from
$8.5 million, and a 181 basis point increase in the yield on average federal
funds sold to 5.97% from 4.16%. The increase in federal funds sold resulted
from excess funds received from the oversubscription of the initial public
offering, which were invested in federal funds awaiting refund to subscribers.
Total interest expense increased by $931,000, or 5.5%, to $17.9 million for the
year ended December 31, 1996, from $17.0 million for the year ended December
31, 1995. The increase was due to a $15.8 million, or 3.8%, increase in average
interest-bearing liabilities to $431.9 million from $416.1 million, and a 6
basis point increase in the average cost of the Bank's interest-bearing
liabilities to 4.15% from 4.09%. The increase in average interest-bearing
liabilities resulted from a $19.4 million, or 7.7%, increase in average
certificates of deposit which offset a $3.6 million, or 2.2% decrease in
average core deposits. The increase in interest-bearing liabilities was
partially the result of the acquisition of BCB. The increase in rates paid on
deposits was attributed to the effect of paying higher market rates on
certificates of deposit in 1996 and a slight decline in less expensive core
deposits.
As a result of the foregoing, the Bank's net interest income was $19.0 million
for 1996 compared to $16.5 million for 1995. The Bank's interest rate spread
was 2.98% for 1996 compared to 2.96% for 1995, as the yield on the Bank's
interest-earning assets increased more rapidly than the Bank's cost of
interest-bearing liabilities. The Bank's interest rate spread was 2.96% for
1995 compared to 3.49% for 1994.
Total interest expense increased by $4.2 million, or 32.4%, to $17.0 million
for the year ended December 31, 1995, from $12.9 million for the year ended
December 31, 1994. The increase was due to a $35.0 million, or 9.2%, increase
in average interest-bearing liabilities to $416.1 million from $381.1 million,
and a 72 basis point increase in the average cost of the Bank's
interest-bearing liabilities to 4.09% from 3.37%. The increase in average
interest-bearing liabilities resulted from a $31.1 million, or 14.1%, increase
in average certificates of deposit, and a $3.9 million, or 2.5% increase in
average core deposits. The increase in interest-bearings liabilities was
largely the result of the assumption of $34.0 million of deposits form the RTC.
The increase in rates paid on deposits was attributed to the higher average
cost of the certificates of deposit purchased from the RTC, and the effect of
paying higher market rates on certificates of deposit in 1994 which continue
until the maturity of the certificates after 1995.
16
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
Provision for Loan Losses. The Bank's provision for loan losses amounted to $0,
$150,000 and $180,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Provisions for loan losses represent charges to income in order
to maintain the allowance for loan losses at a level deemed appropriate by
management based on historical experience, the volume and type of lending
conducted by the Bank, the amount of non-performing loans, general economic
conditions (particularly as they relate to the Bank's market area), and other
factors relating to the Bank's loan portfolio. The decrease in the provisions
to $0 in 1996 from $150,000 and $180,000 in 1995 and 1994, respectively, was
based upon the Bank's analysis of the loan portfolio, history of charge-offs,
and strength of the Bank's coverage ratios. The acquisition of BCB added $1.2
million, or 67.1%, to the Bank's loan loss reserves, increasing the total loan
loss reserves at December 31, 1996 to $2.9 million. Nonperforming loans
totalled $3.4 million at December 31, 1996 compared to $2.2 million at December
31, 1995, primarily as the result of the acquisition of BCB's substantial
commercial loan portfolio. Nonperforming assets as a percentage of total assets
increased from .43% at December 31, 1995 to .57% at December 31, 1996. Based
upon management's evaluation of the factors listed above, management believes
that the allowance for loan losses as of December 31, 1996 is adequate to
provide for loan losses, although there can be no assurance that such losses
will not exceed estimated amounts.
Other Income. In 1996, the net gain on security sales decreased $1.4 million,
or 32.3%, to $2.8 million, compared to a net gain in 1995 of $4.2 million.
Consequently, other income decreased $1.1 million for the year ended December
31, 1996 compared to the year ended December 31, 1995. Service fees and other
income increased $206,000 for fiscal 1996 compared to fiscal 1995.
Other income increased by $1.7 million, or 57.0%, to $4.9 million for 1995
compared to $3.2 million for 1994. The increase resulted primarily from a $1.8
million increase in gain on sale of securities. In 1995, the Bank realized a
net gain on security sales of $4.2 million as compared to a net gain in 1994 of
$2.4 million.
Operating Expenses. Total operating expenses increased by $1.9 million, or
24.0%, to $9.7 million in 1996 as compared to $7.8 million in 1995.
Amortization of intangible assets increased from $226,000 in 1995 to $389,000
in 1996, reflecting the amortization of three months of goodwill from the
acquisition of BCB. Salaries and employee benefits increased $1.1 million, or
28.9%, to $5.1 million in 1996 from $4.0 million in 1995, reflecting normal
salary increases, management incentive awards, and three months of additional
salaries from the acquisition of BCB. Net occupancy expenses increased
$175,000, or 15.5%, due to the addition of one branch as well as the
acquisition of three BCB branches. Other operating expenses increased $553,000,
or 35.0%, to $2.1 million in 1996 as compared to $1.6 million in 1995,
reflecting routine expense increases and three months of expenses from the
acquisition of BCB. These expense increases were offset by a $259,000 reduction
in FDIC insurance premiums.
Total operating expenses increased by $317,000, or 4.2%, to $7.8 million in
1995 as compared to $7.5 million in 1994. Amortization of intangible assets
increased from $21,000 in 1994 to $226,000 in 1995, reflecting the amortization
of the premium paid for the assumption of $34.0 million in deposits from the
RTC in March 1995. Salaries and employee benefits increased $333,000, or 9.2%,
to $4.0 million in 1995 from $3.6 million in 1994 reflecting normal salary
increases and staff enhancements. Net occupancy expenses and other operating
expense increased $98,000, or 9.5%, and $75,000 or 4.1%, respectively,
reflecting routine expense increases. These expense increases were offset by a
$13,000 equipment expense reduction and a $381,000 reduction in FDIC insurance
premiums.
Income Taxes. Income tax expense amounted to $4.7 million, $4.9 million, and
$4.4 million in 1996, 1995, and 1994, reflecting primarily the differences in
income before income taxes for such periods.
17
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
FDIC INSURANCE PREMIUMS AND ASSESSMENT
In September of 1995, the FDIC announced that the Bank Insurance Fund (the
"BIF") was fully capitalized at the end of May 1995. The FDIC has reduced the
deposit insurance premiums paid by "well-capitalized" institutions insured by
the BIF. The majority of the Bank's deposits are BIF-insured. However, earlier
in 1995 the Bank assumed approximately $34.0 million of deposits from the RTC.
These deposits are insured by the Savings Association Insurance Fund (the
"SAIF").
In September 1996, Congress enacted legislation to recapitalize the SAIF by a
one-time assessment on all SAIF-insured deposits held as of March 31, 1995. The
assessment was 65.7 basis points per $100 in deposits, payable on November 30,
1996. For the Bank, the assessment amounted to $177,000 (or $113,000 when
adjusted for taxes), based on the Bank's SAIF-insured deposits of $26.9
million. In addition, beginning January 1, 1997, pursuant to the legislation,
interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by BIF-insured institutions and SAIF-insured
institutions. The FICO assessment will be 1.29 basis points per $100 in BIF
deposits and 6.44 basis points per $100 in SAIF deposits. Beginning January 1,
2000, the FICO interest payments will be paid pro-rata by banks and thrifts
based on deposits (approximately 2.4 basis points per $100 in deposits). The
BIF and SAIF will be merged on January 1, 1999, provided the bank and saving
association charters are merged by that date. In that event, pro-rata FICO
sharing will begin on January 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid" investments in qualifying types of United States Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings institution maintain liquid
assets of not less than 5% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which
short-term liquid assets must consist of not less than 1%. Monetary penalties
may be imposed for failure to meet applicable liquidity requirements. At
December 31, 1996, the Bank's liquidity, as measured for regulatory purposes,
was 38.26%, or $137.6 million in excess of the minimum OTS requirement.
Cash was generated by the Bank's operating activities during the years ended
December 31, 1996, 1995 and 1994, as a result of the acquisition of BCB, the
assumption of deposits, proceeds from the conversion and retained earnings. The
adjustments to reconcile net income to net cash provided by operations during
the years presented consisted primarily of net gains from sale of securities,
the provision for loan losses, depreciation and amortization expense, increases
or decreases in accrued interest payable or receivable, and increases or
decreases in other assets and other liabilities. The primary investing activity
of the Bank is lending, which is funded with cash provided from operations and
financing activities including deposits, as well as proceeds from amortization
and prepayments on existing loans and proceeds from maturities of
mortgage-backed securities and other investment securities. For additional
information about cash flows from the Bank's operating, financing and investing
activities, see the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements.
At December 31, 1996, the Bank had outstanding $13.9 million in commitments to
originate and purchase loans, $30.0 million to purchase investment securities
and $13.8 million in commitments under unused lines of credit for commercial
business loans. At the same date, the total amount of certificates of deposit
which are scheduled to mature by December 31, 1997 was $188.7 million. The
$30.0 million commitment for investment securities was made in conjunction with
a three-year leverage program which was implemented in January 1997. The Bank
believes that it has adequate resources to fund commitments as they arise and
that it can adjust the rate on savings certificates to retain deposits in
changing interest rate environments. If the Bank requires funds beyond its
internal funding capabilities, advances from the FHLB of New York and
borrowings from correspondent banks are available as an additional source of
funds.
18
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
The Bank is required to maintain specified amounts of capital pursuant to
FIRREA and regulations promulgated thereunder by the OTS. The capital standards
generally require the maintenance of regulatory capital sufficient to meet a
tangible capital requirement, a core capital requirement and a risk-
based capital requirement. At December 31, 1996, the Bank's tangible and core
capital totaled $92.3 million, or 15.6%, of adjusted total assets, which
exceeded the minimum requirements at that date by approximately $83.4 million
and $74.6 million, respectively, or 14.1% and 12.6%, respectively, of adjusted
total assets. The Bank's risk-based capital totaled $95.2 million at December
31, 1996, or 28.4%, of risk-weighted assets, which exceeded the current
requirement of 8% by approximately $68.4 million, or 20.4%, of risk-weighted
assets.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS
125). SFAS 125 amends portions of SFAS 115, amends and extends to all servicing
assets and liabilities the accounting standards for mortgage servicing rights
now in SFAS 65, and supersedes SFAS 122. The statement provides consistent
standards for distinguishing transfers of financial assets which are sales from
transfers that are secured borrowings. Those standards are based upon
consistent application of a financial components approach that focuses on
control. The statement also defines accounting treatment for servicing assets
and other retained interest in the assets that are transferred. SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, except for certain provisions
which were deferred until January 1, 1998 by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" issued in
December 1996. The adoption of the statement is to be applied prospectively and
is not expected to have a material effect on the Bank's financial condition or
results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have been
prepared in accordance with GAAP, which requires the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets and
liabilities are monetary in nature. As a result, interest rates generally have
a more significant impact on a financial institution's performance than does
the effect of inflation.
19
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
COMMON STOCK AND RELATED MATTERS
The Common Stock. Effective August 3, 1995, the Bank reorganized from mutual to
stock form and established Peoples Bancorp, MHC, a federal mutual holding
company (the "Holding Company"). In the Bank's initial public offering of
Common Stock, which closed on August 3, 1995, 5,796,000 shares of Common Stock
were issued to the Holding Company, and 3,116,500 shares were sold to the
Bank's customers at a price of $10.00 per share. On such date, the Bank's
Common Stock began to trade over-the-counter on the Nasdaq National Market
using the symbol "TSBS." The following table sets forth the high and low trading
prices of the Bank's common stock subsequent to the completion of the Offering,
together with the cash dividends declared.
- -------------------------------------------------------------------------------
Fiscal Year Ended Cash Dividends
December 31, 1995 High Low Declared
- -------------------------------------------------------------------------------
Third quarter $14 1/8 $11 $ .0575
Fourth quarter $13 3/4 $12 7/8 $ .0875
Fiscal Year Ended
December 31, 1996
- -------------------------------------------------------------------------------
First quarter $15 $12 7/8 $ .0875
Second quarter $15 $13 1/4 $ .0875
Third quarter $15 1/8 $13 3/4 $ .0875
Fourth quarter $16 3/8 $14 $ .0875
As of December 31, 1996, the Bank had 9,037,160 shares of Common Stock
outstanding, including 5,796,000 shares held by the Holding Company and
3,241,160 shares that were publicly held. As of such date the Bank had 1,241
stockholders. This does not reflect the number of persons whose stock is in
nominee or "street" name accounts through brokers.
Dividends. Payment of dividends on the Common Stock is subject to determination
and declaration by the Board of Directors and will depend upon a number of
factors, including capital requirements, regulatory limitations on the payment
of dividends, the Bank's results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
Office of Thrift Supervision ("OTS") regulations impose limitations upon all
"capital distributions" by savings associations, including cash dividends,
payments by a savings association to repurchase or otherwise acquire its stock,
payments to stockholders of another savings association in a cash-out merger,
and other distributions charged against capital. The regulations establish a
three-tiered system of regulation, with the greatest flexibility being afforded
to well-capitalized or Tier 1 savings associations. As of the date hereof, the
Bank was a Tier 1 association. Accordingly, under the OTS capital distribution
regulations, the Bank would be permitted to pay dividends during any calendar
year up to 100 percent of its net income during that calendar year, plus the
amount that would reduce by one-half its surplus capital ratio at the beginning
of the calendar year.
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without
payment of taxes at the then-current tax rate by the Bank on the amount of
earnings removed from the reserves for such distributions. The Bank intends to
make full use of this favorable tax treatment and does not contemplate any
distribution by the Bank in a manner that would create federal tax liability.
20
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
Dividend Waivers by the Holding Company. The Holding Company waived the right
to receive all dividends paid by the Bank during 1996. OTS regulations require
the Holding Company to notify the OTS of any proposed waiver of the right to
receive dividends. It is the OTS' recent practice to review dividend waiver
notices on a case-by-case basis, and, in general, not object to any such waiver
if: (i) the mutual holding company's board of directors determines that such
waiver is consistent with such directors' fiduciary duties to the mutual
holding company's members; (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company are considered as a restriction
on the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is
recorded as a liability; (iv) the amount of any waived dividend is considered
as having been paid by the savings association in evaluating any proposed
dividend under OTS capital distribution regulations; and (v) in the event the
mutual holding company converts to stock form, the appraisal submitted to the
OTS in connection with the conversion application takes into account the
aggregate amount of the dividends waived by the mutual holding company.
As of December 31, 1996, the Holding Company had waived an aggregate of
$2,361,870 of dividends. It is the OTS' policy that in the event of a
mutual-to-stock conversion of the Holding Company, the aggregate amount of
dividends waived by the Holding Company would be credited to the Holding
Company and would adjust the percentage of the converted holding company's
common stock issued to Bank stockholders other than the Holding Company
("Minority Stockholders") in exchange for the Bank's Common Stock. The
percentage of the converted holding company's common stock that would be issued
to Minority Stockholders would be determined by multiplying the percentage of
the Bank's common stock held by Minority Stockholders (i.e., 35.9% as of
December 31, 1996) by a fraction the numerator of which is equal to the Bank's
stockholders equity less the aggregate amount of dividends waived by the
Holding Company, and the denominator of which is equal to the Bank's
stockholders equity.
21
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Trenton Savings Bank FSB:
We have audited the accompanying consolidated statements of condition of
Trenton Savings Bank FSB as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trenton Savings
Bank FSB as of December 31, 1996 and 1995, and the results of its operations
and cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
January 21, 1997
22
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
December 31, 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (note 13)............................. $ 12,937,785 $ 6,252,559
Federal funds sold ........................................... 8,000,000 10,000,000
- -------------------------------------------------------------------------------------------------
Total cash and cash equivalents .......................... 20,937,785 16,252,559
Securities available for sale (note 5) ....................... 87,647,594 83,775,799
Securities held to maturity (market value of $37,925,062
in 1996 and $37,125,899 in 1995) (note 6) .................. 37,935,360 36,944,825
Mortgage-backed securities held to maturity (market value
of $48,587,438 in 1996 and $55,032,429 in 1995) (note 7)..... 48,617,666 54,315,667
Federal Home Loan Bank stock, at cost ........................ 3,089,300 2,864,300
Loans, net (note 8) .......................................... 380,288,191 306,092,624
Bank premises and equipment, net (note 9) .................... 6,981,958 5,867,393
Accrued interest receivable (note 10)......................... 3,602,553 3,765,493
Prepaid expenses ............................................. 1,471,191 766,979
Intangible assets ............................................ 9,164,044 2,325,008
Other assets ................................................. 1,280,631 1,247,361
- -------------------------------------------------------------------------------------------------
Total assets ............................................. $ 601,016,273 $514,218,008
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 11)........................................... 491,245,755 410,770,327
Accrued expenses and other liabilities ..................... 6,418,307 5,905,913
- -------------------------------------------------------------------------------------------------
Total liabilities ....................................... 497,664,062 416,676,240
- -------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock. $.10 par value. Authorized 20,000,000
shares; issued and outstanding 9,037,160 shares at
December 31, 1996 and 8,912,500 shares at December
31, 1995 ................................................... 903,716 891,250
Additional paid-in capital .................................. 30,356,838 28,686,394
Retained earnings - substantially restricted ................ 72,545,415 65,267,044
Unearned Management Recognition Plan shares ............... (1,542,668) --
Net unrealized gain on securities available for sale, net of
taxes ...................................................... 1,088,910 2,697,080
- -------------------------------------------------------------------------------------------------
Total stockholders' equity (notes 12 and 13) ............ 103,352,211 97,541,768
- -------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 9 and 15)................
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity................ $ 601,016,273 $514,218,008
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans ......................... $25,502,919 22,346,132 20,568,976
Interest on securities available for sale ......... 4,762,011 4,484,425 5,058,437
Interest and dividends on investment securities
held to maturity .................................. 2,627,040 1,909,904 1,323,032
Interest on mortgage-backed securities held to
maturity .......................................... 3,234,025 3,273,166 2,162,105
Interest on Federal funds sold ..................... 776,927 1,504,484 355,088
- -------------------------------------------------------------------------------------------------
Total interest income ............................. 36,902,922 33,518,111 29,467,638
Interest expense on deposits (note 11) .............. 17,941,177 17,009,730 12,851,340
- -------------------------------------------------------------------------------------------------
Net interest income ............................... 18,961,745 16,508,381 16,616,298
Provision for loan losses (note 8) .................. -- 150,000 180,000
- -------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses .......................................... 18,961,745 16,358,381 16,436,298
- -------------------------------------------------------------------------------------------------
Other income: .......................................
Service fees on deposit accounts.... ............... 485,442 361,122 346,293
Fees and other income .............................. 471,021 389,896 393,910
Net gain on sale of other real estate .............. 22,664 1,764 2,791
Net gain on sale of securities (note 5) ............ 2,839,123 4,193,142 2,407,548
- -------------------------------------------------------------------------------------------------
Total other income ................................ 3,818,250 4,945,924 3,150,542
- -------------------------------------------------------------------------------------------------
Operating expense:
Salaries and employee benefits (note 14)............ 5,103,767 3,959,393 3,625,757
Net occupancy expense (note 9) ..................... 1,306,068 1,130,539 1,032,868
Equipment expense .................................. 88,193 58,078 70,776
Data processing fees .............................. 416,049 345,764 333,567
Amortization of intangible assets .................. 388,606 226,234 20,881
FDIC insurance premium (note 17) .................. 233,287 492,455 873,070
Other operating expense ............................ 2,133,012 1,579,903 1,517,758
- -------------------------------------------------------------------------------------------------
Total operating expense ........................... 9,668,982 7,792,366 7,474,677
- -------------------------------------------------------------------------------------------------
Income before income taxes ........................ 13,111,013 13,511,939 12,112,163
Income taxes (note 12) .............................. 4,720,000 4,864,000 4,437,000
- -------------------------------------------------------------------------------------------------
Net income ....................................... $ 8,391,013 8,647,939 7,675,163
- -------------------------------------------------------------------------------------------------
Earnings per common share ........................... $ 0.94 -- --
- -------------------------------------------------------------------------------------------------
Weighted average common shares outstanding .......... 8,965,826 -- --
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional
Number Common paid-in
of shares stock capital
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 ............ -- $ -- --
Net income for the year ................. -- -- --
Cumulative effect of accounting
change -- net unrealized gain in
securities designated as available
for sale, net of income tax expense
of $3,018,734........................... -- -- --
Net change in net unrealized gain on
securities available for sale, net of
income tax benefit of $1,861,458 ...... -- -- --
- --------------------------------------------------------------------------------
Balance at December 31, 1994 ............ -- -- --
Proceeds of the stock offering, net of
issuance expenses of $1,387,356,
and mutual holding company
capitalization, $200,000 ............... 8,912,500 891,250 28,686,394
Net income for the year ................. -- -- --
Dividends declared ...................... -- -- --
Net change in net unrealized gain on
securities available for sale, net of
tax expense of $359,830 ............... -- -- --
- --------------------------------------------------------------------------------
Balance at December 31, 1995 ............ 8,912,500 891,250 28,686,394
Net income for the year.................. -- -- --
Dividends declared ...................... -- -- --
Establishment of Management
Recognition Plan ..................... 124,660 12,466 1,670,444
Amortization on unearned Manage-
ment Recognition Plan shares -- -- --
Net change in net unrealized gain on
securities available for sale, net of
tax expense of $904,595 ............... -- -- --
- --------------------------------------------------------------------------------
Balance at December 31, 1996 ............ 9,037,160 $903,716 30,356,838
================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net
unrealized
gain on
Retained securities Unearned
earnings available Management Total
(substantially for sale, Recognition stockholders'
restricted) net of taxes Plan shares equity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 ............ 49,123,141 -- -- 49,123,141
Net income for the year ................. 7,675,163 -- -- 7,675,163
Cumulative effect of accounting
change -- net unrealized gain in
securities designated as available
for sale, net of income tax expense
of $3,018,734........................... -- 5,371,298 -- 5,371,298
Net change in net unrealized gain on
securities available for sale, net of
income tax benefit of $1,861,458 ...... -- (3,400,800) -- (3,400,800)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 ............ 56,798,304 1,970,498 -- 58,768,802
Proceeds of the stock offering, net of
issuance expenses of $1,387,356,
and mutual holding company
capitalization, $200,000 ............... -- -- -- 29,577,644
Net income for the year ................. 8,647,939 -- -- 8,647,939
Dividends declared ...................... (179,199) -- -- (179,199)
Net change in net unrealized gain on
securities available for sale, net of
tax expense of $359,830 ............... -- 726,582 -- 726,582
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 ............ 65,267,044 2,697,080 -- 97,541,768
Net income for the year.................. 8,391,013 -- -- 8,391,013
Dividends declared ...................... (1,112,642) -- -- (1,112,642)
Establishment of Management
Recognition Plan ..................... -- -- (1,682,910) --
Amortization on unearned Manage-
ment Recognition Plan shares............ -- -- 140,242 140,242
Net change in net unrealized gain on
securities available for sale, net of
tax expense of $904,595 ............... -- (1,608,170) -- (1,608,170)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 ............ 72,545,415 1,088,910 (1,542,668) 103,352,211
===========================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 8,391,013 8,647,939 7,675,163
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ........................................ -- 150,000 180,000
Depreciation and amortization expense ........................... 647,621 432,449 388,690
Amortization of intangible assets ................................ 388,606 226,234 20,881
Net accretion of premiums and discounts on securities ............ (585,845) (203,864) (80,698)
Decrease (increase) in accrued interest receivable and
other assets ................................................... 601,574 (4,997,347) 124,010
Increase in accrued interest payable and other liabilities 862,534 855,102 750,349
Net gain on sale of securities ................................. (2,839,123) (4,193,142) (2,407,548)
Net gain on sale of other real estate ............................ (22,664) (1,764) (2,791)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ........................ 7,443,716 915,607 6,648,056
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale
and held to maturity ............................................ 51,755,655 44,850,000 56,960,000
Purchase of securities held to maturity ........................... (11,758,756) (34,015,511) (6,491,380)
Purchase of securities available for sale ........................ (40,280,836) (44,948,842) (29,127,159)
Proceeds from sales of securities available for sale ............. 9,367,945 10,053,561 12,660,623
Maturities and repayments of mortgage backed securities ........... 12,176,778 6,699,543 6,576,297
Purchase of mortgage-backed securities held to maturity ........... (6,064,912) (25,495,487) (9,540,125)
Net increase in loans ............................................. (26,266,237) (16,772,688) (34,105,580)
Net additions to bank premises, furniture and equipment............ (742,179) (387,053) (401,556)
Proceeds from sales of other real estate owned .................... 105,000 78,764 2,791
Payment for purchase of Burlington County Bank, net of
cash acquired ................................................... 3,362,930 -- --
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ............................ (8,344,612) (59,937,713) (3,466,089)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds received from stock offering ......................... -- 29,777,644 --
Dividends paid .................................................... (1,112,642) (179,199) --
Capitalization of mutual holding company ........................ -- (200,000) --
Net cash received from assumption of deposit liabilities ......... -- 31,467,935 --
Net increase in noninterest bearing demand deposits ............... 4,855,587 1,404,730 928,784
Net increase (decrease) in savings and time deposits ............ 2,443,177 338,450 (7,209,108)
Repayment of subordinated note .................................... (600,000) -- --
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities .............. 5,586,122 62,609,560 (6,280,324)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ............... 4,685,226 3,587,454 (3,098,357)
Cash and cash equivalents as of beginning of year .................. 16,252,559 12,665,105 15,763,462
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents as of end of year ........................ $ 20,937,785 16,252,559 12,665,105
- -------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid:
Interest ......................................................... $ 15,577,152 16,394,093 12,672,836
- -------------------------------------------------------------------------------------------------------------------------
Income taxes ..................................................... $ 4,875,000 5,805,000 4,319,879
- -------------------------------------------------------------------------------------------------------------------------
Noncash investing activities:
Transfer of securities to securities available for sale ........... $ -- -- 93,871,948
- -------------------------------------------------------------------------------------------------------------------------
Transfer of securities available for sale to securities held to
maturity ......................................................... $ -- -- 37,111,677
- -------------------------------------------------------------------------------------------------------------------------
Assets acquired in settlement of loans ............................ $ 723,474 34,300 77,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- DECEMBER 31, 1996 AND 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Trenton Savings Bank FSB (the Bank) provides banking services to individual and
corporate customers primarily in Mercer and Burlington counties in New Jersey
and Bucks county in Pennsylvania. The Bank is subject to competition from other
financial institutions and the regulations of certain Federal and state
agencies and undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Trenton Savings Bank and its wholly-owned subsidiary, TSBusiness Finance
Corporation. Significant intercompany accounts and transactions have been
eliminated in consolidation.
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 dates of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses. In
connection with the determination of the allowance for loan losses, management
obtains independent appraisals for significant properties.
Loans
Loans are stated at the principal amount outstanding, net of deferred loan
origination fees, costs and unearned discounts, and the allowance for loan
losses.
Interest income on commercial, real estate mortgage and installment loans is
credited to operations based upon the principal amount outstanding. Loans are
placed on a nonaccrual status when a default of principal or interest has
existed for a period of 90 days, except when, in the opinion of management, the
collection of the principal and interest is reasonably anticipated or adequate
collateral exists. Previously accrued and uncollected interest is reversed when
a loan is placed on nonaccrual status. Interest income is recognized
subsequently only in the period collected. Loans are returned to an accrual
status when factors indicating doubtful collectibility on a timely basis no
longer exist.
Management, considering current information and events regarding the borrowers
ability to repay their obligations, considers a loan to be impaired when it is
probable that the Bank will be unable to collect all amounts due according to
the contractual terms of the loan agreement. When a loan is considered to be
impaired, the amount of impairment is measured based on the fair value of the
collateral. Impairment losses are included in the allowance for loan losses
through provisions charged to operations.
The Bank has defined the population of impaired loans to be all nonaccrual
commercial loans. Impaired loans are individually assessed to determine that
the loan's carrying value is not in excess of the fair value of the collateral
or the present value of the loan's expected cash flows. Smaller balance
homogeneous loans that are collectively evaluated for impairment, including
mortgage and consumer loans, are specifically excluded from the impaired loan
portfolio.
Loan origination and commitment fees less certain costs have been deferred, and
the net amount amortized as an adjustment to the related loan's yield over the
contractual life of the related loan.
27
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
Allowance for Loan Losses
An allowance for loan losses is charged to operations based on management's
evaluation of the credit risk in its portfolio. Such evaluation includes a
review of all loans for which full collectibility may not be reasonably assured
and considers, among other matters, the estimated net realizable value of the
underlying collateral, economic conditions and other matters which warrant
consideration. All losses are charged to the allowance when the loss actually
occurs or when a determination is made that a loss is probable. Subsequent
recoveries, if any, are added back to the allowance.
A substantial portion of the Bank's loans are secured by real estate in the New
Jersey market. Accordingly, the ultimate collectibility of a substantial
portion of the Bank's loan portfolio is susceptible to changes in market
conditions in New Jersey and the Bank's market area.
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, particularly in New Jersey. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
Debt, Equity and Mortgage-Backed Securities
Effective January 1, 1994, the Bank adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115) "Accounting for Certain Investments in Debt and
Equity Securities". Under SFAS 115, the Bank is required to report debt,
readily-marketable equity and mortgage-backed securities in one of the
following categories (i) "held-to-maturity" (management has a positive intent
and ability to hold to maturity) which are to be reported at amortized cost;
(ii) "trading" (held for current resale) which are to be reported at fair
value, with unrealized gains and losses included in earnings and (iii)
"available-for-sale" (all other debt, readily marketable equity and
mortgage-backed securities) which are to be reported at fair value, with
unrealized gains and losses excluded from earnings and reported, net of tax, as
a separate component of stockholders' equity. Accordingly, in adopting SFAS
115, the Bank classified all of its holdings of debt, readily-marketable equity
and mortgage-backed securities at January 1, 1994 as either "held-to-maturity"
or "available-for-sale." The adoption of SFAS 115 had no impact on 1994 net
income but resulted in a net credit of $5,371,298 in stockholders' equity due
to unrealized gains at January 1, 1994, on securities classified as
"available-for-sale."
Premiums and discounts on debt and mortgage-backed securities are amortized to
expense and accreted to income over the estimated life of the respective
security using the level-yield method.
Gains and losses on the sale of securities are based upon the amortized cost of
the security using the specific identification method.
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is provided for on a straight-line basis over
the estimated useful lives of the respective assets. Amortization of leasehold
improvements is provided for on a straight-line basis over the shorter of the
useful life or the lease term plus one renewal period.
28
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
Intangible Assets
Intangible assets consist primarily of premiums paid upon the 1995 assumption
of deposits and goodwill arising from the 1996 acquisition of the net assets of
Burlington County Bank. Premiums on deposits are amortized on a straight-line
basis over a period of ten years. Goodwill is being amortized on a
straight-line basis over 15 years. On a periodic basis, the Bank reviews its
intangible assets for the events or changes in circumstances that may indicate
that the carrying amount of the assets may not be recoverable.
Income Taxes
The Bank records income taxes utilizing the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated 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
in effect for the year in which those temporary differences are expected to be
recovered or settled.
Pension Plan
The Bank has a pension plan covering employees and officers meeting service and
age requirements. The Bank's policy is to fund pension costs accrued.
Other Postretirement Benefit Plans
In addition to the Bank's defined benefit plan, the Bank provides a
postretirement medical and life insurance plan to its retirees. The benefits
available under the plan depend on the years of service to the Bank and the age
of the retiree. The Bank's policy is to accrue for such cost over the period
the employee renders the service to earn the benefit.
Stock Option Plan
The Bank applies the "intrinsic value based method" as described in APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations
in accounting for its stock-based compensation. Accordingly, no compensation
cost has been recognized for the stock option plan.
Management Recognition Plan
Compensation cost is incurred by the Bank over the vesting period based upon
the fair value of the shares at the date of allocation.
Statements of Cash Flows
The Bank considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents.
Earnings Per Share
Earnings per share data is presented for the year ended December 31, 1996.
Prior years earnings per share data is not presented as the Bank completed its
initial public offering on August 3, 1995 and such data is not deemed
meaningful by management.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 amounts to
conform to the 1996 presentation.
29
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
(2) ACQUISITIONS
Intangible assets consist primarily of premium paid upon the assumption of
deposits and goodwill arising from the acquisition of Burlington County Bank.
Deposits of $33,973,935 were assumed in 1995 from the RTC with the Bank paying
a premium of $2,506,000. The premium is being amortized over a ten year period
using the straight-line method.
As of the close of business on September 30, 1996 the Bank acquired the net
assets of Burlington County Bank (BCB), a New Jersey bank, in a cash
transaction accounted for under the purchase method of accounting. As such, the
results of operations of BCB is only included in the results of operations of
Trenton Savings Bank subsequent to the acquisition date.
Trenton Savings Bank paid $12,473,218 in cash for $5,245,132 in net assets of
BCB. The transaction resulted in $7,228,086 in goodwill which is being
amortized over 15 years using the straight-line method. At the consummation
date the primary assets and liabilities of BCB consisted of approximately
$15,800,000 in cash and equivalents, $14,200,000 in securities, $48,200,000 in
loans, and $73,200,000 in deposits.
The following supplemental schedule presents the pro forma results of
operations for 1996 and 1995 as though the companies had combined on January 1,
1995. The pro forma results of operations do not necessarily reflect the
results of operations that would have occurred had the Bank and BCB been
combined during such periods.
----------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------
Net interest income ..................... $21,500,085 20,026,277
Net income .............................. 8,528,924 9,164,672
Earnings per common share ............... 0.95 --
----------------------------------------------------------------------
Pro forma earnings per common share as of December 31, 1995 is not presented as
its presentation would not be meaningful due to the Bank's initial stock
offering as of August 3, 1995.
(3) CHARTER CONVERSION, REORGANIZATION TO A MUTUAL HOLDING COMPANY AND
CONVERSION TO STOCK FORM OF OWNERSHIP
On January 1, 1995 the Bank converted from a state chartered mutual savings
bank to a federally chartered mutual savings bank called Trenton Savings Bank
FSB.
On February 8, 1995, the Board of Directors of the Bank unanimously adopted the
Plan of Reorganization from a Federal Mutual Savings Bank to a Federal Mutual
Holding Company and Stock Issuance Plan, which plan was subsequently amended
(as amended, the Plan). Pursuant to the Plan, the Bank reorganized from a
Federally-chartered mutual savings bank into a Federal mutual holding company,
Peoples Bancorp, MHC and concurrently formed a Federally-chartered capital
stock savings subsidiary, which took the name Trenton Savings Bank FSB. Each
deposit account of the Bank at the time of the reorganization became a deposit
account in the newly-formed bank in the same amount and upon the same terms and
conditions, except that the holder of each such deposit account has voting and
liquidation rights with respect to the holding company rather than the Bank.
30
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
As part of the reorganization, the Bank was authorized to offer stock in one or
more offerings, up to a maximum of 49.9% of the issued and outstanding shares
of its common stock. On May 15, 1995, the Bank received initial approval from
the Office of Thrift Supervision (OTS) to solicit subscribers for stock.
On August 3, 1995, the Bank completed its minority stock offering whereby the
Bank issued 3,116,500 shares at $10 per share for a total of $31,165,000, which
represents a minority ownership of 35.0% of the Bank based upon its valuation
by an independent appraiser. The net proceeds of the stock offering, after
reflecting offering expenses of $1.387 million and costs to capitalize the
mutual holding of $200,000, were $29.578 million. The net proceeds were added
to the Bank's general funds to be used for general corporate purposes.
In 1996 and 1995, the Bank declared cash dividends of $0.35 and $0.0575,
respectively, per common share to holders of common stock of the Bank. The
Bank's Federal mutual holding company, Peoples Bancorp, MHC, waived the receipt
of the cash dividends paid by the Bank, and it currently intends to continue
this policy. There can be no assurance that the Bank's regulators will permit
future dividend waivers, or the terms of such waivers.
(4) REORGANIZATION TO A TWO-TIERED MUTUAL HOLDING COMPANY
On November 26, 1996 the Bank and Peoples Bancorp, MHC filed an application
with the Office of Thrift Supervision (OTS), the Bank's primary regulator, to
reorganize into a two-tiered holding company. Pursuant to the reorganization,
Peoples Bancorp, Inc. will be formed and become the majority-owned subsidiary
of Peoples Bancorp, MHC and the Bank will become the wholly-owned subsidiary of
Peoples Bancorp, Inc. The relative ownership interests of all stockholders of
the Bank will remain unchanged as a result of the reorganization. After the
reorganization, the Bank will continue its current business and operations as a
Federally-chartered savings bank under its existing name.
The reorganization is subject to OTS and stockholder approval.
(5) SECURITIES AVAILABLE FOR SALE
As discussed in note 1, the Bank adopted SFAS 115 as of January 1, 1994. The
cumulative effect of this change in accounting for the net unrealized
appreciation in securities designated as available for sale was an increase to
securities of $8,390,032 and to stockholders' equity of $5,371,298, net of
income tax expense of $3,018,734.
31
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of securities available for sale
as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
============================================================================================
1996
- --------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
United States Treasury
securities ................... $65,335,964 204,470 33,316 65,507,118
United States Agencies
securities ................... 9,923,907 10,121 166,711 9,767,317
Other bonds ................... 9,151,346 20,566 -- 9,171,912
- --------------------------------------------------------------------------------------------
84,411,217 235,157 200,027 84,446,347
Equity securities .............. 893,622 2,307,625 -- 3,201,247
- --------------------------------------------------------------------------------------------
$85,304,839 2,542,782 200,027 87,647,594
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
============================================================================================
1995
- --------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
United States Treasury
securities ................... $70,944,500 727,670 29,660 71,642,510
United States Agencies
securities ................... 5,010,547 -- -- 5,010,547
- --------------------------------------------------------------------------------------------
75,955,047 727,670 29,660 76,653,057
Equity securities .............. 2,536,015 4,586,727 -- 7,122,742
- --------------------------------------------------------------------------------------------
$78,491,062 5,314,397 29,660 83,775,799
============================================================================================
</TABLE>
On October 1, 1994, the Bank transferred $29,704,943 and $5,799,679 of
mortgage-backed securities and United States Agencies securities from available
for sale to held to maturity at fair value. The unrealized loss at the date of
the transfer was $1,607,055 ($641,346 and $1,070,550 at December 31, 1996 and
1995, respectively) and is being amortized over the estimated remaining life of
the related securities.
The amortized cost and estimated market value of securities available for sale
at December 31, 1996 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalties.
====================================================================
Estimated
Amortized market
cost value
- --------------------------------------------------------------------
Due within one year ............. $39,530,426 39,649,242
Due after one year through five
years ......................... 34,633,198 34,706,102
Due after five years through ten
years ......................... 10,247,593 10,091,003
- --------------------------------------------------------------------
84,411,217 84,446,347
Equity securities ............... 893,622 3,201,247
- --------------------------------------------------------------------
$85,304,839 87,647,594
====================================================================
32
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
During the years ended December 31, 1996, 1995 and 1994, proceeds from sales of
securities available for sale resulted in gross gains and gross losses as
follows:
<TABLE>
<CAPTION>
===============================================================================
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales of securities
available for sale ............... $9,367,945 10,053,561 12,660,623
Gross realized gains .............. 2,839,123 4,263,748 2,558,842
Gross realized losses ............. -- 70,606 151,294
===============================================================================
</TABLE>
(6) SECURITIES HELD TO MATURITY
The amortized cost and estimated market value of securities held to maturity as
of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
================================================================================================
1996
- ------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
United States Agencies ............ $17,042,328 -- 134,949 16,907,379
Obligations of state and
political subdivisions ........... 3,399,695 97,725 -- 3,497,420
Corporate bonds .................. 17,493,337 55,463 28,537 17,520,263
- ------------------------------------------------------------------------------------------------
$37,935,360 153,188 163,486 37,925,062
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================================
1995
- ------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
United States Agencies ............ $24,934,032 70,904 76,655 24,928,281
Obligations of state and
political subdivisions ........... 1,055,496 100,977 -- 1,156,473
Corporate bonds .................. 10,955,297 99,577 13,729 11,041,145
- ------------------------------------------------------------------------------------------------
$36,944,825 271,458 90,384 37,125,899
================================================================================================
</TABLE>
The amortized cost and estimated market value of securities held to maturity as
of December 31, 1996 by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
===============================================================
Estimated
Amortized market
cost value
---------------------------------------------------------------
Due in one year or less ......... $ 6,202,209 6,228,874
Due after one year through five
years ......................... 29,354,295 29,196,185
Due five years through ten
years ......................... 1,577,940 1,603,843
Due after ten years ............. 800,916 896,160
---------------------------------------------------------------
$37,935,360 37,925,062
===============================================================
As of December 31, 1996 and 1995, United States Treasury securities with a face
value of $3,900,000 and $100,000, respectively were held in trust to secure
deposits of public funds.
33
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
(7) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The amortized cost and estimated market value of mortgage-backed securities
held to maturity as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
==========================================================================================
1996
- ------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage
Association ................. $ 1,613,904 38,548 7,816 1,644,636
Federal Home Loan Mortgage
Corporation ................. 47,003,762 431,300 492,260 46,942,802
- ------------------------------------------------------------------------------------------
$48,617,666 469,848 500,076 48,587,438
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
==========================================================================================
1995
- ------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage
Association ......... $ 2,055,648 112,188 4,690 2,163,146
Federal Home Loan Mortgage
Corporation ............ 52,260,019 748,357 139,093 52,869,283
- ------------------------------------------------------------------------------------------
$54,315,667 860,545 143,783 55,032,429
==========================================================================================
</TABLE>
The amortized cost and market value of mortgage-backed securities held to
maturity as of December 31, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties
===============================================================
Estimated
Amortized market
cost value
---------------------------------------------------------------
Due in one year or less ......... $ 3,013,891 2,990,156
Due after one year through five
years ......................... 28,776,144 28,400,720
Due five years through ten
years ......................... 1,404,880 1,434,266
Due after ten years ............ 15,422,751 15,762,296
---------------------------------------------------------------
$48,617,666 48,587,438
===============================================================
34
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
(8) LOANS
A summary of loans as of December 31, 1996 and 1995 follows:
======================================================================
1996 1995
----------------------------------------------------------------------
Mortgage loans:
One to four family .............. $ 239,469,728 227,716,966
Commercial real estate and
multi-family .................. 53,414,960 27,827,204
----------------------------------------------------------------------
Total mortgage loans ........... 292,884,688 255,544,170
----------------------------------------------------------------------
Commercial ........................ 34,485,865 11,572,680
Home equity ....................... 28,138,148 21,832,548
Other consumer loans .............. 27,477,904 18,783,391
----------------------------------------------------------------------
Total other loans .............. 90,101,917 52,188,619
----------------------------------------------------------------------
Total loans .................... 382,986,605 307,732,789
Allowance for loan loss ........... (2,900,728) (1,767,340)
Premiums (discounts) .............. (23,904) 22,673
Net deferred costs ................ 226,218 104,502
----------------------------------------------------------------------
Total loans, net ............... $ 380,288,191 306,092,624
======================================================================
A summary of the activity in the allowance for loan losses for the years ended
December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
=================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses at
beginning of year ................ $ 1,767,340 1,641,877 1,471,430
Acquired allowance ................ 1,185,443 -- --
Provision for loan losses ......... -- 150,000 180,000
Chargeoffs ........................ (109,805) (31,638) (23,173)
Recoveries ........................ 57,750 7,101 13,620
- ---------------------------------------------------------------------------------
Allowance for loan losses at end
of year .......................... $ 2,900,728 1,767,340 1,641,877
=================================================================================
</TABLE>
Loans contractually in arrears by three months or more at December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
========================================================================================================
1996 1995
- --------------------------------------------------------------------------------------------------------
Carrying Number % of Carrying Number % of
value of loans category value of loans category
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage .............. $2,276,751 37 0.78% $1,016,778 18 0.40%
Commercial ............ 1,183,281 19 2.01 75,000 1 0.65
Consumer .............. 244,461 20 0.44 39,718 3 0.10
========================================================================================================
</TABLE>
Nonaccrual loans totalled $2,951,000, $1,122,000 and $1,025,000 at December 31,
1996, 1995 and 1994, respectively. The amount of interest income on nonaccrual
loans, which would have been recorded had these loans continued to pay interest
at the original contract rate, was approximately $249,000, $87,000 and $98,000
for the years ended December 31, 1996, 1995 and 1994, respectively. Interest
income on nonaccrual loans included in net income amounted to $76,000, $14,000
and $55,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
There is no commitment to lend additional funds to borrowers whose loans have
been placed on nonaccrual.
35
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
Restructured loans totalled $206,000, $1,052,000 and $1,044,000 at December 31,
1996, 1995 and 1994. The amount of interest income on restructured loans, which
would have been recorded had these loans continued to pay interest at the
original contract rate, was approximately $21,000, $87,000 and $90,000 for the
years ended December 31, 1996, 1995 and 1993, respectively. Interest income on
restructured loans included in net income was approximately $20,000, $80,000
and $80,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
There is no commitment to lend additional funds to borrowers whose loans have
been restructured.
The Bank adopted the provisions of the FAS 114, "Accounting by Creditors for
Impairment of a Loan" as amended by FAS 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures", effective January
1, 1995. Prior periods have not been restated.
The recorded investment in loans receivable considered impaired and the related
allowance for loan losses at December 31, 1996 was $1,183,281 and $448,000,
respectively and $75,000 and $4,000, respectively, at December 31, 1995.
At December 31, 1996 and 1995, loans to officers and directors amounted to
$784,722 and $515,000, respectively. All such loans were performing according
to their original terms.
(9) BANK PREMISES AND EQUIPMENT
Bank premises and equipment consists of the following as of December 31, 1996
and 1995:
===============================================================
1996 1995
---------------------------------------------------------------
Land .............................. $ 867,000 667,000
Buildings and improvements ........ 5,166,918 4,661,278
Furniture and equipment ........... 2,520,578 1,917,081
Leasehold improvements ............ 1,213,840 901,477
---------------------------------------------------------------
9,768,336 8,146,836
Less accumulated depreciation
and amortization ................ 2,786,378 2,279,443
---------------------------------------------------------------
$6,981,958 5,867,393
===============================================================
In the normal course of business, the Bank has entered into leases for its
branch locations. The lease terms range from five to twenty years and expire at
various times through the year 2007. The agreements provide for renewal options
and all but one require the Bank to pay common area costs.
The following is a schedule of future minimum lease payments for operating
leases (with initial or remaining terms in excess of one year) as of December
31, 1996:
=======================================
Year ended
December 31
---------------------------------------
1997 $ 404,150
1998 423,825
1999 395,388
2000 281,360
2001 252,245
2002 249,652
Thereafter 1,038,044
---------------------------------------
Total minimum
lease payments $3,044,664
=======================================
The annual rental expense amounted to $304,000, $226,000 and $164,000 in the
years 1996, 1995 and 1994, respectively.
36
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
(10) ACCRUED INTEREST RECEIVABLE
A summary of accrued interest receivable at December 31, 1996 and 1995 is as
follows:
=============================================================================
1996 1995
- -----------------------------------------------------------------------------
Loans....................................... $1,653,671 1,428,722
Securities available for sale .............. 1,114,332 1,333,512
Mortgage-backed securities
held to maturity ......................... 350,185 386,682
Securities held to maturity ................ 484,365 537,768
Federal funds sold ......................... -- 78,809
- -----------------------------------------------------------------------------
$3,602,553 3,765,493
=============================================================================
(11) DEPOSITS
Deposit balances as of December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
=======================================================================================================================
Weighted
average rate
at Dec. 31, 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Types of deposit:
Noninterest bearing demand
deposit accounts .................. -- $ 25,365,763 5.2 $ 10,800,242 2.6
N.O.W. ............................. 1.65 16,430,630 3.3 9,555,218 2.3
Money market demand
accounts .......................... 2.89 44,793,744 9.1 32,894,681 8.0
Passbook ........................... 2.46 104,210,138 21.2 92,746,547 22.6
Club accounts ...................... -- 269,404 .1 218,599 0.1
Other .............................. -- 3,629,783 .7 2,758,384 0.7
- -----------------------------------------------------------------------------------------------------------------------
194,699,462 39.6 148,973,671 36.3
- -----------------------------------------------------------------------------------------------------------------------
Certificates of deposit ............ 5.74 248,395,975 50.6 209,487,252 51.0
Retirement accounts ............... 6.02 48,150,318 9.8 52,309,404 12.7
- -----------------------------------------------------------------------------------------------------------------------
296,546,293 60.4 261,796,656 63.7
- -----------------------------------------------------------------------------------------------------------------------
$491,245,755 100.0% $410,770,327 100.0%
=======================================================================================================================
</TABLE>
As of December 31, 1996 and 1995, certificates of deposit, regular and
retirement accounts have scheduled maturities as follows:
=============================================================
1996 1995
-------------------------------------------------------------
Within one year .............. $188,744,382 183,658,463
One to two years ............. 39,803,150 27,919,558
Two to three years ........... 20,297,614 27,752,573
Thereafter ................... 47,701,147 22,466,062
-------------------------------------------------------------
$296,546,293 261,796,656
=============================================================
37
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
An analysis of the interest expense for the years 1996, 1995 and 1994 by
deposit category is as
follows:
<TABLE>
<CAPTION>
=======================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW, passbook and other
accounts ................................. $ 2,401,567 2,671,259 2,821,339
Money market demand
accounts ................................. 1,233,088 1,066,382 1,098,894
Club accounts ............................ 14,899 13,308 13,205
Regular certificates of deposit .......... 11,835,811 11,125,216 7,489,728
Retirement accounts ....................... 2,455,812 2,133,565 1,428,174
- ---------------------------------------------------------------------------------------
Total interest .......................... $17,941,177 17,009,730 12,851,340
=======================================================================================
</TABLE>
Certificates of deposit greater than $100,000 amounted to $26,092,929 and
$14,836,846 at December 31, 1996 and 1995, respectively. The deposits of the
Bank are insured up to $100,000 by the BIF and SAIF, which is administered by
the FDIC and is backed by the full faith and credit of the U.S. Government.
(12) INCOME TAXES
The Federal tax bad debt reserve method available to thrift institutions was
repealed in 1996 for tax years beginning after 1995. As a result, the Bank must
change from the reserve method to the specific charge-off method to compute its
bad debt deduction. In addition, the Bank is required generally to recapture
into income the portion of its bad debt reserves (other than the supplemental
reserve) that exceeds its base year reserves, approximately $2,500,000.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable
income ratably (on a straight-line basis) over a six-year period. If the Bank
meets a "residential loan requirement" for a tax year beginning in 1996 or
1997, the recapture of the reserves will be suspended for such tax year. Thus,
recapture can potentially be deferred for up to two years. The residential loan
requirement is met if the principal amount of housing loans made by the Bank
during the year at issue (1996 and 1997) is at least as much as the average of
the principal amount of loans made during the six most recent tax years prior
to 1996. Refinancings and home equity loans are excluded.
Retained earnings as of December 31, 1996 includes approximately $3,500,000 for
which no provision for Federal income tax has been made. This reserve (base
year and supplemental) is frozen not forgiven as certain events could trigger a
recapture.
Income tax expense for the years ended December 31, 1996, 1995 and 1994 is
comprised of the following components:
<TABLE>
<CAPTION>
==================================================================================
1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Federal ............................ $ 4,727,606 4,796,110 3,929,267
State .............................. 415,319 381,659 337,264
- ----------------------------------------------------------------------------------
5,142,925 5,177,769 4,266,531
- ----------------------------------------------------------------------------------
Deferred income tax
(benefit) expense:
Federal ............................ (400,606) (297,199) 161,088
State .............................. (22,319) (16,570) 9,381
- ----------------------------------------------------------------------------------
(422,925) (313,769) 170,469
- ----------------------------------------------------------------------------------
Total income tax expense .......... $ 4,720,000 4,864,000 4,437,000
===================================================================================
</TABLE>
38
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
A reconciliation between the effective income tax expense and the expected
amount computed using the applicable statutory Federal income tax rate for the
years ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
===================================================================================================
1996 1995 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes ......................... $ 13,111,013 13,511,939 12,112,163
Applicable statutory Federal tax rate .............. 35% 35% 35%
Expected Federal income tax expense ............... 4,588,855 4,729,179 4,239,257
State tax net of Federal benefit ................... 255,450 248,078 225,319
Decrease in Federal income tax resulting
from:
Tax-exempt income ................................. (23,585) (24,519) (24,544)
Other ............................................. (100,720) (88,738) (3,032)
- ---------------------------------------------------------------------------------------------------
$ 4,720,000 4,864,000 4,437,000
===================================================================================================
Effective tax rate ................................. 36.0% 36.0% 36.6%
===================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax asset (liability) at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
===============================================================================
1996 1995
-------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan fees ..................................... $ 49,000 48,000
Other ......................................... 256,000 91,000
Postretirement benefits ..................... 506,000 411,000
Pension ....................................... 117,000 67,000
Supplemental Employee Retirement
Plan ......................................... 211,000 --
Allowance for loan loss - book ............... 1,080,000 653,000
-------------------------------------------------------------------------------
2,219,000 1,270,000
-------------------------------------------------------------------------------
Deferred tax liabilities:
Shareholders' equity - unrealized gain
on securities available for sale ............. 613,000 1,517,000
Allowance for loan losses ..................... 930,000 928,000
Other ......................................... 65,000 33,000
-------------------------------------------------------------------------------
1,608,000 2,478,000
-------------------------------------------------------------------------------
Net deferred tax asset (liability) ........... $ 611,000 (1,208,000)
===============================================================================
</TABLE>
Management believes that it is more likely than not that the deferred tax asset
will be realized based upon taxable income in the carryback period and the
probability of future operations to generate sufficient taxable income.
Total deferred tax benefits for the year ended December 31, 1996 were allocated
as follows:
===============================================================
Income from operations ....................... $ (423,000)
Shareholders' equity - unrealized gains
on securities available for sale ........... (905,000)
Business combination ........................ (391,000)
---------------------------------------------------------------
$ (1,719,000)
===============================================================
39
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
(13) REGULATORY MATTERS
Office of Thrift Supervision (OTS) regulations require banks to maintain
minimum levels of regulatory capital. Under the regulations in effect at
December 31, 1996, the Bank was required to maintain (i) a minimum tangible
capital ratio of 1.50%, (ii) a minimum leverage ratio of Tier I capital to
total adjusted assets of 3.0%, and (iii) a minimum ratio of total capital to
risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on the institution's financial statements. The
regulations establish a framework for the classification of savings
institutions into five categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well capitalized if
it has a leverage (Tier I) capital ratio of at least 5.0%; a Tier 1 risk-based
capital ratio of at least 6.0%; and a total risk-based capital ratio of at
least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors.
Management believes that, as of December 31, 1996, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent OTS
notification categorized the Bank as a well-capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's
capital classification.
The following is a summary of the Bank's actual capital amounts and ratios as
of December 31, 1996 and 1995, compared to the OTS minimum capital adequacy
requirements and classification as a well-
capitalized institution:
<TABLE>
<CAPTION>
======================================================================================================
OTS Requirements
- ------------------------------------------------------------------------------------------------------
Minimum For Classification
Actual Capital Adequacy as Well Capitalized
- ------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996:
Tangible capital .............. $92,302 15.6% $8,860 1.50% $ -- --%
Tier I (core) capital ......... 92,302 15.6 17,721 3.00 29,534 5.00
Risk-based capital:
Tier I ....................... 92,302 27.5 -- -- 20,119 6.00
Total ........................ 95,200 28.4 26,825 8.00 33,531 10.00
December 31, 1995:
Tangible capital .............. 91,838 18.1 7,627 1.50 -- --
Tier I (core) capital ......... 91,838 18.1 15,253 3.00 25,422 5.00
Risk-based capital:
Tier I ....................... 91,838 35.5 -- -- 15,528 6.00
Total ........................ 93,605 36.2 20,704 8.00 25,880 10.00
======================================================================================================
</TABLE>
As of December 31, 1996 and 1995, the Federal Reserve Bank required the Bank to
maintain an average reserve balance of $0 and approximately $564,000,
respectively, to meet regulatory requirements.
40
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
(14) BENEFIT PLANS
Pension Plan
The Bank has a pension plan covering officers and employees meeting certain
eligibility requirements. Prior service costs are amortized over a forty-year
period, changes in the unfunded liability due to a prior year change in
actuarial assumptions are amortized over thirty years and pension costs are
funded as accrued.
A comparison of the most recent available accumulated plan benefits and plan
net assets for the pension plan, as determined by the plan actuaries as of
January 1, 1996 (as amended October 1, 1996 for the acquisition of Burlington
County Bank) and 1995, follows:
==========================================================================
1996 1995
--------------------------------------------------------------------------
Actuarial present value of
accumulated plan benefits:
Vested participants .................. $ 2,082,078 2,030,149
Non-vested participants .............. 87,560 82,025
--------------------------------------------------------------------------
$ 2,169,638 2,112,174
==========================================================================
Projected benefit obligation for
services rendered ..................... $ 3,081,132 2,652,539
Plan assets at fair value ............... 2,807,254 2,387,394
--------------------------------------------------------------------------
Projected benefit obliga-
tion in excess of plan
assets ......................... 273,878 265,145
Unrecognized gain ..................... 321,597 148,967
Unrecognized prior service cost.......... (182,373) (214,941)
--------------------------------------------------------------------------
Accrued pension expense .......... $ 413,102 199,171
==========================================================================
The components of net pension expense for the years ended December 31, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
==========================================================================================================
1996 1995 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year ............ $ 155,509 116,933 130,139
Interest cost on projected benefit obligation ............. 198,595 213,703 188,182
Actual return on plan assets .............................. (183,319) (181,718) (188,698)
Net amortization and deferral ........................... 17,500 18,610 (14,200)
- ----------------------------------------------------------------------------------------------------------
Net pension expense ..................................... $ 188,285 167,528 115,423
==========================================================================================================
</TABLE>
Assumptions used to develop the net periodic pension cost for the years ended
December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
======================================================================================
1996 1995 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate ..................................... 7.75% 8.25% 7.0%
Expected long-term rate of return ................. 7.5 7.5 7.5
Rate of increase in compensation levels ........... 5.5 6.0 5.5
======================================================================================
</TABLE>
Postretirement Benefits
The Bank has established a postretirement medical and life insurance plan for
the benefit of substantially all employees. The Bank utilizes the accrual
method of accounting for postretirement benefits.
41
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
The following table sets forth the net periodic postretirement benefit cost and
accumulated postretirement benefit obligation (APBO) at December 31, 1996 (as
amended October 1, 1996 for the acquisition of Burlington County Bank) and
1995:
<TABLE>
<CAPTION>
==========================================================================================
1996 1995
------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation (APBO) ............................... $ (1,176,613) (980,019)
Fair value of assets ............................. -- --
Projected benefit obligation funded status ........ (1,176,613) (980,019)
Accumulated net unrecognized gain ................. (108,971) (97,762)
------------------------------------------------------------------------------------
Net postretirement accrued benefit cost ........... $ (1,285,584) (1,077,781)
==========================================================================================
</TABLE>
Net postretirement benefit costs for the years ended December 31, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
===========================================================================
1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost............................. $ 30,106 26,121 23,000
Interest cost on accumulated postretire-
ment benefit obligation................ 79,235 80,083 64,000
---------------------------------------------------------------------------
$109,341 106,204 87,000
===========================================================================
</TABLE>
For measurement purposes, the cost of medical benefits was projected to
increase at a rate of 10.00% in 1996, thereafter decreasing 1% per year until a
stable 5.5% medical inflation rate is reached. The present value of the
accumulated benefit obligation assumed a 7.75% discount rate compounded
annually. The plan is unfunded as of December 31, 1996, as the Bank funds the
plan on a cash basis.
Stock Option Plan
During 1996, the Bank's stockholders approved a stock option plan authorizing
311,650 shares available to be granted to certain directors, officers and
employees of the Bank. Options granted under the plan amounted to 234,100 at
December 31, 1996 and are exercisable at the fair value of the stock as of the
grant date. The options vest over a five-year term, and expire after 10 years
from the date of the grant. No options were exercised, forfeited or had expired
during 1996.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). This Statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
SFAS 123 encourages all entities to adopt the "fair value based method" of
accounting for employee stock compensation plans. However, SFAS 123 also allows
an entity to continue to measure compensation cost under such plans using the
"intrinsic value based method" as described in APB No. 25. Under the fair value
based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, usually the
vesting period. Fair value is determined using an option pricing model that
takes into account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock and the
expected dividends on it, and the risk-free interest rate over the expected
life of the option.
The Bank continues to recognize compensation expense using the method
prescribed in APB No. 25. Had compensation cost been determined consistent with
SFAS 123 for options granted during 1996, the Bank's 1996 compensation cost
would have increased by $817,009 before taxes. As a result net income and net
income per share for 1996 would have been reduced to $7,868,127 and $0.88,
respectively. The stock option plan's fair value of options granted is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for the grants issued during 1996: dividend
yield of 2.59%, expected volatility of 23.79%; risk-free interest rate of 6.7%,
and expected lives of five years. There were no option plans prior to 1996.
42
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
The weighted average exercise price of options granted in 1996 and outstanding
as of December 31, 1996 was $13.50. The weighted average grant date fair value
for the stock option plan's options granted during 1996 was $3.49.
Management Recognition Plan
During 1996, the Bank's stockholders approved the Trenton Savings Bank
Management Recognition Plan and authorized the issuance of 124,660 shares from
unissued common stock to the Management Recognition Plan. As of December 31,
1996, 124,660 shares have been allocated to employees and directors of the Bank
with a weighted average grant date fair value of $13.50 per share. The shares
vest over a five-year period.
(15) COMMITMENTS AND CONTINGENCIES
The Bank is party to commitments to extend credit in the normal course of
business to meet the financial needs of its customers. Commitments to extend
credit are agreements to lend money to a customer as long as there is no
violation of any condition established in the contract. Commitments to fund
mortgage loans generally have fixed expiration dates or other termination
clauses, whereas home equity lines of credit have no expiration date. Since
some commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis.
Collateral is not required by the Bank for loan commitments. The Bank's loans
are located primarily in the State of New Jersey and Bucks county in
Pennsylvania.
At December 31, 1996 and 1995, the Bank had loan commitments (including unused
lines of credit) of $27,696,985 and $18,843,000, respectively, consisting
primarily of fixed rate loans which are not included in the accompanying
financial statements. The commitments at December 31, 1996 have commitment
periods that range from 30 to 90 days and interest rates ranging from 5.5% to
12.0%. There is no exposure to credit loss in the event the other party to
commitments to extend credit does not exercise its right to borrow under the
commitment.
In the normal course of business, the Bank may be a party to various
outstanding legal proceedings and claims. In the opinion of management, the
financial position of the Bank will not be materially affected by the outcome
of such legal proceedings and claims.
(16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of the fair value of these
instruments.
Debt, Equity and Mortgage-Backed Securities
Fair values are based on quoted market prices or dealer quotes.
Loan Receivables
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, residential
mortgage and other consumer. Each loan category is further segmented into fixed
and adjustable rate interest terms.
The fair value is estimated using an estimate of current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
43
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand as of December 31, 1996 and 1995. The
fair value of certificates of deposit was estimated using the rates currently
offered for deposits of similar remaining maturities.
Commitments to Extend Credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. The
outstanding commitment balance is a reasonable estimate of fair value.
Limitations: The following fair value estimates were made as of December 31,
1996 and 1995, based on pertinent market data and relevant information on the
financial instrument. These estimates do not include any premium or discount
that could result from an offer to sell at one time the Bank's entire holdings
of a particular financial instrument or category thereof. Since no market
exists for a substantial portion of the Bank's financial instruments, fair
value estimates were necessarily based on judgments with respect to future
expected loss experience, current economic conditions, risk assessments of
various financial instruments involving a myriad of individual borrowers, and
other factors. Given the inherently subjective nature of these estimates, the
uncertainties surrounding them and the matters of significant judgement that
must be applied, these fair value estimations cannot be calculated with
precision. Modifications in such assumptions could meaningfully alter these
estimates.
Since these fair value approximations were made solely for on and off balance
sheet financial instruments as of December 31, 1996 and 1995, no attempt was
made to estimate the value of anticipated future business or the value of
nonfinancial statement assets and liabilities. Furthermore, certain tax
implications related to the realization of the unrealized gains and losses
could have a substantial impact on these fair value estimates and have not been
incorporated into many of the estimates.
The estimated fair values of the Bank's financial instruments as of December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
====================================================================================
1996
- ------------------------------------------------------------------------------------
Carrying Fair
amount value
- ------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents .......................... $ 20,937,785 20,937,785
Securities available for sale ...................... 87,647,594 87,647,594
Securities held to maturity ........................ 37,935,360 37,925,062
Mortgage-backed securities held to maturity ........ 48,617,666 48,587,438
Loans, net ........................................ 380,588,191 377,975,984
====================================================================================
Financial liabilities:
Deposits ........................................... $491,245,755 493,654,034
====================================================================================
Off balance sheet financial instruments:
Commitments to extend credit ....................... $ 27,696,985 27,696,985
====================================================================================
</TABLE>
44
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
====================================================================================
1995
- ------------------------------------------------------------------------------------
Carrying Fair
amount value
- ------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents .......................... $ 16,252,559 16,252,559
Securities available for sale ..................... 83,775,799 83,775,799
Securities held to maturity ........................ 36,944,825 37,125,899
Mortgage-backed securities held to maturity ........ 54,315,667 55,032,429
Loans, net ......................................... 306,092,624 307,927,000
====================================================================================
Financial liabilities:
Deposits ........................................... $410,770,327 416,705,000
====================================================================================
Off balance sheet financial instruments:
Commitments to extend credit ....................... $ 18,843,000 18,843,000
====================================================================================
</TABLE>
(17) INSURANCE FUNDS LEGISLATION
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF-insured deposits to recapitalize
Savings Associations Insurance Fund (SAIF) and spread the obligations for
payment of Financing Corporation (FICO) bonds across all SAIF and Bank Insurance
Fund (BIF) members. The Federal Deposit Insurance Corporation (FDIC) special
assessment being levied amounts to 65.7 basis points on SAIF assessable deposits
held as of March 31, 1995. The Bank recorded a $177,000 charge (before
tax-effect) as a result of the FDIC special assessment. This legislation will
eliminate the substantial disparity between the amount that BIF and SAIF member
institutions had been paying for deposit insurance premiums. As of December 31,
1996, the Bank's deposits are primarily BIF-insured except for $34 million of
deposits which were acquired from a SAIF-insured institution.
Beginning on January 1, 1997, BIF members will pay a portion of the FICO
payment equal to 1.29 basis points per $100 in BIF-insured deposits compared to
6.44 basis points per $100 in SAIF-insured deposits, and will pay a pro rata
share (approximately 2.4 basis points per $100 in deposits) of the FICO payment
on the earlier of January 1, 2000, or the date upon which the last savings
association ceases to exist. The legislation also requires BIF and SAIF to be
merged by January 1, 1999, provided that subsequent legislation is adopted to
eliminate the savings association charter and no savings associations remain as
of that time.
The FDIC has recently proposed to lower SAIF assessments to a range comparable
to that of BIF members, although SAIF members must also make the FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis or whether the BIF and SAIF will eventually be
merged.
45
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Board of Directors Officers
<S> <C>
Wendell T. Breithaupt, Director, Lee J. Bellarmino, Executive Vice President.
President and Chief Executive Officer.
John B. Sill, Jr. Chairman. President of Richard L. Gallaudet, Vice President and
Ivins & Taylor, Inc. Senior Lending Officer.
Peter S. Longstreth, Director. Managing
Partner of Aegis Property Group, Ltd. Dean H. Lippincott, Vice President
and Mortgage Officer.
George A. Pruitt, Director. President
of Thomas A. Edison State College. Robert Russo, Vice President and Treasurer.
George W. Reinhard, Director. President Robert C. Hollenbeck, Vice President and
of Lester Fellows Co., Inc. Corporate Secretary.
Charles E. Stokes, Director. Retired Richard L. Alberto, Vice President
President of The Home Rubber Company.
Steven A. Massey, Vice President
Raymond E. Trainer, Director. Chairman of
General Sullivan Group. Robert M. Notigan, Vice President
Miles W. Truesdell, Jr., Director. Floyd S. Weiner, Vice President
Co-President of The Truesdell Company.
Albert E. Curtis, III, Auditor
Harry W. Van Sciver, Director. President
of Burlington County Bank Division. Alex J. Binder, Assistant Vice President
Debra A. Hughes, Assistant Vice President
William R. Jeffers, Assistant Vice President
Judy G. Olsen, Assistant Vice President
Gregorio Perri, Jr., Assistant Vice President
James W. Sorge, Assistant Vice President
Patricia M. Stevenson, Assistant Vice President
John J. Lanzoni, Cashier
Thomas C. Eagan, Assistant Secretary
Judy Burgos, Assistant Treasurer
Gertrude Brandenburg, Assistant Treasurer
Sandra Cruz, Assistant Treasurer
Arthur Cuttino, Assistant Treasurer
Tracy A. Goebel, Assistant Treasurer
Colleen M. Irwin, Assistant Treasurer
Evalin A. Ouskin, Assistant Treasurer
Peggy Yannarella, Assistant Treasurer
Diane M. Ubinger, Assistant Treasurer
John R. Weaver, Assistant Treasurer
TSBusiness Finance Corp.
Frank Sannella, Jr., President
Rodney Greth, Senior Vice President,
Secretary and Treasurer
Thomas Sikora, Assistant Vice President
</TABLE>
46
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
BRANCH OFFICES
Corporate Center Burlington City Branch
332 High Street
134 Franklin Corner Road Burlington, New Jersey
Lawrenceville, New Jersey 08648-0950
Beverly Road Branch
Branch Offices 1660 Beverly Road
Burlington, New Jersey 08016
Home Office
33 West State Street Delanco Branch
Trenton, New Jersey Camp Meeting Grounds
Burlington Avenue & Coopertown Road
Ewing Branch Delanco, New Jersey 08075
1980 North Olden Avenue
Ewing Shopping Plaza Springside Branch
Trenton, New Jersey 2001 Burlington-Mt. Holly Road
Burlington, New Jersey 08016
Hamilton Branch
2465 South Broad Street Mt. Holly Branch
Independence Mall 501 High Street
Trenton, New Jersey Fairground Plaza
Mt. Holly, New Jersey
Robbinsville Branch
2371 Route 33 Mercerville Branch
Robbinsville, New Jersey 1750 Whitehorse-Mercerville Road
Whitehorse Plaza
Lawrenceville Branch Mercerville, New Jersey
Route 1 & Texas Avenue
Lawrence Shopping Center Leisure Village East Branch
Lawrenceville, New Jersey 1 Dumbarton Drive
Lakewood, New Jersey
Pennington Branch
2583 Pennington Road West Windsor Branch
Route 31 Circle 1349 Princeton-Hightstown Road
Pennington, New Jersey Southfield Retail Center
West Windsor, New Jersey
47
<PAGE>
Trenton Savings Bank
- --------------------------------------------------------------------------------
STOCKHOLDER INFORMATION
<TABLE>
<CAPTION>
ANNUAL MEETING DIVIDEND REINVESTMENT PLAN
<S> <C>
The Annual Meeting of Stockholders will be held An Automatic Dividend Reinvestment and
at 10:00 a.m., on Friday, April 25, 1997, at the Voluntary Cash Contribution Plan is available
Trenton Country Club, Sullivan Way, W. Trenton 08628 to Trenton Savings Bank stockholders.
Inquiries about the plan should be directed to
STOCK LISTING Chemical Mellon Shareholder Services, P.O.
Box 750, Pittsburgh, PA 15230.
On August 3, 1995, the Bank's Common Stock
began to trade over-the-counter on the Nasdaq ANNUAL REPORT ON FORM 10-K
National Market under the symbol TSBS.
TRANSFER AGENT A COPY OF THE BANK'S FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996 WILL BE
FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS
Chemical Mellon Shareholder Services OF FEBRUARY 28, 1997, UPON WRITTEN REQUEST TO
85 Challenger Road SECRETARY, TRENTON SAVINGS BANK, 134 FRANK-
Overpark Centre LIN CORNER ROAD, LAWRENCEVILLE, NEW JERSEY
Ridgefield Park, New Jersey 07660 08648-0950 (609) 844-3100.
INDEPENDENT AUDITOR SPECIAL COUNSEL
KPMG Peat Marwich LLP Luse Lehman Gorman
150 JFK Parkway Pomerenk & Schick, P.C.
Short Hills, New Jersey 07078 5335 Wisconsin Avenue, N.W.
Washington, D.C. 20015
</TABLE>
48
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
TSBusiness Finance Corporation
<PAGE>
OFFICE OF THRIFT SUPERVISION
WASHINGTON, D.C. 20552
---------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------ -----------------
OTS Docket Number 12559
TRENTON SAVINGS BANK FSB
------------------------------------------------------
(Exact name of registrant as specified in its charter)
United States of America 22-3408029
- --------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification Number)
134 Franklin Corner Road, Lawrenceville, New Jersey 08648
---------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 609-844-3100
------------------
- ------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 9,037,160
<PAGE>
TRENTON SAVINGS BANK FSB
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition as of
March 31, 1997 and December 31, 1996 .................... 4
Consolidated Statements of Income for the three
months ended March 31, 1997 and 1996 .................... 5
Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 1997 and 1996 .............. 6
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 .................... 7
Notes to Consolidated Financial Statements .............. 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .....................10-11
PART II. OTHER INFORMATION ................................................ 11
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRENTON SAVINGS BANK FSB
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands of Dollars)
March 31 December 31
ASSETS 1997 1996
------ --------- ---------
(unaudited)
Cash due from banks $ 9,618 $ 12,938
Federal Funds sold 8,500 8,000
--------- ---------
Total cash and cash equivalents 18,118 20,938
--------- ---------
Securities available for sale 116,631 87,648
Investment securities held to maturity 37,703 37,935
Mortgage-backed securities held to maturity 46,420 48,618
Federal Home Loan Bank stock, at cost 3,386 3,089
Loans, net 380,695 380,288
Bank premises and equipment, net 6,755 6,982
Accrued interest receivable 4,521 3,602
Prepaid expenses 1,506 1,471
Intangible assets 8,977 9,164
Other assets 1,638 1,281
--------- ---------
Total assets $ 626,350 $ 601,016
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 484,831 $ 491,246
Borrowed funds 30,000 0
Accrued expenses and other liabilities 7,190 6,418
--------- ---------
Total liabilities 522,021 497,664
--------- ---------
Stockholders' Equity
Common Stock, par value $0.10 904 904
authorized 20,000,000 shares, issued &
outstanding 9,037,160 shares as of
March 31, 1997 and December 31, 1996
Additional paid in capital 30,357 30,357
Retained earnings - substantially restricted 74,216 72,545
Unearned Management Recognition Plan shares (1,459) (1,543)
Net unrealized gainon securities available for
sale, net of taxes 311 1,089
--------- ---------
Total stockholders' equity 104,329 103,352
--------- ---------
Total liabilities and stockholders' equity $ 626,350 $ 601,016
========= =========
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
TRENTON SAVINGS BANK FSB
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
(unaudited)
Three Months
Ended
--------------------
1997 1996
------- -------
Interest and dividend income:
Interest and fees on loans $ 7,278 $ 5,814
Interest on securities 3,231 2,824
Interest on Federal funds sold 137 204
------- -------
Total interest income 10,646 8,842
------- -------
Interest expense on deposits 5,328 4,292
------- -------
Net interest income 5,318 4,550
Provision for loan losses (note 4) 10 0
------- -------
Net interest income after provision
for loan losses 5,308 4,550
------- -------
Other income;
Service fees on deposit accounts 247 81
Fees and other income 182 94
Net gain on sale of securities 334 1,572
------- -------
Total other income 763 1,747
------- -------
Operating expense:
Salaries and employee benefits 1,657 1,101
Net occupancy expense 381 326
Equipment expense 31 17
FDIC insurance premium 0 20
Amortization of intangible assets 187 68
Data processing fees 132 100
Other operating expense 631 431
------- -------
Total operating expense 3,019 2,063
------- -------
Income before income taxes 3,052 4,234
Income taxes 1,099 1,525
------- -------
Net income $ 1,953 $ 2,709
======= =======
Net income per common share $ 0.22 $ 0.30
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
TRENTON SAVINGS BANK FSB
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Month Period ended March 31, 1997 and 1996
(In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Net gain
on Unearned
securities Management
Additional available Recognition Total
# Common paid-in Retained for sale, Plan Stockholders'
Shares stock capital Earnings net of taxes Shares equity
--------- --------- --------- --------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 8,912,500 $ 891 $ 28,687 $ 65,267 $ 2,697 $ 0 $ 97,542
Net income for the three months
ended March 31, 1996 0 0 0 2,709 0 0 2,709
Dividends declared[$.0875 per share] 0 0 0 (272) 0 0 (272)
Net change in unrealized net gains
on securities available for sale 0 0 0 0 (1,224) 0 (1,224)
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1996 8,912,500 $ 891 $ 28,687 $ 67,704 $ 1,473 $ 0 $ 98,755
========= ========= ========= ========= ========= ========= =========
Balance at December 31, 1996 9,037,160 $ 904 $ 30,357 $ 72,545 $ 1,089 ($ 1,543) $ 103,352
Income for the three months
ended March 31, 1997 0 0 0 1,953 0 0 1,953
Dividends Paid [$0.0875 per share] 0 0 0 (282) 0 0 (282)
Net change in unrealized net gains
on securities available for sale 0 0 0 0 (778) 0 (778)
Amortization of unearned Management
Recognition Plan shares 0 0 0 0 0 84 84
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1997 9,037,160 $ 904 $ 30,357 $ 74,216 $ 311 ($ 1,459) $ 104,329
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
TRENTON SAVINGS BANK FSB
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,953 $ 2,709
Adjustments to reconcile net income to net cash used inoperating activities:
Provision for loan losses 10 0
Depreciation and amortization expense 422 184
Net accretion of premiums and discounts on securities (8) (51)
Increase in accrued interest receivable and other assets (1,311) (3,069)
Increase in accrued interest payable and other liabilities 1,210 1,370
Net gain on sale of securities (334) (1,572)
-------- --------
Net cash provided by [used in] operating activities 1,942 (429)
-------- --------
Cash flows used in investing activities:
Proceeds from maturities of securities available for sale and held to maturity $ 12,774 $ 19,000
Purchase of investment securities held to maturity 0 (11,522)
Purchase of securities available for sale (43,260) (14,999)
Proceeds from sales of securities available for sale 401 2,450
Purchase of Federal Home Loan Bank Stock (297) (225)
Maturities and repayments of mortgage-backed securities 2,648 3,451
Net increase in loans (407) (4,503)
Net additions to bank premises, furniture, & equipment (236) (121)
Proceeds from sale of bank premises, furniture & equipment 312 0
-------- --------
Net cash used in investing activities (28,065) (6,469)
-------- --------
Cash flows from financing activities:
Net (decrease)increase in savings and time deposits (6,415) 2,561
Dividends paid (282) (272)
Net increase in borrowings 30,000 0
-------- --------
Net cash provided by financing activities 23,303 2,289
-------- --------
Net decrease in cash and cash equivalents (2,820) (4,609)
Cash and cash equivalents as of beginning of year $ 20,938 $ 16,253
-------- --------
Cash and cash equivalents as of end of period $ 18,118 $ 11,644
======== ========
Supplemental disclosure of cash flow information:
Cash paid:
Interest $ 3,106 $ 4,168
======== ========
Income taxes $ 175 $ 0
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
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NOTES TO THE FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in conformity with the instructions to Form 10-Q and Article 10
of Regulation S-X for Trenton Savings Bank FSB (the Bank).
In the opinion of management, all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial condition,
results of operations, and changes in cash flows have been made at and for the
three months ended March 31, 1997 and 1996. The results of operations for the
three months ended March 31, 1997 are not necessarily indicative of results that
may be expected for the entire year ending December 31, 1997.
(2) Reorganization into a Two-tier Mutual Holding Company Structure
At the Annual Stockholders meeting on April 25, 1997, the stockholders
approved the reorganization of the Bank into a two-tier structure. The Bank
anticipates that this restructuring will provide enhanced ability to invest
through a mid-tier structure, facilitate mergers and acquisitions, and
facilitate stock repurchases. OTS approval for the reorganization was received
on March 21, 1997.
(3) Non Performing Loans, Non Performing Assets and the Allowance for Loan
Losses
Non performing loans at March 31, 1997 and December 31, 1996 are as
follows (in thousands of dollars):
March 31, 1997 December 31, 1996
-------------- -----------------
Loans delinquent 90 days or more 3,777 3,704
Loans delinquent 90 days or more
as a percentage of net loans
receivable .99% .97%
An analysis of the allowance for loan losses for the three month
periods ended March 31, 1997 and 1996 is as follows (in thousands of dollars):
March 31, 1997 March 31, 1996
-------------- --------------
Balance at beginning of the period $2,901 $1,767
Provision charged to operations 10 0
Charge-offs, net (42) (47)
------ ------
Balance at the end of the period $2,869 $1,720
====== ======
Generally, the Bank's loans are placed on a non-accrual status when a
default of principal or interest has existed for a period of 90 days except
when, in the opinion of management, the collection of principal or interest is
reasonably anticipated or adequate collateral exists. In addition, the Bank
places any loan on non-accrual if any part of it is classified as doubtful or
loss or if any part has been charged to the allowance for loan losses. Real
estate owned consists of property acquired through formal foreclosures and
acquired by deed in lieu of foreclosure, and is recorded at the lower of cost or
fair value. At March 31, 1997, the Bank had $71 thousand classified as real
estate owned.
As part of the acquisition of BCB, the Bank acquired BCB's loan
portfolio. BCB's underwriting standards and related risk characteristics of the
loan portfolio differed from those of the Bank. The addition of this portfolio
has increased the Bank's non-performing portfolio and negatively effected
certain coverage ratios. However, management believes that the Bank's asset
quality remains strong. Management believes that the allowance for loan losses
is adequate based on historical experience, the volume and
8
<PAGE>
type of lending conducted by the Bank, the amount of non-performing loans,
general economic conditions and other factors relating to the Bank's loan
portfolio. However, there can be no assurance that actual losses will not exceed
estimated amounts.
As of March 31, 1997, the Bank's total non-performing loans and
foreclosed assets amounted to $4.2 million, or .66% of total assets, compared to
$3.4 million, or .57% of total assets at December 31, 1996.
Federal regulations required that each insured savings institution
classify its assets on a regular basis. There are four classifications for
problem assets: "special mention," "substandard," "doubtful" and "loss."
At March 31, 1997, the Bank had $1.2 million of loans classified as
special mention, $5.6 million classified as substandard and $.3 million
classified as doubtful or loss. As of March 31, 1997, total classified assets,
which includes repossessed assets, amounted to $6.0 million, 0.96% of total
assets.
It is management's policy to maintain an allowance for estimated loan
losses based upon an assessment [1] in the case of residential loans,
management's review of delinquent loans, loans in foreclosure and market
conditions, [2] in the case of commercial business loans and commercial mortgage
loans, when a significant decline in value can be identified as well as an
overall assessment of the inherent risk in the portfolio and [3] in the case of
consumer loans, based on the assessment of risks inherent in the loan portfolio.
The Bank's allowance for loan losses, which includes a general valuation
allowance, amounted to approximately $2.9 million at March 31, 1997 and December
31, 1996
(4) Per Share Data
The earnings per share for the three months ended March 31, 1997 of
$.22, has been calculated on a weighted average number of shares outstanding
during the period of 9,037,160. Earnings per share data for the three months
ended March 31, 1996 was $.30 per share.
(5) Acquisition of Manchester Trust Bank
On April 25, 1997, the Bank announced the execution of a Definitive
Acquisition Agreement with Manchester Trust Bank, a trust services company with
$125 million of assets under management. Under terms of the agreement,
Manchester will be operated as a wholly owned subsidiary of the bank.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Stockholders' equity increased by $1.0 million, or .95%, to $104.3
million at March 31, 1997 from $103.4 million at December 31, 1996. The increase
in Stockholders' equity was due to net income of $2.0 million for the quarter
ended March 31, 1997 combined with a net decrease of $.8 million in the market
value of the Bank's portfolio of available for sale investments largely due to
the sale of investments. At March 31, 1997 the Bank's tangible, core and risk
based capital ratios were 15.22%, 15.22%, and 26.89%, respectively.
Total assets increased by $25.3 million, or 4.2%, to $626.3 million at
March 31, 1997 from $601.0 million at December 31, 1996. In January of 1997 the
Board approved a specific borrowing in the amount of $30 million for
reinvestment in federal agency securities at an earnings spread above the cost
of borrowing which increased assets and securities available for sale in that
amount. Deposits decreased by $6.4 million, or 1.3%, to $484.8 million at March
31, 1997 from $491.2 million at December 31, 1996. Cash and cash equivalents
declined $2.8 million, to $18.1 million at March 31, 1997 from $20.9 million at
December 31, 1996. Securities available for sale increased by $29.0 million or
33.1% to $116.6 million at March 31, 1997 from $87.6 million at December 31,
1996. Mortgage-backed securities declined by $2.2 million or 4.52% to $46.4
million at March 31, 1997 from $48.6 million at December 31, 1996. Funds from
repayments of Mortgage-backed Securities and cash equivalents were reinvested in
loans.
Results of Operations
The annualized return on average assets and return on average equity
were 1.24% and 7.49% respectively for the quarter ended March 31, 1997 compared
to 2.10% and 11.00% respectively for the quarter ended March 31, 1996.
Annualized income included security gains of $.3 million in the first quarter of
1997 and $1.6 million in the first quarter of 1996.
Net operating income after tax [excluding net securities gains] for the
first quarter of 1997 was $1.7 million, which represents an increase of $36
thousand or 2.1%, as compared to the first quarter of 1996. Net income including
net securities gains of $214 thousand was $2.0 million for the first quarter of
1997 compared to $2.7 million for the first quarter of 1996 which included net
securities gains of $1.0 million.
Total interest income increased $1.8 million, or 20.4%, to $10.6 million
for the quarter ended March 31, 1997 from $8.8 million for the quarter ended
March 31, 1996. The increase resulted from an increase in average interest
earnings assets to $596.1 million for the quarter ended March 31, 1997 from
$493.4 million for the quarter ended March 31, 1996 which offset a decrease in
average yield on interest-earnings assets from 7.17% for the quarter ended March
31, 1996 to 7.14% for the quarter ended March 31, 1997. The $102.7 million
increase in average interest earnings assets was attributed to the acquisition
of Burlington County Bank in October of 1996 and the $30 million leverage
program in January of 1997.
Total interest expense increased by $1.0 million, or 24.1%, for the
quarter ended March 31, 1997 to $5.3 million from $4.3 million for the quarter
ended March 31, 1996. The increase was primarily the result of an increase in
average deposits to $486.4 million for the quarter ended March 31, 1997 from
$410.2 million for the quarter ended March 31, 1996 which offset with a decrease
in the average rate paid on deposits from 4.19% for the quarter ended March 31,
1996 to 4.01% for the quarter ended March 31, 1997. The increase in deposits is
primarily attributed to the acquisition of BCB. The decrease in the average rate
paid on deposits was attributed to the effect of the addition of lower cost
deposits from the BCB acquisition.
There was a $10 thousand provision for loan losses for the quarter ended
March 31, 1997 compared to a $0 provision for the three months ended March 31,
1996. The provision represents the establishment of a reserve for loans
originated by the Bank's subsidiary, TSBusiness Finance Corporation. Such
evaluation includes a review of all loans for which full collectibility may not
be reasonably assured and considers, among other matters, the estimated net
realizable value of the underlying collateral, economic conditions and other
matters which warrant consideration. The allowance for loan losses was $2.9
million or 70.2% of loans delinquent by 90 days or more at March 31, 1997
compared to $2.9 million or .78% of loans delinquent 90 days or more at December
31, 1996 [see note three].
Total other income decreased by $1.0 million, or 56.3%, to $.7 million
for the quarter ended March 31, 1997 compared to $1.7 million for the quarter
ended March 31, 1996. Other income included $.3 million of gains from the sale
of equity securities for the quarter ended March 31, 1997 compared to $1.6
million of gains from the sale of equity securities for the quarter ended March
31, 1996. Excluding gains on sales of securities, other income increase $254
thousand or 145.1% to $429 thousand for the quarter ended March 31, 1997
compared to $175 thousand for the quarter ended March 31, 1996. The increase in
other income is attributed to
10
<PAGE>
higher fees generated on deposits acquired from BCB. Total operating expenses
increased by $1.0 million, or 46.3%, to $3.0 million for the quarter ended March
31, 1997 compared to $2.1 million for the quarter ended March 31, 1996. The
increase in operating expenses is attributed to the addition of staff and
activities from the BCB acquisition, the establishment of TSBusiness Finance
Corporation and opening of an additional branch [West Windsor].
Capital
The OTS requires that the Bank meet minimum tangible, core and
risk-based capital requirements. As of March 31, 1997, the Bank exceeded all
regulatory capital requirements. The Bank's required, actual, and excess capital
levels as of March 31, 1997, are as follows:
Required Actual Excess of
--------------- --------------- Actual Over
% of % of Regulatory
Amount Assets Amount Assets Requirement
------ ------ ------ ------ -----------
(Dollars in Thousands)
Tangible Capital 9,238 1.50% 93,720 15.22% 84,482
Core Capital 18,477 3.00% 93,720 15.22% 75,243
Risk-based Capital 28,735 8.00% 96,589 26.89% 67,854
Liquidity
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 5%. The
Bank's liquidity ratio averaged 33.56% during the first quarter of 1997 and
equaled 33.21% at March 31, 1997. The Bank adjusts liquidity as appropriate to
meet its asset and liability management objectives.
PART II. OTHER INFORMATION
Legal Proceedings
There are various claims and lawsuits in which the Bank is periodically
involved incidental to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
Changes in Securities
Not applicable.
Defaults upon Senior Securities
Not applicable.
Submission of Matters to a Vote of Security Holders
None.
Other Information
Not applicable.
Exhibits and Report on Form 8-K.
The bank filed a Form 8-K pertaining to the previously mentioned
execution of a definitive purchase agreement with Manchester Trust Bank.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
TRENTON SAVINGS BANK FSB
Date: May 7, 1997 By: /s/ Wendell T. Breithaupt
--------------------------------------
Wendell T. Breithaupt
President and Chief Executive Officer
Date: May 7, 1997 By: /s/ Robert Russo
--------------------------------------------
Robert Russo
Vice President and Treasurer
[Principal Financial and Accounting Officer]
