<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: June 8, 1998
SECOND BANCORP, INCORPORATED
----------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
OHIO 0-15624 34-1547453
- ------------------------------------------------------------------------------------------
(State of incorporation) (Commission (IRS Employer
File Number) Identification No.)
108 MAIN AVENUE S.W., WARREN, OHIO 44482-1311
- ------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: 330-841-0123
ITEM 5. OTHER EVENTS
Included in this filing is the audited financial statements for Trumbull
Financial Corporation (formerly The Trumbull Savings and Loan Company), the
consent of the independent auditors, Crowe, Chizek and Company, LLP, and
applicable other financial information in Management's Discussion and Analysis
of Financial Condition and Results of Operation.
Second Bancorp, Incorporated had previously filed a form 8-K on May 7, 1998
announcing an agreement had been reached for the merger of Trumbull Financial
Corporation into Second Bancorp, Incorporated.
<PAGE> 2
Index
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors....................................................................1
Audited Financial Statements of The Trumbull Savings and Loan Company as of
September 30, 1997 and 1996 and for each of the three years in the
period ended September 30, 1997
Statements of Financial Condition...............................................2
Statements of Income............................................................3
Statements of Stockholders' Equity..............................................4
Statements of Cash Flows........................................................5
Notes to Financial Statements...................................................6
Consent of Independent Public Accountants........................................................27
Selected Financial Data..........................................................................28
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................30
</TABLE>
<PAGE> 3
THE TRUMBULL SAVINGS AND LOAN COMPANY
THE TRUMBULL SAVINGS AND
LOAN COMPANY
FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
The Trumbull Savings and Loan Company
Warren, Ohio
We have audited the accompanying statements of financial condition of The
Trumbull Savings and Loan Company as of September 30, 1997 and 1996, and the
related statements of income, stockholders' equity and cash flows for the three
years ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Trumbull Savings and Loan
Company as of September 30, 1997 and 1996, and the results of its operations and
its cash flows for the three years ended September 30, 1997 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for impaired loans to comply with new accounting guidance
in the fiscal year ended September 30, 1996.
Crowe, Chizek and Company LLP
Cleveland, Ohio
October 31, 1997
<PAGE> 4
THE TRUMBULL SAVINGS AND LOAN COMPANY
STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,038,577 $ 4,020,625
Investment securities held to maturity 7,988,000 9,986,500
Mortgage-backed securities available for sale 25,194,744 53,564,125
Mortgage-backed securities held to maturity 162,530,386 187,755,314
Loans held for sale, net 918,493 295,800
Loans receivable, net 261,862,352 219,808,975
Federal Home Loan Bank stock, at cost 4,687,800 4,368,500
Accrued interest receivable 2,634,105 2,723,505
Premises and equipment 4,899,399 5,121,023
Loan servicing rights 3,598,455 3,844,136
Prepaid expenses and other assets 2,006,607 2,208,980
----------------- -----------------
$ 482,358,918 $ 493,697,483
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand and NOW accounts $ 35,167,341 $ 32,563,617
Money market accounts 24,210,124 26,300,526
Savings accounts 78,258,019 81,602,201
Certificates of deposit 235,187,246 233,460,295
----------------- -----------------
Total deposits 372,822,730 373,926,639
----------------- -----------------
Borrowed funds 68,273,553 80,366,966
Advances from borrowers for taxes and insurance 1,302,457 1,113,768
Accrued expenses and other liabilities 3,321,278 4,461,151
----------------- -----------------
445,720,018 459,868,524
----------------- -----------------
Stockholders' equity
Common stock, no par value, 5,000,000 shares
authorized, 869,364 shares issued and outstanding
Paid in capital in excess of par 869,364 869,364
Retained earnings 35,977,823 33,638,877
Unrealized loss on securities available for sale, net of tax (208,287) (679,282)
----------------- -----------------
36,638,900 33,828,959
----------------- -----------------
$ 482,358,918 $ 493,697,483
================= =================
</TABLE>
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(Continued)
2.
<PAGE> 5
THE TRUMBULL SAVINGS AND LOAN COMPANY
STATEMENTS OF INCOME
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 18,690,196 $ 16,419,152 $ 14,097,735
Interest on mortgage-backed securities 13,069,663 15,103,065 17,200,880
Interest on investment securities 720,950 530,814 750,584
Interest on other interest-earning
investments 100,369 66,076 67,519
--------------- --------------- ----------------
Total interest income 32,581,178 32,119,107 32,116,718
--------------- --------------- ----------------
Interest expense
Interest on deposits 16,000,966 16,418,966 15,844,513
Interest on borrowed funds 4,603,940 4,617,309 5,473,736
--------------- --------------- ----------------
Total interest expense 20,604,906 21,036,275 21,318,249
--------------- --------------- ----------------
Net interest income 11,976,272 11,082,832 10,798,469
Provision for loan losses 140,742 60,010 59,661
--------------- --------------- ----------------
Net interest income after provision
for loan losses 11,835,530 11,022,822 10,738,808
--------------- --------------- ----------------
Noninterest income
Service charges on deposit accounts 1,067,633 753,638 508,022
Net gain/(loss) on sale of securities available
for sale (79,810) 202,391
Net gain/(loss) on sale of loans 106,056 (101,724) 3,417
Loan servicing fees 279,059 256,088 300,186
Other operating income 962,436 916,985 692,282
--------------- --------------- ----------------
Total noninterest income 2,335,374 1,824,987 1,706,298
--------------- --------------- ----------------
Noninterest expense
Salaries and employee benefits 4,323,853 4,013,014 3,956,887
Office, occupancy and equipment expense 1,679,093 1,548,762 1,479,412
Deposit insurance expense 347,178 3,341,284 868,221
Ohio franchise taxes 423,620 418,642 426,217
Data processing expense 426,546 417,512 416,960
Marketing expense 341,104 271,114 404,377
Deposit account expense 441,842 371,214 296,892
Amortization of intangibles 184,193 225,902 567,131
Professional fees 126,779 171,330 190,873
Other operating expenses 767,900 797,925 711,104
--------------- --------------- ----------------
Total noninterest expense 9,062,108 11,576,699 9,318,074
--------------- --------------- ----------------
Income before income taxes 5,108,796 1,271,110 3,127,032
Provision for income taxes 1,744,000 437,000 1,123,000
--------------- --------------- ----------------
Net income $ 3,364,796 $ 834,110 $ 2,004,032
=============== =============== ================
Earnings per share $ 3.87 $ 0.96 $ 2.31
=============== =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
3.
<PAGE> 6
THE TRUMBULL SAVINGS AND LOAN COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Loss on
Paid in Capital Securities Total
Common in Excess of Retained Available Stockholders'
STOCK PAR EARNINGS FOR SALE EQUITY
----- --- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance,
October 1, 1994 $ 869,364 $ 32,052,618 $ (820,293) $ 32,101,689
Change in par value
from $1 per share to
no par value (Note 1) (869,364) $ 869,364
Net income for the
year ended
September 30, 1995 2,004,032 2,004,032
Dividends paid,
$.70 per share (608,554) (608,554)
Unrealized gain
on securities available
for sale, net of tax 234,837 234,837
------------ ------------ --------------- ------------ ----------------
Balance,
September 30, 1995 869,364 33,448,096 (585,456) 33,732,004
Net income for the
year ended
September 30, 1996 834,110 834,110
Dividends paid,
$.74 per share (643,329) (643,329)
Unrealized loss
on securities available
for sale, net of tax (93,826) (93,826)
------------ --------------- ------------ ----------------
Balance,
September 30, 1996 869,364 33,638,877 (679,282) 33,828,959
Net income for the
year ended
September 30, 1997 3,364,796 3,364,796
Dividends paid,
$1.18 per share (1,025,850) (1,025,850)
Unrealized gain
on securities available
for sale, net of tax 470,995 470,995
------------ --------------- ------------ ---------------
Balance,
September 30, 1997 $ 869,364 $ 35,977,823 $ (208,287) $ 36,638,900
============ =============== ============ ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
4.
<PAGE> 7
THE TRUMBULL SAVINGS AND LOAN COMPANY
STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,364,796 $ 834,110 $ 2,004,032
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 544,340 530,347 504,712
Amortization of intangibles 184,193 225,902 567,131
Amortization of mortgage servicing rights 656,945 612,543 360,676
Accretion of deposit market value adjust. (100,200) (128,225) (180,107)
Net amortization of investment securities 793,520 1,001,861 810,555
Net amortization of premium/accretion of
discount on loans purchased 1,612 (27,412) (45,079)
Provision for loan losses 140,742 60,010 59,661
Provision for loss on servicing rights 18,000
Deferred taxes 934,257 (775,182) 156,639
Deferred loan fees (469,314) (250,803) (446,518)
(Gain)/loss on sale of securities 79,810 (202,391)
available for sale
Proceeds from sale of loans held for sale 11,137,787 13,049,145 12,318,929
Loans originated for sale (11,654,424) (12,645,229) (12,199,102)
(Gain)/loss on sale of loans (106,056) 101,724 (3,417)
Gain on sale of servicing rights (66,394)
Gain on sale of real estate owned and
premises and equipment (168,593) (4,826)
FHLB stock dividend (319,300) (292,100) (308,900)
Changes in other assets and other
liabilities (2,318,037) 2,877,230 (1,747,772)
--------------- --------------- ----------------
Net cash provided by operating activities 2,822,277 5,005,328 1,644,223
--------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities:
Held to maturity (3,000,000) (9,985,250) (11,058,569)
Available for sale (10,328,058)
Proceeds from sales of securities
available for sale 19,694,057 15,044,654
Proceeds from calls, maturities and
principal repayments of securities:
Held to maturity 30,564,980 24,904,970 31,105,885
Available for sale 8,176,867 17,023,352 21,032,128
Purchase of loans (5,361,061) (9,939,262) (17,809,752)
Net change in loans originated (36,259,300) (11,115,323) (21,910,644)
Proceeds from sales of real estate owned
and premises and equipment 11,718 254,238 53,826
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
5.
<PAGE> 8
THE TRUMBULL SAVINGS AND LOAN COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES (Continued)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Purchase of Federal Home Loan Bank stock (13,300) (997,100)
Redemption of Federal Home Loan Bank stock 997,100
Purchases of premises and equipment (334,434) (241,580) (938,068)
Sales of mortgage servicing rights 285,608
Purchases and originations of mortgage
servicing rights (648,478) (1,217,191) (2,370,068)
--------------- --------------- ----------------
Net cash used in investing activities 13,129,957 (657,404) (1,895,262)
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts (1,003,709) (5,844,582) 5,229,893
Proceeds from borrowed funds 34,300,000 340,447,000 467,096,000
Repayments of borrowed funds (46,393,412) (338,765,098) (473,692,357)
Net increase in escrow accounts 188,689 156,847 9,481
Payment of dividends on common stock (1,025,850) (643,329) (608,554)
--------------- --------------- ----------------
Net cash used in financing activities (13,934,282) (4,649,162) (1,965,537)
--------------- --------------- ----------------
Net change in cash and cash equivalents 2,017,952 (301,238) (2,216,576)
Cash and cash equivalents at beginning of year 4,020,625 4,321,863 6,538,439
--------------- --------------- ----------------
Cash and cash equivalents at end of year $ 6,038,577 $ 4,020,625 $ 4,321,863
=============== =============== ================
Supplemental disclosures of cash flow information
Cash paid during the year
Interest on deposits and borrowings $ 20,260,423 $ 21,327,472 $ 21,378,053
Income taxes 1,440,000 1,194,000 986,000
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6.
<PAGE> 9
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of The Trumbull Savings and Loan Company conform to
generally accepted accounting principles and prevailing practices within the
savings and loan industry. A summary of the more significant accounting policies
follow:
NATURE OF OPERATIONS: The Company is engaged primarily in the business of
accepting consumer savings deposits and making residential real estate loans,
with operations conducted through its main office located in Warren, Ohio and
six branches located in Trumbull and Jefferson counties. The Company has
established loan production offices to service Summit, Cuyahoga, Geauga and
other surrounding counties. The majority of the Company's income is derived from
investment and lending activities.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions affecting the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Areas involving use of management's estimates and
assumptions include allowance for loan losses, realization of deferred tax
assets, determination and carrying value of impaired loans, value of certain
investment securities and loans held for sale, accrued liability for deferred
compensation, recognition and measurement of loan servicing rights, loss
contingencies, depreciation of premises and equipment and carrying value and
amortization of intangibles. Estimates that are more susceptible to change in
the near term include the allowance for loan losses, the fair value of certain
securities and loans and the recognition and measurement of loan servicing
rights.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, interest-bearing
demand deposits in financial institutions, federal funds sold and overnight
deposits. The Company reports net cash flows for customer loan transactions,
deposit transactions and interest-bearing time deposits with banks and FHLB
overnight advances.
SECURITIES: The Company classifies debt and marketable equity securities as held
to maturity, trading or available for sale. Securities classified as held to
maturity are those management has the positive intent and ability to hold to
maturity. Securities held to maturity are reported at cost, adjusted for
amortization of premiums and accretion of discounts, which are recognized into
income on the interest method. Securities classified as trading are recorded at
fair value with unrealized gains and losses charged to income. Management has
not classified any securities as trading as of September 30, 1997. Securities
classified as available for sale are those management intends to sell or could
be sold for liquidity, investment management, or similar reasons, even if there
is not a present intention for such a sale.
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE> 10
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities available for sale are carried at fair value with unrealized gains
and losses included as a separate component of stockholders' equity, net of tax.
Gains or losses on dispositions are based on net proceeds and the adjusted
carrying amount of securities sold, using the specific identification method.
To provide additional flexibility to meet liquidity and asset-liability
management needs, the Company reclassified certain investment securities from
held-to-maturity to available-for-sale. The securities, with an amortized cost
of $50,588,734, were transferred on December 31, 1995, as allowed by the
Statement of Financial Accounting Standards (SFAS) No. 115 implementation guide
issued by the Financial Accounting Standards Board in November 1995.
LOANS HELD FOR SALE: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
aggregate. Net unrealized losses are recognized in a valuation allowance by
charges to income.
ALLOWANCE FOR LOSSES ON LOANS: In May 1993, the Financial Accounting Standards
Board issued SFAS 114, Accounting by Creditors for Impairment of a Loan, which
was amended by SFAS 118, Accounting by a Creditor for Impairment of a Loan -
Income Recognition and Disclosures, issued in October 1994. The Company adopted
the provisions of SFAS 114 and 118 effective October 1, 1995.
Under SFAS 114 and 118, a loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal and interest according to the
contractual terms of the loan agreement. Since the Company's loans are primarily
collateral-dependent, measurement of impairment is based on the fair value of
the collateral. Large groups of homogeneous loans such as credit card consumer
loans and residential mortgages are collectively evaluated for impairment. The
allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries) based on the Company's evaluation of impairment
of its loans.
The adequacy of the allowance for loan losses is periodically evaluated by the
Company based upon the overall portfolio composition and general market
conditions. While management uses what it believes to be the best information
available to make these evaluations, future adjustments to the allowance may be
necessary if economic conditions change substantially from assumptions used in
making evaluations. Future adjustments to the allowance may also be required by
regulatory examiners based on their judgments about information available to
them at the time of their examination.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 11
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Uncollectible interest on loans that are contractually over 90 days past due is
charged-off, or an allowance is established. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent cash is received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Premises are depreciated using the straight-line
method over a 10 to 20 year period. Equipment is depreciated using the
straight-line method, with lives ranging primarily from 5 to 15 years.
Maintenance and repairs are expensed and major improvements are capitalized.
REAL ESTATE OWNED: Real estate owned, other than that used in the normal course
of business, is initially recorded at fair market value less estimated costs to
sell. Any reduction to fair market value at the time of acquisition is accounted
for as a loan loss. Additional provisions for losses are made when the
realizable value of the property is determined to be less than the recorded
value. Also, gains or losses are recorded when the property is sold and are
reflected in the Statement of Income.
LOAN SERVICING RIGHTS: The cost of loan servicing rights acquired is amortized
in proportion to, and over the period of, estimated net servicing revenues. The
cost of loan servicing rights purchased and the amortization thereon is
periodically evaluated in relation to estimated future net servicing revenues.
The Company evaluates the carrying value of the servicing portfolio by
estimating the future net servicing income of the portfolio based on
management's best estimate of remaining loan lives.
Effective October 1, 1996, the company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." SFAS No. 122 requires lenders who sell or securitize
originated loans and retain the servicing rights to recognize as separate assets
the rights to service mortgage loans for others. SFAS No. 122 also requires that
capitalized mortgage servicing rights be assessed for impairment based on the
fair value of those rights. For purposes of measuring impairment, management
stratifies loans by loan type.
INTEREST ON LOANS: Interest on loans is accrued primarily over their term based
on the scheduled loan amortization, except where a mortgage loan is delinquent
more than 90 days. Fees and costs associated with originating loans are deferred
and amortized over the life of the loans as a yield adjustment. The net amount
of fees and costs deferred for mortgage and consumer loans is reported as part
of loans.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 12
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES: The Company follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and liabilities
are recorded based on the difference between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as "temporary differences."
PENSION PLAN: The Company has a noncontributory defined benefit retirement plan
covering substantially all of its employees. The Company's policy is to fund
normal annual costs currently. The plan is a multi-employer plan and separate
actuarial valuations are not made with respect to each employer, nor are the
plan assets so segregated. The Company contributed approximately $71,000 in
1997, $79,000 in 1996 and $10,000 in 1995.
The Company has a 401(k) defined contribution plan covering substantially all
employees. Participants are allowed to make voluntary contributions up to 15% of
individual compensation and the Company matches 50% of those contributions up to
6%. The expense related to this plan was $76,000, $70,000 and $63,900 for the
years ended September 30, 1997, 1996 and 1995, respectively.
CONCENTRATION OF CREDIT RISK: The Company grants residential, commercial real
estate, and consumer loans to customers located primarily in Trumbull County.
First mortgage loans comprise approximately 79% of the loan portfolio and the
remaining 21% consists of consumer loans.
The Company, in the normal course of business, makes commitments to originate
loans which are not reflected in the financial statements. A summary of these
commitments is disclosed in Note 14.
RECLASSIFICATION: Certain amounts in the 1996 and 1995 financial statements have
been reclassified to conform to the 1997 presentation.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 13
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and estimated fair value of securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
September 30, 1997:
Mortgage-backed
securities $ 25,074,089 $ 237,634 $ 116,979 $ 25,194,744
================= =========== ================ =================
September 30, 1996:
Mortgage-backed
securities $ 53,969,164 $ 292,851 $ 697,890 $ 53,564,125
================= =========== ================ =================
HELD-TO-MATURITY SECURITIES:
September 30, 1997:
U.S. Treasury and
government agency
securities $ 7,988,000 $ 7,615 $ 35,940 $ 7,959,675
Mortgage-backed
securities 162,530,386 394,760 1,676,400 161,248,746
----------------- ----------- ---------------- -----------------
$ 170,518,386 $ 402,375 $ 1,712,340 $ 169,208,421
================= =========== ================ =================
September 30, 1996:
U.S. Treasury and
government agency
securities $ 9,986,500 $ 10,000 $ 184,022 $ 9,812,478
Mortgage-backed
securities 187,755,314 331,030 4,457,109 183,629,235
----------------- ----------- ---------------- -----------------
$ 197,741,814 $ 341,030 $ 4,641,131 $ 193,441,713
================= =========== ================ =================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 14
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The scheduled maturities of securities held-to-maturity and securities
available-for-sale at September 30, 1997 were as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- ------
<S> <C> <C> <C> <C>
Due from one to five years $ 62,068,477 $ 61,237,445 $ 10,509,530 $ 10,424,974
Due from five to ten years 19,611,833 19,499,480
Due after ten years 88,838,076 88,471,496 14,564,559 14,769,770
---------------- ---------------- --------------- ----------------
$ 170,518,386 $ 169,208,421 $ 25,074,089 $ 25,194,744
================ ================ =============== ================
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted-average contractual maturities of the underlying mortgage pools.
The mortgage-backed securities may mature earlier than the weighted-average
contractual maturities because of principal prepayments.
Proceeds from sale of investments in debt securities available for sale during
1997 and 1995 were $19,694,057 and $15,044,654, respectively. Gross gains of
$16,892 and $203,967 and gross losses of $96,702 and $1,576 were realized on
sales in 1997 and 1995, respectively. There were no sales of securities
available for sale during 1996.
At September 30, 1997, $4,895,333 of securities were pledged to secure public
deposits.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 15
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
The composition of the loan portfolio at September 30, 1997 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Residential real estate $ 196,133,432 $ 157,485,914
Commercial real estate 8,892,022 9,696,177
Real estate construction 2,919,543 1,684,254
Consumer 55,054,295 52,786,692
---------------- -----------------
262,999,292 221,653,037
---------------- -----------------
Undistributed portion of loans in process (821,132) (1,312,348)
Net deferred loan origination costs 1,143,600 974,286
Allowance for loan losses (1,459,408) (1,506,000)
---------------- -----------------
$ 261,862,352 $ 219,808,975
================ =================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 1,506,000 $ 1,587,000 $ 1,567,000
Provision charged to income 140,742 60,010 59,661
Charge-offs, net (187,334) (141,010) (39,661)
--------------- --------------- ----------------
Balance at end of year $ 1,459,408 $ 1,506,000 $ 1,587,000
=============== =============== ================
</TABLE>
Nonaccrual loans for which recognition of interest income has been discontinued
totaled approximately $1,100,000, $221,000 and $733,000 at September 30, 1997,
1996 and 1995, respectively. In addition, the Company had no impaired loans
included in total real estate or total consumer loans at or during the years
ended September 30, 1997, 1996 and 1995.
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 16
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 1,131,537 $ 1,131,537
Office buildings and improvements 5,362,090 5,332,445
Land improvements 234,619 234,619
Furniture, fixtures, and equipment 3,075,896 2,794,172
-------------- -------------
Total 9,804,142 9,492,773
Accumulated depreciation 4,904,743 4,371,750
-------------- -------------
$ 4,899,399 $ 5,121,023
============== =============
</TABLE>
Obligations under noncancelable operating leases on certain office facilities
expire in the year 2003. At September 30, 1997, the total future minimum rental
commitments under the leases are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 82,111
1999 83,236
2000 64,925
2001 51,240
2002 51,240
Thereafter 64,050
-------------
$ 396,802
=============
</TABLE>
The total rent expense charged to operations during 1997 amounted to $69,533,
and $51,240 during both 1996 and 1995.
NOTE 5 - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balance of mortgage
loans serviced for others was approximately $338,237,000 and $351,033,000 at
September 30, 1997 and 1996.
Custodial account balances, included in demand deposits, maintained in
connection with the foregoing loan servicing were approximately $3,715,000 and
$4,315,000 at September 30, 1997 and 1996.
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE> 17
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 5 - LOAN SERVICING (Continued)
Following is an analysis of the activity in the cost of purchased loan servicing
rights for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year $ 3,844,136 $ 3,239,488
Additions 541,327 1,217,191
Sales (219,214)
Amortization (655,068) (612,543)
Less: Valuation Allowance (18,000)
-------------- ---------------
$ 3,493,181 $ 3,844,136
============== ==============
</TABLE>
The Company did not have a valuation allowance associated with loan servicing
rights at any time during 1995.
Following is an analysis of the changes in loan servicing rights originated for
the year ended September 30:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Additions $ 107,151
Amortization (1,877)
--------------
$ 105,274
==============
</TABLE>
During 1997, the Company sold servicing rights in the amount of $219,214 with a
resulting gain on the sale of $66,394.
NOTE 6 - DEPOSITS
The aggregate amount of deposits with a minimum denomination of $100,000 was
approximately $17,363,000 and $23,548,000 at September 30, 1997 and 1996.
At September 30, 1997, scheduled maturities of certificates of deposit were as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 141,986,493
1999 66,462,896
2000 18,031,770
2001 3,725,382
2002 4,980,705
----------------
$ 235,187,246
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 18
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 7 - BORROWED FUNDS
Borrowed funds as of September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Advances from Federal Home Loan Bank $ 48,473,553 $ 80,366,966
Borrowings under reverse repurchase
agreements 19,800,000
--------------- ----------------
$ 68,273,553 $ 80,366,966
=============== ================
</TABLE>
Additional information on borrowed funds is as follows as of September 30:
<TABLE>
<CAPTION>
Fixed Rate
-----------------------------------------------------------------------------------
Maturity Interest
Date Rate 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Demand note October 1, 1997 6.50% $ 29,500,000
Term note October 18, 1999 5.42 9,800,000
Term note November 4, 1999 5.21 10,000,000
Demand note October 1, 1996 6.03 $ 28,200,000
Term note October 18, 1996 5.40 20,000,000
Amortizing debt March 1, 2002 6.70 244,300 329,521
Amortizing debt May 1, 2002 6.95 1,872,866 2,552,668
Amortizing debt March 1, 2007 6.85 1,856,387 2,284,777
---------------- ---------------
53,273,553 53,366,966
---------------- ---------------
Variable Rate
----------------------------------------------------------------------------------
Maturity Interest
DATE RATE 1997 1996
---- ---- ---- ----
Term note February 24, 1997 5.39 12,000,000
Term note May 24, 1999 5.61 15,000,000 15,000,000
---------------- ---------------
15,000,000 27,000,000
---------------- ----------------
Total $ 68,273,553 $ 80,366,966
================ ===============
</TABLE>
At September 30, 1997, $72,711,000 of qualifying one- to four-family residential
loans and mortgage-backed securities were pledged to collateralize advances from
the Federal Home Loan Bank.
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 19
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 7 - BORROWED FUNDS (Continued)
Mortgage-backed securities sold under reverse repurchase agreements were
delivered to the broker-dealers who arranged the transactions. The
broker-dealers may have sold, loaned, or otherwise disposed of such securities
to other parties in the normal course of their operations and agreed to resell
to the Company substantially identical securities at the maturities of the
agreements. At September 30, 1997, there were mortgage-backed securities
underlying the agreements with a book value of $20,639,496 and an estimated fair
value of $20,225,938. At September 30, 1996, the Company was not a party to such
agreements.
Information concerning securities sold under agreements to repurchase during the
year is summarized below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Average balance during the year $ 18,415,300 $ 8,436,389
Average interest rate during the year 5.32% 5.32%
Maximum month-end balance during the year $ 19,800,000 $ 23,887,000
</TABLE>
NOTE 8 - FEDERAL INCOME TAXES
The provision for income taxes for the year ended September 30 consists of the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current federal income tax expense $ 809,743 $ 1,212,182 $ 966,361
Deferred federal income tax expense/
(benefit) 934,257 (775,182) 156,639
--------------- --------------- ----------------
$ 1,744,000 $ 437,000 $ 1,123,000
=============== =============== ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 20
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 8 - FEDERAL INCOME TAXES (Continued)
The sources of gross deferred tax assets and gross deferred tax liabilities at
September 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Items giving rise to deferred tax assets
Unrealized loss on investment securities $ 105,930 $ 349,513
FDIC Assessment 840,058
Intangible asset amortization 341,979 333,172
Deferred compensation 98,600 86,360
Purchased mortgage servicing amortization 97,912 69,881
Self insurance accrual 17,193 11,341
Employee annuity 11,516 12,321
Prepaid interest 10,673 12,699
Other 313 5,564
-------------- ---------------
684,116 1,720,909
-------------- ---------------
Items giving rise to deferred tax liabilities
FHLB stock dividends (653,123) (544,561)
Depreciation (78,085) (100,644)
Change in accounting method (38,704) (77,407)
Deferred loan costs (385,879) (331,752)
Allowance for loan losses in excess of book
reserves (148,053) (131,485)
Market value adjustments (7,686) (20,209)
Originated mortgage servicing (35,793)
Other (934) (1,152)
-------------- ---------------
(1,348,257) (1,207,210)
-------------- ---------------
Net deferred tax asset/(liability) $ (664,141) $ 513,699
============== ===============
</TABLE>
A valuation allowance is established to reduce the deferred tax asset if it is
more likely than not that the related tax benefits will not be realized. In
management's opinion, it is more likely than not that the tax benefits will be
realized; consequently, no valuation allowance has been established at September
30, 1997 and 1996.
The difference between the financial statement provision and amounts computed by
using the statutory rate is immaterial for fiscal 1997, 1996 and 1995.
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE> 21
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 9 - FDIC ASSESSMENT
The Company was affected by the undercapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
On September 30, 1996, the President of the United States signed legislation
which required federally insured institutions such as the Company to pay a
one-time assessment of $0.657 per $100 of deposits held by the institution at
March 31, 1995 to bring the SAIF to the required 1.25% reserve level.
The Company had an assessment base of deposits of $376,067,000 at March 31,
1995. The one-time assessment required the Company to record an additional
liability of $2,470,000 during 1996, which reduced net income by approximately
$1,630,000 after applicable income taxes.
NOTE 10 - RESTRICTIONS ON CASH AND RETAINED EARNINGS
Federal regulations require institutions to set aside specified amounts of cash
as reserves against transaction and time deposits. These reserves may be held as
vault cash, in a non-interest bearing account with a district Federal Reserve
Bank or FHLB, or as deposits with correspondent banks. At September 30, 1997,
the Company was required to and maintained reserves of $1,038,000 in vault cash
and in deposits with the Federal Reserve Bank of Cleveland.
Retained earnings at September 30, 1997 and 1996 include approximately
$6,126,000 for which no deferred federal income tax liability has been recorded.
This amount represents an allocation of income to bad-debt deductions for tax
purposes alone. Reduction of amounts so allocated for purposes other than tax
bad-debt losses or adjustments from carryback of net operating losses would
create income for tax purposes only, which would be subject to current tax. The
unrecorded deferred tax liability on the above amounts at September 30, 1997 and
1996 was approximately $2,083,000.
By regulation, banks are limited in the amount of retained earnings available
for the payment of dividends. These limitations generally restrict dividend
payments to current and prior two years earnings. In addition, banks are
precluded from paying dividends that would reduce regulatory capital below
established minimums. As of September 30, 1997, the Corporation was not
precluded from making normal dividend payments under the more restrictive of the
two limitations.
- --------------------------------------------------------------------------------
(Continued)
19.
<PAGE> 22
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS
During 1997, the Company changed its charter from a state chartered savings and
loan regulated by the Office of Thrift Supervision and the Ohio Division of
Financial Institutions to a state chartered savings bank regulated by the Ohio
Division of Financial Institutions and the Federal Deposit Insurance
Corporation.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. The Federal Deposit Insurance Corporation
Improvement Act (FDICIA) was signed into law on December 19, 1991. Regulations
implementing the prompt corrective action provisions of FDICIA became effective
December 19, 1991. In addition to the prompt corrective action requirements,
FDICIA includes significant changes to the legal and regulatory environment for
insured depository institutions, including reductions in insurance coverage for
certain kinds of deposits, increased supervision by the federal regulatory
agencies, increased reporting requirements for insured institutions and new
regulations concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." At September
30, 1997 and 1996, the Company was in compliance with regulatory capital
requirements and is considered "well capitalized."
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE> 23
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS (Continued)
At September 30, 1997:
<TABLE>
<CAPTION>
To be Well
Capitalized for
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity and
ratio to total assets $ 36,638,900 7.60%
====
Unrealized losses on
certain available-for-sale
securities 208,287
Intangible assets (729,782)
Nonqualifying purchased
mortgage servicing rights (345,630)
----------------
Tier 1 (Core) capital, and
ratio to adjusted
Total Average Assets $ 35,771,775 7.34% $ 14,621,820 3.00% $ 24,369,700 5.00%
================ ====== ============== ======= ============== ======
Tier 1 capital, and ratio to
Risk-Weighted Assets $ 35,771,775 15.70% $ 9,115,560 4.00% $ 13,673,340 6.00%
====== ============== ======= ============== ======
General allowance for loan
losses 1,459,408
----------------
Total Risk-based capital and
ratio to Risk-Weighted
Assets $ 37,231,183 16.34% $ 18,231,120 8.00% $ 22,788,900 10.00%
================ ====== ============== ======= ============== ======
Total Assets $ 482,358,918
================
Adjusted Total Average
Assets $ 487,394,000
================
Risk-Weighted Assets $ 227,889,000
================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE> 24
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS (Continued)
At September 30, 1996:
<TABLE>
<CAPTION>
To be Well
Capitalized for
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity and
ratio to total assets $ 33,828,959 6.85%
====
Unrealized losses on
certain available-for-sale
securities 679,282
Intangible assets (913,975)
Nonqualifying purchased
mortgage servicing rights (430,458)
----------------
Tangible capital and ratio
to adjusted total assets $ 33,163,808 6.72% $ 7,400,715 1.50%
================ ====== ============== =======
Tier 1 (Core) capital, and
ratio to adjusted
Total Average Assets $ 33,163,808 6.72% $ 14,801,431 3.00% $ 24,669,052 5.00%
================ ====== ============== ======= ============== ======
Tier 1 capital, and ratio to
Risk-Weighted Assets $ 33,163,808 16.05% $ 12,395,400 6.00%
====== ============== ======
General allowance for loan
losses 1,461,977
----------------
Total Risk-based capital and
ratio to Risk-Weighted
Assets $ 34,625,785 16.76% $ 16,527,200 8.00% $ 20,659,000 10.00%
================ ====== ============== ======= ============== ======
Total Assets $ 493,697,483
================
Adjusted Total Average
Assets $ 493,381,031
================
Risk-Weighted Assets $ 206,590,000
================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE> 25
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 12 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company makes loans to its directors and
executive officers. These loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with unrelated parties. The following is a summary
of the related party loan transactions for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Principal balance at beginning of year $ 1,007,717 $ 1,059,364
New loans 241,000 142,000
Repayments (174,619) (193,647)
-------------- --------------
Principal balance at end of year $ 1,074,098 $ 1,007,717
============== ==============
</TABLE>
At September 30, 1997, related parties had unused lines of credit of $20,505.
NOTE 13 - FINANCIAL INSTRUMENTS
The Company can be party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make and sell loans,
commitments under credit card arrangements, and letters of credit. The Company's
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make or sell loans, letters of credit or
financial guarantees written is represented by the contractual amount of those
instruments. The Company follows the same credit policy to make such commitments
as is followed for those loans recorded in the financial statements.
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
- --------------------------------------------------------------------------------
(Continued)
23.
<PAGE> 26
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 13 - FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
------------------------------------- -------------------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash
equivalents $ 6,038,577 $ 6,039,000 $ 4,020,625 $ 4,021,000
Investment securities:
Available for sale 25,194,744 25,195,000 53,564,125 53,564,000
Held to maturity 170,518,386 169,208,000 197,741,814 193,442,000
Loans held for sale 918,493 926,000 295,800 297,000
Loans receivable, net 261,862,352 266,238,000 219,808,975 221,022,000
Federal Home Loan
Bank stock 4,687,800 4,688,000 4,368,500 4,369,000
Accrued interest
receivable 2,634,105 2,634,000 2,723,505 2,724,000
Cost of loan servicing
receivables 3,598,455 3,614,000 3,844,136 4,302,000
Financial liabilities
Deposits (372,822,730) (373,697,000) (379,926,639) (373,968,000)
Borrowed funds (68,273,553) (68,300,000) (80,366,966) (80,229,000)
Accrued interest payable (670,149) (670,000) (325,666) (326,000)
</TABLE>
The carrying amounts of cash and cash equivalents approximate their fair value.
The fair values for securities are based on quoted market prices. Fair values
for mortgage loans, credit card loans and other consumer loans are approximated
by discounting cash flows utilizing estimated market interest rates. Loans which
are held for sale have fair values based on quoted market prices. The fair value
for Federal Home Loan Bank stock and accrued interest receivable and payable is
approximated by their carrying value. The fair value of the cost of loan
servicing receivables is established using discounted cash flows.
The fair values disclosed for demand deposits are, by definition, equal to the
amount payable on demand at the reporting date (their carrying value). The
carrying amounts of variable-rate, fixed-term certificates of deposit (CD's)
approximate their fair values at the reporting date. Fair values for fixed-rate
CD's are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits. The fair values of the
Company's borrowings are estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rates for similar types of borrowing
arrangements.
- --------------------------------------------------------------------------------
(Continued)
24.
<PAGE> 27
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 13 - FINANCIAL INSTRUMENTS (Continued)
The fair value of commitments, credit card arrangements and letters of credit is
estimated using the fees currently charged to enter similar agreements, taking
into account the remaining terms of the agreements and the counterparty's credit
standing. At September 30, 1997 and 1996, the fair value of off-balance
sheet-assets and liabilities is not significant.
Other assets and liabilities of the Company that are not defined as financial
instruments are not included in the above disclosures. These would include,
among others, such items as property and equipment, financing leases, and the
intangible value of the Company's customer base and profit potential.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. In addition, the Company is involved in
certain claims and legal actions arising in the ordinary course of business. In
the opinion of management and counsel, the outcome of these legal actions will
not have a material adverse affect on the financial condition of the Company.
The notional amount of the Company's financial instruments with
off-balance-sheet risk at September 30, 1997 was:
<TABLE>
<CAPTION>
Asset/
(Liability)
-----------
<S> <C>
Commitments to extend credit
Fixed rate, 7.125% to 9.250% $ (6,580,486)
Variable rate (1,629,800)
Commitments to sell loans 656,000
Credit card arrangements (3,878,670)
Consumer letters of credit (8,736,507)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
25.
<PAGE> 28
- --------------------------------------------------------------------------------
NOTE 15 - BRANCH ACQUISITION
The intangible assets and deposit valuation adjustment arising from a prior
acquisition and included in other assets and deposits in the accompanying
Statements of Financial Condition are summarized as follows at September 30, net
of accumulated amortization:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Core deposit intangibles $ 515,042 $ 663,231
Goodwill 214,740 250,744
-------------- ---------------
Total intangible assets $ 729,782 $ 913,975
============== ===============
Deposit valuation adjustment $ 86,800 $ 179,474
============== ===============
</TABLE>
The core deposit intangible is being amortized on an accelerated method over 10
years and goodwill is being amortized on a straight-line basis over 10 years.
The deposit valuation adjustment is being accreted on an accelerated basis over
8 years and included in deposit interest expense.
NOTE 16 - SUBSEQUENT EVENT, HOLDING COMPANY FORMATION
On August 20, 1997, shareholders of the Company approved the formation of a
thrift holding company. The formation of the holding company, Trumbull Financial
Corporation, represents an internal reorganization whereby each shareholder of
the Company receives one share of Trumbull Financial Corporation common stock
for each share of Company common stock owned. The transaction is expected to
close in December of 1997 and is being accounted for similar to a pooling of
interests, whereby the historical carrying values of the assets and liabilities
of the Company are carried forward to the consolidated financial statements of
Trumbull Financial Corporation.
- --------------------------------------------------------------------------------
26.
<PAGE> 29
- --------------------------------------------------------------------------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
WE CONSENT TO THE INCORPORATION IN THIS FORM 8-K OF SECOND BANCORP, INCORPORATED
OF OUR REPORT DATED OCTOBER 31, 1997 ON THE FINANCIAL STATEMENTS OF THE TRUMBULL
SAVINGS AND LOAN COMPANY AS OF SEPTEMBER 30, 1997 AND 1996 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1997.
CROWE, CHIZEK AND COMPANY LLP
CLEVELAND, OHIO
JUNE 5, 1998
- --------------------------------------------------------------------------------
27.
<PAGE> 30
Trumbull Financial Corporation
(Dollars in thousands, except per share data)
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Six month period ended: Twelve month period ended:
-----------------------------------------------------------------------------------
3/31/98 3/31/97 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations:
Interest income $16,649 $16,187 $32,581 $32,119 $32,117 $28,998 $23,703
Interest expense 10,286 10,273 20,605 21,036 21,318 17,087 13,591
-------------------- ------------------------------------------------------
Net interest income 6,363 5,914 11,976 11,083 10,799 11,911 10,112
Provision for loan losses 120 30 140 60 60 60 72
Other income 1,151 1,183 2,335 1,825 1,706 1,765 1,628
Other expense 4,398 4,481 9,062 11,577 9,318 8,838 6,690
Cumulative effect of change (131)
in accounting method
-------------------- ------------------------------------------------------
Income before Federal income taxes 2,996 2,586 5,109 1,271 3,127 4,647 4,978
Federal tax expense 1,035 886 1,744 437 1,123 1,644 1,583
-------------------- ------------------------------------------------------
Net income $1,961 $1,700 $3,365 $834 $2,004 $3,003 $3,395
-------------------- ------------------------------------------------------
Per Share Data:
Basic earnings $2.26 $1.96 $3.87 $0.96 $2.31 $3.45 $3.91
Diluted earnings 2.26 1.96 3.87 0.96 2.31 3.45 3.91
Cash dividends 0.67 0.68 1.18 0.74 0.70 0.70 0.55
Book Value 43.80 42.12 42.14 38.91 38.80 36.92 35.11
Market Value 55.33 38.22 38.50 37.38 35.50 36.75 33.00
Shares outstanding 869,364 869,364 869,364 869,364 869,364 869,364 869,364
Balance Sheet Data:
As of Balance Sheet Date
Total assets $525,122 $482,403 $482,403 $493,697 $495,011 $496,168 $461,241
Loans, net 316,851 237,115 262,781 220,105 199,338 159,302 151,538
Securities 183,921 238,043 195,713 251,306 274,064 315,399 276,868
Deposits 382,819 372,157 372,823 373,927 379,899 374,850 401,950
Borrowings 99,207 87,274 68,339 80,367 78,685 85,281 26,206
Shareholders' Equity 38,031 35,103 36,618 33,829 33,732 32,102 30,527
Averages
Total assets 495,001 496,669 495,071 499,171 506,883 479,818 345,017
Loans, net 282,134 228,463 239,202 210,561 182,425 153,124 162,419
Securities 186,449 243,335 231,800 265,252 303,076 308,148 162,598
Deposits 376,167 371,685 371,857 379,180 380,428 386,690 277,178
Borrowings 72,987 84,215 82,414 80,379 90,373 57,118 27,966
Shareholders' Equity 37,328 34,485 35,216 34,389 32,865 31,659 28,944
</TABLE>
- --------------------------------------------------------------------------------
28.
<PAGE> 31
Trumbull Financial Corporation
(Dollars in thousands, except per share data)
SELECTED FINANCIAL DATA
(Continued)
<TABLE>
<CAPTION>
Six month period ended: Twelve month period ended:
-----------------------------------------------------------------------------------
3/31/98 3/31/97 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C> <C> <C>
Ratios:
Return on average assets 0.79% 0.69% 0.68% 0.17% 0.40% 0.63% 0.98%
Return on average total
shareholders' equity 10.54% 9.89% 9.56% 2.43% 6.10% 9.49% 11.73%
Net interest margin 2.72% 2.51% 2.54% 2.33% 2.22% 2.58% 3.11%
Net overhead ratio 1.34% 1.40% 1.41% 1.53% 1.61% 1.67% 1.63%
Efficiency ratio 57.67% 63.14% 62.89% 70.55% 75.74% 67.80% 58.19%
Dividend pay-out 29.70% 34.77% 30.49% 77.13% 30.37% 20.26% 14.08%
Average loans to average deposits 75.00% 61.47% 64.33% 55.53% 47.95% 39.60% 58.60%
Average equity to average total 7.54% 6.94% 7.11% 6.89% 6.48% 6.60% 8.39%
assets
Allowance for loan losses as a 0.45% 0.60% 0.55% 0.68% 0.79% 0.96% 0.98%
percent of loans
Net charge-offs as a percent of 0.05% 0.05% 0.08% 0.07% 0.02% 0.01% 0.01%
average loans
Non-performing loans to total loans 0.58% 0.18% 0.44% 0.13% 0.43% 0.30% 0.40%
Allowance for loan losses to
non-performing loans 31.37% 57.94% 29.69% 27.49% 51.16% 70.13% 45.85%
Tier 1 leverage ratio 7.30% 6.87% 7.34% 6.72% 6.64% 6.15% 6.14%
</TABLE>
- --------------------------------------------------------------------------------
29.
<PAGE> 32
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion is intended to focus no certain financial information
regarding Trumbull Financial Corporation ("Trumbull") and its wholly owned
subsidiary Trumbull Savings Bank ("Trumbull" or the "Bank"). The purpose of this
discussion is to provide the reader with a more thorough understanding of the
financial statements. This discussion should be read in conjunction with the
financial statements and accompanying notes contained elsewhere within this
filing.
Management of Trumbull is not aware of any market or institutional
trends, events or uncertainties that are expected to have a material effect on
liquidity, capital resources or operations except as discussed herein. Also,
management is not aware of any current recommendations by its regulatory
authorities that would have such effect if implemented.
OVERVIEW
The reported results of Trumbull are dependent on a variety of factors,
including the general interest rate environment, competitive conditions in the
industry, government policies and regulations and conditions in the markets for
financial assets. Net interest income is the largest component of Trumbull's net
income, and consist of the difference between income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is primarily affected by the volumes, interest
rates and composition of interest-earning assets and interest-bearing
liabilities.
AVERAGE BALANCES AND YIELDS
THE FOLLOWING TABLES PRESENT FOR THE PERIODS INDICATED, THE TOTAL AMOUNT
OF INTEREST INCOME FROM AVERAGE INTEREST-EARNING ASSETS AND THE RESULTANT
YIELDS, AS WELL AS THE INTEREST EXPENSE ON AVERAGE INTEREST-BEARING
LIABILITIES, EXPRESSED BOTH IN DOLLARS AND RATES, AND NET INTEREST MARGIN. NET
INTEREST MARGIN REFERS TO THE NET INTEREST INCOME DIVIDED BY TOTAL
INTEREST-EARNING ASSETS AND IS INFLUENCED BY THE LEVEL AND RELATIVE MIX OF
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES. ALL AVERAGE
BALANCES ARE DAILY AVERAGE BALANCES.
NON-ACCRUING LOANS ARE INCLUDED IN AVERAGE LOAN BALANCES.
- --------------------------------------------------------------------------------
30.
<PAGE> 33
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YIELD ANALYSIS
<TABLE>
<CAPTION>
Year ended September 30 1997 1996 1995
Average Yield / Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Taxable loans 239,202 18,690 7.81% 210,561 16,419 7.80% 182,425 14,098 7.73%
Taxable securities 231,800 13,891 5.99% 265,252 15,700 5.92% 303,076 18,019 5.95%
Other
----------------------------------------------------------------------------------------
Total interest earning assets 471,002 32,581 6.92% 475,813 32,119 6.75% 485,501 32,117 6.62%
Non-interest earning assets 24,069 23,358 21,382
----------------------------------------------------------------------------------------
TOTAL 495,071 499,171 506,883
----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits- int bearing 24,516 380 1.55% 22,267 391 1.76% 20,279 436 2.15%
Savings deposits 105,732 2,790 2.64% 110,775 2,946 2.66% 119,572 3,385 2.83%
Time deposits 231,174 12,831 5.55% 235,766 13,082 5.55% 234,176 12,024 5.13%
Securities sold under agreements
to repurchase 18,488 997 5.39% 8,386 449 5.35% 29,924 1,706 5.70%
Federal Home Loan Bank advances 63,926 3,607 5.64% 71,993 4,168 5.79% 60,449 3,767 6.23%
Amortization of Interest Cap Contract
----------------------------------------------------------------------------------------
Total interest bearing liabilities 443,836 20,605 4.64% 449,187 21,036 4.68% 464,400 21,318 4.59%
Non-interest bearing liabilities 16,019 15,595 9,618
Shareholders' equity 35,216 34,389 32,865
----------------------------------------------------------------------------------------
TOTAL 495,071 499,171 506,883
----------------------------------------------------------------------------------------
Net Interest Income 11,976 11,083 10,799
--------- ---------- ---------
Net Interest Spread 2.27% 2.07% 2.02%
---------- --------- ----------
Net Interest Margin 2.54% 2.33% 2.22%
---------- --------- ----------
</TABLE>
- --------------------------------------------------------------------------------
31.
<PAGE> 34
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RATE / VOLUME ANALYSIS
<TABLE>
<CAPTION>
Twelve month Period: 1997 compared to 1996 1996 compared to 1995
Due to Changes in Due to Changes in
Volume Rate Net Volume Rate Net
-------------------------------------- ------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Taxable loans 2,233 38 2,271 2,174 147 2,321
Taxable securities (1,980) 171 (1,809) (2,249) (70) (2,319)
Other
-------------------------------------- ------------------------------------
Total interest bearing assets 253 209 462 (75) 77 2
-------------------------------------- ------------------------------------
Interest bearing liabilities:
Demand Deposits- int bearing 39 (50) (11) 43 (88) (45)
Savings deposits (134) (22) (156) (249) (190) (439)
Time deposits (255) 4 (251) 82 976 1,058
Securities sold under agreements
to repurchase 541 7 548 (1,228) (29) (1,257)
Federal Home Loan Bank advances (467) (94) (561) 719 (318) 401
Amortization of Interest Rate Caps
-------------------------------------- ------------------------------------
Total interest bearing liabilities (276) (155) (431) (633) 351 (282)
-------------------------------------- ------------------------------------
-------------------------------------- ------------------------------------
Total effect on net interest income 529 364 893 558 (274) 284
-------------------------------------- ------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
32.
<PAGE> 35
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YIELD ANALYSIS
<TABLE>
<CAPTION>
Six Month Period ended March 31 1998 1997
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Taxable loans 282,134 10,950 7.78% 228,463 8,902 7.81%
Taxable securities 186,449 5,699 6.13% 243,335 7,285 6.00%
Other
---------------------------------------------------------------------------
Total interest earning assets 468,583 16,649 7.13% 471,798 16,187 6.88%
Non-interest earning assets 26,418 24,871
---------------------------------------------------------------------------
TOTAL 495,001 496,669
---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits- int bearing 25,548 198 1.55% 24,000 186 1.55%
Savings deposits 100,315 1,322 2.64% 106,479 1,402 2.64%
Time deposits 238,958 6,657 5.59% 231,047 6,361 5.52%
Securities sold under agreements
to repurchase 13,128 352 5.38% 13,451 361 5.38%
Note payable 46 2 8.72%
Federal Home Loan Bank advances 59,813 1,721 5.77% 70,764 1,963 5.56%
Amortization of Interest Cap Contract 34
---------------------------------------------------------------------------
Total interest bearing liabilities 437,808 10,286 4.71% 445,741 10,273 4.62%
---------------------------------------------------------------------------
Non-interest bearing liabilities 19,865 16,443
Shareholders' equity 37,328 34,485
---------------------------------------------------------------------------
TOTAL 495,001 496,669
---------------------------------------------------------------------------
Net Interest Income 6,363 5,914
------------- -------------
Net Interest Spread 2.42% 2.26%
------------ ------------
Net Interest Margin 2.72% 2.51%
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
33.
<PAGE> 36
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Month Period ended March 31 1998 compared to 1997
Due to Changes in
Volume Rate Net
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Taxable loans 2,091 (43) 2,048
Taxable securities (1,703) 117 (1,586)
Other
----------------------------------------
Total interest bearing assets 388 74 462
----------------------------------------
Interest bearing liabilities:
Demand Deposits- int bearing 12 0 12
Savings deposits (81) 1 (80)
Time deposits 218 78 296
Securities sold under agreements
to repurchase (9) 0 (9)
Note Payable 2 2
Federal Home Loan Bank advances (304) 62 (242)
Amortization of Interest Rate Caps 36 36
----------------------------------------
Total interest bearing liabilities (162) 177 15
----------------------------------------
----------------------------------------
Total effect on net interest income 550 (103) 447
----------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
34.
<PAGE> 37
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND
1997.
Net Income. Net income for the six month period ended March 31, 1998
was $1,961,000 compared to $1,700,000 reported for the comparable period in
1997, resulting in an increase of $261,000 or 15.4%. The increase in earnings is
primarily due to the company's continuing strategy of changing its asset mix by
increasing net loan balances outstanding and decreasing investments in
mortgage-backed securities, resulting in a higher overall yield on interest
earning assets and ultimately spread. This increased net interest income was
partially off-set by an increase in the provision for loan losses.
Interest Income. Interest income for the six month period ended March
31, 1998 was $16,649,000, up $462,000 or approximately 3% from $16,187,000 for
the six month period ended March 31, 1997. Total average interest earning assets
shrunk slightly, from $471.8 million during the six month period ended March 31,
1997 to $468.6 million for the comparable period during 1998 due to an increase
in average net loans outstanding of $53.7 million while average net investments
decreased by $56.9 million. This resulted in an overall yield increase of 0.25%
when comparing total yield on earning assets of 7.13% for the six month period
ended March 31, 1998 to 6.88% for the six month period ended March 31, 1997.
Interest Expense. Interest expense rose to $10,286,000 for the six
month period ended March 31, 1998 from $10,273,000 for the comparable period in
1997. This modest $13,000 increase was due to a combination of a 9 basis point
increase in cost of funds partially offset by a small volume variance of
approximately $7.9 million as total average interest bearing liabilities shrunk
from $445.7 million for the six months ended March 31, 1997 to $437.8 million
for the same period in 1998.
Net Interest Income. Net interest income increased 7.6% to $6,363,000
during the six month period ended March 31, 1998, up from $5,914,000 during the
same period in 1997. The increase was due primarily to the increase in yield on
average interest earning assets, resulting from the change in asset mix as
discussed above.
Provision for Loan Losses. The provision for loan losses increased by
$90,000 to $120,000 for the six month period ended March 31, 1998 as compared to
$30,000 for the six month period ended March 31, 1997. This increase was
primarily the result of increasing loan balances outstanding relative to total
assets. Net loans outstanding at March 31, 1998 increased by $79.7 million to
$316.9 million as compared to $237.2 million at March 31, 1997. As a percentage
of total assets, net loans outstanding at March 31, 1998 was 60.3% as compared
to 49.2% at March 31, 1997.
- --------------------------------------------------------------------------------
35.
<PAGE> 38
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income. Noninterest income was $1,151,000 for the six month
period ended March 31, 1998 which was a decrease of $32,000 as compared to
$1,183,000 reported for the comparable period in 1997. Although the net decrease
was minor, it resulted from a net amount of several larger items. During the six
month period ended March 31, 1998, gain on the sale of securities was $70,000
higher, and service charges on deposit accounts was $154,000 higher than the
comparable period in 1997. These increases were offset by a decrease in loan
servicing fees net of valuation of $251,000 during the six month period ended
March 31, 1998 as compared to the six month period ended March 31, 1997. The
decrease in loan servicing fees net of valuation was due to a combination of an
increase in the market valuation allowance of $182,000 due to a low interest
rate environment and increase prepayment risk, and the remaining decrease of
$69,000 was due to lower loan servicing balances.
Noninterest Expense. Noninterest expense was $4,398,000 for the six
month period ended March 31, 1998 compared to $4,481,000 for the comparable
period in 1997 resulting in a $83,000 decrease. Noninterest expense decreased
primarily due to a $112,000 decrease in compensation and related employee
expenses and a $112,000 decrease in deposit insurance expense. These two
decreases were partially offset by a $50,000 increase in office occupancy and
equipment expense, a $32,000 increase in professional fee expense, a $31,000
increase in deposit account expenses, and a $28,000 increase in various other
operating expenses.
Provision for Income Taxes. Provision for income taxes was $1,035,000
for the six month period ended March 31, 1998 as compared to $886,000 for the
six month period ended March 31, 1997 resulting in a $149,000 increase. This
increase was a result of increased pre-tax income during the six month period
ended March 31, 1998 as compared to the comparable period in 1997.
- --------------------------------------------------------------------------------
36.
<PAGE> 39
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR YEARS ENDED SEPTEMBER 30, 1997 AND 1996.
Net Income. Net income for 1997 was $3,365,000 as compared to $834,000
for 1996 resulting in an increase of $2,531,000 or $2.91 per share. In 1996 all
SAIF (Savings Association Insurance Fund of the FDIC) insured institutions were
required to take a one time charge against income to recapitalize the insurance
fund. Trumbull's contribution amounted to $2,470,000 on a pre-tax basis,
resulting in an after tax charge against earnings of $1,630,000 or $1.87 per
share. The remaining increase in 1997 compared to 1996 came primarily from net
interest income, due to the company's continuing strategy of changing it's asset
mix by increasing net loan balances outstanding and decreasing investments in
mortgage-back securities, thereby contributing to the increase in spread from
2.07% in 1996 to 2.27% in 1997. Noninterest income also contributed to the
increase in earnings, primarily due to the growth in fees earned on deposit
accounts resulting from the continued success of the "High Performance Checking"
program first implemented in January 1995.
Interest Income. Interest income for 1997 was $32,581,000 compared to
$32,119,000 for 1996, resulting in a $462,000 increase. Although total average
interest earnings assets shrunk slightly in 1997 to $471.0 million as compared
to $475.8 million for 1996, average net loans outstanding increased by $28.6
million while average net investments decreased by $33.5 million. This resulted
in an overall yield increase of 0.17% when comparing 1997's total yield on
interest earning assets of 6.92% to 1996's yield of 6.75%.
Interest Expense. Total interest expense decreased $431,000 to
$20,605,000 in 1997 from $21,036,000 in 1996. This decrease is due to a
combination of a decrease in average interest bearing liabilities outstanding of
approximately $5.4 million and a decrease in average cost of funds of
approximately 0.04%. With regard to average cost of funds, Trumbull lowered it's
rate paid on interest bearing checking accounts from 2.15% to 1.75% on October
31, 1995 and again from 1.75% to 1.55% on April 15, 1996. The remaining interest
bearing liabilities adjusted with general market interest rates. The Federal
Open Market Committee (FOMC) lowered the discount rate by 0.25% on December 20,
1995 and again by another 0.25% on January 31, 1996. The FOMC raised the rate by
0.25% on March 25, 1997 where it remains unchanged to date.
Provision for Loan Losses. The provision for loan losses increased by
$80,000 to $140,000 in 1997 as compared to $60,000 in 1996. This increase was
primarily the result of increasing loan balances outstanding. Net loans
outstanding as a percentage of total assets at September 30, 1997 was 54.5%
compared to 44.6% at September 30, 1996.
- --------------------------------------------------------------------------------
37.
<PAGE> 40
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income. Noninterest income total $2,335,000 in 1997
compared to $1,825,000 in 1996 resulting in an increase of $510,000. The primary
component contributing to this increase was service charges on deposit accounts
which increased by $314,000 in 1997 compared to 1996. This 41.7% increase was
due to the successful implementation and growth of the "High Performance
Checking" program implemented in January 1995. Net gain on the sale of loans
increased by approximately $208,000 in 1997 compared to 1996. There was also an
increase in loan service fees of $23,000 and other operating income increased by
$45,000 during 1997 as compared to 1996. The increases in noninterest income
were partially offset by an increase in loss on sale of securities of $80,000.
Noninterest Expense. Noninterest expense was $9,062,000 in 1997
compared to $11,577,000 in 1996 resulting in a $2,515,000 decrease. In 1996 all
SAIF (Savings Association Insurance Fund of the FDIC) insured institutions were
required to take a one time charge against income to recapitalize the insurance
fund. Trumbull's contribution was $2,470,000 which was expensed in 1996.
Provision for Income Taxes. The provision for income taxes increased
$1,307,000 to $1,744,000 in 1997 from $437,000 in 1996. This increase was a
result of increased pre-tax income during 1997 as compared to 1996.
COMPARISON OF OPERATING RESULTS FOR YEARS ENDED SEPTEMBER 30, 1996 AND 1995.
Net Income. Net income for 1996 was $834,000 as compared to $2,004,000
for 1995 resulting in an decrease of $1,170,000 or $1.35 per share. In 1996 all
SAIF (Savings Association Insurance Fund of the FDIC) insured institutions were
required to take a one time charge against income to recapitalize the insurance
fund. Trumbull's contribution amounted to $2,470,000 on a pre-tax basis,
resulting in an after tax charge against earnings of $1,630,000 or $1.87 per
share.
Interest Income. Interest income for 1996 was $32,119,000 compared to
$32,117,000 for 1995 resulting in a $2,000 increase. This increase was due to a
combination of a decrease in average interest bearing assets in 1996 compared to
1995 resulting in a decreasing effect on interest income of $75,000 and an
increase in average yield in 1996 compared to 1995 of 0.13% resulting in an
increasing effect on interest income of $77,000. The increase in overall yield
is primarily a result of the continuing shift in interest earning assets from
investments, which tend to be lower yielding assets, to loans which tend to be
higher yielding assets.
- --------------------------------------------------------------------------------
38.
<PAGE> 41
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Expense. Total interest expense decreased $282,000 to
$21,036,000 in 1996 from $21,318,000 in 1995. This decrease is due to a decrease
in average interest bearing liabilities in 1996 compared to 1995 resulting in a
decreasing effect on interest expense of $633,000 which was partially offset by
an increase in cost of funds in 1996 compared to 1995 of 0.09% resulting in an
increasing effect on interest expense of $351,000.
Provision for Loan Losses. The provision for loan losses remained the
same for 1996 and 1995 at $60,000 for each year.
Noninterest Income. Noninterest income total was $1,825,000 in 1996
compared to $1,706,000 in 1995 resulting in an increase of $119,000. Service
charges on deposit accounts increased $246,000 in 1996 compared to 1995
representing a 48.4% increase. This increase was due to the successful
implementation and growth of the "High Performance Checking" program implemented
in January 1995. Other operating income also increased by $224,000 in 1996
compared to 1995, partly due to increased late fee income earned on the
company's growing portfolio of loans owned and loans serviced for others.
Somewhat offsetting these increases was the decrease in the net gain on the sale
of securities available for sale which decreased by $202,000 in 1996 compared to
1995. In addition, the net loss on the sale of loans increased by $105,000 in
1996 compared to 1995 and loan service fees decreased by $44,000 in 1996
compared to 1995
Noninterest Expense. Noninterest expense was $11,577,000 in 1996
compared to $9,318,000 in 1995 resulting in an increase of $2,259,000. In 1996
all SAIF (Savings Association Insurance Fund of the FDIC) insured institutions
were required to take a one time charge against income to recapitalize the
insurance fund. Trumbull's contribution was $2,470,000 which was expensed in
1996.
Provision for Income Taxes. The provision for income taxes decreased
$686,000 to $437,000 in 1996 from $1,123,000 in 1995. This decrease was a result
of decreased pre-tax earnings in 1996 as compared to 1995. In addition,
Trumbull's effective tax rate decreased from 35.9% in 1995 to 34.4% in 1996.
COMPARISON OF MARCH 31, 1998 AND SEPTEMBER 30, 1997 FINANCIAL CONDITION.
Total assets increased to $525,122,000 at March 31, 1998 as compared to
$482,403,000 at September 30, 1997, resulting in an increase of $42,719,000 or
8.9%. This increase was funded by a $10 million increase in deposits, a $30.9
million increase in borrowed funds and a $1.5 million increase in shareholders'
equity.
- --------------------------------------------------------------------------------
39.
<PAGE> 42
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total net loans outstanding increased to $316,851,000 at March 31, 1998
as compared to $262,781,000 at September 30, 1997, resulting in an increase of
$54,070,000 or 20.6%. Most of this increase was due to single family home loans
which increased approximately $49.8 million, consumer loans also increased by
approximately $6.1 million, while commercial real estate loans decreased by $1.8
million. Included in total net loans outstanding are single family home loans
held for sale of $11 million at March 31, 1998 and $0.9 million at September 30,
1997. Much of the increased activity in single family home lending is due to
Trumbull's Loan Production Office which opened for business in February 1997 as
well as the favorable interest rate environment. During the six month period
ended March 31, 1998 Trumbull originated a total of $63.9 million of single
family first mortgage home loans from all sources and purchased an additional
$9.2 million through brokers. During this period Trumbull sold $1.6 million of
these loans in the secondary market retaining the servicing rights. During the
six month period ended March 31, 1997 Trumbull originated a total of $21.6
million of single family first mortgage home loans from all sources and
purchased an additional $5.4 million through brokers. During this period
Trumbull sold $2.1 million of these loans in the secondary market.
Total securities decreased to $183,921,000 at March 31, 1998 as
compared to $195,713,000 at September 30, 1997 resulting in a decrease of $11.8
million or 6.0%. During the six month period ended March 31, 1998 Trumbull
purchased $40.1 million and sold $15.5 million of securities, and approximately
$36.8 million was received as repayment of principal. Trumbull's continuing
strategy is to change the interest earning asset mix over time by decreasing
security balances outstanding and increasing investments in real estate loans
and consumer lending. Of the $183,921,000 of total securities outstanding at
March 31, 1998, $20,819,000, or 11.3%, are classified as available-for-sale with
the remainder classified as held-to-maturity. Of the $195,713,000 of total
securities outstanding at September 30, 1997, $25,195,000, or 12.9%, are
classified as available-for-sale with the remainder classified as
held-to-maturity.
Investment in premises and equipment increased to $5,276,000 at March
31, 1998 as compared to $4,899,000 at September 30, 1997 resulting in an
increase of $377,000. In January 1998 Trumbull purchased land for $450,000 in
Twinsburg, Ohio with the intention of building a new full service branch office.
The branch is expected to be opened by the end of calendar year 1998.
Total deposits increased to $382,819,000 at March 31, 1998 as compared
to $372,823,000 at September 30, 1997, an increase of $10 million. The increase
was due to Trumbull's continued effort to emphasize several marketing plans
including cross selling efforts related to the "High Performance Checking"
program.
- --------------------------------------------------------------------------------
40.
<PAGE> 43
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total borrowings increased to $99,207,000 at March 31, 1998 as compared
to $68,339,000 at September 30, 1997 resulting in an increase of $30.9 million.
Trumbull increased it's borrowings as a means to fund it's efforts to grow the
loan portfolio.
Total shareholders' equity increased to $38,081,000 at March 31, 1998
as compared to $36,618,000 at September 30, 1997, an increase of $1,463,000. The
increase was due to year-to-date net income of $2 million, a $0.1 million
decrease in unrealized loss on securities available for sale, and was partially
offset by payment of cash dividends totaling $0.67 per share or $0.6 million.
Total shareholders' equity as a percentage of total assets at March 31, 1998 was
7.24% compared to 7.59% at September 30, 1997. Trumbull's equity exceeded all
regulatory capital requirements at March 31, 1998 and September 30, 1997.
COMPARISON OF SEPTEMBER 30, 1997 AND 1996 FINANCIAL CONDITION.
Total assets decreased to $482,403,000 at September 30, 1997 as
compared to $493,697,000 at September 30, 1996, resulting in a decrease of
$11,294,000 or 2.3%. This decrease was used to fund the $1.1 million decrease in
deposits and contribute to the repayment of $12 million in borrowed funds.
Total net loans outstanding increased to $262,781,000 at September 30,
1997 as compared to $220,105,000 at September 30, 1996, resulting in an increase
of $42,676,000 or 19.4%. Most of this increase was due to single family home
loans which increased approximately $41.2 million, consumer loans also increased
by approximately $2.3 million, while commercial real estate loans decreased by
$0.8 million. Included in total net loans outstanding are single family home
loans held for sale of $0.9 million at September 30, 1997 and $0.3 million at
September 30, 1996. Much of the increased activity in single family home lending
is due to Trumbull's Loan Production Office which opened for business in
February 1997 as well as the favorable interest rate environment. During the
twelve month period ended September 30, 1997 Trumbull originated a total of $64
million of single family first mortgage home loans from all sources and
purchased an additional $5.4 million through brokers. During this period
Trumbull sold $11.7 million of these loans in the secondary market retaining the
servicing rights. During the twelve month period ended September 30, 1996
Trumbull originated a total of $46.9 million of single family first mortgage
home loans from all sources and purchased an additional $9.9 million through
brokers. During this period Trumbull sold $12.6 million of these loans in the
secondary market.
- --------------------------------------------------------------------------------
41.
<PAGE> 44
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total securities decreased to $195,713,000 at September 30, 1997 as
compared to $251,306,000 at September 30, 1996, a decrease of $55.6 million or
22.1%. During the twelve month period ended September 30, 1997 Trumbull
purchased $3 million and sold $19.7 million of securities, and approximately
$38.7 million was received as repayment of principal. Trumbull's continuing
strategy is to change the interest earning asset mix over time by decreasing
security balances outstanding and increasing investments in real estate loans
and consumer lending. Of the $195,713,000 of total securities outstanding at
September 30, 1997, $25,195,000, or 12.9%, are classified as available-for-sale
with the remainder classified as held-to-maturity. Of the $251,306,000 of total
securities outstanding at September 30, 1996, $53,564,000, or 21.3%, are
classified as available-for-sale with the remainder classified as
held-to-maturity.
Total deposits decreased to $372,823,000 at September 30, 1997 as
compared to $373,927,000 at September 30, 1996, a decrease of $1.1 million.
Total borrowings decreased to $68,339,000 at September 30, 1997 as
compared to $80,367,000 at September 30, 1996 resulting in a decrease of $12
million. Trumbull used cash flows generated from it's security portfolios to
repay borrowings with the intent to redeploy the funds into loans.
Total shareholders' equity increased to $36,618,000 at September 30,
1997 as compared to $33,829,000 at September 30, 1996 resulting in an increase
of $2,789,000. The increase was due to 1997 net income of $3.4 million, a $0.4
million decrease in unrealized loss on securities available for sale, and was
partially offset by payment of cash dividends totaling $1.18 per share or $1
million. Total shareholders' equity as a percentage of total assets at September
30, 1997 was 7.59% compared to 6.85% at September 30, 1996. Trumbull's equity
exceeded all regulatory capital requirements at September 30, 1997 and 1996.
- --------------------------------------------------------------------------------
42.
<PAGE> 45
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY
Management of the Corporation's liquidity position is necessary to ensure that
funds are available to meet the cash flow needs of depositors and borrowers as
well as the operating cash needs of the Corporation. The Corporation's asset
liability committee ("ALCO") is responsible for measuring, monitoring and
managing liquidity. Funds are available from a number of sources including
maturing securities, payments made on loans, the acquisition of new deposits,
the sale of packaged loans, the sale of securities in the Corporation's
available-for-sale portfolio, borrowings through reverse repurchase agreements
and borrowing from the FHLB (current capacity of $97 million, could be extended
to $165 million with additional FHLB stock purchases). The parent company's only
major source of funding is dividends received from it's subsidiary Savings Bank.
The Savings Bank is subject to regulation and may be limited in its ability to
pay dividends to the parent company. Accordingly, consolidated cash flows may
not represent cash available to common stockholders.
YEAR 2000
The Year 2000 ("Y2K") issue deals with the fact that many computer applications,
if not corrected, could fail or create erroneous results by or at the year 2000
because many existing computer programs use only two digits to identify a year
in the date field and these programs were not designed or developed while
considering the impact of the upcoming change in the century. The Corporation
has identified, assessed and prioritized the Y2K risks. The process involves
modifying or replacing certain hardware and software used by the Corporation.
The software utilized is primarily originated and serviced by external
providers. The Corporation is communicating with those providers to ensure that
appropriate steps are being taken to remedy any Y2K issues. The Corporation
expects to have all the identified essential system and application changes
completed by the end of 1998. Substantially all testing will be completed as
well in 1998. Total cost associated with the process, including the cost of
acquiring certain hardware and software and the internal and external costs
relating to modifying the systems is not determinable at this time, but is not
expected to be material to the financial statements taken as a whole. Purchased
hardware and software will be capitalized in accordance with normal policy.
Personnel and all other costs related to the process are being expensed as
incurred.
- --------------------------------------------------------------------------------
43.
<PAGE> 46
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES
Total shareholders' equity increased from $33,829,0000 at September 30, 1996 to
$36,618,000 at September 30, 1997. Most of this increase resulted from net
income and was partially offset by the payment of cash dividends and the impact
of changes in market values on the securities available-for-sale. Future
volatility in shareholders' equity is expected, as changes in market rates of
interest impact the market value of Trumbull's securities held in the
available-for-sale portfolio.
Banking regulations have established minium capital ratios for banks. As a
result, Trumbull must meet a risk-based capital requirement, which defines the
two tiers of capital and compares each to Trumbull's "risk-weighted assets."
Trumbull's assets and certain off-balance sheet items, such as loan commitments,
are each assigned a risk factor so that assets with potentially higher credit
risk will require more capital support than assets with lower risk. These
regulations require Trumbull to have a minimum total risk-based capital ratio of
8%, at least half of which must be Tier 1 capital. Trumbull's Tier 1 capital is
its shareholders' equity before any gain or loss on securities
available-for-sale, less certain intangibles and the non-qualifying portion of
mortgage loan servicing rights asset, while total risk-based capital includes
Tier 1 capital and a limited amount of the allowance for loan losses.
- --------------------------------------------------------------------------------
44.
<PAGE> 47
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes Trumbull's capital ratios in comparison with
minimum requirements.
TRUMBULL SAVINGS
CAPITAL RATIOS
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996 September 30, 1995
Amount Percent Amount Percent Amount Percent
------------------------------ ------------------------- --------------------------
LEVERAGE RATIO
- --------------
<S> <C> <C> <C> <C> <C> <C>
Actual 35,772 7.34% 33,164 6.72% 32,832 6.64%
Minimum Required 14,622 3.00% 14,801 3.00% 14,832 3.00%
TIER 1 RISK-BASED CAPITAL
- -------------------------
Actual 35,772 15.70% 33,164 16.05% 32,832 15.89%
Minimum Required 9,116 4.00% 8,264 4.00% 7,864 4.00%
TOTAL RISK-BASED CAPITAL
Actual 37,231 16.34% 34,626 16.76% 34,381 17.49%
Minimum Required 18,231 8.00% 16,527 8.00% 15,728 8.00%
Risk Adjusted Assets 227,889 206,590 196,603
</TABLE>
The payment of dividends by Trumbull to its shareholders is subject to
restrictions by its regulatory authorities, which generally limit dividends to
the current and prior two years retained earnings, as defined by regulation. In
addition, banks are precluded from paying dividends that would reduce regulatory
capital below established minimums. The Merger Agreement also sets forth certain
limitations on the payment of dividends by Trumbull to its shareholders.
- --------------------------------------------------------------------------------
45.
<PAGE> 48
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IMPACT OF INFLATION
Consolidated financial data included herein has been prepared in accordance with
generally accepted accounting principles (GAAP). Presently, GAAP requires the
measurement of financial position and operating results in terms of historical
dollars, except for securities available for sale which are carried at fair
value. Changes in the relative value of money due to inflation or recession are
generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of Trumbull Financial Corporation to a far greater degree than changes
in the inflation rate. While interest rates are greatly influenced by changes in
the inflation rate, they do not move concurrently. Rather, interest rate
volatility is based on changes in the expected rate of inflation, as well as
changes in monetary and fiscal policy. A financial institution's ability to be
relatively unaffected by changes in interest rates is a good indicator of its
capability to perform in today's volatile economic environment. In an effort to
protect itself from the effects of interest rate volatility, Trumbull reviews
its interest rate risk position frequently, monitoring its exposure and taking
necessary steps to minimize any detrimental effects on the Corporation's
profitability.
- --------------------------------------------------------------------------------
46.
<PAGE> 49
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET LIABILITY MANAGEMENT
The asset/liability committee ("ALCO") includes the Corporation's chief
executive officer, chief financial officer, chief lending officer and the
executive officer responsible for retail deposit operations. The ALCO meets at
least once per month to monitor and discuss lending strategies, funding
strategies, investment strategies, monitor adherence to and analyze significant
variances with the Corporation's business plan, as well as interest rate risk
exposure and strategies. The Corporation measures and monitors interest rate
risk from the perspectives of acceptable levels of changes in the economic value
of equity, also referred to as net portfolio value ("NPV") and net interest
income.
On a quarterly basis, the Corporation's chief financial officer prepares the
interest rate risk report using computer simulation. The computer model uses the
concepts of duration analysis and discounted cash flows. Changes to the
Corporation's NPV and net interest income is simulated using instant and
permanent interest rate shocks of plus and minus 400bps in increments of 100bps.
These results are then compared to the limits imposed by the Board of Directors
to determine compliance, and also compared to prior periods to determine the
effect of previously implemented strategies. These reports are monitored and
analyzed by the ALCO and the Board of Directors on at least a quarterly basis.
If estimated changes to NPV and/or net interest income are not within the limits
established by the Board of Directors, the Board may direct management to adjust
its asset and liability mix to bring interest rate risk within Board approved
limits.
Historically, the Corporation has had higher than average interest rate risk as
compared to it's OTS regulated Thrift peer group. The Corporation believes that
the interest rate risk component in the overall risk profile of the entity is
acceptable primarily due to lower levels of other component risk factors.
Specifically, the Corporation believes it's credit risk is relatively low
primarily because of the asset mix. Approximately 50% ($248 million) of it's
interest earning assets at March 31, 1998, is invested in single family home
loans, with low to moderate credit risk and approximately 36% ($182.5 million)
is invested in U.S. Government agency-backed securities with little if any
credit risk. The remaining interest earning assets are comprised of
approximately $61.3 million (approximately 12% of interest earning assets) of
consumer loans, primarily automobile loans originated through local automobile
dealers, and the remaining 2% are commercial real estate and other loans. The
Corporation's interest rate risk exposure during the past three years is
summarized below:
- --------------------------------------------------------------------------------
47.
<PAGE> 50
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERCENTAGE CHANGE IN NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
Change in
Board Interest 9-30-97 9-30-96 9-30-95
Limit Rates
<S> <C> <C> <C> <C>
-80% 4.00% -56% -68% -81%
-60% 3.00% -39% -50% -59%
-40% 2.00% -23% -31% -37%
-20% 1.00% -10% -14% -18%
0% 0.00% 0% 0% 0%
-20% -1.00% 6% 11% 10%
-40% -2.00% 3% 14% 14%
-60% -3.00% 5% 18% 19%
-80% -4.00% 10% 25% 27%
</TABLE>
PERCENTAGE CHANGE IN NET INTEREST INCOME (12 month horizon)
<TABLE>
<CAPTION>
Change in
Board Interest 9-30-97 9-30-96 9-30-95
Limit Rates
<S> <C> <C> <C> <C>
-40% 4.00% -26% -34% -22%
-30% 3.00% -15% -22% -15%
-20% 2.00% -5% -14% -8%
-10% 1.00% -1% -6% -3%
0% 0.00% 0% 0% 0%
-10% -1.00% -1% 5% 0%
-20% -2.00% -3% 8% -2%
-30% -3.00% -7% 6% -6%
-40% -4.00% -10% 3% -10%
</TABLE>
The NPV calculations are based on the net present value of discounted cash flows
utilizing market prepayment assumptions provided by Bloomberg and market rates
of interest for each asset and liability product type based on their
characteristics. The NPV data presented above for periods September 30, 1997
through 1995 have been calculated by OTS based on information provided by the
Corporation.
- --------------------------------------------------------------------------------
48.
<PAGE> 51
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Corporation may undertake in response to changes in interest rates.
Substantially all long-term, fixed-rate mortgages are underwritten according to
guidelines of the Federal Home Loan Mortgage Corporation ("FHLMC") and the
Federal National Mortgage Association ("FNMA"). From time to time the
Corporation may sell portions or all of it's current long-term fixed-rate
mortgage loan production as a means of managing interest rate risk as well as
generating fee income. Sales are executed through either swapping the loans with
FHLMC or FNMA in exchange for mortgage-backed securities secured by such loans
which are then sold, or the loans are sold directly for cash in the secondary
market.
The Corporation also uses interest rate caps as a means of managing interest
rate risk. At March 31, 1998 the Corporation had the following interest rate
caps on it's books: two 5 year 6% LIBOR caps maturing December 2002 with
combined notional value of $20.9 million, and one 3 year 6% LIBOR cap maturing
January 2001 with a notional value of $10 million.
- --------------------------------------------------------------------------------
49.
<PAGE> 52
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TRUMBULL FINANCIAL CORPORATION'S STATISTICAL INFORMATION
I. Distribution of assets, liabilities, and shareholders' equity; interest
rates and interest differential
A&B.
The average balance sheet information and the related analysis of net interest
earned for the years ended September 30, 1997, 1996 and 1995 and for the six
months ended March 31, 1998 and 1997 is included on pages 31 and 33. All
interest income is reported on a fully taxable equivalent basis. Nonaccrual
loans, for the purpose of the computations, are included in the daily average
loan amounts outstanding.
Tables setting forth the effect of volume and rate changes on interest income
and expense for the years ended September 30, 1997 and 1996, September 30, 1996
and 1995 and for the six months ended March 31, 1998 and 1997 are included on
pages 32 and 34. For purposes of these tables, changes in interest due to volume
and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in rate multiplied by the previous year's volume.
Rate/Volume Variance - change in volume multiplied by the change in rate.
The rate/volume variance was allocated to volume variance and rate variance in
proportion to the relationship of the absolute dollar amount of the change in
each.
- --------------------------------------------------------------------------------
50.
<PAGE> 53
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
II. Investment Portfolio
A&B.
Investment securities
The carrying value of investment and mortgage-backed securities at the
dates indicated are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------ -------------------------
AVAILABLE FOR HELD TO AVAILABLE FOR HELD TO
SALE YIELD MATURITY YIELD SALE YIELD MATURITY YIELD
-------------- ------- ------------ ------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury and other U.S.
Government agencies &
corporations
Under 1 year - - - -
1 to 5 years - - - 2,000,000 7.02%
5 to 10 years - 7,988,000 7.29% - 7,986,500 7.29%
Over 10 years - 0 - -
-------------- ------------ ------------ -------------
- 7,988,000 7.29% - 9,986,500 7.24%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed Securities 25,074,089 6.30% 105,962,139 5.82% 53,969,164 5.99% 123,811,952 5.82%
Collateralized Mortgage - 56,568,247 6.04% - 63,943,362 5.97%
Obligations
-------------- ------------ ------------ -------- ------------- --------
25,074,089 6.30% 162,530,386 5.90% 53,969,164 5.99% 187,755,314 5.87%
SEPTEMBER 30, 1995
--------------------------
AVAILABLE FOR HELD TO
SALE YIELD MATURITY YIELD
------------- --------- -------------- ----------
U. S. Treasury and other U.S.
Government agencies &
corporations
Under 1 year - 500,789 7.52%
1 to 5 years - 1,996,344 6.63%
5 to 10 years - 2,000,000 7.40%
Over 10 years - -
------------- --------------
- 4,497,133 7.08%
Mortgage-backed Securities 8,596,730 6.13% 192,262,515 5.77%
Collateralized Mortgage - 68,746,538 6.02%
Obligations
------------- --------- -------------- ----------
8,596,730 6.13% 261,009,053 5.84%
</TABLE>
Mortgage-backed securities and collateralized mortgage obligations have various
stated maturities through March 2027.
The estimated weighted-average maturity of this segment of the portfolio is
3.5 years.
- --------------------------------------------------------------------------------
51.
<PAGE> 54
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
C. Excluding those holdings of securities portfolio in U.S. Treasury
securities and other agencies and corporations of the U.S. government,
there were no investments in securities of any one issuer which
exceeded 10% of Trumbull's shareholder's equity at September 30, 1997.
III. Loan Portfolio
A. Listed below is Trumbull's loan distribution at the end of each of the last
five years ending September 30,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Residential Real Estate $196,133,432 $157,485,914 $147,472,355 $118,189,384 $114,662,066
Commercial Real Estate 8,892,022 9,696,177 10,689,222 11,061,659 10,510,693
Real Estate Construction 2,919,543 1,684,254 905,560 1,208,400 62,000
Consumer 55,054,295 52,786,692 40,919,638 31,179,005 25,269,976
Loans held-for-sale 918,493 25,800 801,440 917,850 4,092,800
--------------------------------------------------------------------------
263,917,785 221,678,837 200,788,215 162,556,298 154,597,535
--------------------------------------------------------------------------
Undistributed portion of (821,132) (1,312,348) (587,073) (1,973,560) (1,398,607)
loans in process
Net deferred loan 1,143,600 974,286 723,483 285,965 (138,339)
origination costs
Allowance for loan losses (1,459,408) (1,506,000) (1,587,000) (1,567,000) (1,522,744)
Balance September 30, $262,780,845 $219,834,775 $199,337,625 $159,301,703 $151,537,845
==========================================================================
</TABLE>
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52.
<PAGE> 55
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
C. Risk Elements
1. Nonaccrual, past due and restructured loans - The following schedule
summarizes nonaccrual, pastdue and restructured loans at September 30,:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-accrual Loans 1,103,689 221,119 733,079 474,499 497,000
Accrual loans past due 90 days 52,640 55,924 131,425 13,022 109,000
Restructured Loans 0 0 0 0 0
--------------------------------------------------------------------------------------
$1,156,329 $277,043 $864,504 $487,521 $606,000
--------------------------------------------------------------------------------------
Percentage of loans at year end 0.44% 0.13% 0.43% 0.30% 0.40%
Real Estate Owned $0 $0 $0 $49,000 $50,000
</TABLE>
2. Potential problem loans - At September 30, 1997, there are approximately
$2,020,991 of loans not otherwise identified above which are included on
management's watch list. These loans were included on management's watch
list due to the fact that the loans have a loan to value ratio greater than
or equal to 80% and do not carry any private mortgage insurance. There were
no loans included on management's watch list due to doubt as to the
borrower's ability to comply with the present repayment terms which were
not identified above. These loans and their potential loss exposure have
been considered in Management's analysis of the adequacy of the allowance
for loan losses.
3. Foreign Outstandings - There were no foreign outstandings at September 30,
1997, 1996 or 1995.
4. Loan Concentrations - As of September 30, 1997, there are no concentrations
of loans greater than 10% of total loans which are not otherwise disclosed
as a category of loans to Item III A.
5. Other Interest Bearing Assets - As of September 30, 1997, there are no
other interest bearing assets that would be required to be disclosed under
Item III C 1. or 2. if such assets were loans.
- --------------------------------------------------------------------------------
53.
<PAGE> 56
- --------------------------------------------------------------------------------
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IV. Summary of Loan Loss Experience
The following schedule present an analysis of the allowance for loan losses
for the years ended September 30,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at October 1, $1,506,000 $1,587,000 $1,567,000 $1,522,744 $1,461,586
Charge-offs:
Residential Real Estate 11,535 54,947 21,254 67,148 141,565
Commercial Real Estate
Consumer 246,750 362,219 248,934 203,810 203,803
------------------------------------------------------------------
258,285 417,166 270,188 270,958 345,368
Recoveries:
Residential Real Estate 433 46,027 18,010 44,035 118,515
Commercial Real Estate
Consumer 70,518 230,129 212,517 210,704 216,011
------------------------------------------------------------------
70,951 276,156 230,527 254,739 334,526
Net charge-offs
Residential Real Estate 11,102 8,920 3,244 23,113 23,050
Commercial Real Estate 0 0 0 0 0
Consumer 176,232 132,090 36,417 (6,894) (12,208)
------------------------------------------------------------------
187,334 141,010 39,661 16,219 10,842
Additions:
Charges to operations 140,742 60,010 59,661 60,475 72,000
==================================================================
Balance at September 30, $1,459,408 $1,506,000 $1,587,000 $1,567,000 $1,522,744
==================================================================
Reserve for loan losses as
a percentage of year end
loans 0.55% 0.68% 0.79% 0.96% 0.98%
Reserve for loan losses as
a percentage of
non-performing assets 29.69% 27.49% 51.16% 70.13% 45.85%
</TABLE>
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54.
<PAGE> 57
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
B. The following schedule is a breakdown of the allowance for loan losses
allocated by type of loan and related ratios:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996 September 30, 1995
Percent of Percent of Percent of
Loans in Loans in Loans in
Allowance Each Category Allowance Each Category Allowance Each Category
(Dollars in thousands) amount to Total Loans amount to Total Loans amount to Total Loans
<S> <C> <C> <C> <C> <C> <C>
Residential Real Estate $483 75.80% $589 71.80% $552 74.30%
Commercial Real Estate 3.40% 4.40% 5.30%
247 194 214
Consumer 20.80% 23.80% 20.40%
730 723 821
--------------------------------------------------------------------------------------------------
$1,460 100.00% $1,506 100.00% $1,587 100.00%
==================================================================================================
September 30, 1994 September 30, 1993
Percent of Percent of
Loans in Loans in
Allowance Each Category Allowance Each Category
amount to Total Loans amount to Total Loans
$461 74.00% $445 76.90%
6.80% 6.80%
285 300
19.20% 16.30%
821 778
------------------------------------------------------------------
$1,567 100.00% $1,523 100.00%
==================================================================
</TABLE>
- --------------------------------------------------------------------------------
55.
<PAGE> 58
TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
V. Deposits
The following is a schedule of average deposit amounts and average
rates paid on each category for the periods included:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996 September 30, 1995
(Dollars in thousands)
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C>
Noninterest bearing
Demand deposits $8,954 $6,120
$10,151
-
Interest bearing
Demand deposits 24,516 1.55% 22,267 1.76% 20,279 2.15%
Savings deposits 105,732 2.64% 110,775 2.66% 119,572 2.83%
Time deposits 231,174 5.55% 235,766 5.55% 234,176 5.13%
----------------- ----------------- -----------------
$371,573 $377,762 $380,147
================= ================= =================
</TABLE>
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56.
<PAGE> 59
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TRUMBULL FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
VI. Return on Equity and Assets
Information required by this section is included on page 29.
VII. Short-term borrowings
The following is a schedule of short-term deposits for the periods indicated:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996 September 30, 1995
(Dollars in thousands)
<S> <C> <C> <C>
Balance at year ended: $ 19,800 - $ 14,187
Average balance during the year $ 18,415 $ 8,436 $ 30,091
Maximum month-end balance during year $ 19,800 $ 23,887 $ 58,043
Average interest rate during the year 5.32% 5.32% 5.66%
Average interest rate at period end 5.22% 0.00% 5.81%
</TABLE>
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57.
