1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from to
--------- --------
Commission File No. 1-13826
THREE RIVERS FINANCIAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3235452
(State or other jurisdiction of (IRS Employer ID No)
Incorporation or organization)
123 Portage Avenue, Three Rivers, Michigan 49093
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
(616) 279-5117
Registrant's telephone number, including area code
N/A
Former name, address, and fiscal year, if changed since last report
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 requirement for the past 90
days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common equity as of the latest practicable date:
702,734 shares of Common Stock, Par Value $.01 per share as of May 5,
1999
Transitional Small Business Disclosure Format (check one): Yes ; No X
--- ---
2
THREE RIVERS FINANCIAL CORPORATION
THREE RIVERS, MICHIGAN
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
March 31, 1999 and June 30, 1998 1
Consolidated Statements of Income (Unaudited)
Three and nine months ended March 31, 1999 and 1998 2
Condensed Consolidated Statement of Changes in Shareholders'
Equity (Unaudited)
Nine months ended March 31, 1999 4
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended March 31, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II. OTHER INFORMATION
Items 1-6 17
Signatures 18
3
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and June 30, 1998
- --------------------------------------------------------------------------------
March 31, June 30,
1999 1998
---- ----
(unaudited)
ASSETS
Cash and due from other financial institutions $ 3,136,845 $ 2,768,730
Interest-earning deposits with other financial institutions 2,787,652 9,512,347
------------ ------------
Cash and cash equivalents 5,924,497 12,281,077
Interest-earning time deposits with other financial institutions 4,253,960 4,064,980
Securities available for sale 2,029,923 725,036
Securities held to maturity (fair value: $13,484,785 at
March 31, 1999 and $14,388,034 at June 30, 1998) 13,353,576 14,277,573
Loans receivable, net of allowance for loan losses of
$505,254 at March 31, 1999 and $489,361 at June 30, 1998 66,704,736 62,119,886
Federal Home Loan Bank Stock 1,162,200 1,162,200
Accrued interest receivable 506,692 467,691
Premises and equipment, net 2,508,872 2,626,114
Foreclosed real estate 0 29,408
Investment in low-income housing partnership 386,251 423,742
Other assets 826,078 707,175
------------ ------------
Total assets $ 97,656,785 $ 98,884,882
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Demand deposits $ 3,374,788 $ 2,879,180
Savings and NOW deposits 22,834,797 21,507,839
Other time deposits 38,827,928 37,128,630
------------ ------------
Total deposits 65,037,513 61,515,649
Borrowed funds 20,156,961 22,743,737
Advances from borrowers for taxes and insurance 226,875 531,757
Due to low-income housing partnership 253,058 323,622
Accrued expenses and other liabilities 731,713 1,082,265
------------ ------------
Total liabilities 86,406,120 86,197,030
Shareholders' equity
Preferred stock, par value $0.01; 500,000 shares authorized;
none outstanding
Common stock, par value $0.01; 2,000,000 shares authorized;
749,634 and 790,698 shares issued and 749,634 and 783,313
outstanding at March 31, 1999 and June 30, 1998, respectively 7,496 7,907
Additional paid-in-capital 6,200,396 6,861,182
Retained earnings, substantially restricted 5,763,358 6,607,642
Net unrealized gain on securities available for sale,
net of tax of $2,246 at March 31, 1999 4,362 --
------------ ------------
11,975,612 13,476,731
Unearned Employee Stock Ownership Plan shares (491,582) (491,582)
Unearned Recognition and Retention Plan shares (233,365) (199,055)
Treasury stock, at cost (7,385 shares at June 30, 1998) 0 (98,242)
------------ ------------
Total shareholders' equity 11,250,665 12,687,852
------------ ------------
Total liabilities and shareholders' equity $ 97,656,785 $ 98,884,882
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
1.
4
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Three and nine months ended March 31, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
Interest income
Loans receivable $1,384,377 1,390,109 $4,142,536 $4,162,304
Securities 243,487 268,162 750,442 871,412
Other interest and dividend income 145,481 146,849 522,855 378,835
---------- --------- ---------- ----------
Total interest income 1,773,345 1,805,120 5,415,833 5,412,551
Interest expense
Deposits 693,487 656,684 2,095,052 2,006,724
Borrowed funds 274,596 303,067 875,043 867,301
---------- --------- ---------- ----------
Total interest expense 968,083 959,751 2,970,095 2,874,025
---------- --------- ---------- ----------
NET INTEREST INCOME 805,262 845,369 2,445,738 2,538,526
Provision for loan losses 15,000 15,000 45,000 45,000
---------- --------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 790,262 830,369 2,400,738 2,493,526
Noninterest income
Loan servicing 31,891 29,283 92,896 90,696
Net gains on sales of loans 60,746 39,284 172,094 87,533
Net gains on sales of foreclosed real estate 0 0 130 20,038
Service charges on deposit accounts 63,124 49,628 196,545 159,447
Other 28,133 46,813 110,618 118,305
---------- --------- ---------- ----------
183,894 165,008 572,283 476,019
Noninterest expense
Compensation and benefits 384,601 338,148 1,171,572 1,018,067
Occupancy and equipment 148,780 134,512 440,250 353,551
SAIF deposit insurance premium 9,911 9,542 28,211 28,487
Advertising and promotion 25,113 25,371 83,482 85,173
Data processing 65,912 58,564 195,230 161,551
Professional fees 25,595 29,128 78,392 89,586
Printing, postage, stationery, and supplies 29,720 45,096 95,312 95,960
Other 95,286 78,698 297,997 252,318
---------- ---------- ---------- ----------
784,918 719,059 2,390,446 2,084,693
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAXES 189,238 276,318 582,575 884,852
Federal income tax expense 56,800 88,750 133,711 269,600
---------- ---------- ---------- ----------
NET INCOME $ 132,438 187,568 $ 448,864 $ 615,252
---------- ---------- ---------- ----------
(continued)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
2.
5
THREE RIVERS FINANCIAL CORPORATION
Three and nine months ended March 31, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
Other comprehensive income
Net unrealized gains (losses) on securities
available for sale 3,185 0 6,608 0
Tax effect (1,083) 0 (2,246) 0
--------- --------- --------- ---------
Total other comprehensive income 2,102 0 4,362 0
--------- --------- --------- ---------
Comprehensive income $ 134,540 $ 187,568 $ 453,226 $ 615,252
========= ========= ========= =========
Basis earnings per share $ 0.19 $ 0.23 $ 0.61 $ 0.74
========= ========= ========= =========
Diluted earnings per share $ 0.19 $ 0.22 $ 0.60 $ 0.73
========= ========= ========= =========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements
3.
6
THREE RIVERS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended March 31, 1999
(Unaudited)
- --------------------------------------------------------------------------------
Balance at June 30, 1998 $ 12,687,852
Net income 448,864
Effect of shares committed to be released by ESOP, 26,828
at market value
Cash dividends declared on common stock @ $0.33 per share (266,143)
Cash paid for fractional shares of 10% stock dividend (492)
Amortization of 4,743 RRP shares 63,932
Retirement of 113,100 shares of common stock (1,714,538)
Net change in unrealized gains on securities
available for sale, net of taxes 4,362
------------
Balance at March 31, 1999 $ 11,250,665
============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
4.
7
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
Nine months ended
March 31,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 448,864 $ 615,252
Adjustments to reconcile net income to
net cash provided from operating activities
Depreciation of premises and equipment 230,999 166,385
Net accretion on securities (38,999) (54,088)
Provision for loan losses 45,000 45,000
RRP expense 63,932 53,215
ESOP expense 26,828 48,583
Loans originated for sale (7,047,815) (3,750,575)
Proceeds from sales of loans held for sale 7,163,905 3,838,109
Net gains on sales of loans (172,094) (87,534)
Net gains on sales of foreclosed real estate (130) (19,639)
Change in
Accrued interest receivable and other assets (101,900) (100,110)
Accrued expenses and other liabilities (352,798) 366,962
----------- -----------
Net cash provided by operating activities 265,792 1,121,560
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest earning time
deposits with other financial institutions $ (188,980) $ (495,000)
Net increase in loans (3,379,836) (1,696,939)
Purchase of loans (1,250,014) --
Net premises and equipment expenditures (113,757) (1,085,846)
Purchase of securities available for sale (1,360,249) --
Paydowns on securities available for sale 61,820
Purchase of securities held to maturity (4,455,899) (2,487,913)
Proceeds from maturities on securities held to maturity 1,500,000 2,500,000
Paydowns on securities held to maturity 3,919,045 2,906,868
Purchase of Federal Home Loan Bank Stock -- (69,900)
Proceeds from sale of foreclosed real estate 29,538 402,863
Net change in investment in low-income housing partnership (33,073) (52,539)
----------- -----------
Net cash used in investing activities (5,271,405) (78,406)
- --------------------------------------------------------------------------------
(Continued)
5.
8
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
Nine months ended
March 31,
1999 1998
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 3,521,864 $ 880,064
Net change in advances from borrowers for taxes
and insurance (304,882) (82,683)
Proceeds from borrowed funds 4,000,000 11,750,000
Repayments of borrowed funds (6,586,776) (10,350,550)
Cash dividends paid (266,635) (257,897)
Purchase of common stock (1,714,538) --
------------ ------------
Net cash provided by (used in) financing activities (1,350,967) 1,938,934
------------ ------------
Net change in cash and cash equivalents (6,356,580) 2,982,088
Cash and cash equivalents at beginning of period 12,281,077 7,437,993
------------ ------------
Cash and cash equivalents at end of period 5,924,497 $ 10,420,081
============ ============
Supplemental disclosures of cash flow information
Cash paid for
Interest on deposits, advances and other
borrowings $ 2,970,305 $ 2,869,276
Income taxes 333,437 73,950
Transfers from loans to real estate acquired
through foreclosure -- 29,408
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements
6.
9
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended March 31, 1999
NOTE 1 - BASIS OF PRESENTATION
Nature of Operations: The consolidated financial statements include the accounts
of Three Rivers Financial Corporation ("the Company"), First Savings Bank ("the
Bank") and Alpha Financial, Inc ("Alpha"). All significant intercompany balances
and transactions have been eliminated in consolidation. The Company is a savings
and loan holding company located in Three Rivers, Michigan and owns all of the
outstanding stock of the Bank. Alpha is a wholly-owned subsidiary of the Bank.
The Company was organized in April 1995 for the purpose of owning all of the
outstanding stock of the Bank.
The Bank grants residential and commercial real estate and consumer loans,
accepts deposits and engages in mortgage banking activities. Substantially all
loans are secured by specific items of collateral including residences, business
assets and consumer assets. The Bank services its customers, which are primarily
located in southwestern Michigan and the central portion of northern Indiana,
through its main office in Three Rivers and five other offices located in its
market area. The primary business of Alpha is to own and receive the dividend
income from stock holdings in MMLIC Life Insurance Company.
Basis of Presentation: The accompanying unaudited consolidated financial
statements were prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include all disclosures required by generally accepted
accounting principles for complete presentation of financial statements. In the
opinion of management, the consolidated financial statements contain all
adjustments necessary to present fairly the consolidated balance sheets of Three
Rivers Financial Corporation and its subsidiary First Savings Bank as of March
31, 1999 and June 30, 1998, and the consolidated statements of income for the
three months and nine months ended March 31, 1999 and 1998 and the consolidated
statements of cash flows for the nine months ended March 31, 1999 and 1998. All
significant intercompany transactions and balances are eliminated in
consolidation. The income reported for the nine months ended March 31, 1999 is
not necessarily indicative of the results that may be expected for the full
year.
- --------------------------------------------------------------------------------
(Continued)
7.
10
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended March 31, 1999
NOTE 2- BORROWINGS
Borrowings at March 31, 1999 consisted of advances from the Federal Home Loan
Bank (FHLB) of Indianapolis, bearing rates from 4.53% to 6.14%. The loans are
collateralized by the Company's single family whole loans, U. S. Government and
federal agency securities and mortgage-backed securities. Adjustable rate
advances include $15.8 million indexed to the 3 month LIBOR rate which adjusts
quarterly. Adjustable rate advances have maturities ranging from 15 months to 10
years. The remaining balance of $4.4 million of advances are fixed rate, fixed
term, with maturities from three months to three years. The Company also
maintains a $500,000 line of credit with the FHLB which adjusts daily to the
FHLB's posted rate for these borrowings. The line of credit did not have a
balance at March 31, 1999.
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per common share is computed under the provisions of Statement of
Financial Accounts Standards (SFAS) No. 128, Earnings Per Share, which was
adopted retroactively by the Company at the beginning of the second quarter of
1997. Adoption of the Statement did not change the EPS amounts previously
reported by the Company for prior annual or quarterly periods. Unallocated ESOP
shares and unearned recognition and retention plan shares are excluded from the
weighted average number of shares outstanding used in the computation of
earnings per share. Basic earnings per share is based on net income divided by
the weighted average number of shares outstanding during the period. Diluted
earnings per share shows the dilutive effect of additional common stock
equivalents.
A reconciliation of the numerators and denominators of basic and dilutive
earnings per common share for the periods ended March 31, 1999 and 1998 is
presented below. All share and per share amounts have been retroactively
adjusted for the October 28, 1998 stock dividend.
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
BASIC EARNINGS PER SHARE
Net income available to common
shareholders $132,438 $187,568 $ 448,864 $ 615,252
======== ======== ========= =========
Weighted average common share
outstanding 703,234 826,955 735.011 826,521
======== ======== ========= =========
Basic earnings per share $ 0.19 $ 0.23 $ 0.61 $ 0.74
======== ======== ========= =========
(Continued)
8.
11
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended March 31, 1999
NOTE 3 - EARNINGS PER COMMON SHARE (Continued)
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
DILUTED EARNINGS PER SHARE
Net income available to common $132,438 $187,568 $448,864 $615,252
shareholders ======== ======== ======== ========
Weighted average common shares
outstanding 703,234 826,955 735,011 826,521
Add: Dilutive effects of assumed
exercises
Stock options 4,797 25,078 9,084 17,893
Unvested recognition and retention shares 1,021 0 3,316 0
-------- -------- -------- --------
Weighted average common and
dilutive potential common
shares outstanding 709,052 852,033 747,411 844,414
-------- -------- -------- --------
Diluted earnings per share $ 0.19 $ 0.22 $ 0.60 $ 0.73
======== ======== ======== ========
NOTE 4 - STOCK OPTIONS
The Company's Board of Directors has adopted a stock option plan. Under the
terms of this plan, options for up to 94,558 shares of the Company's common
stock may be granted to key management employees and directors of the Company
and its subsidiaries. The exercise price of the options is determined at the
time of grant by an administrative committee appointed by the Board of
Directors.
SFAS No.123, which became effective for 1997, requires disclosures for companies
that do not adopt its fair value accounting method for stock-based employee
compensation. Accordingly, the following proforma information presents net
income and income per common share had the fair value been used to measure
compensation cost for stock option plans. No compensation cost has been
recognized for the stock options.
The fair value of options granted during the nine months ended March 31, 1999
and 1998 is estimated using the following weighted average information:
risk-free interest rate of 5.00% and 5.25%, expected life of 7 and 7 years,
expected volatility of stock price of .055 and .048, and expected dividends of
2.20% and 2.11% per year.
(Continued)
9.
12
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended March 31, 1999
NOTE 4 - STOCK OPTIONS (Continued)
Nine Months Ended
March 31,
1999 1998
---- ----
Net income as reported $448,864 $615,252
Proforma net income 420,419 591,397
Basic earnings per common share as reported $0.61 $0.74
Diluted earnings per share as reported 0.60 0.73
Proforma basic earnings per common share 0.57 0.72
Proforma dilutive earnings per common share 0.56 0.70
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options are issued for ten year periods with a five
year vesting period. Information about option grants follows:
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
------- ----- ----- ---------
Balance at June 30, 1997 64,350 $12.05 $12.05
Granted 4,400 14.89 14.89 $ 2.56
------
Balance at June 30, 1998 68,750 12.05-14.89 12.23
Granted 21,780 14.09 14.09 $ 2.22
Forfeited (3,575) 12.05
------
Balance at March 31, 1999 86,955 12.05-14.89 12.70
======
The weighted average remaining contractual life of options outstanding at March
31, 1999 was approximately eight years. Stock options exercisable at March 31,
1999 and 1998 totaled 25,190 and 12,155 at a weighted average exercise price of
$12.14 and $12.05. All share and per share amounts have been retroactively
adjusted for the October 28, 1998 stock dividend.
(Continued)
10.
13
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended March 31, 1999
NOTE 5 - REGULATORY CAPITAL REQUIREMENTS
Savings institutions must meet three separate minimum capital-to-asset
requirements. The following table summarizes, as of March 31, 1999, the capital
requirements for the Bank and the Bank's actual capital ratios. As of March 31,
1999, the Bank substantially exceeded all current regulatory capital
requirements.
Regulatory
Capital requirement Actual Capital
------------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Risk-based capital $ 4,156 8.00% $ 9,993 19.23%
Core capital $ 2,925 3.00% $ 9,490 9.73%
Tangible capital $ 1,463 1.50% $ 9,490 9.73%
11.
14
ITEM 2: THREE RIVERS FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Three Rivers Financial Corporation (the "Company") was incorporated under the
laws of the State of Delaware for the purpose of becoming the savings and loan
holding company of First Savings Bank, a Federal Savings Bank (the "Bank") in
connection with the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank (the "Conversion"). On August
23, 1995, the Conversion was completed and the Bank became a wholly-owned
subsidiary of the Company. The following discussion compares the financial
condition of the Company at March 31, 1999 to June 30, 1998 and the results of
operations for the three-month and nine month periods ended March 31, 1999 with
the same periods ended March 31, 1998. This discussion should be read in
conjunction with the financial statements and footnotes included herein.
FINANCIAL CONDITION
March 31, 1999 compared to June 30, 1998.
The Company's total assets decreased $1.2 million from $98.9 million at June 30,
1998 to $97.7 at March 31, 1999. The overall decrease was due primarily to
decreases in cash and cash equivalents, premises and equipment, foreclosed real
estate and investment in low-income housing partnership. These decreases were
offset with increases in interest earning time deposits with other financial
institutions, investment securities, loans receivable and other assets.
Cash and cash equivalents decreased $6.4 million or 52.03% from $12.3 million at
June 30, 1998 to $5.9 million at March 31, 1999. This was due primarily to an
increase in loan demand resulting in a need to invest excess cash into loans.
Interest-earning time deposits with other financial institutions increased
$200,000 or 4.88% from $4.1 million at June 30, 1998 to $4.3 million at March
31, 1999.
Loans receivable increased $4.6 million or 7.41% from $62.1 million at June 30,
1998 to $66.7 million at March 31, 1999 due to the higher level of demand for
loans in the Company's market area. These increases were funded by excess cash
and through increases in deposits.
Securities increased $400,000 or 2.67% from $15 million at June 30, 1998 to
$15.4 million at March 31, 1999. Securities consist of U.S. Government and
federal agency securities, mortgage backed and related securities and other
collateralized obligations.
Total liabilities increased $200,000 from $86.2 million at June 30, 1998 to
$86.4 million at March 31, 1999 due primarily to increases in deposits, which
were partially offset by decreases in FHLB advances, advances from borrowers for
taxes and insurance, and accrued expenses and other liabilities.
- --------------------------------------------------------------------------------
(Continued)
12.
15
Total borrowed funds decreased $2.5 million or 11.01% from $22.7 million at June
30, 1998 to $20.2 million at March 31, 1999. This decrease was the result of
repayment of maturing FHLB advances. Borrowed funds consist of FHLB advances
with both fixed and variable interest rates and stated maturities ranging
through 2008.
Total deposits increased $3.5 million to $65.0 million for the nine month period
ended March 31, 1999. This increase was primarily the result of growth at the
two new branches in Howe and Middlebury, Indiana. The Howe, Indiana office
opened in February 1998 and Middlebury, Indiana in May 1998. There were
increases in all deposit categories.
Shareholders's equity deceased $1.4 million to $11.3 million for the nine-month
period ended March 31, 1999. This is primarily the result of the repurchase of
stock totaling $1,715,000 and dividends paid in the amount of $266,000 offset by
net income of $449,000.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1999 was $132,000 compared to
$188,000 for the three months ended March 31, 1998, a decrease of $56,000 or
29.79%. Interest income decreased $32,000 or 1.77%. This decrease was primarily
due to a decrease in interest income in investment securities. The Bank was
reluctant to invest in longer term securities due to the rates that were
available. Increases of $8,000 in interest expense was the result of an increase
in deposit interest expense which was partially offset by decreases in interest
on FHLB advances. Increases in non-interest expense were partially offset by
increases in non-interest income, along with a decrease in federal income tax
expense. This decrease in federal income tax expense was due to the decrease in
income before Federal income tax expense.
Net income for the nine months ended March 31, 1999 was $449,000 compared to
$615,000 for the nine months ended March 31, 1998, a decrease of $166,000, or
26.99%. Interest income increased $3,000 to $5,416,000 from $5,413,000. This
increase was offset by an increase in interest expense of $96,000 or 3.34% to
$2,970,000 from $2,874,000 largely based on the increase in deposits during the
period.
Decreases in net income for the three and six months ended March 31, 1999 were
primarily the result of increased operating expenses due to the opening of the
two new branches in Howe and Middlebury, Indiana, along with year 2000 expenses
for data processing and personnel costs.
Non-interest income increased $19,000 from $165,000 to $184,000 during the three
month period ended March 31, 1999. Increases in loan servicing, gains on sales
of loans and service charges on deposit accounts were offset by a decrease in
other income. The substantial increase in net gains on sales of loans was due to
the increased volume in sales of loans to the Federal Home Loan Mortgage Company
(FHLMC) resulting from the favorable interest rate environment.
Non-interest income increased $96,000 or 20.17% to $572,000 from $476,000 for
the nine month period ended March 31, 1999 compared to the same period ended
March 31, 1998. This was primarily due to the increased volume in sales of loans
along with increases in service charges on deposit accounts. These increases
were partially offset by decreases in gains on sale of foreclosed real estate
and other income.
(Continued)
13.
16
Non-interest expense increased $66,000 or 9.18% to $785,000 from $719,000 for
the three month period ended March 31, 1999 compared to the same period ended
March 31, 1998. Increases were in compensation of $47,000 to $385,000 from
$338,000, occupancy and equipment of $14,000 to $149,000 from $135,000, data
processing of $7,000 to $66,000 from $59,000 and other expense of $16,000 to
$95,000 from $79,000. These decreases were partially offset by decreases in
professional fees of $3,000 and printing and postage expense of $15,000 to
$30,000 from $45,000.
Non-interest expense increased $305,000 or 14.63% to $2,390,000 from $2,085,000
for the nine months ended March 31, 1999 compared to the nine month period ended
March 31, 1998. Increases in compensation expense of $154,000 to $1,172,000 from
$1,018,000 along with increases in occupancy and equipment of $86,000 to
$440,000 from $354,000, data processing expense of $33,000 to $195,000 from
$162,000 and increases in other expense of $46,000 to $298,000 from $252,000
were partially offset by decreases in professional fees of $12,000 to $78,000
from $90,000.
Federal income tax is lower for the three and nine month periods ended March 31,
1999 due to the decrease in income before Federal income tax expense as compared
to the same periods ended March 31, 1998.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOANS
The allowance for loan losses is established through a provision for loan losses
based on management's quarterly asset classification review, and evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation considers, among other matters, the estimated
value of the underlying collateral, economic conditions, cash flow analysis,
historical loan loss experience, discussions held with delinquent borrowers and
other factors that warrant recognition in providing for an adequate allowance
for loan losses. As a result of this review process, management recorded a
provision for loan losses in the amount of $15,000 for the three-month period
ended March 31, 1999. While management believes the current allowance for loan
losses is adequate, management anticipates growth in the loan portfolio and will
therefore continue to make additional provisions to the allowance for loan
losses. No assurance can be given that the amounts allocated to the allowance
for loan losses will be adequate to cover actual losses that may occur.
Total non-performing assets decreased $30,000 at March 31, 1999 to $652,000
compared to $682,000 at June 30, 1998. The ratio of non-performing assets to
total assets at March 31, 1999 was 0.67% compared to 0.69% at June 30, 1998.
Included in non-performing assets at March 31, 1999 were consumer loans in the
amount of $34,000, non-performing mortgages of $583,000 and other repossessed
assets of $35,000.
OTS regulations require that the Bank periodically review and classify assets
pursuant to the classification of assets policy set forth in its regulations.
Based on management's review of its assets as of March 31, 1999, $530,000 of
assets were classified as substandard, $-0- as doubtful, $-0- as loss, and
$153,000 as special mention. At the time of the quarterly review, an asset
classification listing is prepared, in conformity with the OTS regulations, and
a detailed report is presented to the Board.
(Continued)
14.
17
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, borrowings from the FHLB and
interest payments on loans. While scheduled repayments of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Bank has managed this fluctuation in its source of funds through borrowings from
the FHLB.
Under OTS regulations, a savings association is required to maintain an average
daily balance of liquid assets (including cash, certain time deposits and
savings accounts, bankers's acceptances, certain government obligations, and
certain other investments) in each calendar quarter of not less than 4% of
either (1) its liquidity base (consisting of certain net withdrawable accounts
plus short-term borrowings) as of the end of the preceding calendar quarter, or
(2) the average daily balance of its liquidity base during the preceding
quarter. This liquidity requirement may be changed from time to time by the OTS
to any amount between 4.0% and 10.0% depending upon certain factors, including
economic conditions and savings flows of all savings associations. For the
quarter ended March 31, 1999, the Bank maintained a liquidity ratio of 21.74%.
The Bank anticipates that it will have sufficient funds available to meet
current commitments.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, Reporting Comprehensive Income. Comprehensive income consists of
net income and other comprehensive income. Other comprehensive income includes
the net change in unrealized appreciation (depreciation) on securities available
for sale, net of tax which is also recognized as a separate component of
shareholders' equity. The accounting standard that requires reporting
comprehensive income first applied as of July 1, 1998, with prior information
restated to be comparable.
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, will require future reporting of additional information related to
material business segments beginning with the year ended June 30, l999. This
pronouncement is not expected to have a material impact on the consolidated
financial position or results of operations.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans held for Sale by a Mortgage Banking Enterprise.
SFAS No. 134 amends SFAS No 65, "Accounting for Certain Banking Activities,"
which establishes accounting and reporting standards for certain activities of
mortgage banking enterprises and other enterprises that conduct operations that
are substantially similar. SFAS No. 134 requires that after the securitization
of mortgage loans held for sale, the resulting mortgage-backed securities and
other retained interests should be classified in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," based on the
company's ability and intent to sell or hold those investments. SFAS No. 134 is
effective for the first fiscal quarter beginning after December 15, 1998. The
adoption of this standard had no impact on the Companys results of operations or
financial position.
(Continued)
15.
18
YEAR 2000
In May 1997, the Federal Financial Institutions Examinations Council issued an
interagency statement to the chief executive officers of all federally
supervised financial institutions regarding year 2000 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the year 2000, there will be major
disruptions in the operations of financial institutions. The statement provides
guidance to the financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies are conducting year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. The OTS
has established an examination procedure which contains three categories of
ratings: "Satisfactory," "Needs Improvement," and "Unsatisfactory." Institutions
that receive a year 2000 rating of Unsatisfactory may be subject to formal
enforcement action, supervisory agreements, cease and desist orders, civil money
penalties, or the appointment of a conservator. In addition, federal banking
agencies will be taking into account year 2000 compliance programs when
analyzing applications and may deny an application based on year 2000 related
issues.
The Company has completed its assessment of Year 2000 issues, developed a plan,
and arranged for the required resources to complete the necessary remediation
and testing. As part of its efforts to ensure compliance with the Year 2000, the
Company has signed a contract with FiServ, Milwaukee, to convert to a new
processing system in May 1999. At this time, computer hardware will also be
replaced.
The Company will utilize both internal and external resources to reprogram or
replace, and test hardware and software for the Year 2000 compliance. The
Company plans to complete changes and testing of critical systems by July 31,
1999. Testing of non-critical applications will continue throughout 1999 and
will be completed prior to any impact on operating systems. The total costs of
the Year 2000 project are estimated to be in excess of $300,000. The Company
will incur remediation and testing costs through the year 2000, but does not
anticipate that material incremental costs will be incurred in any single
period.
The Company has initiated formal communications with all of its critical vendors
and service providers to determine the extent to which the Company is vulnerable
to any failure of those third parties to remedy their own Year 2000 issues.
However, there can be no guarantee that the system of other companies on which
the Company's systems rely will be remedied in a timely manner or that there
will be no adverse effect on the Company's systems. Critical companies include
power companies and telephone systems. Therefore, the Company could possibly be
negatively impacted to the extent that other entities not affiliated with the
Company are unsuccessful in properly addressing this issue. It is expected that
in a worse case scenario, the Company would operate on a manual basis. The
Company has developed a formal contingency plan.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based upon management's best estimates. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar circumstances.
16.
19
PART II
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
On February 17, 1999, the Company declared a cash dividend of $0.115
per share which was payable on April 1, 1999, to stockholders of record
on March 17, 1999.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-k
None
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17.
20
THREE RIVERS FINANCIAL CORPORATION
THREE RIVERS, MICHIGAN
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.
Three Rivers Financial Corporation
Date: May 10, 1999 /s/ G. Richard Gatton
----------------------------------
G. Richard Gatton
President and Chief Executive Officer
Date: May 10, 1999 /s/ Martha Romig
-------------------------------------
Martha Romig
Senior Vice-President, Treasurer and
Chief Financial Officer
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18.
21
EXHIBIT INDEX
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Exhibit No. Description
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27 Financial Data Schedule