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 June 30, 1999
-------------------------------------------------
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.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
WYOMING 83-0304855
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
2201 MAIN STREET, TORRINGTON, WY 82240
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(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 August 13, 1999.
Class: $.10 par value common stock Outstanding: 881,048 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 June 30, 1999 (unaudited)
and December 31, 1998................................3
Condensed Consolidated Statements of Operations
for the Six Months Ended June 30, 1999
and 1998 (unaudited).................................4
Condensed Consolidated Statements of Stockholder's
Equity for the Six Months Ended June 30, 1999
and 1998 (unaudited).................................5
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999
and 1998 (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...................................17
Item 2. Changes in Securities...............................17
Item 3. Default Upon Senior Securities......................17
Item 4. Submissions of Matters to a Vote of Security
Holders.............................................17
Item 5. Other Information...................................17
Item 6. Exhibits and Reports on Form 8-K....................17
SIGNATURES...................................................18
-2-
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
June 30, December 31,
1999 1998
(unaudited)
------------ ------------
ASSETS
Cash and due from banks $411,752 $385,804
Interest-bearing deposits with banks 1,043,253 2,979,241
Securities available for sale, at fair value 29,333,085 28,727,466
Securities held to maturity, market value of
$4,567,063 (1999) and $5,474,222 (1998) 4,471,686 5,335,700
Loans held for sale, at market value 125,000 435,721
Loans receivable, net of allowance for loan losses of
$399,462 (1999) and $409,984 (1998) 45,281,686 42,054,222
Accrued interest receivable 576,393 450,017
Bank property and equipment 1,525,518 801,141
Other assets 77,353 138,685
------ -------
Total Assets $82,845,726 $81,307,997
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits 496,316 690,177
Savings and NOW deposits 16,229,351 14,513,645
Time deposits 30,868,620 30,770,264
---------- ----------
Total Deposits 47,594,287 45,974,086
Advance from Federal Home Loan Bank 23,975,367 23,799,117
Accounts payable and accrued expenses 350,583 216,841
Advances by borrowers for taxes and insurance 129,612 110,167
Deferred income taxes 572,767 787,119
------- -------
Total Liabilities 72,622,616 70,887,330
---------- ----------
Stockholders' Equity
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, 10,000,000 share of $.10 par value
authorized, 1,523,425 (1999) and 1,520,425
(1998) shares issued 152,342 152,043
Additional paid in capital 7,374,787 7,319,578
Retained earnings - substantially restricted 9,447,680 9,260,742
Unearned compensation relating to Management Stock
Bonus Plan and ESOP (254,150) (284,050)
Unrealized gain/(loss) on securities available for
sale, net of tax 649,841 1,106,701
Treasury stock, 642,377 (1999) and 641,627 (1998)
shares, at cost (7,147,390) (7,134,347)
---------- ----------
Total Stockholders' Equity 10,223,110 10,420,667
---------- ----------
Total Liabilities and Stockholders' Equity $82,845,726 $81,307,997
=========== ===========
See notes to condensed consolidated financial statements.
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TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Interest Income
Loans $891,685 $873,719 $1,767,197 $1,731,371
Securities available for sale 83,993 535,015 173,551 1,104,756
Securities held to maturity 440,433 130,655 882,427 275,008
Other interest earning assets 22,297 29,651 48,349 46,634
------ ------ ------ ------
Total Interest Income 1,438,408 1,569,040 2,871,524 3,157,769
--------- --------- --------- ---------
Interest Expense
Deposits 497,165 515,787 986,465 1,026,471
Advances and other borrowings 330,438 391,032 653,582 788,420
------- ------- ------- -------
Total Interest Expense 827,603 906,819 1,640,047 1,814,891
------- ------- --------- ---------
Net Interest Income 610,805 662,221 1,231,477 1,342,878
Provision for credit losses -- -- -- --
------- ------- --------- ---------
Net Interest Income After Provision
for Credit Losses 610,805 662,221 1,231,477 1,342,878
------- ------- --------- ---------
Non-interest Income
Gain on sale of loans 15,988 19,084 26,408 25,744
Gain(loss) on sale of available for
sale securities -- -- 3,696 --
Service charges on deposits 30,390 28,537 61,586 57,799
Other, net 7,852 6,462 13,086 10,937
----- ----- ------ ------
Total Non-interest Income 54,230 54,083 104,776 94,480
------ ------ ------- ------
Non-interest Expense
Compensation and benefits 218,001 223,876 423,575 447,739
Occupancy and equipment 82,517 80,235 165,681 160,662
Federal deposit insurance premium 6,714 7,031 13,465 14,500
Other, net 82,567 84,366 160,329 160,869
------ ------ ------- -------
Total Non-interest Expense 389,799 395,508 763,050 783,770
------- ------- ------- -------
Earnings Before Income Taxes 275,236 320,796 573,203 653,588
Income taxes 92,400 93,600 192,600 194,600
------ ------ ------- -------
Net Earnings(Loss) $182,836 $227,196 $380,603 $458,988
======== ======== ======== ========
Earnings(Loss) Per Common Share - Diluted $0.19 $0.18 $0.40 $0.36
===== ===== ===== =====
Cash Dividend Paid Per Common Share $0.11 $0.11 $0.22 $0.21
===== ===== ===== =====
See notes to condensed consolidated financial statements.
-4-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1998 and 1999
(unaudited)
Employee Accumulated
Additional Stock MSBP Other
Common Paid-In Retained Ownership Unearned Comprehensive Treasury
Stock Capital Earnings Plan Compensation Income Stock Total
-----------------------------------------------------------------------------------------------
Balance - December 31, 1997 $149,500 $7,100,600 $8,792,947 ($343,850) ($44,175) $817,476 ($2,645,314) $13,827,184
Net earnings -- -- 458,988 -- -- -- -- 458,988
Other comprehensive income:
Unrealized market adjustments,
net of tax and
reclassification adjustment -- -- -- -- -- 79,593 -- 79,593
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Comprehensive income -- -- 458,988 -- -- 79,593 -- 538,581
-------------------------------------------------------------------------------------------------
Repayment of ESOP debt -- -- -- 29,900 -- -- -- 29,900
Allocation of ESOP shares -- 51,677 -- -- -- -- -- 51,677
Amortization of deferred
compensation -- -- -- -- 29,450 -- -- 29,450
Dividends paid - cash -- -- (245,175) -- -- -- -- (245,175)
Stock options exercised -- -- -- -- -- -- -- --
Treasury stock purchased -- -- -- -- -- -- -- --
-------- --------- -------- ------ ------- ------ ---------- --------
Balance - June 30, 1998 $149,500 $7,152,277 $9,006,760 ($313,950) ($14,725) $897,069 ($2,645,314) $14,231,617
======== ========== ========== ========= ======== ======== =========== ===========
Balance -ecember 31, 1998 $152,043 $7,319,578 $9,260,742 ($284,050) -- $1,106,701 ($7,134,347) $10,420,667
Net earnings -- -- 380,603 -- -- -- -- 380,603
Other comprehensive income:
Unrealized market adjustments,
net of tax and
reclassification adjustment -- -- -- -- -- (456,860) -- (456,860)
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Comprehensive income -- -- 380,603 -- -- (456,860) -- (76,257)
-------------------------------------------------------------------------------------------------
Repayment of ESOP debt -- -- -- 29,900 -- -- -- 29,900
Allocation of ESOP shares -- 40,509 -- -- -- -- -- 40,509
Dividends paid - cash -- -- (193,666) -- -- -- -- (193,666)
Stock options exercised 300 14,700 -- -- -- -- -- 15,000
Treasury stock purchased -- -- -- -- -- -- (13,043) (13,043)
-------- ---------- ---------- --------- --------- -------- ----------- -----------
Balance - June 30, 1999 $152,343 $7,374,787 $9,447,679 ($254,150) -- $649,841 ($7,147,390) $10,223,110
======== ========== ========== ========= ========= ======== =========== ===========
See notes to condensed consolidated financial statements.
-5-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30 ,
1999 1998
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Net Cash Provided by Operations $ 603,907 $1,180,229
Investing Activities
Principal payments received on held to maturity 860,106 1,235,699
securities
Purchase of held to maturity securities -- (75,000)
Purchase of available for sale securities (9,499,420) (7,398,590)
Sale of available for sale securities 3,433,328 --
Principal payments received on available for sale
securities 4,811,173 11,845,194
Net decrease (increase) in loans 513,598 3,586,091
Purchase of loans (3,508,563) (3,371,397)
Investment in property and equipment and real
estate owned (778,258) (14,421)
-------- -------
Net Cash Provided (Used) by Investing Activities $(4,168,036) $5,807,576
=========== ==========
Financing Activities
Net increase (decrease) in deposits $ 1,620,202 $ 189,115
Net increase (decrease) in advances from
borrowers for taxes and insurance 19,446 13,000
FHLB borrowings 5,500,000 9,500,000
Repayment of FHLB advance (5,323,750) (13,573,748)
Payments received from ESOP 29,900 29,900
Exercise of stock options 15,000 --
Treasury stock purchased (13,043) --
Cash dividends paid (193,666) (245,175)
-------- --------
Net Cash Provided (Used) by Financing Activities 1,654,089 (4,086,908)
---------- -----------
Increase (Decrease) in Cash and Cash Equivalents (1,910,040) 2,900,897
Cash and cash equivalents - beginning of period 3,365,044 2,638,807
----------- -----------
Cash and cash equivalents - end of period $ 1,455,004 $ 5,539,704
=========== ===========
Supplemental Disclosures
Cash paid for:
Interest $1,652,937 $1,819,710
========== ==========
Income taxes $185,400 $257,300
========= ========
See notes to condensed consolidated financial statements.
-6-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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
(formerly Tri-County Federal Savings and Loan Association) (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 1998 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, 1998.
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, 1999 are not
necessarily indicative of the results which may be expected for the year ending
December 31, 1999 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
Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. In accordance with SFAS No.
115, the Company classified its investment securities and mortgage-backed
securities as either "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 of the 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 are aggregated and
reported as a separate component of equity capital, net of deferred taxes. These
securities are acquired with the intent to hold them to maturity, but they are
available for disposal in the event of unforeseen liquidity needs.
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 June 30, 1999 and 1998.
Before-Tax Tax Benefit Net-of-Tax
Amount or (Expense) Amount
-------------------------------------
For the Six Months ended June 30, 1998
Accumulated Comprehensive Income - Dec. 31, 1997 $1,238,601 ($421,125) $817,476
Unrealized hold gains (losses) arising during the period 120,594 (41,001) 79,593
Gain(Loss) reclassification adjustment
for gains (losses) realized in net earnings 0 0 0
---------- --------- --------
Accumulated Comprehensive Income - June 30, 1998 $1,359,195 ($462,126) $897,069
========== ========= ========
For the Six Months ended June 30, 1999
Accumulated Comprehensive Income - Dec. 31, 1998 $1,676,820 ($570,119) 1,106,701
Unrealized hold gains (losses) arising during the period (695,908) 236,609 (459,299)
Gain (Loss) reclassification adjustment
for gains (losses)realized in net earnings 3,696 (1,257) 2,439
---------- --------- ---------
Accumulated Comprehensive Income - June 30, 1999 $ 984,608 ($334,767) $ 649,841
========= ========= =========
-8-
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis or Plan of Operation
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
Total assets of the Bank increased by $1.54 million or 1.89% during the first
six months of 1999. The increase was primarily the result of increases in loans
receivable, securities available for sale and Bank property and equipment which
more than offset decreases in cash and securities held to maturity.
Interest earning deposits at correspondent banks decreased $1.94 million during
the period. The decrease was primarily the result of the funding of loans and
the purchase of undeveloped land to be used by the Bank as the site for a new
branch.
Securities available for sale increased by $606,000 during the first half of
1999. Securities totaling $3.44 million were sold, principal payments and
prepayments of $3.81 million were received from mortgage-backed securities, a $1
million agency securities was called by the issuer and the market value of the
securities decreased $0.69 million during the period. These decreases were fully
offset by purchases of agency securities totaling $9.5 million.
Securities held to maturity decreased by $.86 million. The decrease was the
result of principal payments and prepayments on the Bank's portfolio of
mortgage-backed securities.
-9-
Loans receivable increased $3.23 million during first the six months of 1999.
During this period, the Bank originated or purchased portfolio residential
mortgage loans totaling $5.99 million, non-residential mortgage loans totaling
$1.85 million, consumer loans totaling $1.12 million, and commercials loan in
the amount of $0.63 million. During the same period, the Bank received scheduled
principal payments and prepayments totaling $6.38 million on its loan portfolio.
Of the total mortgage loans originated or purchased during the year, $4.03
million were adjustable rate and $3.58 million 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 38% 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 non-residential real estate
loans along 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.
Bank property and equipment increased by $0.72 million and was primarily the
result of the purchase of land to be used as the site for a new branch bank to
be located in Cheyenne, Wyoming. The parcel of land consists of 4.5 acres of
which 1 acre will be used as the site for the new branch and the remaining 3.5
will be held for future development. It is not anticipated that the development
of the excess land will be undertaken by the Company. The Company is presently
assessing marketing alternatives for the property. The property is located at an
intersection of Interstate 25 in the northwest part of the city. The total cost
of the facility is estimated to be $1.4 million and the projected opening date
is in the 1st quarter of 2000.
LIABILITIES
Deposit balances increased by $1.62 million or 3.52% from $45.97 million at
December 31, 1998 to $47.59 million at June 30, 1999. The net increase consisted
of a decrease of $194,000 in demand deposits and increases of $1.72 million in
savings and NOW deposits and $98,000 in time deposits.
Deferred income taxes decreased by $214,000 during the year 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
decreased $692,000 during the period, which resulted in an increase in deferred
income taxes.
STOCKHOLDERS' EQUITY
The increase in additional paid-in capital of $55,000 was caused primarily 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
$381,000 which more than offset the decrease in retained earnings caused by the
payments of dividends of $0.22 per share totaling $194,000.
As discussed earlier, SFAS No. 115 requires unrealized gains and losses on
securities classified as available for sale to be shown as a separate component
of stockholders' equity in an amount that is net of deferred income taxes. The
market value of securities classified as available for sale decreased during the
first half of 1999 and resulted in a decrease, net of deferred income tax, of
$457,000 million in stockholders' equity.
-10-
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998
NET INCOME
Net income decreased $44,000 during the quarter ended June 30, 1999 when
compared to the same period of 1998. Net interest income decreased by $51,000,
non-interest income was unchanged, and non-interest expense decreased by $6,000.
The provision for income taxes decreased by $1,000.
INTEREST INCOME
Interest income from loans increased $18,000 or 2.06% for the quarter ended June
30, 1999. The increase was the result of an increase in the average balance of
loans outstanding of $3.41 million which more than offset a decrease in yield on
the loans from 8.49% to 8.01%.
The decrease of $95,000 in interest on securities available for sale was the
result of a decrease in the average balance of securities of $5 million and a
decrease in the average yield on the portfolio from 6.27% to 6.03%. The decrease
in yield was the result of the purchase of securities, which, on average, had a
lower yield than the yield on the portfolio before the purchase.
Interest on securities held to maturity decreased $47,000 and was caused
primarily by a decrease in the average balance of the portfolio of $2.51
million, which offset an increase in the yield on the portfolio from 7.45% to
8.19%. The increase in yield was the result of the higher level of principal
prepayments on the lower yielding mortgage-backed securities in the portfolio.
The decrease in income from other interest-earning assets of $7,000 was
primarily caused by a decrease in the average balance of these assets. This
category of assets consists primarily of interest-earning demand deposits held
at FHLB.
INTEREST EXPENSE
Interest expense on deposits decreased $19,000 during the second quarter of
1999. This decrease was the result of a decrease in the average cost of deposits
from 4.58% to 4.21%, which offset an increase of $2.11 million in the average
balance of deposits.
The Bank took advantage of a relatively inexpensive source of funding available
through the FHLB to supplement retail deposits and to purchase financial
instruments that yield a slightly higher return than the rate charged on the
advances. The average balance of these borrowings was $2.32 million less during
the second quarter of 1999 than during the same period of 1998 and the average
cost of the borrowings decreased from 5.95% to 5.50% which resulted in a
decrease of $61,000 in interest expense.
PROVISION FOR LOAN LOSSES
No provision for loan losses was made during the second quarter of 1999. 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 $399,000 at June 30, 1999. 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.
-11-
NON-INTEREST INCOME
Overall, the total of non-interest income did not change in the second quarter
of 1999 when compared to the same period of 1998.
The decrease in the gain on sale of loans of $3,000 was the result of a decrease
in the dollar amount of loans sold. Service charges on deposits increased $2,000
mainly because of an increase in chargeable events.
NON-INTEREST EXPENSE
Overall, non-interest expense decreased $6,000 during the quarter ended June 30,
1999.
Compensation and benefits decreased by $6,000 in 1999 and was primarily caused
by the fulfillment in the previous year of a management stock bonus plan. The
stock was awarded over a five-year period beginning in the fourth quarter of
1993 and concluded in the third quarter of 1998. This decrease more than offset
an overall increase in employee compensation.
Occupancy and equipment expense increased $2,000 and was primarily caused by
increases in utilities and building repairs and maintenance.
INCOME TAXES
Earning before taxes decreased by $46,000 while the provision for income taxes
decreased $1,000 for the quarter ended June 30, 1999. The main reason for the
disproportionate decrease in income tax when compared to the decrease in income
before tax was due to the establishment, in the prior year, of a deferred tax
asset resulting from the difference between financial and tax accounting for
losses incurred from mortgage loan foreclosure and disposition.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998
NET INCOME
Net income decreased $78,000 during the first half of 1999 when compared to the
same period of 1998. Net interest income decreased by $111,000, non-interest
income increased by $10,000 and non-interest expense decreased by $21,000. The
provision for income taxes decreased by $2,000.
INTEREST INCOME
Interest income from loans increased $36,000 or 2.07% for the period ended June
30, 1999. The increase was the result of an increase in the average balance of
loans outstanding of $2.71 million which more than offset a decrease in yield on
the loans from 8.40% to 8.06%.
The decrease of $222,000 in interest on securities available for sale was the
result of a decrease in the average balance of securities of $5.62 million and a
decrease in the average yield on the portfolio from 6.33% to 6.00%. The decrease
in yield was the result of the purchase of securities, which, on average, had a
lower yield than the yield on the portfolio before the purchase.
-12-
Interest on securities held to maturity decreased $101,000 and was caused
primarily by a decrease in the average balance of the portfolio of $2.69
million, which offset an increase in the yield on the portfolio from 7.46% to
7.99%. The increase in yield was the result of the higher level of principal
prepayments on the lower yielding mortgage-backed securities in the portfolio.
The increase in income from other interest-earning assets of $2,000 was
primarily caused by slight increases in the average balance and the yield on
these assets. This category of assets consists primarily of interest-earning
demand deposits held at FHLB.
INTEREST EXPENSE
Interest expense on deposits decreased $40,000 during the first half of 1999.
This decrease was the result of a decrease in the average cost of deposits from
4.56% to 4.21%, which offset an increase of $1.77 million in the average balance
of deposits.
The Bank took advantage of a relatively inexpensive source of funding available
through the FHLB to supplement retail deposits and to purchase financial
instruments that yield a slightly higher return than the rate charged on the
advances. The average balance of these borrowings was $3.31 million less during
the first half of 1999 than during the same period of 1998 and the average cost
of the borrowings decreased from 5.79% to 5.46% which resulted in a decrease of
$135,000 in interest expense.
PROVISION FOR LOAN LOSSES
No provision for loan losses was made during the first half of 1999. 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 $399,000 at June 30, 1999. 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
Total non-interest income increased by $10,000 during the first half of 1999
when compared to the same period of 1998.
The increase in the gain on sale of loans of $1,000 was the result of an
increase in the dollar amount of loans sold. The Bank sold available for sale
securities in 1999 and recognized a gain of $4,000 while no securities were sold
in the previous year. Service charges on deposits increased $4,000 mainly
because of an increase in chargeable events.
NON-INTEREST EXPENSE
Overall, non-interest expense decreased $21,000 during the period ended June 30,
1999.
Compensation and benefits decreased by $24,000 in 1999 and was primarily caused
by the fulfillment in the previous year of a management stock bonus plan. The
stock was awarded over a five-year period beginning in the fourth quarter of
1993 and concluded in the third quarter of 1998. This decrease more than offset
an overall increase in employee compensation.
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Occupancy and equipment expense increased $5,000 and was primarily caused by
increases in utilities and building and equipment repairs and maintenance.
INCOME TAXES
Earning before taxes decreased by $80,000 while the provision for income taxes
decreased $2,000 for the six-month period ended June 30, 1999. The main reason
for the disproportionate decrease in income tax when compared to the decrease in
income before tax was due to the establishment, in the prior year, of a deferred
tax asset resulting from the difference between financial and tax accounting for
losses incurred from mortgage loan foreclosure and disposition.
LIQUIDITY AND CAPITAL RESOURCES
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 June 30, 1999
amounted to $1,043,253. 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:
6 Months Ended June 30,
(in thousands)
-----------------------
1999 1998
Cash and cash equivalents at beginning of year $ 3,365 $ 2,639
------- -------
OPERATING ACTIVITIES:
Net Income 381 459
Adjustments to reconcile net income to
net cash provided by operation activities 223 721
-------- -------
Net cash provided by operating activities 604 1,180
Net cash provided (used) by investing activities (4,168) 5,808
Net cash provided (used) by financing activities 1,654 (4,087)
----- ------
Net increase (decrease) in cash and cash equivalents (1,910) 2,901
------ -----
Cash and cash equivalents at end of period $ 1,455 $ 5,540
======= =======
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 June 30, 1999, the Bank had outstanding commitments of
$1,995,030. Certificates of deposit scheduled to mature in one year or less at
June 30, 1999 totaled $24,447,376. Based on past experience, Management believes
that a substantial portion of such deposits will remain with the Bank.
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The following table sets forth the Bank's capital position at June 30, 1999, as
compared to the minimum regulatory requirements:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------
Dollars Ratio Dollars Ratio Dollars Ratio
June 30, 1999
Total Equity Capital (to risk-weighted assets) $8,405 23.08% $2,913 8.0% $3,642 10.0%
Tier 1 Capital (to risk-weighted assets) $7,751 21.29% $1,457 4.0% $2,185 6.0%
Tier 1 Capital (to adjusted total assets) $7,751 9.54% $3,250 4.0% $4,062 5.0%
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.
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. Prioritization of the most critical software
applications has been addressed, along with contract and service agreements. The
Bank determined it had three "mission-critical" applications. The three
mission-critical systems consist of operating software that is obtained from and
maintained by external providers. The three missions-critical providers have
renovated, validated and implemented their Year 2000 compliant software. The
Bank has also successfully completed extensive validation testing of the
implemented mission-critical systems.
The Bank has contacted all other material vendors and suppliers regarding their
Year 2000 state of readiness. Each of these third parties has delivered written
assurances to the Bank that their systems will be Year 2000 compliant prior to
December 31, 1999.
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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 its 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.
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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 June 30, 1999. 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
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11: Statement regarding computation of earnings per share.
Exhibit 27: FDS (in electronic filing only)
(b) Reports on Form 8-K
On May 10, 1999 the Registrant announced that Joe P. Guth had
joined Tri-County Bancorp, Inc. and Subsidiaries as Executive
Vice President.
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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: August 13, 1999 /s/ Robert L. Savage
------------------------- President and Chief Executive Officer
Date: August 13, 1999 /s/ Tommy A. Gardner
------------------------- Vice President and Chief Financial Officer
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