<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K /A
AMENDMENT TO APPLICATON OR REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: June 26, 1998
SECOND BANCORP, INCORPORATED
----------------------------
(Exact name of registrant as specified in its charter)
AMENDMENT NO. 1
<TABLE>
Ohio 0-15624 34-1547453
- ------------------------------------------------------------------------------------------
<S> <C> <C>
(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
The undersigned Registrant hereby amends in its entirety the following items,
financial statements and other portions of its Current Report on Form 8-K filed
June 6, 1998, as set forth in the pages attached hereto:
Item 5 - Other Events
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, hereby duly authorized.
SECOND BANCORP INCORPORATED
Registrant
By: /s/ David L. Kellerman
David L. Kellerman, Treasurer
-1-
<PAGE> 2
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.
Index
<TABLE>
<S> <C>
Report of Independent Auditors .................................................................... 3
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 ............................................... 4
Statements of Income ............................................................ 5
Statements of Stockholders' Equity .............................................. 6
Statements of Cash Flows ........................................................ 7
Notes to Financial Statements ................................................... 8
Consent of Independent Public Accountants.......................................................... 29
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................... 30
</TABLE>
-2-
<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)
4
<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)
5
<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>
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(Continued)
6
<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)
7
<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.
8.
<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)
9.
<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)
10.
<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)
11.
<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)
12.
<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)
13.
<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)
14.
<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)
15.
<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)
16.
<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>
<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)
17.
<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)
18.
<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)
19.
<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 amorization 341,979 333,172
Deferred compensation 98,600 86,360
Purchased mortgage servicing amoritization 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)
20.
<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)
21.
<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)
22.
<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)
23.
<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)
24.
<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)
25.
<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)
26.
<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)
27
<PAGE> 28
THE TRUMBULL SAVINGS AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Continued)
28.
<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 25, 1998
- --------------------------------------------------------------------------------
29.
<PAGE> 30
- --------------------------------------------------------------------------------
BUSINESS OF TRUMBULL
GENERAL
Headquartered in Warren, Ohio, Trumbull is a unitary savings and loan
holding company registered with the Office of Thrift Supervision of the United
States Department of the Treasury ("OTS"). Trumbull was organized under Ohio law
on July 17, 1997 for the purpose of serving as the holding company for Trumbull
Savings. The holding company reorganization of Trumbull Savings was approved by
shareholders at an August 20, 1997 special meeting and completed on January 15,
1998. As a result of the holding company reorganization of Trumbull Savings,
shareholders of Trumbull Savings became shareholders of Trumbull and Trumbull
Savings became a wholly owned subsidiary of Trumbull. The principal asset of
Trumbull is the common stock of Trumbull Savings. Trumbull has no significant
business operations independent of Trumbull Savings.
The Second National Bank of Warren, a commercial bank and wholly owned
subsidiary of Second Bancorp, provided financing in the form of a $65,000 line
of credit to Trumbull in order for Trumbull to finance the costs and expenses
associated with the holding company reorganization. The line of credit was
retired promptly following completion of the holding company reorganization. The
line of credit was extended on arm's-length terms and in the ordinary course of
business by The Second National Bank of Warren.
Organized as an Ohio-chartered savings and loan association in February
of 1889 under the name, "The Trumbull Building and Loan Association," Trumbull
Savings' name was changed to "The Trumbull Savings and Loan Company" in 1900.
With shareholder approval, Trumbull Savings converted from a savings and loan
association charter to a savings bank charter under Ohio law effective June 11,
1997. Prior to the charter conversion, Trumbull Savings' principal federal
regulator was the OTS. As a result of the conversion, Trumbull Savings'
principal federal regulator is the Federal Deposit Insurance Corporation (the
"FDIC"). Trumbull Savings is also subject to regulation by the Division of
Financial Institutions of the Ohio Department of Commerce (the "Division").
Through its subsidiary Trumbull Savings, Trumbull is engaged
principally in the business of making first mortgage loans to finance the
purchase, construction or improvement of one- to four-family residential real
estate or other real property located in its primary market areas. Loan funds
are obtained primarily from savings deposits, which are insured up to applicable
limits by the FDIC, loan repayments, advances from the Federal Home Loan Bank of
Cincinnati (the "FHLB of Cincinnati") and other borrowings. Interest earned on
such loans is the primary source of revenue of Trumbull Savings. In addition to
originating and purchasing loans, Trumbull Savings invests in U.S. Government
and agency obligations and mortgage-backed securities.
Trumbull Savings conducts its principal business activities through its
main office and four branch offices in Trumbull County, Ohio, and two branch
offices in Jefferson County, Ohio. Trumbull Savings also recently obtained
regulatory approval to establish a new branch facility in Twinsburg in Summit
County, Ohio, which is expected to open for business by the end of the fourth
quarter of 1998. In addition to its branch offices, Trumbull Savings also has a
loan production office in Solon, Ohio.
- --------------------------------------------------------------------------------
30.
<PAGE> 31
- --------------------------------------------------------------------------------
As a savings and loan holding company, Trumbull is subject to
regulation, examination, and supervision by the OTS and by the Division. As a
savings bank incorporated under the laws of the State of Ohio, Trumbull Savings
is subject to regulation, supervision and examination by the FDIC and the
Division. Trumbull Savings is also a member of the FHLB of Cincinnati. See
"SUPERVISION AND REGULATION."
LENDING ACTIVITIES
General. The principal lending activity of Trumbull Savings is the
origination of conventional fixed-rate and adjustable-rate mortgage loans for
the acquisition or construction of one- to four-family residences located in the
primary markets of Trumbull Savings. Trumbull Savings is also approved to
originate mortgage loans insured by the Federal Housing Administration and
guaranteed by the Veterans Administration, but has only originated a few loans,
substantially all of which have been sold in the secondary market with servicing
released. Trumbull's secondary lending activities are the origination of
consumer loans (secured and unsecured), including automobile, home improvement,
credit card and home equity line of credit loans, as well as small business
loans, including lines of credit and term loans. In addition to single family
residential real estate lending and consumer lending, and to a much lesser
extent, Trumbull also originates loans secured by multi-family properties,
including mortgage loans on condominiums and apartment buildings, and by
nonresidential properties, including retail, office and other types of business
facilities. Trumbull Savings' total loans at March 31, 1998 totaled
approximately $316.9 million which represented approximately 60% of total
assets.
Loan Portfolio Composition. The following table sets forth certain
information concerning the composition of the loan portfolio of Trumbull Savings
at the dates indicated.
<TABLE>
<CAPTION>
Six Month
Period Ended Years ended September
----------------------------------------------------------------
March 31, 1998 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential $235,356,756 $196,133,432 $157,485,914 $147,472,355 $118,189,384 $114,662,066
Commercial 7,094,989 8,892,022 9,696,177 10,689,222 11,061,659 10,510,693
Construction 4,623,167 2,919,543 1,684,254 905,560 1,208,400 62,000
Consumer 61,108,872 55,054,295 52,786,692 40,919,638 31,179,005 25,269,976
Loans held-for-sale 11,018,943 918,493 25,800 801,440 917,850 4,092,800
-------------------------------------------------------------------------------
subtotal 319,202,727 263,917,785 221,678,837 200,788,215 162,556,298 154,597,535
-------------------------------------------------------------------------------
Undistributed portion of -2,157,411 -821,132 -1,312,348 -587,073 -1,973,560 -1,398,607
loans in process
Net deferred loan origination 1,234,559 1,143,600 974,286 723,483 285,965 -138,339
costs
Allowance for loan losses -1,428,945 -1,459,408 -1,506,000 -1,587,000 -1,567,000 -1,522,744
-------------------------------------------------------------------------------
Balance End of Period $316,850,930 $262,780,845 $219,834,775 $199,337,625 $159,301,703 $151,537,845
===============================================================================
</TABLE>
Real Estate Loans -- Residential. The primary lending activity of
Trumbull Savings is the origination of conventional loans for the acquisition or
construction of one- to four-family residential properties located within the
primary markets of Trumbull Savings. Each of such loans is secured by a mortgage
or deed of trust on the underlying real estate and improvements thereon.
FDIC regulations and Ohio law limit the amount Trumbull Savings may
lend in relationship to the appraised value of the real estate and improvements
thereon at the time of loan origination. In accordance with such regulations,
Trumbull Savings makes loans on single-family residences up to 97% of the value
of the real estate improvements (the "Loan-to-Value Ratio" or "LTV"). Although
Trumbull Savings makes loans in excess of a 95%
- --------------------------------------------------------------------------------
31.
<PAGE> 32
- --------------------------------------------------------------------------------
LTV, most of such loans are insured by a third party to reduce exposure to a 80%
LTV or less. Generally, Trumbull Savings requires private mortgage insurance
and/or charges premium interest rates for loans over 80% LTV. See "Non-accrual,
past due and restructured loans - Potential problem loans."
Trumbull Savings offers fixed-rate loans and adjustable-rate mortgage
loans ("ARMs") with initial interest rate adjustment periods generally of one
year, three years, five years or seven years. The new rate of interest at each
adjustment date is determined by adding a stated margin to an index identified
at the time the loan is originated: the longer the period before adjustment, the
higher the rate of interest to compensate Trumbull Savings for the increased
exposure to risk resulting from interest-rate fluctuations during the fixed-rate
period. The maximum adjustment at each adjustment date for one-year ARMs is
usually 2%, with a maximum adjustment of 6% over the life of the loan.
Residential mortgage loans offered by Trumbull Savings are usually for
terms of 10 to 30 years. Due to the long-term nature of an investment in
mortgage loans, such loans could have an adverse effect upon the net interest
margin of a lender if such loans do not reprice as quickly as the lender's cost
of funds. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF TRUMBULL." Experience during recent years demonstrates
that, as a result of prepayments in connection with refinancing and sales of the
underlying properties, residential loans generally remain outstanding for
periods that are substantially shorter than the stated maturity of such loans.
Trumbull also originates single family second mortgage real estate loans.
Second mortgage loans are generally fixed rate amortizing loans with maturities
of ten to fifteen years. At March 31, 1998 Trumbull had approximately $10
million of second mortgage loans.
At March 31, 1998, Trumbull Savings had a total of approximately $259
million real estate loans of which approximately $120 million are adjustable
rate loans (approximately 46%) and approximately $139 million (approximately
54%) are fixed rate loans.
Real Estate Loans -- Commercial. Trumbull Savings originates loans
secured by other real estate, including multifamily dwellings, land and lots for
single-family homes, land for commercial uses, and office, retail and other
types of facilities.
Nonresidential real estate loans are made primarily as five year
balloons with amortization generally between twenty and twenty-five years
resulting in a final balloon payment due at the end of the five year term. Such
loans are typically made at a maximum 80% LTV. To enable Trumbull Savings to
monitor the loans, Trumbull Savings requests rent rolls and financial
statements.
Because of the relatively larger loan amounts and effects of general
economic conditions on the successful operation of income-producing properties,
loans secured by multifamily dwellings and commercial facilities generally are
regarded as having a higher degree of risk than loans secured by one- to
four-family dwellings. If the cash flow on income-producing property is reduced,
for example as leases are not obtained or renewed, the borrower's ability to
repay may be impaired. Trumbull Savings endeavors to reduce such risk by
evaluating the credit history and past performance of the borrower, the location
of the real estate, the quality of the management constructing and operating the
property, the debt service ratio, the quality and characteristics of the income
stream generated by the property and appraisals confirming the property's
valuation.
Trumbull Savings also offers business loans including lines of credit, term
loans and SBA loans to individuals, which are not material.
- --------------------------------------------------------------------------------
32.
<PAGE> 33
- --------------------------------------------------------------------------------
Real Estate Loans - Construction. Trumbull Savings offers residential
construction loans both to owner-occupants and to homebuilders. Trumbull Savings
does not originate construction loans for nonresidential or multifamily
properties. Trumbull Savings also does not lend for the development of raw land.
At March 31, 1998, Trumbull Savings had approximately $4.6 million of
construction loans, none of which were nonperforming.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on properties with finished structures.
This is largely due to the concentration of principal in a limited number of
loans and borrowers and the effects of general economic conditions on real
estate developments, developers, managers and builders. In addition,
construction loans are more difficult to evaluate and monitor. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value before the completion of construction. Moreover, because of
uncertainties inherent in estimating construction costs, the accurate evaluation
of the LTVs and the total loan funds required to complete a project is
difficult. In the event a default on a construction loan occurs and foreclosure
follows, Trumbull Savings would have to take control of the project and attempt
either to arrange for completion of construction or dispose of the unfinished
project. Almost all of Trumbull Savings' construction loans are secured by
properties in Trumbull Savings' primary market. Trumbull Savings has not
foreclosed on any construction loans during the three year period ended
September 30, 1997.
Generally, construction loans have terms ranging up to nine months.
After the loans initial construction period, the loan then converts to an
amortizing permanent loan which amortizes over the original loan term less the
construction period. Construction loans can be originated under any of the
company's existing permanent loan programs and generally a slightly higher
interest rate is charged to compensate for the additional risk.
Consumer Loans. Consumer lending is Trumbull Savings' secondary lending
focus after single family real estate lending, in terms of volume. Trumbull
Savings makes various types of consumer loans, including loans made to
depositors secured by their savings deposits, automobile loans, home equity
lines of credit, credit cards and unsecured personal loans. On March 31, 1998,
total consumer loans totaled approximately $60.2 million. Of this amount
approximately $9.7 million are adjustable rate equity lines of credit loans
secured by second liens on single family homes. Approximately $44.3 million are
automobile loans originated primarily through local automobile dealers. The
remaining amount (approximately $6.2 million) are made up of credit card loans,
student loans, loans made to depositors secured by their savings deposits, and
other secured and unsecured personal loans.
Equity lines of credit loans secured by single family homes are made at
an ajustable rate of interest tied to the Wall Street prime lending rate.
Substantially all other consumer loans are made on the basis of a fixed rate of
interest. Consumer loans may entail greater risk than residential loans,
particularly consumer loans that are unsecured or are secured by rapidly
depreciating assets such as automobiles. Repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance. For second mortgages, amounts due on prior mortgages have a prior
claim. The risk of default on consumer loans increases during periods of
recession, higher unemployment and other adverse economic conditions that limit
the borrower's ability to repay.
Loan Solicitation and Processing. Trumbull's primary lending focus is
first mortgage real estate loans secured by single family homes. This type of
lending is originated from three primary sources; (1) through Trumbull's branch
system and local loan originators, (2) A Loan Production Office ("LPO") located
in Solon, Ohio, and (3) through correspondent and broker relationships,
collectively referred to as "wholesale" lending. In addition, Trumbull will
occasionally purchase a package of loans, usually with servicing retained by the
seller, from a
- --------------------------------------------------------------------------------
33.
<PAGE> 34
mortgage loan broker. Second mortgage real estate loans and equity lines of
credit loans, both secured by single family homes are originated through
commissioned loan brokers, through the branch system, or via telemarketing
efforts generated in Trumbull's consumer loan department. Trumbull's
telemarketer's generally solicit the company's first mortgage customers for
second mortgages, equity lines of credit loans, or other consumer lending
products.
After single family real estate loans, Trumbull's secondary lending
focus in terms of volume is consumer loans. Exclusive of second mortgage loans
and equity lines of credit loans discussed above, consumer loans outstanding at
March 31, 1998 approximate $50.5 million of which approximately $44.3 million,
or 88% are short-term fixed rate loans secured by automobiles or light trucks.
These loans are primarily originated through local automobile dealerships who
are paid an origination commission, generally around 2% of the loan amount.
Approximately $40.9 million of the $44.3 million, or 92% of automobile loans
outstanding at March 31, 1998 were originated through this source. The remaining
$3.4 million or 8% of this amount was originated through Trumbull's branch
system and internal sales force.
Multifamily residential real estate loans, commercial real estate loans
and business loans collectively referred to as commercial loans or commercial
lending is a very small piece of Trumbull's lending activity. These loans are
originated by Trumbull's commercial loan department, which consist of one
commercial loan officer and his secretary/assistant. At March 31, 1998 the
company had approximately $11.3 million of these types of loans representing
approximately 2% of total assets.
Loan applications for permanent mortgage loans are taken by loan
personnel. Trumbull Savings generally obtains a credit report, verification of
employment and other documentation concerning the credit worthiness of the
borrower. Each appraisal of the fair market value of the real estate that will
be used as security for the loan is generally prepared by either Trumbull's
internal appraisal department or an independent fee appraiser approved by the
Appraisal Committee of Trumbull Savings, comprised of the president, chief
lending officer and chief appraiser. An environmental study is conducted if the
appraiser or management has reason to believe that an environmental problem
might exist.
For multifamily and nonresidential mortgage loans, a personal guarantee
is generally required. Trumbull Savings also obtains information with respect to
prior projects completed by the borrower. Upon the completion of the appraisal
and the receipt of information on the borrower, the application for a loan is
submitted either to a Loan Committee or its designees or the Boards of Directors
of Trumbull Savings for approval or denial.
If a mortgage loan application is approved, a title insurance policy or
title report is obtained on the real estate that will secure the mortgage loan.
Borrowers are required to carry fire and casualty insurance and flood insurance,
if applicable, and to name Trumbull Savings as loss payee.
The procedure for approval of construction loans is the same as the
approval procedure for permanent first mortgage loans secured by single family
home loans, except that building plans, construction specifications and
estimates of construction costs are analyzed. Trumbull does not originate
construction loans secured by multifamily or nonresidential real estate.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
- --------------------------------------------------------------------------------
34.
<PAGE> 35
- --------------------------------------------------------------------------------
Small business loans are underwritten on the basis of the borrower's
historic income and expenses, projections of future cash flows, and credit
history, as well as on the value of the collateral, if any.
Most Trumbull Savings loans carry provisions that the entire balance of
the loan is due upon sale of the property securing the loan.
Loan Originations, Purchases and Sales. Trumbull Savings has been
actively originating new 30-year, 20-year and 15-year fixed-rate and
adjustable-rate loans. Virtually all residential fixed-rate loans made by
Trumbull Savings (excluding second mortgages) are originated on documentation
that will permit a possible sale of such loans to FNMA, FHLMC or other secondary
mortgage market participants. When mortgage loans are sold to FNMA, FHLMC or
other secondary mortgage market participants, Trumbull Savings either (i)
retains the servicing on such loans by collecting monthly payments of principal
and interest and forwarding such payments to the investor or other secondary
mortgage market participants, net of a servicing fee, or (ii) sells both the
loan and its servicing into the secondary market. Fixed-rate loans not sold in
the secondary market and generally all of the ARMs originated by Trumbull
Savings are primarily held in Trumbull Savings' held-to-maturity portfolio.
Trumbull Savings sold approximately $11 million of whole loans during
the 1997 fiscal year, compared to sales of approximately $12.7 million of whole
loans in 1996. Management believes secondary market activities will increase as
single family lending increases and as total investments continue to shrink in
terms of a percentage of total assets.
<TABLE>
<CAPTION>
(In Thousands) Year ended September 30,
1997 1996 1995
------------------- ------------------ ------------------
Amount $ % Amount $ % Amount $ %
------------------- ------------------ ------------------
<S> <C> <C> <C>
Loan Origination Activity
Beginning Balance $219,835 $199,338 $159,302
Loans Originated:
Real Estate Loans 70,171 70% 53,452 69% 45,708 68%
Consumer Loans:
Automobile and Misc 25,065 25% 22,467 29% 21,127 31%
Equity Lines of Credit,
net change 3,809 4% 618 1% -377 0%
Credit Card Loans, net
change 43 0% 101 0% 203 0%
Student Loans, net
change 623 1% 810 1% 634 1%
------------------- ------------------ ------------------
Total Consumer Loans 29,540 30% 23,996 31% 21,587 32%
------------------- ------------------ ------------------
Total Loans Originated 99,711 100% 77,448 100% 67,295 100%
Loans Purchased 5,267 9,939 17,823
Loans Sold -11,138 -13,049 -12,319
Principal Repayments -50,894 -53,841 -32,763
---------- --------- ---------
Ending Balance $262,781 $219,835 $199,338
========== ========= =========
</TABLE>
Note 1: Construction loans are included with real estate loans.
- --------------------------------------------------------------------------------
35.
<PAGE> 36
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Month Period ended March 31,
----------------------------------------
1998 1997
Amount $ % Amount $ %
------------------- ------------------
<S> <C> <C>
Loan Origination Activity
Beginning Balance $262,781 $219,835
Loans Originated:
Real Estate Loans 68,786 81% 24,302 66%
Consumer Loans:
Automobile and Misc 13,192 15% 11,268 31%
Equity Lines of Credit, 2,792 3% 800 2%
net change
Credit Card Loans, net -51 0% -32 0%
change
Student Loans, net 450 1% 439 1%
change
---------- ---------
Total Consumer Loans 16,383 19% 12,475 34%
---------- ---------
Total Loans Originated 85,169 100% 36,777 100%
---------- ---------
Loans Purchased 9,222 5,267
Loans Sold -1,633 -2,142
Principal Repayments -38,688 -22,622
========== =========
Ending Balance $316,851 $237,115
========== =========
</TABLE>
Note 1: Construction loans are included with real estate loans.
Federal Lending Limit. FDIC regulations impose a lending limit on the
aggregate amount that an institution may lend to one borrower. In summary terms,
the lending limit is an amount equal to 15% of the institution's total capital
for risk-based capital purposes, plus any loan reserves not already included in
total capital (the "Lending Limit Capital"). An institution may lend to one
borrower an additional amount not in excess of 10% of the institution's Lending
Limit Capital, provided the additional amount is fully secured by certain forms
of "readily marketable collateral." Real estate is not considered "readily
marketable collateral." In applying this limit, the regulations require that
loans to certain related or affiliated borrowers be aggregated. Trumbull Savings
has no outstanding loans or related borrowing arrangements in excess of its
lending limit as of March 31, 1998.
Loan Origination and Other Fees. Trumbull Savings realizes loan
origination fee and other fee income from its lending activities. Trumbull
Savings also realizes income from late payment charges, default interest,
application fees, and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield over the life of the related loan.
Delinquent Loans, Nonperforming Assets and Classified Assets. When a
borrower fails to make a required payment on a loan, Trumbull Savings attempts
to cause the deficiency to be cured by contacting the borrower. In most cases,
deficiencies are cured promptly.
Trumbull Savings attempts to minimize loan delinquencies through the
assessment of late charges and interest rate increases and adherence to its
established collection procedures. After a mortgage loan payment is 15 days
delinquent, a late charge of 5% of the amount of the payment is usually
assessed, and Trumbull Savings will
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36.
<PAGE> 37
- --------------------------------------------------------------------------------
contact the borrower by mail or phone to request payment. In certain limited
instances, Trumbull Savings may modify the loan or grant a limited moratorium on
loan payments to enable the borrower to reorganize his or her financial affairs.
If the loan continues in a delinquent status for 90 days or more, Trumbull
Savings generally will initiate foreclosure proceedings.
Real estate acquired by Trumbull Savings as a result of foreclosure or
by deed in lieu of foreclosure is classified as "real estate owned" until it is
sold. When property is so acquired, it is recorded at the lower of the loan's
unpaid principal balance or fair value at the date of foreclosure less estimated
selling expenses. Periodically, real estate owned is reviewed to ensure that
fair value less estimated costs to sell is not less than carrying value, and any
allowance resulting therefrom is charged to earnings as a provision for losses
on real estate acquired through foreclosure. Costs to develop or improve real
estate are capitalized; costs of holding real estate are expensed.
The following table reflects the amount of loans in delinquent status
as of March 31, 1998:
<TABLE>
<CAPTION>
30-59 DAYS 60-89 DAYS 90 DAYS OR MORE
-------------- ------------ -----------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
------ ------- -------- -------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans 34 $1,286 13 $ 360 31 $1,167
Consumer.............................55 $ 459 14 $ 153 27 $ 247
--- ------- --- ------- --- -------
89 $1,745 27 $ 513 58 $1,414
=== ======= === ======= === =======
Percentage of total to total loans... 0.06% 0.02% 0.04%
======= ======= =======
</TABLE>
All delinquent loans are reviewed on a regular basis and are placed on
nonaccrual status when the loans are 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on nonaccrual status is charged against
interest income via increases to reserve for uncollected interest. Subsequent
payments are recorded as a reduction to the reserve for uncollected interest
until the loan is brought current or delinquent less than 90 days and management
feels that the collectability of future interest payments is reasonably
probable.
Non-accrual, past due and restructured loans
Nonaccrual, past due and restructured loans - The following schedule summarizes
nonaccrual, pastdue and restructured loans at September 30,:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
(in Dollars) March 31, 1998 1997 1996 1995 1994 1993
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual Loans $1,229,367 $1,103,689 $221,119 $733,079 $474,499 $497,000
Accrual loans past due 90 76,243 52,640 55,924 131,425 13,022 109,000
days
Restructured Loans 0 0 0 0 0 0
-------------------------------------------------------------------
$1,305,610 $1,156,329 $277,043 $864,504 $487,521 $606,000
===================================================================
Percentage of loans at 0.41% 0.44% 0.13% 0.43% 0.30% 0.40%
year end
Real Estate Owned $69,000 $0 $0 $0 $49,000 $50,000
</TABLE>
- --------------------------------------------------------------------------------
37.
<PAGE> 38
- --------------------------------------------------------------------------------
High Loan-to-Value 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.
SUMMARY OF LOAN LOSS EXPERIENCE AND CHARGE-OFFS
Regulations of the FDIC and the Division require that institutions
classify their assets on a regular basis. Problem assets are classified as
"substandard," "doubtful" or "loss." "Substandard" assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the same weaknesses as "substandard" assets,
with the additional characteristics that (1) the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable and (2) there is a high possibility of loss. An asset
classified "loss" is considered uncollectible and of such little value that its
continuance as an asset of the institution is not warranted. The regulations
also provide for a "special mention" category, consisting of assets that do not
currently expose an institution to a sufficient degree of risk to warrant
classification but which possess credit deficiencies or potential weaknesses
deserving management's close attention.
Generally, Trumbull Savings classifies as "substandard" all loans that
are delinquent more than 90 days, real estate owned ("REO"), loans to facilitate
workouts and the sale of REO and other loans if the credit problems of the
borrowers have caused management to have doubts as to the ability of the
borrowers to comply with present loan repayment terms.
The aggregate amount of Trumbull Savings' classified assets at March
31, 1998, was as follows:
<TABLE>
<CAPTION>
AT MARCH 31,
1998
---------------
(IN THOUSANDS)
<S> <C>
Special mention............................... $ 1,097
Substandard................................... 1,630
Doubtful...................................... 0
Loss.......................................... 249
-------
Total classified assets....................... $ 2,976
=======
</TABLE>
Federal examiners are authorized to classify an institution's assets.
If an institution does not agree with an examiner's classification of an asset,
it may appeal this determination to the Regional Director of the FDIC. Trumbull
Savings had no disagreements with the examiners regarding the classification of
assets at the time of the last examination. Trumbull Savings has no restructured
loans as of March 31, 1998.
- --------------------------------------------------------------------------------
38.
<PAGE> 39
- --------------------------------------------------------------------------------
FDIC regulations require that Trumbull Savings establish prudent
general allowances for loan losses. If an asset or portion thereof is classified
as loss, the institution must either establish specific allowances for losses in
the amount of 100% of the portion of the asset classified loss, or charge off
such amount.
Allowance for Loan Losses. Trumbull's business strategy continues to
focus on increasing it's loan portfolio while decreasing it's security
portfolios. Most of the increases in the loan portfolio is from real estate
loans. Management expects that an increase in loans will increase delinquencies,
however, management is aware that increased delinquencies in real estate loans
does not necessarily mean an increase in loan losses. Reserve for loan losses as
a percentage of total loans have been decreasing over the five and a half year
period ended March 31, 1998. Net charge-offs on real estate loans have been
consisently minor over this period, but net charge-offs on consumer loans have
grown substantially as indicated in the table below. Although management feels
that the credit risk is acceptable and that the loan loss reserves are adequate,
consumer loan activity is monitored closely and loan loss reserve amounts
relative to the company's consumer loan activity is being reviewed.
The Board of Directors of Trumbull Savings reviews on a monthly basis
the allowance for loan losses as it relates to a number of relevant factors,
including but not limited to trends in the level of nonperforming assets and
classified loans, current and anticipated economic conditions in the primary
lending areas, past loss experience, possible losses arising from specific
problem assets and loan concentrations by collateral type and to single
borrowers. To a lesser extent, management considers loan underwriting, off
balance sheet items, loan renewals and modifications and management expertise
and collection practices. Although the Board of Directors and management believe
that they use the best information available to determine the allowances for
loan losses, unforeseen market conditions could result in adjustments, and net
earnings could be significantly affected if circumstances differ substantially
from the assumptions used in making the final determination. At March 31, 1998,
Trumbull Savings' allowance for loan losses totaled $1.4 million.
The following table sets forth an analysis of the allowance for loan
losses and charge-offs of Trumbull Savings for the periods indicated:
- --------------------------------------------------------------------------------
39.
<PAGE> 40
<TABLE>
<CAPTION>
Six Month
Period Ended Years ended
September 30,
March 31, 1997 1996 1995 1994 1993
1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1 $1,459,408 $1,506,000 $1,587,000 $1,567,000 $1,522,744 $1,461,586
Charge-offs:
Residential Real
Estate 46,040 11,535 54,947 21,254 67,148 141,565
Commercial Real Estate
Consumer 116,434 246,750 362,219 248,934 203,810 203,803
------------------------------------------------------------------------
162,474 258,285 417,166 270,188 270,958 345,368
Recoveries:
Residential Real
Estate 1,313 433 46,027 18,010 44,035 118,515
Commercial Real Estate
Consumer 10,699 70,518 230,129 212,517 210,704 216,011
------------------------------------------------------------------------
12,012 70,951 276,156 230,527 254,739 334,526
Net charge-offs
Residential Real 44,727 11,102 8,920 3,244 23,113 23,050
Estate
Commercial Real 0 0 0 0 0 0
Estate
Consumer 105,735 176,232 132,090 36,417 -6,894 -12,208
------------------------------------------------------------------------
150,462 187,334 141,010 39,661 16,219 10,842
Additions:
Charges to 120,000 140,742 60,010 59,661 60,475 72,000
operations
------------------------------------------------------------------------
Balance at End of Period $1,428,946 $1,459,408 $1,506,000 $1,587,000 $1,567,000 $1,522,744
========================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Reserve for loan losses as a
percentage
of year end loans 0.45% 0.55% 0.68% 0.79% 0.96% 0.98%
Reserve for loan losses as a
percentage
of non-performing 31.36% 29.69% 27.49% 51.16% 70.13% 45.85%
assets
</TABLE>
The following schedule is a breakdown of the allowance for loan losses allocated
by type of loan and related ratios:
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997 September 30, 1996
---------------------------------------------------------------
<S> <C> <C>
Percent of Percent of Percent of
Loans in Loans in Loans in
AllowanceEach Allowance Each Allowance Each
Category Category Category
(Dollars in thousands) Amount to Total amount to Total Amount to Total
Loans Loans Loans
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Residential Real 373 79.53% $483 75.80% $589 71.80%
Estate
Commercial Real Estate 224 4.34% 247 3.40% 194 4.40%
Consumer 832 16.13% 730 20.80% 723 23.80%
---------------------------------------------------------------
$1,429 100.00% $1,460 100.00% $1,506 100.00%
===============================================================
</TABLE>
- --------------------------------------------------------------------------------
40.
<PAGE> 41
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994 September 30, 1993
---------------------------------------------------------------
<S> <C> <C>
Percent of Percent of Percent of
Loans in Loans in Loans in
AllowanceEach Allowance Each Allowance Each
Category Category Category
amount to Total amount to Total amount to Total
Loans Loans Loans
---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Residential Real $552 74.30% $461 74.00% $445 76.90%
Estate
Commercial Real Estate 214 5.30% 285 6.80% 300 6.80%
Consumer 821 20.40% 821 19.20% 778 16.30%
---------------------------------------------------------------
$1,587 100.00% $1,567 100.00% $1,523 100.00%
===============================================================
</TABLE>
INVESTMENT ACTIVITIES
Trumbull purchases securities for their held-to-maturity portfolio and
available-for-sale portfolio for purposes of earning spread interest income, in
addition to, as well as a substitute for, available and acceptable loan
products. Trumbull's continuing business strategy has been to increase it's loan
portfolio and decrease it's security portfolios. As the company becomes more
successful in originating loan products, securities as a percentage of total
assets will continue to decrease. Trumbull primarily invests in U.S. Government
and agency obligations, and mortgage-backed securities including CMOs. Trumbull
Savings does not make any investments in securities that are rated less than
investment grade by a nationally recognized statistical rating organization.
A goal of Trumbull Savings' investment policy is to manage interest rate risk.
All securities-related activity is reported to the Board of Directors
of Trumbull Savings. General changes in investment strategy are required to be
reviewed and approved by the Trumbull Savings Board of Directors. Trumbull
Savings' senior management can purchase and sell securities on behalf of
Trumbull Savings in accordance with Trumbull Savings' stated investment policy.
Mortgage-backed and Related Securities. In the ordinary course of
business, Trumbull Savings purchases mortgage-backed securities for both it's
Held-to-Maturity portfolio and it's Available-for-Sale portfolio. Occasionally,
Trumbull will securitize a pool of loans to facilitate the sale of these loans
in the secondary market. The mortgage backed security created is sold by
Trumbull and is not retained in the company's portfolio. Mortgage-backed
securities generally entitle Trumbull Savings to receive the cash flows from an
identified pool of mortgages underlying the securities. Freddie Mac ("FHLMC"),
Ginnie Mae ("GNMA") and Fannie Mae ("FNMA") mortgage-backed securities owned by
Trumbull Savings are each guaranteed or insured by the respective agencies as to
principal and interest.
Trumbull Savings has also invested in collateralized mortgage
obligations ("CMOs"), securities that are backed by pools of mortgages that are,
in most instances, insured or guaranteed by FNMA or FHLMC. A CMO investor has no
ownership interest in the mortgages themselves, except to the extent the
mortgages serve as collateral for the CMO security. Payment streams from the
mortgages serving as collateral are reconfigured with varying terms and timing
of payment to the CMO investor. Though they can be used for hedging and
investment, CMOs can expose investors to higher risk of loss than direct
investments in mortgage-backed pass-through securities, particularly with
respect to price and average life sensitivity in such securities. The Federal
Financial
- --------------------------------------------------------------------------------
41.
<PAGE> 42
- --------------------------------------------------------------------------------
Institutions Examination Council ("FFIEC") has developed methods of
measuring the suitability of CMOs and other mortgage derivative products
intended for financial institution portfolios. CMOs that do not meet the
standards of the FFIEC test are deemed "high-risk." Trumbull has not purchased a
CMO that fails the FFIEC stress test at date of purchase. However, external
market forces including market interest rates will cause a CMO to fail the test
from time to time. At March 31, 1998 none of Trumbull Savings' CMOs are in the
"high-risk" category.
At March 31, 1998, mortgage backed securities, CMOs and other US government
agency securities totaled approximately $183.9 million (approximately 35% of
total assets). Of this amount, approximately $103.6 million are mortgage backed
securities of which approximately $93.7 pay a fixed rate of interest and
approximately $9.9 million are adjustable rate. Total CMOs are approximately
$42.9 million of which approximately $24.5 million pay a fixed rate of interest
and approximately $18.4 are adjustable rate. Total US government agency
securities total approximately $37.5 million, which are comprised of
approximately $14 million of ten year non amortizing bonds with various call
provisions, and approximately $23.5 million of 20 year zero coupon agency bonds
also with call provisions. The zero coupon bonds have a book value of
approximately $23.5 million and a related notional amount of approximately $103
million.
In accordance with Statement of Financial Accounting Standards ("SFAS 115")
No. 115, the mortgage backed securities, CMOs and other US government agency
backed securities designated as being held for sale are carried on Trumbull
Savings' balance sheet at estimated fair value, with unrealized gains and/or
losses carried as an adjustment to shareholders' equity, net of applicable
taxes. At March 31, 1998, Trumbull Savings' available-for-sale portfolio totaled
approximately $20.8 million. The remaining $163.1 million were designated as
held-to-maturity which had an estimated fair market value of approximately
$162.9 at March 31, 1998.
See "Asset/Liability Management" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TRUMBULL -
Liquidity and Market Risk." The following table sets forth certain information
regarding Trumbull Savings' mortgage-backed securities, CMOs and other U.S.
government agencies securities at the dates indicated:
<TABLE>
<CAPTION>
March 31,1998 September 30, 1997
------------------------------------------ --------------------------------------------
Available Held to Available Held to
for for
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 - - - -
5 to 10 years - $ 7.01% - $ 7.29%
14,000,000 7,988,000
Over 10 years $12,353,768 7.48% 11,102,711 7.80% - 0
-------------
------------- -------------
$12,353,768 $25,102,711 - $7,988,000 7.29%
------------- ------------- ------------- -------------
Mortgage-backed Securities $8,464,886 6.63% $95,119,934 5.78% $25,194,744 6.30% $105,962,139 5.82%
Collateralized Mortgage - 42,879,400 6.29% - 56,568,247 6.04%
Obligations
------------- ------------- ------------- -------------
$8,464,886 $137,999,326 $25,194,744 6.30% $162,530,386 5.90%
============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
42.
<PAGE> 43
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
------------------------------------------ --------------------------------------------
Available Held to Available Held to
for for
Sale Yield Maturity Yield Sale Yield Maturity Yield
------------------------------------------ --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury and other U.S.
Government agencies & corporations
Under 1 year - - - 7.52%
$ 500,789
1 to 5 years - $2,000,000 7.02% - $1,996,344 6.63%
5 to 10 years - 7,986,500 7.29% - 2,000,000 7.40%
Over 10 years - - - -
------------- -------------
- $9,986,500 7.24% - $4,497,133 7.08%
------------- ------------- ------------- -------------
Mortgage-backed Securities $53,564,125 5.99% $123,811,952 5.82% $8,557,853 6.13% $192,262,515 5.77%
Collateralized Mortgage - 63,943,362 5.97% - 68,746,538 6.02%
Obligations
------------- -------------
============= ============= ============= =============
$53,564,125 5.99% 5.87% $8,557,853 6.13% 5.84%
$187,755,314 $261,009,053
============= ============= ============= =============
</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.
DEPOSITS AND BORROWINGS
General. Deposits have traditionally been the primary source of
Trumbull Savings' funding for lending and other investment activities. In
addition to deposits, Trumbull Savings derives funds from interest payments and
principal repayments on loans and mortgage-backed securities, advances from the
FHLB, reverse repurchase agreements, income on earning assets, service charges
and gains on the sale of assets. Loan payments are a relatively stable source of
funds, while deposit inflows and outflows fluctuate in response to general
interest rates and money market conditions. FHLB advances and reverse repurchase
agreements are used as an ancilliary source of funding as well as to compensate
for reductions in the availability of funds from other sources.
Deposits. Historically, deposits have been attracted principally from
within Trumbull Savings' primary market areas through the offering of a broad
selection of deposit instruments, including checking accounts (both interest
bearing and noninterest bearing), regular passbook savings accounts, statement
savings accounts, money market demand accounts, and term certificate of deposit
accounts including individual retirement accounts ("IRAs").
Interest rates paid, maturity terms, service fees and withdrawal
penalties for the various types of accounts are established periodically by
management of Trumbull Savings based on Trumbull Savings' liquidity
requirements, growth goals and local competition. During periods of rising
interest rates, Trumbull Savings attempts to manage its interest rate risk by
lengthening the term to maturity or repricing of its deposit liabilities.
Trumbull Savings has not solicited or purchased broker deposits.
At March 31, 1998, Trumbull Savings' certificates of deposit totaled $243.9
million, or 63.7% of total deposits. Of such amount, approximately $89.8 million
in certificates of deposit mature within one year. Based on experience and
Trumbull Savings' prevailing pricing strategies, management believes that a
substantial percentage of such certificates
- --------------------------------------------------------------------------------
43.
<PAGE> 44
- --------------------------------------------------------------------------------
will renew with Trumbull Savings at maturity. If there is a significant
deviation from historical experience, Trumbull Savings can use borrowings from
the FHLB as an alternative to this source of funds. The following table sets
forth the dollar amount of deposits in the various types of savings programs
offered by Trumbull Savings at the dates indicated.
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
--------------------------------------------------------
Average Average Average Average
(Dollars in Thousands) Rate Amount Percent Rate Amount Percent
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook/Statement 2.50% $77,121 20% 2.50% $78,258 22%
NOW and Demand 1.08% 38,326 10% 1.08% 35,167 9%
Money Market Accounts 3.22% 23,379 6% 3.21% 24,210 6%
----------
138,826 36% 2.23% 137,635 37%
----------
Certificates of Deposits
1 year or less 5.47% 136,352 36% 5.54% 141,879 38%
1 to 3 years 5.83% 98,019 26% 5.86% 84,516 23%
[greater than] 3 or more years 5.85% 9,562 2% 5.96% 8,706 2%
----------
5.63% 243,933 64% 5.67% 235,101 63%
----------
----------
Total Deposits 4.36% 382,759 100% 4.40% 372,736 100%
----------
Purchase Acctg Adjustment 60 87
----------
Total Deposit per Financial $382,819 $372,823
Statements
----------
September 30, 1996 September 30, 1995
--------------------------------------------------------
Average Average Average Average
Rate Amount Percent Rate Amount Percent
--------------------------------------------------------
Passbook/Statement 2.50% $81,602 22% 2.75% $83,641 22%
NOW and Demand 1.11% 32,564 9% 1.50% 28,627 8%
Money Market Accounts 3.17% 26,301 7% 3.14% 28,121 7%
2.25% 140,467 38% 2.72% 140,389 37%
Certificates of Deposits
1 year or less 5.52% 175,209 47% 5.19% 118,275 31%
1 to 3 years 5.74% 49,022 13% 5.96% 109,370 29%
[greater than] 3 or more years 5.94% 9,049 2% 5.96% 11,558 3%
5.58% 233,280 6% 5.67% 239,203 63%
Total Deposits 4.33% 373,747 100% 4.36% 379,592 100%
Purchase Acctg Adjustment 180 307
Total Deposit per Financial $373,927 $379,899
Statements
</TABLE>
- -------------------------------------------------------------------------------
44.
<PAGE> 45
- --------------------------------------------------------------------------------
The following table sets forth rate and maturity information for Trumbull
Savings' certificates of deposit as of March 31, 1998.
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1998
--------------
(IN THOUSANDS)
<S> <C>
Less than 1 year............................... $136,355
1 to 2 years................................... 89,957
2 to 3 years................................... 8,060
Thereafter..................................... 9,561
----------
$243,933
==========
</TABLE>
The following is a schedule of average amounts and average rates paid on each
category for the periods included:
<TABLE>
<CAPTION>
Six month period ended
March 31, 1998 September 30, 1997 September 30, 1996 September 30, 1995
------------------------------------------------------------------------------
(Dollars in Average Average Average Average Average Average Average Average
thousands)
Balance Rate Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest
bearing
Demand deposits $10,896 $10,151 $8,954 $6,120
Interest bearing
Demand deposits 25,610 1.55% 24,516 1.55% 22,267 1.76% 20,279 2.15%
Savings deposits 100,325 2.64% 105,732 2.64% 110,775 2.66% 119,572 2.83%
Time deposits 238,854 5.62% 231,174 5.55% 235,766 5.55% 234,176 5.13%
------------------------------------------------------------------------------
$375,685 4.38% $371,573 4.31% $377,762 4.35% $380,147 4.16%
==============================================================================
</TABLE>
Borrowings. Trumbull Savings primarily borrows from the Federal Home
Loan Bank of Cincinnati ("FHLB") and occasionally will borrow via reverse
repurchase agreements and/or dollar rolls generally through national brokerage
firms. At March 31, 1998, Trumbull had total debt of approximately $99.2
million. Of this amount, $20.4 million was reverse repurchase agreements with a
national brokerage firm with maturity dates between December 2002 and January
2003 and initial call dates of December 15, 1999 ($10.75 million) and January
13, 2000 ($9.65 million). The $10.75 million has an interest rate of 5.52% and
the $9.65 million has an interest rate of 5.08%. The remaining $78.8 million are
FHLB advances, which include $3.7 million of long-term fixed rate advances at
interest rates ranging between 6.70% and 6.95%, $22 million of monthly
adjustable rate advances with interest rates of approximately 5.63%, and $53.1
million of overnight advances averaging approximately 5.58%.
The following is a schedule of reverse repurchase agreements, including dollar
rolls for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, September 30, September 30,
1997 1996 1995
------------------------------------------------
<S> <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>
- --------------------------------------------------------------------------------
45.
<PAGE> 46
- --------------------------------------------------------------------------------
The following is a schedule of FHLB Advances for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) 30-Sep-97 30-Sep-96 30-Sep-95
<S> <C> <C> <C>
Balance at year ended: $48,474 $80,367 $64,498
Average balance during the year $63,451 $71,874 $60,449
Maximum month-end balance during year $70,795 $85,161 $94,534
Average interest rate during the year 5.58% 5.76% 6.36%
Average interest rate at period end 5.65% 5.54% 6.12%
</TABLE>
INTEREST RATE SWAPS, CAPS AND FLOORS
Trumbull does not use interest rate swaps or floors, but has purchased
interest rate caps. During fiscal years 1997, 1996 and 1995 Trumbull did not
purchase nor have any interest rate caps. Trumbull purchased two interest rate
cap contracts in December 1997 and one in January 1998. Information as to these
cap contracts as of March 31, 1998 is as follows:
Interest Rate Caps
<TABLE>
<CAPTION>
3/31/98
3/31/98 Estimated
*
Purchase Purchase Notional Cap Book Market
Date Price Amount Term Index Rate Value Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12-4-97 $280,800 $10,800,0005 years 3mo LIBOR 6.00% $262,080 $169,688
12-29-97 $238,865 $10,100,0005 years 3mo LIBOR 6.00% $226,922 $162,473
1-22-98 $76,000 $10,000,0003 years 3mo LIBOR 6.00% $71,074 $63,517
---------- ----------- ----------------------
$595,665 $30,900,000 $560,076 $395,678
========== =========== ======================
</TABLE>
Interest rate caps serve to hedge Trumbull's short-term borrowings and
deposits. The interest rate caps have cap rates, also referred to as strike
rates based on three month London Interbank Banking Rate ("LIBOR"). When LIBOR
increases above the cap rate, Trumbull receives interest on the difference
between the LIBOR and the cap rate on the notional principal amount, if LIBOR
doesn't increase beyond the cap rate, Trumbull does not receive any payments.
Trumbull's interest expense is reduced by the interest received on the interest
rate caps.
* Estimated market values where obtained from Bloomberg Financial
Services.
Counterparties to the above financial instruments expose Trumbull
Savings to credit-related losses in the event of non-performance. However,
Trumbull Savings deals with primary dealers only and does not anticipate
nonperformance by the counterparty.
COMPETITION
Trumbull Savings competes for deposits with other savings banks and
savings associations, commercial banks and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are terms, interest rates
and convenience of
- --------------------------------------------------------------------------------
46.
<PAGE> 47
- --------------------------------------------------------------------------------
office location. In making loans, Trumbull Savings competes with other savings
banks and savings associations, commercial banks, consumer finance companies,
credit unions, leasing companies, mortgage brokers and other lenders. Trumbull
Savings competes for loan originations primarily through the interest rates and
loan fees it charges and through the efficiency and quality of services it
provides to borrowers. Competition is affected by, among other things, the
general availability of lendable funds, general and local economic conditions,
current interest rate levels and other factors which are not readily
predictable.
TAXATION
Federal Taxation. Trumbull and Trumbull Savings are subject to the federal
tax laws and regulations that apply to corporations generally. Trumbull's tax
year is the same as it's fiscal year, September 30. Trumbull Financial
Corporation is a new corporation that has not yet filed it's first federal
income tax return. It is expected that Trumbull Financial Corporation will file
a consolidated return with it's wholly owned subsidiary Trumbull Savings for
federal tax purposes. That decision will be made by the due date of the 1997
(tax year ended 9/30/98) federal return.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions were allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers. Qualified thrift institutions could
compute deductions for bad debts using either the specific charge-off method of
Section 166 of the Code or one of two reserve methods of Section 593 of the
Code. The reserve methods under Section 593 of the Code permitted a thrift
institution annually to elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the "experience" method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method. For tax years ended 9/30/96, 9/30/95 and
9/30/94, Trumbull used the percentage of taxable income method for computing
it's allowable bad debt deduction.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after December 31, 1995. Thrift institutions that are treated as small
banks are allowed to use the experience method applicable to such institutions,
while thrift institutions that are treated as large banks are required to use
the specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after December 31, 1995, subject to the residential
loan requirement described below. In the case of a thrift institution that is
treated as a large bank, the amount of the institution's applicable excess
reserves generally is the excess of (i) the balances of its reserve for losses
- --------------------------------------------------------------------------------
47.
<PAGE> 48
- --------------------------------------------------------------------------------
on qualifying real property loans (generally loans secured by improved real
estate) and its reserve for losses on nonqualifying loans (all other types of
loans) as of the close of its last taxable year beginning before January 1,
1996, over (ii) the balances of such reserves as of the close of its last
taxable year beginning before January 1, 1988 (i.e., the "pre-1988 reserves").
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property. Trumbull has provided
deferred taxes of approximately $644,000 and will be permitted to amortize the
recapture of the bad debt reserve over a six year period commencing in fiscal
1999.
- --------------------------------------------------------------------------------
48.
<PAGE> 49
- --------------------------------------------------------------------------------
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be used for payment of cash dividends or other distributions to a shareholder
(including distributions in dissolution or liquidation) or for any other purpose
(except to absorb bad debt losses). Distribution of a cash dividend by a thrift
institution to a shareholder is treated as made: first, out of the institution's
post-1951 accumulated earnings and profits; second, out of the pre-1988
reserves; and third, out of such other accounts as may be proper. To the extent
a distribution by Trumbull Savings to Trumbull is deemed paid out of its
pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and
the gross income of Trumbull for tax purposes would be increased by the amount
which, when reduced by the income tax, if any, attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the
pre-1988 reserves. As of September 30, 1997, the pre-1988 reserves of Trumbull
Savings for tax purposes totaled approximately $6.1 million in the aggregate. No
representation can be made as to whether Trumbull Savings will have current or
accumulated earnings and profits in subsequent years.
The tax returns of Trumbull and Trumbull Savings have been closed
without audit through the tax year ending 9/30/94. In the opinion of management,
any examination of open returns would not result in a deficiency that could have
a material adverse effect on the financial condition of Trumbull or Trumbull
Savings.
Ohio Taxation. Trumbull Savings is a "financial institution" for State
of Ohio tax purposes. As such, it is subject to the Ohio corporate franchise tax
on "financial institutions," which is imposed annually at a rate of 1.5% of book
net worth as determined in accordance with generally accepted accounting
principles. For tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of the book net worth and for tax year 2000 and years
thereafter the tax will be 1.3% of the book net worth. As a "financial
institution," Trumbull Savings is not subject to any tax based upon net income
or net profits imposed by the State of Ohio.
PERSONNEL
As of March 31, 1998, Trumbull Savings had 145 full-time equivalent
employees. Trumbull Savings believes that relations with its employees are good.
Trumbull Savings offers health, disability, life, dependent care benefits and
qualified retirement program among other benefits. None of the employees of
Trumbull Savings is represented by a collective bargaining unit.
SELECTED HISTORICAL FINANCIAL DATA OF TRUMBULL
The following table sets forth certain historical financial data
concerning Trumbull. This information is based on information contained in
Trumbull's audited Financial Statements and internal sources for its fiscal
years ended September 30, 1997, 1996, 1995, 1994 and 1993 and unaudited
financial statements for the six-month periods ended March 31, 1998 and March
31, 1997, which are included in this Proxy Statement/Prospectus and should be
read in conjunction therewith. In the opinion of Trumbull management, the
unaudited financial information in the table below contains all adjustments,
which consist of normal recurring adjustments only, that are necessary for a
fair presentation of results at and for the six-month periods ended March 31,
1998 and March 31, 1997. See "INDEX TO FINANCIAL STATEMENTS OF TRUMBULL."
- --------------------------------------------------------------------------------
49.
<PAGE> 50
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Six month period Twelve month period ended:
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
in accounting method -131
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 0.7 0.7 0.55
Book Value 43.8 42.12 42.14 38.91 38.8 36.92 35.11
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>
- --------------------------------------------------------------------------------
50.
<PAGE> 51
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
Six month period Twelve month period ended:
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 assets 7.54% 6.94% 7.11% 6.89% 6.48% 6.60% 8.39%
Allowance for loan losses as
a percent of loans 0.45% 0.60% 0.55% 0.68% 0.79% 0.96% 0.98%
Net charge-offs as a percent
of average loans 0.05% 0.05% 0.08% 0.07% 0.02% 0.01% 0.01%
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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TRUMBULL
Because Trumbull has no significant operations independent of Trumbull Savings,
the discussion herein concerns the financial condition and results of operations
of Trumbull Savings, except as may be otherwise specifically indicated. This
discussion is intended to focus no certain financial information regarding
Trumbull Financial Corporation ("Trumbull") and its wholly owned subsidiary
Trumbull Savings and Loan Company (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.
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. 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.
FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations of Trumbull contains certain forward-looking
statements, meaning statements that relate to present or future trends or
factors affecting the banking industry and specifically the operations, markets
and products of Trumbull and its subsidiary, Trumbull Savings. Because of a
variety of factors, including but not limited to those related to the economic
environment (particularly in the market areas in which Trumbull Savings
operates), competitive products and pricing, fiscal and monetary policies of the
U.S. Government, changes in government regulations affecting financial
institutions, including regulatory capital requirements, changes in prevailing
interest rates, asset/liability and credit risk management, the financial and
securities markets and the availability of and costs associated with sources of
liquidity, actual results could differ materially from those set forth in
forward-looking statements.
- --------------------------------------------------------------------------------
51.
<PAGE> 52
NET INTEREST INCOME
Trumbull Savings' profitability depends primarily on net interest
income, which is the difference between (a) interest income generated by
interest-earning assets (i.e., loans and investments) and (b) interest expense
incurred on interest-bearing liabilities (i.e., customer deposits and borrowed
funds). Net interest income is affected by the difference between the rates of
interest earned on interest-earning assets and the rates of interest paid on
interest-bearing liabilities, which is commonly referred to as the "net interest
rate spread." Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. If the total of
interest-earning assets approximates or exceeds the total of interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. Financial institutions have traditionally used interest rate spreads as
a measure of net interest income. Another indication of an institution's net
interest income is its "net yield on interest-earning assets" or "net interest
margin," which is net interest income divided by average interest-earning
assets.
As market interest rates change, asset yields and liability costs do not
generally change simultaneously. Due to maturity, repricing and timing
differences of interest-earning assets and interest-bearing liabilities,
earnings are affected differently under various interest rate scenarios.
Trumbull Savings has sought to limit these net earnings fluctuations and manage
interest rate risk by originating adjustable-rate loans and purchasing
relatively short-term and variable-rate investments and securities. 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.
- --------------------------------------------------------------------------------
52.
<PAGE> 53
- --------------------------------------------------------------------------------
YIELD ANALYSIS
<TABLE>
<CAPTION>
Year ended September 30 1997 1996 1995
----------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------
<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%
----------------------------------------------------------------------------------
Total interest earning assets 6.92% 6.75% 6.62%
471,002 32,581 475,813 32,119 485,501 32,117
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 $24,516 1.55% $22,267 1.76% $20,279 2.15%
bearing 380 391 436
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 1706 5.70%
Federal Home Loan Bank 63,926 3,607 5.64% 71,993 4,168 5.79% 60,449 3,767 6.23%
advances
----------------------------------------------------------------------------------
Total interest bearing $443,836 4.64% $449,187 4.68% $464,400 4.59%
liabilities 20,605 21,036 21,318
------------------ ------------------ -----------------
Non-interest bearing 16,019 15,595 9,618
liabilities
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>
- --------------------------------------------------------------------------------
53.
<PAGE> 54
- --------------------------------------------------------------------------------
YIELD ANALYSIS
Six Month Period ended March 31 1998 1997
<TABLE>
<CAPTION>
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%
---------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
54.
<PAGE> 55
- --------------------------------------------------------------------------------
RATE / VOLUME ANALYSIS
The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected Trumbull Savings' interest income and expense during
the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate) and (ii)
changes in rate (change in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to changes due to volume and changes due to rate.
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 Total Volume Rate Total
------------------------------------ ------------------------------------
(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)
------------------------------------ ------------------------------------
Total interest earning 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
------------------------------------ ------------------------------------
Total interest bearing liabilities $(276) $(155) $(431) $(633) $351 $(282)
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
Total effect on net interest income $529 $364 $893 $558 $(274) $284
------------------------------------ ------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
55.
<PAGE> 56
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Month Period ended March 31 1998 compared to 1997
Due to Changes in
Volume Rate Total
----------------------------------------
(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)
----------------------------------------
Total interest earning 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>
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 it's 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
declined 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 25 basis points 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.
- --------------------------------------------------------------------------------
56.
<PAGE> 57
- --------------------------------------------------------------------------------
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
decreased 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 net charge-offs in consumer loans. 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. Most of the increase in loans results from increases in real estate
loans, yet net charge-offs are occurring primarily on consumer loans. Management
feels that the credit risk is acceptable, but is also currently reviewing loan
loss reserve levels specifically as they relate to consumer lending activities.
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.
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
- --------------------------------------------------------------------------------
57.
<PAGE> 58
- --------------------------------------------------------------------------------
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 decreased 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 net charge-offs on consumer loans. Net loans
outstanding as a percentage of total assets at September 30, 1997 was 54.5%
compared to 44.6% at September 30, 1996.
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.
- --------------------------------------------------------------------------------
58.
<PAGE> 59
- --------------------------------------------------------------------------------
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.
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. Net charge-offs on real estate
loans for both years was minor. Net charge-offs on consumer loans increased from
approximately $36,000 in 1995 to $132,000 in 1996, however management felt that
the loan loss reserve balance at year end 1996, although less than the reserve
balance at year end 1995, was adequate for the risk characteristics of the loan
portfolio.
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.
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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, primarily due to the retention of earnings.
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.
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.
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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.
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.
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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.
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.
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<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.
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63.
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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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" was issued in June 1997 and is effective for fiscal years
beginning after December 15, 1997. The statement requires additional reporting
of items that affect comprehensive income but not net income. An example
relevant to Trumbull Savings is unrealized gains and losses on securities
available for sale. This statement will result in additional financial statement
disclosures.
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.
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Historically, the Corporation has had higher 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. Trumbull's
business strategy continues to concentrate on increasing the loan portfolios
while decreasing the security portfolios. Because the increase in loans in
recent months has been primary long-term fixed rate residential real estate
loans, interest rate risk has also been increasing. Management has purchased
three interest rate cap contracts as a means of managing the growing exposure.
In addition, management has recently decided to sell substantially all new 30
year fixed rate mortgage loans and increase sales of 15 year fixed rate mortgage
loans. This will result in a smaller asset size and will help lessen the growing
interest rate risk exposure to potential future interest rate increases.
However, by initiating these techniques to control and/or lower the company's
interest rate risk, the company will be foregoing some current income, which
management believes is a prudent trade-off.
Although the company's loan portfolio has increased in terms of dollars
and in terms of a percentage of total assets, due to the strategy of changing
the asset mix, and therefor overall delinquencies have increased, loan loss
reserves have not increased. Most of the increase in the company's loan
portfolio is from real estate loans. Management is aware that increased
delinquencies in real estate loans does not necessarily mean an increase in loan
losses. However, management is also aware that reserve for loan losses as a
percentage of total loans have been decreasing over the five year period ended
September 30, 1997. SEE "SUMMARY OF LOAN LOSS EXPERIENCE AND CHARGE-OFFS." Net
charge-offs on real estate loans have been consistently minor over this period,
but net charge-offs on consumer loans have increased substantially. During 1997,
the company's loan loss provision charged to current earnings was approximately
$141,000. Yet during 1997 net charge-offs on real estate loans totaled
approximately $11,000 while net charge-offs on consumer loans totaled
approximately $176,000. Management further increased the provision for loan
losses by $120,000 charge to current earnings during the six month period ended
March 31, 1998. During this six month period, net charge-offs on real estate
loans totaled approximately $45,000 and net charge-offs on consumer loans
totaled approximately $106,000. Management feels that the credit risk is
acceptable, and is currently reviewing loan loss reserve levels relative to
consumer lending activities. The Corporation's interest rate risk exposure
during the past three years is summarized below:
PERCENTAGE CHANGE IN NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
Change
in
Board Interest 3-31-98 9-30-97 9-30-96 9-30-95
Limit Rates
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-80% 4.00% -79% -66% -68% -81%
-60% 3.00% -57% -47% -50% -59%
-40% 2.00% -38% -30% -31% -37%
-20% 1.00% -17% -13% -14% -18%
0% 0.00% 0% 0% 0% 0%
-20% -1.00% 1% 6% 11% 10%
-40% -2.00% -5% 1% 14% 14%
-60% -3.00% -3% 1% 18% 19%
-80% -4.00% 3% 9% 25% 27%
</TABLE>
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PERCENTAGE CHANGE IN NET INTEREST INCOME (12 month horizon)
<TABLE>
<CAPTION>
Change
in
Board Interest 3-31-98 9-30-97 9-30-96 9-30-95
Limit Rates
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-40% 4.00% -19% -25% -34% -22%
-30% 3.00% -10% -15% -22% -15%
-20% 2.00% -3% -5% -14% -8%
-10% 1.00% 0% -1% -6% -3%
0% 0.00% 0% 0% 0% 0%
-10% -1.00% -1% -1% 5% 0%
-20% -2.00% -3% -3% 8% -2%
-30% -3.00% -6% -7% 6% -6%
-40% -4.00% -10% -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 Financial Service
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,
1996 and 1995 have been calculated by OTS based on information provided by the
Corporation. The NPV data presented for September 30, 1997 has been calculated
by Trumbull using computer simulation. The theoretical projected change in net
interest income over a twelve month period under each of the instantaneous and
permanent rate shocks have been calculated by Trumbull using computer
simulation.
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. Deposit decay rate is an internal estimate of
deposit run off based on certain variables including interest rate scenarios.
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.
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66.
