SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 0-22220
TRI-COUNTY BANCORP, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
WYOMING
(State or Other Jurisdiction of Incorporation or Organization)
83-0304855
(I.R.S.Employer Identification No.)
2201 MAIN STREET, TORRINGTON, WY 82240
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code (307) 532-2111
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
The number of shares outstanding of each of the issuer's classes of common stock
as of November 13, 1998.
Class Outstanding
$.10 par value common stock 1,182,448 shares
Transitional Small Business Disclosure Format (check one):Yes No X
-1-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Financial
Condition as of September 30, 1998 (unaudited)
and December 31, 1997...............................................3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended September 30, 1998
(unaudited) and 1997................................................4
Condensed Consolidated Statements of Stockholder's Equity for
the Nine Months Ended September 30, 1998 (unaudited)
and 1997............................................................5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998
and 1997 (unaudited)................................................6
Notes to Condensed Consolidated Financial Statements................7
Item 2. Management's Discussion and Analysis or Plan
of Operation........................................................9
PART II OTHER INFORMATION
Item 1. Legal Proceedings..........................................18
Item 2. Changes in Securities......................................18
Item 3. Default Upon Senior Securities.............................18
Item 4. Submissions of Matters to a Vote of Security Holders.......18
Item 5. Other Information..........................................18
Item 6. Exhibits and Reports on Form 8-K...........................18
SIGNATURES.........................................................19
-2-
-5- PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
September December
30, 31,
1998 1997
ASSETS (unaudited)
--------------------------
Cash $ 376,802 $ 758,398
Interest earning deposits at other financial institutions 3,290,356 1,880,407
Securities available-for-sale 31,754,775 36,526,012
Securities held-to-maturity, market value of $6,418,808(1998)
and $8,260,991(1997) 6,247,982 7,987,250
Loans receivable, net 43,404,030 40,425,288
Loans held for resale 144,779 117,111
Office property and equipment, net 823,980 886,879
Prepaid expenses and other assets 671,822 1,379,180
------------ ------------
Total Assets $ 86,714,526 $ 89,960,525
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 769,922 $ 541,510
Saings and NOW deposits 13,344,787 12,504,022
Time deposits 30,638,265 32,359,696
------------ ------------
Total Deposits $ 44,752,974 $ 45,405,228
------------ ------------
Advances from Federal Home Loan Bank 26,310,992 29,696,616
Advances by borrowers for taxes and insurance 151,615 101,267
Accounts payable and accrued expenses 255,912 269,105
Deferred income taxes 729,016 661,125
------------ ------------
Total Liabilities $ 72,200,509 $ 76,133,341
------------ ------------
Stockholders' Equity
Preferred stock, $.10 par value, 5,000,000 shares authorized
none issued 0 0
Common stock, 10,000,000 share of $.10 par value authorized,
1,495,000(1998) and 1,495,000 (1997) shares issued 149,500 149,500
Additional paid in capital 7,172,993 7,100,600
Retained earnings - substantially restricted 9,124,453 8,792,947
Unearned compensation relating to Management Stock Bonus
Plan and ESOP (299,000) (388,025)
Unrealized gain/(loss) on securities available-for-sale, net
of tax 1,011,385 817,476
Treasury stock, 327,502 (1998) and 327,502 (1997) shares,
at cost (2,645,314) (2,645,314)
------------ ------------
Total Stockholders' Equity 14,514,017 13,827,184
------------ ------------
Total Liabilities and Stockholders' Equity $ 86,714,526 $ 89,960,525
============ ============
See notes to condensed consolidated financial statements.
-3-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
----------------------------------------------
Interest Income
Loans $ 852,942 $ 784,56 $2,584,312 $2,272,623
Securities available-for-sale 511,056 658,060 1,614,687 1,896,819
Securities held-to-maturity 121,218 175,108 397,351 550,631
Other interest earning assets 14,009 11,688 60,642 32,574
---------- ---------- ---------- ----------
Total Interest Income 1,499,225 1,629,417 4,656,992 4,752,647
---------- ---------- ---------- ----------
Interest Expense
Deposits 513,361 551,876 1,539,832 1,645,094
Advances and other borrowings 348,029 405,400 1,136,449 1,103,326
---------- ---------- ---------- ----------
Total Interest Expense 861,390 957,276 2,676,281 2,748,420
---------- ---------- ---------- ----------
Net Interest Income 637,835 672,141 1,980,711 2,004,227
---------- ---------- ---------- ----------
Provision for credit losses -- -- -- --
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Credit Losses 637,835 672,141 1,980,711 2,004,227
---------- --------- ---------- ----------
Non-interest Income
Gain on sale of loans 17,784 6,610 43,528 23,013
Gain(loss) on sale of available-for-sale
securities 35,402 (56,726) 35,402 (55,554)
Service charges on deposits 30,643 28,115 88,442 84,431
Other, net 8,531 8,680 19,468 24,627
---------- --------- ---------- ----------
Total Non-interest Income 92,360 (13,321) 186,840 76,517
---------- --------- ---------- ----------
Non-interest Expense
Compensation and benefits 206,485 204,911 625,423 590,505
Occupancy and equipment 80,517 91,732 241,179 253,597
Federal deposit insurance premium 6,843 7,765 21,343 23,080
Other, net 89,534 84,915 279,202 266,372
---------- --------- ---------- ----------
Total Non-interest Expense 383,379 389,323 1,167,147 1,133,554
---------- --------- ---------- ----------
Earnings Before Income Taxes 346,816 269,497 1,000,404 947,190
Income taxes 100,700 58,619 295,300 264,271
---------- --------- ---------- ----------
Net Earnings(Loss) $ 246,116 $ 210,87 $ 705,104 $ 682,919
========== ========= ========= ==========
Earnings(Loss) Per Common Share - Dilutes $0.20 $0.17 $0.56 $0.53
===== ===== ===== =====
Cash Dividend Paid Per Common Share $0.11 $0.08 $0.32 $0.23
===== ===== ===== =====
See notes to condensed consolidated financial statements.
-4-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1998 and 1997
(unaudited)
Unrealized
Gain on Employee
Securities Additional Stock MSBP
Comprehensive Retained Available- Common Paid-in Treasury Ownership Unearned
Total Income Earnings for-sale Stock Capital Stock Plan Compensation
---------------------------------------------------------------------------------------------------------
Balance - December 31,
1997 $13,827,184 $8,792,947 $817,476 $149,500 $7,100,600 $(2,645,314) $(343,850) $(44,175)
Comprehensive income
Net earnings 705,104 $705,104 705,104 -- -- -- -- -- --
Other comprehensive
income, net of tax
Unrealized gain on
securities, net of
reclassification
adjustment 193,909 193,909 -- 193,909 -- -- -- -- --
--------
Comprehensive income -- $899,013 -- -- -- -- -- -- --
========
Repayment of ESO 44,850 -- -- -- -- -- 44,850 --
Allocation of ESOP
shares 72,393 -- -- -- 72,393 -- -- --
Amortization of
deferred compensation 44,175 -- -- -- -- -- -- 44,175
Dividends paid - cash (373,600) (373,600) -- -- -- -- -- --
----------- -------- ---------- -------- ---------- ----------- --------- --------
Balance - September 30,
1998 $14,514,015 $9,124,451 $1,011,385 $149,500 $7,172,993 $(2,645,314) $(299,000) $ --
=========== ========== ========== ======== ========== =========== ========= ========
Balance - December 31,
1996 $13,145,564 $8,353,630 $239,619 $74,750 $7,029,604 $(2,045,314) $(403,650) $(103,075)
Comprehensive income
Net earnings 682,919 $682,919 682,919 -- -- -- -- -- --
Other comprehensive
income, net of tax
Unrealized gain on
securities, net of
reclassification
adjustment 418,895 418,895 -- 418,895 -- -- -- -- --
--------
Comprehensive income -- $1,101,814 -- -- -- -- -- -- --
==========
Repayment of ESOP debt 36,014 -- -- -- -- -- 36,014 --
Allocation of ESOP
shares 45,669 -- -- -- 45,669 -- -- --
Amortization of
deferred compensation 44,175 -- -- -- -- -- -- 44,175
Dividends paid - cash (270,187) (270,187) -- -- -- -- -- --
Two for one stock
split effect as a
stock split -- (74,750) -- 74,750 -- -- -- --
Treasury stock
purchased (600,000) -- -- -- -- (600,000) -- --
-------- ---------- -------- -------- ---------- ----------- --------- ---------
Balance - September 30,
1997 $13,503,049 $8,691,612 $658,514 $149,500 $7,075,273 $(2,645,314) $(367,636) $ (58,900)
=========== ========== ======== ======== ========== =========== ========= =========
See notes to consolidated condensed financial statements.
-5-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
1998 1997
------------------------
Net Cash Provided by Operations $ 1,558,340 $ 405,565
Investing Activities
Principal payments received on held-to-maturity securities 1,917,388 1,905,787
Purchase of held-to-maturity securities (177,000) --
Purchase of available-for-sale securities (10,398,590) (6,626,925)
Sale of available-for-sale securities 977,799 4,527,850
Principal payments received on available-for-sale securities 14,492,797 1,490,703
Net decrease(increase) in loans 2,273,745 (212,361)
Purchase of loans (5,276,452) (3,260,849)
Proceeds from sale of real estate owned -- 52,392
Investment in property and equipment and real estate owned (23,472) (87,100)
----------- ----------
Net Cash Provided (Used) by Investing Activities 3,786,215 (2,210,503)
----------- ----------
Financing Activities
Net increase (decrease) in deposits (652,179) (1,216,684)
Net increase (decrease) in advances from borrowers for
taxes and insurance 50,350 42,995
FHLB borrowings 15,700,000 41,050,000
Repayment of FHLB advance (19,085,623) (38,152,625)
Payments received from ESOP 44,850 36,014
Treasury stock purchased -- (600,000)
Cash dividends paid (373,600) (270,188)
----------- -----------
Net Cash Provided (Used) by Financing Activities (4,316,202) 889,512
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 1,028,353 (915,426)
Cash and cash equivalents - beginning of period 2,638,807 2,288,592
----------- -----------
Cash and cash equivalents - end of period $ 3,667,160 $ 1,373,166
=========== ===========
Supplemental Dsclosures
Cash paid for:
Interest 2,762,789 2,272,428
Income taxes 320,600 307,300
See notes to consolidated condensed financial statements.
-6-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the accounts
of Tri-County Bancorp, Inc. (the "Company"), Tri-County Federal Savings Bank
(the "Bank") and First Tri-County Services, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions for Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all information and disclosures
required by generally accepted accounting principles for complete financial
statements. The accompanying consolidated financial statements do not purport to
contain all the necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the circumstances and
should be read together with the 1997 consolidated financial statements and
notes thereto of Tri-County Bancorp, Inc. and Subsidiaries included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
However, all normal recurring adjustments have been made which, in the opinion
of Management, are necessary to the fair presentation of the financial
statements.
The results of operations for the six-month period ended June 30, 1998 are not
necessarily indicative of the results which may be expected for the year ending
December 31, 1998 or any other period.
See Notes 2 and 3.
NOTE 2 - EARNINGS PER SHARE
In February 1997, the FASB issued Statement No. 128, Earnings Per Share (SFAS
128). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share (EPS) with basic and diluted EPS. Unlike primary EPS, basic EPS
excludes any dilutive effects of options, warrants, and convertible securities.
Diluted EPS is very similar to fully diluted EPS. All EPS amounts presented have
been restated, as applicable, to conform with the new requirements.
NOTE 3 - INVESTMENTS
The Company classifies its investment securities and mortgage-backed securities
in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The classifications are "held-to-maturity,"
"available-for-sale," or "trading." Management has determined that all
applicable securities are either "held-to-maturity" or "available-for-sale."
-7-
Investment and mortgage-backed securities designated as held-to-maturity are
stated at cost, adjusted for amortization or related premiums and accretion of
discounts, computed using the level yield method. The Company has the positive
intent and ability to hold these securities to maturity.
Investment and mortgage-backed securities designated as available-for-sale are
stated at estimated market value. Unrealized gains and losses represent the
difference between the amortized cost and amount and the estimated market value
as of the date of the statement of financial condition.
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial condition. The Company's only item of other comprehensive
income is the unrealized gain (loss) on securities available-for-sale, which is
reported net of tax effect. The following schedule reflects the unrealized
holding gains arising during the periods ended September 30, 1998 and 1997:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
--------------- ------------------- ---------------
For the Nine Months Ended September 30, 1998:
Unrealized holding gains arising during the period $329,201 $(111,927) $217,274
Less reclassification adjustment for gains realized in net
earnings (35,402) 12,037 (23,365)
------- ------ -------
Net Realized Gains $293,799 $ (99,890) $193,909
======== ========= ========
For the Nine Months Ended September 30, 1997:
Unrealized holding gains arising during the period $577,964 $(196,508) $381,456
Less reclassification adjustment for losses realized in net
earnings 56,726 (19,287) 37,439
------ ------- ------
Net Realized Gains $634,690 $(215,795) $418,895
======== ========= ========
NOTE 4 - SUBSEQUENT EVENT - ISSUER TENDER OFFER
On October 20, 1998, the Company announced an offer to purchase (the "Offer") up
to 313,000 shares of its Common Stock at a cash price not in excess of $14.00
per share or less than $11.00 per share. The Offer, unless extended, expires at
5:00 p.m. Wyoming Time on November 19, 1998. In connection with the Offer, on
October 20, 1998, the Company filed (and subsequently amended) Schedules 13E-3
and 13E-4 with the Securities and Exchange Commission.
-8-
PARTI - FINANCIAL INFORMATION Item 2 - Management's Discussion
and Analysis or Plan of Operation
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of opening a new
branch, the ability to control costs and expenses, and general economic
conditions. Tri-County Bancorp, Inc. undertakes no obligation to publicly
release the results of any revisions to those forward looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
GENERAL
Tri-County Bancorp, Inc. (the "Company") was incorporated on June 15, 1993, and
is the holding company of Tri-County Federal Savings Bank (the "Bank"). On
September 28, 1993, the Bank completed its conversion from a mutual savings and
loan association to a stock form of ownership at which time the Company issued
747,500 shares of Common Stock and utilized a portion of the proceeds to acquire
all of the issued shares of the Bank.
The Company is headquartered in Torrington, Wyoming and its principal business
currently consists of the operation of its wholly owned subsidiary, Tri-County
Federal Savings Bank. The Bank's primary business is attracting retail deposits
from the general public and investing those deposits and other borrowed funds in
various loan products, including mortgage-backed and mortgage-related
securities, federal agency securities and other investment securities.
The Company's results of operations are dependent primarily on its net interest
income, which is the difference between the interest earned on its assets,
primarily its loans and securities portfolios, and its cost of funds, which
consists of the interest paid on its deposits and borrowings. The Company's net
income also is affected by its provision for loan losses as well as non-interest
income, compensation and benefits, occupancy expenses, federal deposit insurance
premiums, other non-interest expenses, and income tax expense. Other
non-interest expenses consist of real estate lending operations, legal expenses,
accounting services and other miscellaneous costs. The earnings of the Company
are significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
CHANGES IN FINANCIAL CONDITION
ASSETS
The total assets of the Bank decreased by $3,245,999 or 3.61% during the first
nine months of 1998.
Interest earning deposits increased by $1,409,949 during the period. The
increase was the result of a decision by the management of the Bank to hold more
short term deposits in the existing interest rate environment.
-9-
Securities available-for-sale decreased by $4,771,237 during the first nine
months of 1998. Securities totaling $11,012,222 matured or were redeemed by the
issuing agency and principal payments and prepayments of $4,492,799 were
received from mortgage-backed securities during the period. These decreases were
partially offset by purchases totaling $10,398,590 and an increase in the market
value of the portfolio of $293,800.
Securities held-to-maturity decreased by $1,739,268. The decrease was the result
of principal payments and prepayments of $1,917,387 on the Bank's portfolio of
mortgage-backed securities which more than offset the purchase of tax-exempt
bonds in the amount of $177,000.
Loans receivable increased $2,978,742 during the first nine months of 1998.
During this period, the Bank originated or purchased portfolio residential
mortgage loans totaling $8,362,676, non-residential mortgage loans totaling
$1,597,200, consumer loans totaling $2,587,712, and commercial loans in the
amount of $136,590. During the same period, the Bank received scheduled
principal payments and prepayments totaling $9,921,591 on its loan portfolio. Of
the total mortgage loans originated or purchased during the first nine months of
the year, $4,547,205 were adjustable rate and $5,412,671 were fixed rate loans.
Because of a lack of demand for certain types of loans in the Bank's primary
lending area, purchased loans totaled 51% of mortgage lending during the period.
The majority of purchased loans are residential and non-residential real estate
loans in Colorado and Idaho mountain resort communities and a non-residential
real estate loan on the front range of Colorado. Purchased loans are subjected
to the same underwriting standards and loan terms as those originated by the
Bank for its portfolio.
LIABILITIES
Deposit balances decreased by $652,254 or 1.44% and consisted of increases of
$228,412 and $840,765 in demand accounts and savings and NOW deposits,
respectively, and a decrease of $1,721,431 in time deposits. The decrease in
time deposits was due, in part, to the scheduled maturity of a deposits held by
a local school district which were originally issued in the previous year.
Advances from the Federal Home Loan Bank of Seattle (FHLB) decreased by
$3,385,624 during the nine-month period ended September 30, 1998. The change was
caused by a decrease in the amount of advances obtained or renewed to purchase
or carry securities classified as available-for-sale.
Deferred income taxes increased by $67,891 during the first nine months of 1998
and was mainly the result of the application of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, which requires unrealized
gains and losses on available-for-sale securities to be reported, net of
deferred income taxes, as a separate component of stockholders' equity. The
market value of these securities increased $293,800 during the period, which
resulted in an increase in deferred income taxes.
STOCKHOLDERS' EQUITY
The increase in additional paid-in capital of $72,393 was caused by the
application of an accounting standard which requires charging current expense
for the fair value of shares of stock committed to be released by the Bank's
Employee Stock Ownership Plan and crediting the difference between the fair
value and the cost of the shares to paid-in capital.
The increase in retained earnings was the result of net earnings totaling
$705,104 which more than offset the decrease in retained earnings caused by the
payments of dividends of $0.31 per share totaling $373,599.
-10-
As discussed earlier, SFAS No. 115 requires unrealized gains and losses on
securities classified available-for-sale to be shown as a separate component of
stockholders' equity in an amount which is net of deferred income taxes. The
market value of securities classified as available-for-sale increased during the
first nine months of 1998 and resulted in an increase, net of deferred income
tax, of $193,909 in stockholder's equity.
SUBSEQUENT EVENT - ISSUER TENDER OFFER
If the Offer is completed and a significant number of shares are purchased by
the Company, net income will decrease due to the sale of securities to provide
the funds used to purchase the Shares. The liquidity of the remaining shares
held by the public might be adversely affected because the Offer may reduce the
number of Shares that might otherwise be traded publicly. Also, the Shares will
be purchased with funds received as dividends from Tri-County Federal Savings
Bank, which will reduce the regulatory capital ratios of the Bank. Regulatory
capital will remain well above that which is required by our regulator.
-11-
COMPARISON OF THE OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997
NET INCOME
Net income increased $35,238 during the third quarter of 1998 when compared to
the same period of 1997. Net interest income decreased by $34,306, non-interest
income increased by $105,681 and non-interest expense decreased by $5,944. The
provision for income taxes increased by $42,081.
INTEREST INCOME
Interest income from loans increased $68,381 or 8.72% for the quarter ended
September 30, 1998. The increase was the result of an increase in the average
balance of loans outstanding of $3,825,123 which more than offset a decrease in
yield on the loans from 8.23% to 8.13%.
The decrease of $147,004 in interest on securities available-for-sale was the
result of a decrease in the average balance of securities of $5,683,741 and a
decrease in the average yield on the portfolio from 6.94% to 6.34%. The decrease
in yield was the result of the purchase of securities, which on average had a
lower yield than the yield on the existing portfolio.
Interest on securities held to maturity decreased $53,890 and was caused
primarily by a decrease in the average balance of the portfolio of $2,206,852
and a decrease in the yield on the portfolio from 8.13% to 7.56%. The decrease
in yield was the result of the higher level of principal prepayments on the
higher yielding mortgage-backed securities in the portfolio.
The increase in income from other interest-earning assets of $2,321 was
primarily caused by an increase in the average balance of these assets. This
category of assets consists primarily of interest-earning demand and time
deposits held at the FHLB.
INTEREST EXPENSE
Interest expense on deposits decreased $38,515 during the third quarter of 1998.
This decrease was the result of a decrease of $2,528,963 in the average balance
of deposits and a decrease in the average cost of deposits from 4.68% to 4.60%.
The Bank took advantage of a relatively inexpensive source of funding available
through the FHLB to purchase financial instruments that yield a slightly higher
return than the rate charged on the advances. The average balance of these
borrowings was $2,514,123 less during the third quarter of 1998 than during the
third quarter of 1997 and the average cost of the borrowings decreased from
6.02% to 5.70% which resulted in an decrease of $57,371 in interest expense.
PROVISION FOR LOAN LOSSES
No provision for loan losses was made during the third quarter of 1998. The
allowance for loan losses is based on management's evaluation of the risk
inherent in its loan portfolio after giving due consideration to the changes in
general market conditions and in the nature and volume of the Bank's loan
activity. The Bank intends to continue to provide for loan losses based on its
periodic review of the loan portfolio and general market conditions. The
allowance for loan losses amounted to $412,651 at September 30, 1998. While the
Bank maintains its allowance for loan losses at a level which it considers
adequate to provide for potential losses, there can be no assurances that
further additions will not be made to the loss allowance and that such losses
will not exceed the estimated amounts.
-12-
NON-INTEREST INCOME
Non-interest income increased $105,681 during the third quarter of 1998.
The increase in the gain on sale of loans of $11,174 was the result of an
increase in the dollar amount of loans sold. Gain on sale of available-for-sale
securities increased $92,128 during the third quarter of 1998. In the third
quarter of 1997, shares of a mutual fund were redeemed at a loss of $56,726
whereas the sales in the current year netted a $35,402 gain.
NON-INTEREST EXPENSE
Overall, non-interest expense decreased $5,944 during the third quarter of 1998.
Compensation and benefits increased by $1,574 in 1998 and was primarily caused
by an increase in overall salaries and pension costs.
Occupancy and equipment expense decreased $11,215 and was primarily caused by
decreases in data processing costs and equipment depreciation.
Other, net expenses increased by $4,619 and was the result of increases in
advertising costs and consulting fees.
INCOME TAXES
The provision for income taxes increased $42,081 for the quarter ended September
30, 1998 when compared to the same period of the previous year. This decrease
was due primarily to an increase in taxable income.
COMPARISON OF THE OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
NET INCOME
Net income increased $22,185 during the first three quarters of 1998 when
compared to the same period of 1997. Net interest income decreased by $23,516,
non-interest income increased by $110,323 and non-interest expense increased by
$33,593. The provision for income taxes increased by $31,029.
INTEREST INCOME
Interest income from loans increased $311,689 or 13.7% for the nine months ended
September 30, 1998. The increase was the result of an increase in the average
balance of loans outstanding of $4,809,741 and an increase in yield on the loans
from 8.27% to 8.31%.
The decrease of $282,132 in interest on securities available-for-sale was the
result of a decrease in the average balance of securities of $3,957,741 and a
decrease in the average yield on the portfolio from 6.72% to 6.39%. The decrease
in yield was the result of the replacement of maturing securities with lower
yielding securities.
-13-
Interest on securities held-to-maturity decreased $153,280 and was caused
primarily by a decrease in the average balance of the portfolio of $2,181,963
and a decrease in the yield on the portfolio from 7.96% to 7.51%. The decrease
in yield was the result of the higher level of principal prepayments on the
higher yielding mortgage-backed securities in the portfolio.
The increase in income from other interest-earning assets of $28,068 was
primarily caused by an increase in the average balance of these assets. This
category of assets consists primarily of interest earning demand and time
deposits held at the FHLB.
INTEREST EXPENSE
Interest expense on deposits decreased $105,262 during the nine months of 1998.
This decrease was the result of a decrease of $2,888,321 in the average balance
of deposits and a slight decrease in the average cost of deposits from 4.57% to
4.55%.
The Bank took advantage of a relatively inexpensive source of funding available
through the FHLB to purchase financial instruments that yield a slightly higher
return than the rate charged on the advances. The average balance of these
borrowings was $620,741 greater during the first nine months of 1998 than during
the first nine months of 1997 and the average cost of the borrowings increased
from 5.73% to 5.76% which resulted in an increase of $33,123 in interest
expense.
PROVISION FOR LOAN LOSSES
No provision for loan losses was made during the first nine months of 1998. The
allowance for loan losses is based on management's evaluation of the risk
inherent in its loan portfolio after giving due consideration to the changes in
general market conditions and in the nature and volume of the Bank's loan
activity. The Bank intends to continue to provide for loan losses based on its
periodic review of the loan portfolio and general market conditions. The
allowance for loan losses amounted to $412,651 at September 30, 1998. While the
Bank maintains its allowance for loan losses at a level which it considers
adequate to provide for potential losses, there can be no assurances that
further additions will not be made to the loss allowance and that such losses
will not exceed the estimated amounts.
NON-INTEREST INCOME
Non-interest income increased $110,321 during the first three quarters of 1998.
The increase in the gain on sale of loans of $20,515 was the result of an
increase in the dollar amount of loans sold. Gain on sale of available-for-sale
securities increased $90,956 during 1998. In 1997, dispositions of securities
totaled a net loss of $56,726 whereas the sales in the current year netted a
$35,402 gain.
Other non-interest income decreased $5,159 and was primarily the result of the
recovery in the previous year of foreclosure costs incurred in a prior period.
NON-INTEREST EXPENSE
Overall, non-interest expense increased $33,593 during the first nine months of
1998.
Compensation and benefits increased by $34,918 in 1998 and was primarily caused
by an increase in overall salaries and pension costs.
Occupancy and equipment expense decreased $12,418 and was primarily caused by
decreases in data processing costs and equipment depreciation.
Other, net expenses increased by $12,830 and was the result of increases in
advertising and accounting expenses.
-14-
INCOME TAXES
The provision for income taxes increased by $31,029 for the nine months ended
September 30, 1998 when compared to the same period of the previous year. This
increase was primarily the result of an increase in income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as defined by
the Office of Thrift Supervision regulations. This requirement, which may vary
from time to time, depends upon, among other things, economic conditions and the
amount of cash flows needed for operations and is based upon a percentage of
deposits and short-term borrowings. The required ratio currently is 4%. The
Bank's liquidity averaged 60.05% during the third quarter of 1998. The Bank
adjusts its liquidity levels in order to meet funding needs for deposit
outflows, payment of real estate taxes from escrow accounts on mortgage loans,
repayment of borrowings, when applicable, and loan funding commitments. The Bank
also adjusts its liquidity level as appropriate to meet its asset/liability
objectives.
The Bank's primary sources of funds are deposits, amortization and prepayments
of loans and mortgage-backed securities, FHLB advances, sales and maturities of
investments and funds provided from operations. While scheduled loan
amortization and maturing investment securities are a relatively predictable
source of funds, deposit flow and loan prepayments are greatly influenced by
market interest rates, economic conditions and competition. The Bank manages the
pricing of its deposits to maintain a steady deposit balance. In addition, the
Bank invests its excess funds in short-term time deposits that provide liquidity
to meet lending requirements. Interest-bearing deposits at September 30, 1998
amounted to $3,290,356. The Bank's liquidity, represented by cash and cash
equivalents, is a product of its operating, investing and financing activities.
These activities are summarized as follows:
9 Months Ended
September 30,
(in thousands)
----------------
1998 1997
Cash and cash equivalents at beginning of year $ 2,639 $ 2,289
------- -------
OPERATING ACTIVITIES:
Net Income------------------------------------------------ 705 472
Adjustments to reconcile net income to net
cash provided by operation activities-------------------- 853 10
------- -------
Net cash provided by operating activities----------------- 1,558 482
Net cash provided (used) by investing activities---------- 3,786 (4,112)
Net cash provided (used) by financing activities---------- (4,318) 2,787
------- -------
Net increase (decrease) in cash and cash equivalents------ 1,028 (843)
------- -------
Cash and cash equivalents at end of period------------ $ 3,667 $ 1,446
======= =======
-15-
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as Federal funds and interest-bearing deposits. If the Bank requires funds
beyond its ability to generate them internally, borrowing agreements exist with
the FHLB, which provides an additional source of funds.
The Bank anticipates it will have sufficient funds available to meet its current
loan commitments. At September 30, 1998, the Bank had outstanding commitments of
$285,080. Certificates of deposit scheduled to mature in one year or less at
September 30, 1998 totaled $23,203,545. Based on past experience, Management
believes that a substantial portion of such deposits will remain with the Bank.
The following table sets forth the Bank's capital position at September 30,
1998, as compared to the minimum regulatory requirements:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes ction Provisions
------------------------------------------------------------
Dollars Ratio Dollars Ratio Dollars Ratio
------------------------------------------------------------
September 30, 1998
Total Equity Capital
(to risk-weighted assets) $13,560 36.26% $2,858 8.0% $3,573 10.0%
Tier 1 Capital
(to risk-weighted assets) $12,546 35.11% $1,429 4.0% $2,144 6.0%
Tier 1 Capital
(to adjusted total assets) $12,546 14.70% $3,413 4.0% $4,267 5.0%
assets)
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles ("GAAP"), which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Company are financial. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
-16-
YEAR 2000 COMPLIANCE
During 1998, the Company adopted a Year 2000 Action Plan (the "Plan"). The
objectives of the Plan are to prepare the Company for the new millennium. As
recommended by the Federal Financial Institutions Examination Council, the Plan
encompasses the following phases: Awareness, Assessment, Renovation, Validation
and Implementation. These phases will enable the Company to identify risks,
develop detailed action plans, perform adequate testing, and complete
certification that its processing systems will be Year 2000 ready. Execution of
the Plan is currently on target. The Company is currently in Phase 3,
Renovation, which includes code enhancements, program changes, and hardware and
software upgrades. Prioritization of the most critical applications has been
addressed, along with contract and service agreements. The primary operating
software for the Company is obtained and maintained by an external provider of
software (the "External Provider"). The External Provider has completed the
modification of its software and the Company has tested the software. The tests
verified that the primary operating software is Year 2000 ready. The Company has
contacted all other material vendors and suppliers regarding their Year 2000
state of readiness. Each of these third parties has delivered written assurance
to the Company that they expect to be Year 2000 compliant prior to the Year
2000. The Renovation phase is targeted for completion by December 31, 1998. The
Validation phase involves testing the changes to hardware and software
accompanied by monitoring and testing with vendors. The Validation Phase is
targeted for completion by March 31, 1999. The Implementation Phase is to
certify that systems are Year 2000 ready, along with assurances that any new
systems are compliant on a going-forward basis. The Implementation Phase is
targeted for completion by June 30, 1999.
Costs will be incurred due to the replacement of non-compliant hardware and
software. The Company does not anticipate that the related overall costs will be
material in any single year. In total, the Company estimates that is costs for
compliance will amount to approximately $18,000 over the two-year period from
1998-1999. No assurance can be given that the Year 2000 Compliance Plan will be
completed successfully by the Year 2000, in which event the Company could incur
significant costs. Delays, mistakes or failures could have a significant adverse
impact on the financial statement of the Company.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including testing plans, and all vendors,
suppliers and customer readiness.
-17-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank was engaged in any legal proceeding of a
material nature at September 30, 1998. From time to time, the Bank is a
party to legal proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
See "Note 4 - Subsequent Event - Issuer Tender Offer."
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 2.1: Schedule 13E-3 of the Registrant initially filed with the SEC
on October 20, 1998, and subsequently amended.
Exhibit 2.2: Schedule 13E-4 of the Registrant initially filed with the SEC
on October 20, 1998, and subsequently amended.
Exhibit 11: Statement regarding computation of earnings per share.
Exhibit 27: FDS (in electronic filing only)
(b) Reports on Form 8-K
None
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
Date: November 13, 1998 /s/ Robert L. Savage
------------------------------- President and Chief Executive Officer
Date: November 13, 1998 /s/ Tommy A. Gardner
------------------------------- Vice President and Chief Financial Officer
-18-