As filed with the Securities and Exchange Commission on November 16, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ 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: 0-21386
T R Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware 11-3154382
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1122 Franklin Avenue, Garden City, New York 11530
(Address of principal executive offices) (Zip code)
(516) 742-9300
(Registrant's telephone number, including area code)
Indicate by check mark 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 preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days.
Yes X No
----- -----
As of November 10, 1998, there were 17,630,212 shares of the Registrant's
common stock outstanding.
<PAGE>
Form 10-Q
T R FINANCIAL CORP.
INDEX
Page
PART I -- FINANCIAL INFORMATION Number
- - ------------------------------- ------
Item 1. Financial Statements -- Unaudited
Consolidated Statements of Financial Condition at
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for the three
and nine months ended September 30, 1998 and 1997 4
Consolidated Statement of Changes in Stockholders' Equity for
the nine months ended September 30, 1998 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23-24
PART II -- OTHER INFORMATION
- - ----------------------------
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature Page 25
================================================================================
Statements contained in this Form 10-Q which are not historical
facts are forward-looking statements, as that term is defined in
the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those
projected. Such risks and uncertainties include, but are limited
to, general economic conditions, changes in interest rates,
deposit flows, loan demand, real estate values and competition;
changes in accounting principles, polices or guidelines; change
in legislation or regulation; other economic, competitive,
governmental, regulatory or technological factors affecting the
Company's operations, pricing, products and services; and other
risks detailed in documents filed by the Company with the
Securities and Exchange Commission from time to time.
================================================================================
2
<PAGE>
PART I -- FINANCIAL INFORMATION
- - --------------------------------
Item 1. Financial Statements -- Unaudited
---------------------------------
T R FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(unaudited)
ASSETS
- - ------
<S> <C> <C>
Cash and cash equivalents........................................................... $15,519 $18,307
Securities available for sale:
Bonds and equities.............................................................. 213,967 308,569
Mortgage-backed securities...................................................... 197,711 168,096
---------- ----------
Total securities available for sale.............................. 411,678 476,665
---------- ----------
Securities held to maturity, net (estimated fair value of $1,327,259 and
$1,245,735 at September 30, 1998 and December 31, 1997, respectively):
Bonds........................................................................... 32,659 42,092
Mortgage-backed securities...................................................... 1,271,499 1,177,208
--------- ----------
Total securities held to maturity, net.......................................... 1,304,158 1,219,300
--------- ----------
Loans receivable.................................................................... 2,378,848 2,062,896
Allowance for possible loan losses.................................................. (15,537) (14,917)
---------- ----------
Loans receivable, net............................................................. 2,363,311 2,047,979
--------- ----------
Other real estate owned, net........................................................ 1,075 1,040
Banking house and equipment, net.................................................... 12,426 13,642
Accrued interest receivable......................................................... 24,683 24,338
Federal Home Loan Bank (FHLB) stock, at cost........................................ 40,029 33,390
Deferred tax asset, net............................................................. 3,504 2,034
Other assets........................................................................ 6,979 6,361
---------- ----------
Total assets...................................................................... $4,183,362 $3,843,056
========== ==========
LIABILITIES and STOCKHOLDERS' EQUITY
- - ------------------------------------
Due to depositors................................................................... $2,141,726 $2,202,353
Securities sold under agreements to repurchase...................................... 1,200,000 807,000
FHLB borrowings..................................................................... 468,378 491,578
Mortgagors' escrow deposits......................................................... 30,563 21,784
Accounts payable and accrued expenses............................................... 22,998 19,526
Official checks outstanding......................................................... 14,143 27,989
Accrued taxes payable............................................................... 17,595 15,620
Other liabilities................................................................... 21,759 16,235
---------- -----------
Total liabilities................................................................. 3,917,162 3,602,085
--------- ---------
Commitments and contingencies....................................................... -- --
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued......... -- --
Common stock, $.01 par value, 60,000,000 shares authorized; 22,724,000 shares
issued; 17,629,854 shares and 17,598,029 shares outstanding at September 30,
1998 and December 31, 1997, respectively....................................... 227 227
Additional paid-in-capital........................................................ 119,493 110,962
Retained earnings................................................................. 205,728 183,065
Accumulated other comprehensive income:
Net unrealized appreciation in certain securities, net of tax................. 3,108 5,057
Less:
Unallocated common stock held by Employee Stock Ownership Plan (ESOP)......... (3,866) (4,604)
Unearned common stock held by Bank's Recognition and Retention Plan and Trust
(RRP)................................................................... (52) (103)
Common stock held by Bank's Supplemental Executive Retirement Plan and Trust
(SERP), at cost (132,333 shares and 106,103 shares at September 30, 1998
and December 31, 1997, respectively)........................................... (2,126) (1,225)
Treasury stock, at cost (5,094,146 shares and 5,125,971 shares at September
30, 1998 and December 31, 1997, respectively)............................... (56,312) (52,408)
----------- -----------
Total stockholders' equity............................................... 266,200 240,971
---------- -----------
Total liabilities and stockholders' equity........................................ $4,183,362 $3,843,056
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
T R FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------
1998 1997 1998 1997
----- ----- ----- ----
Interest income:
<S> <C> <C> <C> <C>
Mortgage loans............................ $40,822 $33,984 $116,742 $96,626
Mortgage-backed securities................ 25,950 22,617 76,552 64,380
Bonds, equities and other investments..... 4,725 6,481 15,584 20,452
Other loans............................... 2,498 1,970 6,718 6,175
------- ------- ------- -------
Total interest income................... 73,995 65,052 215,596 187,633
------ ------ ------- -------
Interest expense:
Deposits.................................. 23,857 28,319 71,504 84,826
Borrowed funds............................ 24,688 13,844 68,083 35,401
------ ------ ------ ------
Total interest expense.................. 48,545 42,163 139,587 120,227
------ ------ ------- -------
Net interest income......................... 25,450 22,889 76,009 67,406
Provision for possible loan losses.......... 250 125 750 675
------- ------- ------- -------
Net interest income after provision
for possible loan losses.................. 25,200 22,764 75,259 66,731
------ ------ ------ ------
Non-interest income:
Loan fees and other charges, net.......... 1,276 1,622 3,868 4,664
Net gain on sales of securities........... 3,033 1,804 7,991 3,784
Gain on sales of whole loans.............. - - 280 158
Other income.............................. 172 185 599 971
----- ----- ----- -----
Total non-interest income............... 4,481 3,611 12,738 9,577
------ ------ ------ ------
Non-interest expense:
Salaries and employee benefits............ 7,557 7,581 23,917 21,268
Occupancy and equipment expense........... 1,241 1,354 3,747 3,958
Marketing expense......................... 286 671 1,570 2,026
Other real estate owned expense........... 38 50 220 183
FDIC assessment........................... 71 76 220 227
Other operating expense................... 1,470 1,731 5,087 6,729
----- ------ ------ ------
Total non-interest expense.............. 10,663 11,463 34,761 34,391
------ ------ ------ ------
Income before provision for income taxes.... 19,018 14,912 53,236 41,917
Provision for income taxes.................. 7,459 5,880 21,180 16,707
------- ------- ------- -------
Net income.................................. $11,559 $ 9,032 $32,056 $25,210
======= ======== ======= =======
Basic earnings per share.................... $ 0.69 $ 0.55 $ 1.93 $ 1.54
======= ======== ======= =======
Diluted earnings per share.................. $ 0.66 $ 0.51 $ 1.84 $ 1.43
======= ======== ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
T R FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
(unaudited)
Common Additional
Stock Paid-in Retained
Total (Par Value $0.01) Capital Earnings
----- ----------------- ------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 .......................... $240,971 $ 227 $110,962 $ 183,065
Comprehensive income:
Net income .......................................... 32,056 -- -- 32,056
Other comprehensive income, net of tax:
Decrease in net unrealized appreciation on
certain securities, net of reclassification adjustment . (1,949) -- -- --
--------
Comprehensive income (1) ............................... 30,107 -- -- --
--------
Cash dividends declared on common stock
($0.55 per share) .................................... (9,100) -- -- (9,100)
Reissuance of treasury stock ........................... 1,082 -- 44 (293)
Benefit plan adjustments, including tax benefits ....... 8,324 -- 7,586 --
RRP amortization ....................................... 51 -- -- --
Common stock acquired at cost .......................... (5,235) -- 901 --
-------- ----- -------- ---------
Balance at September 30, 1998 .......................... $266,200 $ 227 $119,493 $ 205,728
======== ===== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
Held by RRP as
Accumulated Unearned, Held
Other by ESOP as
Comprehensive Unallocated and Treasury
Income Held by SERP Stock, at cost
------ ------------ --------------
<S> <C> <C> <C>
Balance at December 31, 1997 .......................... $5,057 $(5,932) $(52,408)
Comprehensive income:
Net income .......................................... -- -- --
Other comprehensive income, net of tax:
Decrease in net unrealized appreciation on
certain securities, net of reclassification adjustment . 1,949) -- --
Comprehensive income (1) ............................... -- -- --
Cash dividends declared on common stock
($0.55 per share) .................................... -- -- --
Reissuance of treasury stock ........................... -- -- 1,331
Benefit plan adjustments, including tax benefits ....... -- 738 --
RRP amortization ....................................... -- 51 --
Common stock acquired at cost .......................... -- (901) (5,235)
------ ------- --------
Balance at September 30, 1998 .......................... $3,108 $(6,044) $(56,312)
====== ======= ========
</TABLE>
(1) Comprehensive income for the nine months ended September 30, 1997 was
$30,296.
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
T R FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended September 30,
1998 1997
-------- -------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income............................................................. $ 32,056 $ 25,210
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for possible loan losses................................... 750 675
Provision for possible other real estate owned losses................ -- 4
Depreciation of banking house and equipment.......................... 1,548 1,557
Gain on calls of securities.......................................... (2) (1)
Net gain on sales of securities available for sale................... (7,989) (3,691)
Gain on sales of whole loans......................................... (280) (158)
Net gain on sales of other real estate owned......................... (89) (354)
Amortization of net deferred loan origination costs.................. 1,808 503
Amortization of premiums in excess of accretion of discounts......... 5,142 1,158
Income taxes deferred and tax benefits attributable to stock plans... 2,429 431
Amortization relating to allocation and earned portions of stock
plans.............................................................. 5,946 3,941
Increase/decrease in:
Accrued interest receivable.......................................... (345) (1,452)
Accounts payable and accrued expenses................................ 3,472 5,511
Official checks outstanding.......................................... (13,846) (6,393)
Other assets......................................................... (618) 4,060
Accrued taxes payable................................................ 1,975 9,095
Other liabilities.................................................... 5,524 581
-------- -------
Net cash provided by operating activities......................... 37,525 40,677
--------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for the purchase of:
Securities held to maturity and FHLB Capital Stock................... (423,756) (292,301)
Securities available for sale........................................ (182,612) (191,560)
Banking house and equipment.......................................... (332) (2,157)
Proceeds from:
Redemption of FHLB Capital Stock and calls of securities............. 28,451 15,315
Sales of securities available for sale............................... 176,027 175,189
Repayments on securities............................................. 374,810 124,985
Sales of whole loans................................................. 8,942 9,837
Principal collected on real estate loans............................. 264,024 150,107
Sales of other real estate owned..................................... 1,127 3,692
Principal collected on other loans................................... 59,987 35,640
Real estate loans originated and purchased............................. (564,134) (412,506)
Other loans originated and purchased................................... (87,502) (35,186)
---------- --------
Net cash used in investing activities.............................. (344,968) (418,945)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Interest credited to deposits.......................................... 55,975 66,535
Net withdrawals from savings accounts, certificate of deposit
accounts, money market accounts and checking accounts................. (116,602) (88,778)
Net proceeds from exercise of stock options............................ 1,082 906
Net deposits to escrow accounts........................................ 8,779 8,143
Net repayments of short-term borrowed funds............................ (9,000) (43,610)
Repayments of long-term borrowed funds................................. (131,200) (80,800)
Proceeds from long-term borrowed funds................................. 510,000 535,478
Purchase of treasury stock............................................. (5,235) (3,034)
Cash dividends paid.................................................... (9,100) (6,365)
--------- --------
Net cash provided by financing activities........................... 304,655 388,475
-------- -------
Net (decrease) increase in cash and cash equivalents................... (2,788) 10,207
Cash and cash equivalents at beginning of period....................... 18,307 18,128
-------- ---------
Cash and cash equivalents at end of period............................. $ 15,519 $ 28,335
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes............................................. $ 2,176 $ 4,351
========= ==========
Cash paid for interest on deposits and borrowed funds.................. $ 79,967 $ 49,147
========= =========
Non-cash investing activities:
Additions to other real estate owned, net............................ $ 1,073 $ 965
========= ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
T R FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of T R Financial Corp. ("T R Financial"), its direct wholly owned
subsidiary, Roosevelt Savings Bank (the "Bank"), and the subsidiaries of the
Bank (collectively, the "Company").
The unaudited consolidated financial statements included herein reflect all
normal recurring adjustments which are, in the opinion of management, necessary
to present a fair statement of the results for the interim periods presented.
The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results of operations that may be expected
for the entire year. Certain information and note disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report to Stockholders for the year ended
December 31, 1997.
7
<PAGE>
2. DEBT AND EQUITY SECURITIES
The following tables set forth certain information regarding amortized
cost, estimated fair values and gross unrealized gains and losses on debt and
equity securities of the Company at September 30, 1998.
<TABLE>
<CAPTION>
Amortized Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
Bonds and equities:
United States Government
obligations........................ $128,895 $131,506 $ 2,611 $ --
Federal agency obligations........... 52,499 52,912 413 --
Industrial, financial corporation
and other bonds................... 3,007 3,122 115 --
Common and preferred stocks.......... 24,417 26,427 3,304 (1,294)
------- ------- ------- ----------
Total bonds and equities............ 208,818 213,967 6,443 (1,294)
------- ------- ------- ----------
Mortgage-backed securities:
FNMA, net ........................... 1,329 1,345 16 --
GNMA, net............................ 190,781 192,575 1,813 (19)
FHLMC, net........................... 3,733 3,791 58 --
-------- -------- ------ ----------
Total mortgage-backed securities........ 195,843 197,711 1,887 (19)
------- ------- ------- ----------
Total available for sale.......... $404,661 $411,678 $ 8,330 $(1,313)
======== ======== ======= --========
Held to Maturity, Net:
Bonds:
Federal agency obligations............. $ 1,000 $ 1,001 $ 1 $ --
Public utility bonds................... 800 799 1 (2)
Municipal bonds........................ 5,085 5,318 233 --
Industrial and financial
corporation bonds.................... 25,774 25,735 32 (71)
------ ------ ------ ---------
Total bonds............................. 32,659 32,853 267 (73)
------ ------ ----- --------
Mortgage-backed securities:
FNMA, net ............................. 72,635 73,844 1,241 (32)
GNMA, net ............................. 1,124,007 1,142,285 18,697 (419)
FHLMC, net (1) ........................ 71,946 75,235 3,289 --
CMOs, net (1) ......................... 2,911 3,042 131 --
---------- ---------- -------- --------
Total mortgage-backed securities..... 1,271,499 1,294,406 23,358 (451)
--------- --------- ------- -------
Total held to maturity, net........ $1,304,158 $1,327,259 $23,625 $ (524)
========== ========== ======= =======
</TABLE>
(1) Includes securities which were transferred on March 31, 1995 from
available for sale to held to maturity. As of September 30, 1998, the
amortized cost of these securities was reduced by $1,564,000 of gross
unrealized losses existing as of March 31, 1995, adjusted for subsequent
accretion.
3. EMPLOYEE STOCK OWNERSHIP PLAN
The Company recognizes compensation expense attributable to its employee
stock ownership plan ("ESOP") ratably over the year based upon the estimated
number of shares of T R Financial common
8
<PAGE>
stock to be allocated by the ESOP to participant accounts each December 31st.
The amount of compensation expense recorded is equal to the estimate of shares
to be allocated by the ESOP multiplied by the average fair value of the
underlying shares during the period. The compensation expense attributable to
the ESOP was $1,894,000 and $1,557,000, respectively, for the three months ended
September 30, 1998 and 1997 and the average quoted price of the underlying
shares was $34.67 per share and $26.80 per share, respectively, in each period.
For the nine months ended September 30, 1998 and 1997, such compensation expense
and average quoted price of the underlying shares was $5,860,000 and $34.94 per
share, respectively, in 1998 and $3,724,000 and $21.37 per share, respectively,
in 1997.
4. EARNINGS PER SHARE
Earnings per share is computed in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which became effective for the Company as of December 31, 1997. As
required by the statement, earnings per share for all prior periods presented
have been restated. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Such shares exclude the weighted average number
of unallocated shares of Company common stock held by the ESOP. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock, such as stock options, were exercised,
converted into common stock or otherwise resulted in the issuance of common
stock.
The following table is a reconciliation of basic and diluted earnings per
share as required under SFAS No. 128.
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
Per Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended September 30,:
- - ----------------------------------------
Net income (all available to common
stockholders)............................ $11,559,000 $9,032,000
=========== ==========
Weighted average number of shares of
common stock outstanding (1).......... 16,716,847 16,466,944
Basic earnings per share................. $0.69 $0.55
===== =====
Effect of other potentially dilutive
securities:
Stock options...................... 775,892 1,330,257
------- ---------
Total weighted average of securities:.... 17,492,739 17,797,201
========== ==========
Diluted earning per share................ $0.66 $0.51
===== =====
For the nine months ended September 30,:
- - ---------------------------------------
Net income (all available to common
stockholders)......................... $32,056,000 $25,210,000
=========== ===========
Weighted average number of shares of
common stock outstanding (2).......... 16,619,774 16,408,169
Basic earnings per share................. $1.93 $1.54
===== =====
Effect of other potentially dilutive
securities:
Stock options...................... 817,343 1,254,008
------- ---------
Total weighted average of securities..... 17,437,117 17,662,177
========== ==========
Diluted earnings per share............... $1.84 $1.43
===== =====
</TABLE>
(1) Excludes average unallocated shares of Company common stock held by the
ESOP for the three months ended September 30, 1998 and 1997 of 886,904 and
1,110,646, respectively.
(2) Excludes average unallocated shares of Company common stock held by the
ESOP for the nine months ended September 30, 1998 and 1997 of 941,081 and
1,168,272, respectively.
9
<PAGE>
5. CONTINGENCIES
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with legal
counsel, the financial position of the Company will not be affected materially
by the outcome of such legal proceedings.
6. STOCKHOLDERS' EQUITY
During the nine months ended September 30, 1998, a total of 175,000 shares
of T R Financial common stock were repurchased by the Company at an aggregate
cost of $5,235,000. For the nine months ended September 30, 1998, the Board of
Directors declared cash dividends on the Company's outstanding common stock of
$0.17 per common share, $0.18 per common share and $0.20 per common share to
stockholders of record on February 12, 1998, May 14, 1998 and September 2, 1998,
respectively. These dividends were paid in March, June and September, 1998,
respectively and aggregated $9,100,000.
7. REGULATORY CAPITAL
The following table sets forth the Bank's and the Company's amounts and
ratios for required and actual regulatory capital requirements at September 30,
1998.
<TABLE>
<CAPTION>
Bank Company
-------------------------------------- -------------------------------------
Total Tier 1 Total Tier 1
Risk- Risk- Tier 1 Risk- Risk- Tier 1
Based Based Leverage Based Based Leverage
Capital Capital Capital Capital Capital Capital
------- ------- ------- ------- ------- -------
(dollars in thousands)
At September 30, 1998:
Actual:
<S> <C> <C> <C> <C> <C> <C>
Amount ............................ $269,547 $254,010 $254,010 $278,728 $263,191 $263,191
Ratio.............................. 17.40% 16.40% 6.08% 17.98% 16.98% 6.28%
Minimum requirement for
capital adequacy purposes:
Amount............................. $123,924 $61,962 $125,231 $124,000 $62,000 $125,717
Ratio.............................. 8.00% 4.00% 3.00% 8.00% 4.00% 3.00%
To be "well-capitalized" under prompt
corrective action provisions (1):
Amount............................. $154,904 $92,943 $208,719 -- -- --
Ratio.............................. 10.00% 6.00% 5.00% -- -- --
</TABLE>
(1) Such amounts are not applicable to the Company.
10
<PAGE>
8. PROVISION FOR INCOME TAXES
In March 1997, New York City legislative changes were enacted to permit
continued future use of bad debt reserve methods similar to New York State tax
law. The Company reduced its provision for income taxes during the three months
ended March 31, 1997 by $275,000 principally as a result of the change in New
York City bad debt tax legislation.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way public business enterprises, including
the Company, are to report information about operating segments in annual
reporting and selected information about operating segments in interim
reporting. This statement also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and amends SFAS No. 94, "Consolidation of All Majority Owned
Subsidiaries," to remove special disclosure requirements for previously
unconsolidated subsidiaries. SFAS No. 131 is effective for the Company for
annual reporting periods beginning after December 15, 1997 and requires interim
periods to be presented in the second year of application. The interim periods,
however, must be presented in comparative form unless it is impracticable to do
so. SFAS No. 131 is limited to additional disclosure and, accordingly, the
adoption of this statement will not have an impact on the Company's financial
condition or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosure
About Pensions and Other Retirement Benefits," which amends existing disclosure
rules regarding pension and other post-retirement benefits to standardize the
disclosure formats effective for fiscal years beginning after September 15,
1997. Disclosures regarding pensions and other non-pension post-retirement
benefits have been combined. SFAS No. 132 addresses disclosure issues only and
does not require any substantive change in accounting treatment for the benefits
covered by it. Accordingly, the implementation of SFAS No. 132 will have no
effect on the Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective prospectively for the
Company on January 1, 2000. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair values, cash flows or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change.
11
<PAGE>
The Company has not determined the impact that SFAS No. 133 will have on
its financial statements and believes that such determination will not be
meaningful until closer to the date of initial adoption.
In October 1998, the FASB issued 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 is effective for
fiscal quarters beginning after December 15, 1998 and amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." SFAS No. 134 provides that
an enterprise engaged in mortgage banking activities may choose the appropriate
classification for mortgage-backed securities retained after the securitization
of mortgage loans held for sale. SFAS No. 134 requires that such classification
be made on a basis that is consistent with the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Because the
Company generally retains whole mortgage loans for its portfolio and does not
classify such loans as held for sale, the Company believes that the
implementation of SFAS No. 134 will have no material effect on the Company's
financial condition or results of operations.
10. RECENT DEVELOPMENTS
PROPOSED MERGER WITH ROSLYN BANCORP, INC. On May 26, 1998, the Company
announced the signing of a definitive agreement ("Agreement") to merge with and
into Roslyn Bancorp, Inc. ("Roslyn") in an exchange of stock transaction. Under
the terms of the Agreement, the merger will be structured as a tax-free
stock-for-stock transaction that will be accounted for as a pooling of
interests. As of September 30, 1998, the Company has deferred $263 thousand of
costs relating to the proposed merger.
During the quarter ended September 30, 1998, the Company and Roslyn
Bancorp, Inc. filed preliminary proxy materials with the Securities and Exchange
Commission in connection with each company's stockholders meeting to consider
and vote upon a proposal to approve and adopt the Agreement. The stockholders
meetings are expected to be held during the fourth quarter of 1998. During the
third quarter, applications with respect to the proposed merger were also filed
with the bank regulatory agencies. Both Roslyn and the Company continue to work
towards the successful closing of the proposed merger, while giving due
consideration to recent changes in the financial markets and the prices of
financial institution securities.
DECLARATION OF CASH DIVIDEND. On October 27, 1998, the Board of Directors
declared a cash dividend on the Company's outstanding common stock of $0.22 per
share to stockholders of record on December 2, 1998. The dividend is payable on
December 14, 1998.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
GENERAL
T R Financial Corp. ("T R Financial") is the bank holding company for
Roosevelt Savings Bank and its subsidiaries (the "Bank"), a New York chartered
stock savings bank. While the following discussion of financial condition and
results of operations includes the collective results of T R Financial and the
Bank (collectively, the "Company"), this discussion reflects principally the
Bank's activities.
12
<PAGE>
FINANCIAL CONDITION
Total assets increased $340.3 million, or 8.9%, to $4.18 billion at
September 30, 1998 from $3.84 billion at December 31, 1997, primarily as a
result of management's continued strategy to leverage its capital position
through asset growth. This growth was funded primarily by increased borrowings
from securities sold under agreements to repurchase ("securities repurchase
agreements").
Of the increase in total assets, $315.3 million was attributable to an
increase in loans receivable, net, due primarily to the origination and purchase
of residential real estate loans. Securities available for sale decreased $65.0
million, or 13.6%, to $411.7 million at September 30, 1998 from $476.7 million
at December 31, 1997, due principally to sales and repayments of such securities
totaling $176.0 million and $75.2 million, respectively, for the nine months
ended September 30, 1998. For the nine months ended September 30, 1998 such
sales and repayments were partially offset by purchases of securities available
for sale of $182.6 million. Securities held to maturity, net, increased $84.9
million, or 7.0%, to $1.30 billion at September 30, 1998 from $1.22 billion at
December 31, 1997. The increase in securities held to maturity, net, reflects
purchases during the nine months ended September 30, 1998 totaling $423.8
million, which were partially offset by repayments of such securities during
this period of $299.6 million. These changes in securities portfolios reflect
the effects of securities purchases, securities repayments and maturities and,
in the case of the available for sale securities portfolio, also reflects the
effects of securities sales and changes in the estimated fair values of the
portfolio. As of September 30, 1998, the available for sale portfolio had net
unrealized appreciation of $7.0 million as compared to $11.1 million at December
31, 1997.
Total deposits decreased $60.6 million, or 2.8%, to $2.14 billion at
September 30, 1998 from $2.20 billion at December 31, 1997. This decrease was
attributable to the planned net outflow of certain higher cost customer
deposits. Total borrowings, however, from securities repurchase agreements and
from Federal Home Loan Bank of New York ("FLHB") borrowings, increased $369.8
million, or 28.5%, to $1.67 billion at September 30, 1998 from $1.30
billion at December 31, 1997. In managing the Company's overall cost
of funds and interest rate sensitivity, management is using borrowings
to leverage asset growth and to supplement its deposit base. This
strategy is intended to mitigate the repricing effect of certain
maturing time deposit products.
Stockholders' equity increased to $266.2 million at September 30, 1998, or
6.4% of total assets, as compared to $241.0 million at December 31, 1997, or
6.3% of total assets. In accordance with SFAS No. 115, "Accounting for
Investments in Certain Debt and Equity Securities," stockholders' equity at
September 30, 1998 and December 31, 1997 includes net unrealized appreciation in
certain securities, net of tax, of $3.1 million and $5.1 million, respectively.
In addition, during the nine months ended September 30, 1998, the Company
repurchased 175,000 shares of Company common stock at a total cost of $5.2
million for the period. See "Liquidity and Capital Resources."
The Bank's leverage capital ratio increased from 5.98% at December 31, 1997
to 6.08% at September 30, 1998 due to an increase in the Bank's Tier 1 leverage
capital of $29.2 million, which was partially offset by an increase in the
Bank's quarterly average assets. The Bank's total risk-based capital ratio of
17.40% at September 30, 1998 represents a 40 basis point decrease as compared to
that ratio at December 31, 1997. These capital ratios are well in excess of
Federal Deposit Insurance Corporation ("FDIC") capital requirements applicable
to the Bank. See "Liquidity and Capital Resources -- Regulatory Capital
Position" and Note 7 to Notes to Unaudited Consolidated Financial Statements.
13
<PAGE>
Non-performing assets increased to $15.3 million at September 30, 1998,
from $14.8 million at December 31, 1997 while the ratio of these assets to total
assets decreased to 0.37% at September 30, 1998 from 0.38% at December 31, 1997.
Other real estate owned, net, increased $35 thousand to $1.1 million at
September 30, 1998 from $1.0 million at December 31, 1997. Non-performing loans,
the largest component of non-performing assets, increased $460 thousand to $14.2
million at September 30, 1998, as compared to $13.7 million at December 31,
1997. This increase was due primarily to a $6.4 million increase in FHA
government insured residential mortgage loans which are 90 days or more
delinquent, which was partially offset by decreases in both delinquent
conventional residential loans and commercial real estate loans. Generally, the
ultimate recovery on non-performing FHA government insured loans is achieved
through FHA insurance claims and without substantial charge-offs to the
allowance for possible loan losses. The ratio of non-performing loans to total
loans decreased to 0.60% at September 30, 1998 from 0.67% at December 31, 1997.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the volume of earning assets and interest-bearing liabilities and the
interest rates earned or paid on them.
The following table sets forth certain information regarding the Company's
average statements of financial condition and its statements of income for the
three and nine months ended September 30, 1998 and 1997, and reflects the
average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense,
annualized, by the average balance of assets or liabilities, respectively, for
the periods shown. Average balances are derived from daily balances. Average
balances and yields include non-accrual loans.
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------------------------------
1998 1997
------------------------------------------ -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(dollars in thousands)
Assets
- - ------
Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans, net................ $2,178,411 $40,822 7.50% $ 1,794,729 $33,984 7.57%
Other Loans........................ 129,536 2,498 7.71 106,047 1,970 7.43
Mortgage-Backed Securities......... 1,478,353 25,950 7.02 1,203,120 22,617 7.52
Short-Term Securities.............. 78 1 5.13 17,111 241 5.63
Other Securities................... 320,415 4,724 5.90 414,204 6,240 6.03
------- ----- ----------- ------
Total Earning Assets................. 4,106,793 73,995 7.20 3,535,211 65,052 7.36
------ ------
Non-Earning Assets................... 78,183 71,957
---------- -----------
Total Assets......................... $4,184,976 $ 3,607,168
========== ===========
Liabilities and Stockholders' Equity
- - ------------------------------------
Interest-Bearing Liabilities:
Deposits:
Passbook Accounts.............. $548,979 $3,256 2.37% $ 642,387 $4,829 3.01%
Now Accounts................... 9,732 58 2.38 10,050 73 2.91
Money Market Accounts.......... 75,172 434 2.31 77,228 529 2.74
Certificate of Deposit Accounts 1,456,654 20,109 5.52 1,596,573 22,888 5.73
--------- ------ ----------- -------
Total Interest-Bearing Deposits...... 2,090,537 23,857 4.56 2,326,238 28,319 4.87
Borrowings....................... 1,694,778 24,688 5.83 935,485 13,844 5.92
--------- ------ ----------- ------
Total Interest-Bearing Liabilities... 3,785,315 48,545 5.13 3,261,723 42,163 5.17
------ -------
Other Liabilities.................... 139,232 121,148
--------- -----------
Total Liabilities................ 3,924,547 3,382,871
Stockholders' Equity................. 260,429 224,297
--------- -----------
Total Liabilities and Stockholders'
Equity............................. $4,184,976 $ 3,607,168
========== ===========
Net Interest Income/Interest Rate
Spread............................. $25,450 2.07% $22,889 2.19%
======= ===== ======= =====
Net Earning Assets/Net Interest
Margin............................. $ 321,478 2.48% $ 273,488 2.59%
========== ===== =========== =====
Ratio of Earning Assets to
Interest-Bearing Liabilities....... 1.08x 1.08x
===== =====
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(dollars in thousands)
Assets
- - ------
Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans, net................ $2,077,855 $ 116,742 7.49% $ 1,704,972 $96,626 7.56%
Other Loans........................ 116,501 6,718 7.69 108,555 6,175 7.58
Mortgage-Backed Securities......... 1,443,908 76,552 7.07 1,139,013 64,380 7.54
Short-Term Securities.............. 712 29 5.43 17,585 731 5.54
Other Securities................... 352,365 15,555 5.89 442,355 19,721 5.94
--------- --------- ---------- -------
Total Earning Assets................. 3,991,341 215,596 7.20 3,412,480 187,633 7.33
--------- -------
Non-Earning Assets................... 80,336 69,999
---------- ----------
Total Assets......................... $4,071,677 $ 3,482,479
========== ===========
Liabilities and Stockholders' Equity
- - ------------------------------------
Interest-Bearing Liabilities:
Deposits:
Passbook Accounts............... $ 581,594 $ 10,862 2.49% $634,787 $14,207 2.98%
Now Accounts.................... 10,672 202 2.52 9,532 201 2.81
Money Market Accounts........... 77,739 1,412 2.42 76,358 1,578 2.76
Certificate of Deposit Accounts. 1,431,005 59,028 5.50 1,622,047 68,840 5.66
--------- --------- --------- --------
Total Interest-Bearing Deposits... 2,101,010 71,504 4.54 2,342,724 84,826 4.83
Borrowings........................ 1,581,498 68,083 5.74 810,036 35,401 5.83
--------- --------- ---------- -------
Total Interest-Bearing Liabilities... 3,682,508 139,587 5.05 3,152,760 120,227 5.08
--------- --------
Other Liabilities.................... 137,542 115,528
---------- ----------
Total Liabilities................. 3,820,050 3,268,288
Stockholders' Equity................. 251,627 214,191
---------- -----------
Total Liabilities and Stockholders'
Equity............................. $4,071,677 $ 3,482,479
========== ===========
Net Interest Income/Interest Rate
Spread............................. $ 76,009 2.15% $ 67,406 2.25%
========= ===== ========= =====
Net Earning Assets/Net Interest
Margin............................. $ 308,833 2.54% $ 259,720 2.63%
========== ===== =========== =====
Ratio of Earning Assets to 1.08x 1.08x
===== =====
Interest-Bearing Liabilities.......
</TABLE>
16
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
GENERAL. The Company's net income for the three months ended September 30,
1998 increased $2.5 million to $11.6 million from $9.0 million for the same
period in 1997.
INTEREST INCOME. Interest income increased by $8.9 million, or 13.7%, to
$74.0 million for the three months ended September 30, 1998, from $65.1 million
for the same period in 1997, due to a $571.6 million increase in the average
balance of earning assets during the period to $4.11 billion for the three
months ended September 30, 1998, from $3.54 billion for the same period in 1997,
partially offset by lower yields earned on such assets. This increase was
primarily attributable to growth in the average balance of mortgage loans, net,
of $383.7 million and growth in the average balance of mortgage-backed
securities of $275.2 million. In addition, the average balance of other loans
increased $23.5 million, the average balance of short-term securities decreased
$17.0 million and the average balance of other securities decreased $93.8
million. The average yield on earning assets decreased to 7.20% for the three
months ended September 30, 1998 from 7.36% for the same period in 1997, due
primarily to the effects that the current interest rate environment has had on
increasing prepayments on higher yielding mortgage loans and mortgage-backed
securities, on lowering the yields of new assets acquired and on the downward
repricing of earning assets. Included in mortgage loan interest income for the
three months ended September 30, 1998 was a $596 thousand recovery of interest
associated with two previously delinquent and non-accruing commercial real
estate loans.
INTEREST EXPENSE. Interest expense increased by $6.4 million, or 15.1%, to
$48.5 million for the three months ended September 30, 1998, from $42.2 million
for the same period in 1997, due primarily to an $759.3 million increase in
average borrowings, and was partially offset by a $235.7 million decrease in
average interest-bearing deposits and generally lower interest rates associated
with deposits and borrowings. For the three months ended September 30, 1998 as
compared to the same period in 1997, the average rate paid on interest-bearing
deposits decreased 31 basis points and the average rate paid on borrowings
decreased 9 basis points. The average rate paid on interest-bearing liabilities,
however, decreased only 4 basis points to 5.13% for the three months ended
September 30, 1998 from 5.17% for the same period in 1997. The more moderate
decrease in the average rate paid on total interest-bearing liabilities as
compared to the aforementioned decreases in the average rates paid on deposits
and on borrowings is due to the changing mix of funding towards borrowings. The
average balance of interest-bearing liabilities increased $523.6 million for the
three months ended September 30, 1998, to $3.79 billion from $3.26 billion for
the same period in 1997.
NET INTEREST INCOME. Net interest income increased $2.6 million, or 11.2%,
to $25.5 million for the three months ended September 30, 1998, from $22.9
million for the same period in 1997. This increase is the result, in part, of a
$571.6 million increase in the average balance of earning assets to $4.11
billion, offset by a $523.6 million increase in the average balance of
interest-bearing liabilities to $3.79 billion for the three months ended
September 30, 1998 as compared to the comparable prior year period. As a result
of these increases in average balances and the related decreases in the yields
and costs associated with the earning assets and interest-bearing liabilities,
the net interest rate spread for the three months ended September 30, 1998
decreased to 2.07% from 2.19% for the same period in 1997.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
increased $125 thousand, or 100.0%, to $250 thousand for the three months ended
September 30, 1998 from $125 thousand for the same period in 1997. The increase
reflects management's assessment of the loan portfolio, the Bank's historical
charge-off experience, the level of the Bank's allowance for possible loan
losses and management's assessment of the local economy and market conditions.
For the three months
17
<PAGE>
ended September 30, 1998, the Bank had net loan charge-offs of $80 thousand as
compared to $181 thousand for the comparable prior year period. At September 30,
1998 and December 31, 1997, the allowance for possible loan losses amounted to
$15.5 million and $14.9 million, respectively, and the ratio of such allowance
to non-performing loans was 109.4% at September 30, 1998, as compared to 108.5%
at December 31, 1997. Although management believes its allowance for possible
loan losses is adequate at September 30, 1998, if general economic conditions
and real estate values deteriorate, the level of non-performing loans and
charge-offs may increase and higher provisions for possible loan losses may be
necessary, which would adversely affect future operating results.
NON-INTEREST INCOME. Non-interest income increased $870 thousand to $4.5
million for the three months ended September 30, 1998 from $3.6 million for the
same period in 1997. This increase was attributable to a $1.2 million increase
in net gain on sales of securities and was partially offset by a $346 thousand
decrease in loan fees and other charges, net, and a $13 thousand decrease in
other income. The decrease in loan fees and other charges, net, was primarily
attributable to lower levels of loan origination fees. Net gain on sales of
securities totaled $3.0 million in the three months ended September 30, 1998 as
compared to $1.8 million for the same period in 1997. The net gain for the three
months ended September 30, 1998 resulted from sales of available for sale
securities having an amortized cost of $91.7 million as compared to $102.4
million in the 1997 comparable period. For the three months ended September 30,
1998, the Company sold $88.8 million of bonds (as compared to $71.8 million in
the same period in 1997) and $2.9 million of equities (as compared to $3.8
million in the same period in 1997) from its available for sale portfolio. These
securities were sold during the three months ended September 30, 1998 at net
gains of $953 thousand and $2.1 million, respectively (as compared to $86
thousand and $2.3 million, respectively, for the same period in 1997). The
Company did not sell any mortgage-backed securities from its available for sale
portfolio during the three months ended September 30, 1998 (as compared to $26.8
million in the same period in 1997 at net losses of $594 thousand).
NON-INTEREST EXPENSE. Non-interest expense decreased $800 thousand, or
7.0%, to $10.7 million for the three months ended September 30, 1998, from $11.5
million for the same period in 1997. Of this decrease, salaries and employee
benefits expense decreased $24 thousand due to decreased costs associated with
certain health benefit plans, which was partially offset by higher costs
associated with certain stock-based compensation plans. For the three months
ended September 30, 1998 as compared to the same period in 1997, occupancy and
equipment expense decreased $113 thousand to $1.2 million for the three months
ended September 30, 1998, and marketing expense decreased $385 thousand to $286
thousand. Other real estate owned expense also decreased $12 thousand to $38
thousand for the three months ended September 30, 1998 as compared to the same
period in 1997. FDIC assessment expense was $71 thousand for the three month
period ending September 30, 1998 as compared to $76 thousand for the same period
in 1997. FDIC Bank Insurance Fund ("BIF") assessment rates for both periods were
$0.013 per $100 of insured deposits. Other operating expense decreased $261
thousand, or 15.1%, for the three months ended September 30, 1998 as compared to
the same period during 1997, due in part to lower loan origination costs, lower
professional fees and generally lower levels of other operating expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $1.6
million to $7.5 million for the three months ended September 30, 1998 as
compared to $5.9 million during the same period in 1997. As a percentage of
income before provision for income taxes, the provision for income taxes was
39.2% of pre-tax earnings for the three months ended September 30, 1998 as
compared to 39.4% in the comparable 1997 period.
18
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
GENERAL. The Company's net income for the nine months ended September 30,
1998 increased $6.8 million to $32.1 million from $25.2 million for the same
period in 1997.
INTEREST INCOME. Interest income increased by $28.0 million, or 14.9%, to
$215.6 million for the nine months ended September 30, 1998, from $187.6 million
for the same period in 1997, due to a $578.9 million increase in the average
balance of earning assets during the period to $3.99 billion for the nine months
ended September 30, 1998, from $3.41 billion for the same period in 1997,
partially offset by lower yields earned on such assets. Of the increase in
average earning assets, $372.9 million was attributable to growth in mortgage
loans, net, $304.9 million was attributable to growth in mortgage-backed
securities, and $7.9 million was attributable to growth in other loans. These
increases were partially offset by a $90.0 million decrease in the average
balance of other securities and a $16.9 million decrease in the average balance
of short-term securities. The average yield on earning assets decreased 13 basis
points to 7.20% for the nine months ended September 30, 1998 as compared to the
same period in 1997. This decrease in the yield on average earning assets
reflects the effects that the current interest rate environment has had on
increasing prepayments on higher-yielding mortgage loans and mortgage-backed
securities, on lowering the yields of new assets acquired and on the downward
repricing of earning assets. Included in mortgage loan interest income for the
nine months ended September 30, 1998 was a $596 thousand recovery of interest
associated with two previously delinquent and non-accruing commercial real
estate loans.
INTEREST EXPENSE. Interest expense increased by $19.4 million, or 16.1%, to
$139.6 million for the nine months ended September 30, 1998, from $120.2 million
for the same period in 1997, due primarily to a $771.5 million increase in
average borrowings, which was partially offset by a $241.7 million decrease in
average interest-bearing deposits. In addition, for the nine months ended
September 30, 1998 the average rate paid on interest-bearing deposits and
borrowings decreased 29 basis points and 9 basis points, respectively, as
compared to the same period in 1997. The average rate paid on total
interest-bearing liabilities, however, decreased only 3 basis points to 5.05%
for the nine months ended September 30, 1998 from 5.08% for the same period in
1997. The more moderate decrease in the average rate paid on total
interest-bearing liabilities as compared to the aforementioned decreases in the
average rates paid on deposits and on borrowings is due to the changing mix of
funding towards borrowings. The average balance of interest-bearing liabilities
increased $529.7 million for the nine months ended September 30, 1998, to $3.68
billion from $3.15 billion for the same period in 1997.
NET INTEREST INCOME. Net interest income increased $8.6 million, or 12.8%,
to $76.0 million for the nine months ended September 30, 1998, from $67.4
million for the same period in 1997. This increase is the result, in part, of a
$578.9 million increase in the average balance of earning assets to $3.99
billion, offset by a $529.7 million increase in the average balance of
interest-bearing liabilities to $3.68 billion for the nine months ended
September 30, 1998 as compared to the comparable prior year period. As a result
of these increases in average balances and the decreases in the yields and costs
associated with the earning assets and interest-bearing liabilities, the net
interest rate spread for the nine months ended September 30, 1998 decreased to
2.15% from 2.25% for the same period in 1997.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan
losses increased $75 thousand, or 11.1%, to $750 thousand for the nine months
ended September 30, 1998 from $675 thousand for the same period in 1997. The
increase resulted from management's assessment of the loan portfolio and the
Bank's historical charge-off experience, the level of the Bank's allowance for
possible loan losses and management's assessment of the local economy and market
conditions. For the nine months ended September 30, 1998, loan charge-offs, net
of recoveries, aggregated $130 thousand, as compared to $111 thousand for the
comparable prior year period.
19
<PAGE>
NON-INTEREST INCOME. Non-interest income increased $3.2 million to $12.7
million for the nine months ended September 30, 1998 from $9.6 million for the
same period in 1997. This increase was primarily attributable to a $4.2 million
increase in net gain on sales of securities and a $122 thousand increase in gain
on sales of whole loans and was partially offset by a $796 thousand decrease in
loan fees and other charges, net and a $372 thousand decrease in other income.
For the nine months ended September 30, 1998, the Company sold available for
sale securities having an amortized cost of $168.0 million, and recognized $8.0
million of net securities gains. The securities sold included $151.7 million of
bonds, $4.3 million of mortgage-backed securities and $12.0 million of equities.
These securities were sold at net gains of $1.5 million, $86 thousand and $6.4
million, respectively. Loan fees and other charges, net decreased $796 thousand
for the nine months ended September 30, 1998 as compared to the prior year
comparable period as a result primarily of lower levels of loan origination
fees. In addition, other income decreased $372 thousand due primarily to lower
levels of recoveries on foreclosed properties and certificate of deposit penalty
income during 1998 as compared to 1997.
NON-INTEREST EXPENSE. Non-interest expense increased $370 thousand, or
1.1%, to $34.8 million for the nine months ended September 30, 1998, from $34.4
million for the same period in 1997. Of this increase, salaries and employee
benefits expense increased $2.6 million, or 12.5%, due primarily to higher costs
associated with certain stock-based compensation plans and normal salary
increases, which were offset partially by lower costs associated with certain
health benefit plans. For the nine months ended September 30, 1998 as compared
to the comparable prior year, occupancy and equipment expense decreased $211
thousand to $3.7 million and marketing expense decreased $456 thousand to $1.6
million. Other real estate owned expense increased $37 thousand to $220 thousand
for the nine months ended September 30, 1998 as compared to the same period in
1997. FDIC assessment expense was $220 thousand for the nine month period ending
September 30, 1998 as compared to $227 thousand for the same period in 1997. BIF
assessment rates for both periods were $0.013 per $100 of insured deposits.
Other operating expense decreased $1.6 million, or 24.4% for the nine months
ended September 30, 1998, as compared to the same period during 1997, due to
lower loan origination costs, lower professional fees and generally lower levels
of other operating expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $4.5
million to $21.2 million for the nine months ended September 30, 1998 as
compared to $16.7 million during the same period in 1997. As a percentage of
income before provision for income taxes, the provision for income taxes
decreased slightly from 39.9% of pre-tax earnings to 39.8%. Provision for income
taxes for the nine months ended September 30, 1997 included a $275,000 reduction
attributable to certain legislative changes regarding bad tax debt reserves. See
Note 8 to Notes to Unaudited Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Following the completion of the Bank's conversion and T R
Financial's stock offering in September 1993, T R Financial's principal business
was that of its subsidiary, the Bank. T R Financial invested 50% of the net
proceeds from the stock offering in the Bank and initially invested the
remaining proceeds in short-term securities, corporate debt obligations, money
market investments and mortgage-backed securities. The Bank can pay dividends to
T R Financial, to the extent such payments are permitted by law or regulation,
which serves as an additional source of liquidity. T R Financial can use its
liquidity to, among other things, support future expansion of operations or
diversification into other banking related businesses or pay dividends to its
stockholders. During the nine months ended September 30, 1998, T R Financial
also utilized its liquidity to repurchase 175,000 shares of its common stock
pursuant to its sixth stock repurchase program at a cost of $5.2 million. The
sixth stock repurchase program was authorized by the Board of Directors on April
16, 1996 covering the repurchase of up to 1,789,618 shares of common stock. As
of September 30, 1998, a total of 792,000 shares had been
20
<PAGE>
repurchased pursuant to this program. On May 26, 1998, the Company announced
that it had entered into a definitive agreement to merge with and into Roslyn
Bancorp, Inc. See Note 10 to Notes to Unaudited Consolidated Financial
Statements. In connection with the proposed merger, the Company has terminated
its stock repurchase program. On October 27, 1998, the Board of Directors
declared a quarterly cash dividend of $0.22 per common share to stockholders of
record on December 2, 1998. This dividend is payable on December 14, 1998.
The Bank's primary sources of funds are deposits, FHLB borrowings,
securities sold under agreements to repurchase and proceeds from principal and
interest payments on loans, mortgage-backed securities and debt securities.
Proceeds from the sales of securities available for sale and, to a lesser
extent, loans are also sources of funding. While maturities and scheduled
amortization of loans and investments are predictable sources of funds, deposit
flows and prepayments of mortgage loans and mortgage-backed securities are
greatly influenced by general interest rates, economic conditions and
competition.
The primary investing activities of the Company are the origination or
purchase of mortgage loans and the purchase of securities, including
mortgage-backed securities. The Company's most liquid assets are cash and cash
equivalents, short-term securities, securities available for sale and securities
held to maturity with expected repayment within one year. The levels of these
assets are dependent on the Company's operating, financing, lending and
investing activities during any given period.
Liquidity management for the Company is both a daily and long-term
component of the Company's management strategy. Excess funds are generally
invested in short-term and intermediate-term securities. In the event that the
Company seeks to raise funds beyond what it generates internally, additional
sources of funds are available through the use of FHLB term advances and through
the use of securities sold under agreements to repurchase. In addition, the Bank
may access funds, if necessary, through a variety of other FHLB products
including a $100 million overnight line of credit and a $100 million one-month
borrowing facility from the FHLB.
REGULATORY CAPITAL POSITION. The Bank is subject to minimum regulatory
requirements imposed by the FDIC which vary according to the institution's
capital level and the composition of its assets. An insured institution is
required to maintain core capital of not less than 3.0% of total assets plus an
additional amount of at least 100 to 200 basis points ("leverage capital
ratio"). An insured institution must also maintain a ratio of total capital to
risk-based assets of 8.0%. Although the minimum leverage capital ratio is 3.0%,
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
stipulates that an institution with less than a 4.0% leverage capital ratio is
deemed to be an "undercapitalized" institution and results in the imposition of
regulatory restrictions. The Bank's capital ratios qualify it to be deemed "well
capitalized" under FDICIA. In addition, the Company's capital ratios exceed the
minimum regulatory capital requirements imposed by the Federal Reserve Board,
which are substantially similar to the requirements of the FDIC. See Note 7 to
Notes to Unaudited Consolidated Financial Statements.
THE YEAR 2000 ISSUE. The Year 2000 issue is the result of the inability
of certain computer systems to recognize the year 2000. Many existing computer
programs and systems were initially programmed with six digit dates that
provided only two digits to identify the calendar year in the date field without
considering the upcoming change in the century. As a result, such programs and
systems may recognize a date using "00" as the year 1900 instead of the year
2000, which could result in system failures or miscalculations. Like most
financial service providers, the Company and its operations may be significantly
affected by the Year 2000 issue due to the nature of financial information.
Software, hardware and equipment both within and outside the Company's direct
control and with whom the Company electronically or operationally interfaces
(i.e., third party vendors providing data processing, information system
management, maintenance of computer systems and credit bureau information) are
21
<PAGE>
likely to be affected. Furthermore, if computer systems are not adequately
changed to identify the year 2000, many computer applications could fail or
create erroneous results. As a result, many calculations which rely upon the
date field information, such as interest, payment or due dates and other
operating functions, may generate results which could be significantly
misstated, and the Company could experience a temporary inability to process
transactions, send invoices or engage in similar normal business activities. In
addition, under certain circumstances, failure to adequately address the Year
2000 issue could adversely affect the viability of the Company's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 issue could result in a material adverse impact upon
the Company's products, services and competitive condition and, therefore, its
results of operations, and could be deemed to imperil the safety and soundness
of the Bank.
The FDIC, the Bank's primary federal regulator, along with the other
federal bank regulatory agencies, has published substantive guidance on the Year
2000 issue and has included Year 2000 compliance as a substantive area of
examination. These publications, in addition to providing guidance as to
examination criteria, have outlined requirements for the creation and
implementation of a compliance plan and target dates for testing and
implementation of corrective action. As a result of the oversight by and
authority vested in the federal bank regulatory agencies, a financial
institution that does not become Year 2000 compliant could be subject to
administrative remedies similar to those imposed on financial institutions
otherwise found not to be operating in a safe and sound manner, including
remedies available under prompt corrective action regulations.
The Company has developed and is implementing a plan (the "Plan") to
address the Year 2000 issue and its effects on the Company. The Plan includes
five components which address issues involving awareness, assessment,
renovation, validation and implementation. The Company has completed the
awareness and assessment phases of the Plan. During the awareness and assessment
phases of the Plan, the Company inventoried all material information systems and
reviewed them for Year 2000 compliance. This review included both internal
systems and those of third party vendors. The Company is now actively involved
in the renovation, validation and implementation phases of the Plan. In
accordance with regulatory guidelines, the Company began testing its
mission critical systems in October 1998 and expects to complete such testing
in March 1999. The Company expects to meet the deadlines noted above.
As part of the Plan, the Company has had formal communications with all
of its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issue
and has been following the progress of those vendors with their Year 2000
compliance status. The Company presently believes that, with modifications to
existing software and conversions to new software and hardware where necessary,
the Year 2000 issue will be mitigated without causing a material adverse impact
on the operations of the Company or the Bank. At this time, the Company
anticipates most of its hardware and software to become Year 2000 compliant,
tested and operational within the FDIC's suggested time frame. However, if such
modifications and conversions are not made, or are not timely completed, the
Year 2000 issue could have an impact on the operations of the Company or the
Bank.
Despite its best efforts to ensure Year 2000 compliance, it is possible
that one or more of the Company's internal or external systems may fail to
operate. At this time, while the Company expects to become Year 2000 compliant,
the probability of such likelihood cannot be determined. In the event that
system failures related to the Year 2000 issue occur, the Company has developed
contingency plans, which
22
<PAGE>
involve, among other actions, utilization of an alternate service provider or
alternate products available through the current vendor.
The Company has reviewed its customer base to determine whether they
pose significant Year 2000 risks. The Company's customer base consists primarily
of individuals who utilize the Company's services for personal, household or
consumer uses. Individually, such customers are not likely to pose significant
year 2000 risks directly. It is not possible at this time to gauge the indirect
risks which could be faced if the employers of such customers encounter
unresolved Year 2000 issues.
Monitoring and managing the Year 2000 issue will result in additional
direct and indirect costs to the Company. Direct costs include potential charges
by third party software vendors for product enhancements, costs involved in
testing software products for Year 2000 compliance and any resulting costs for
developing and implementing contingency plans for critical software products
that are not enhanced. Indirect costs will principally consist of time devoted
by existing employees in monitoring software vendor progress, testing enhanced
software products and implementing any necessary contingency plans. The Company
estimates that total costs related to the Year 2000 issue will not exceed
$225,000. Both direct and indirect costs of addressing the Year 2000 issue will
be charged to earnings as incurred. The disclosure set forth above contains
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Specifically, such forward-looking statements are
contained in sentences including the words "expects" or "anticipates" or "could"
or "should." Such forward-looking statements are subject to inherent risks and
uncertainties that may cause actual results to differ materially from those
contemplated by such forward-looking statements. The factors that may cause
actual results to differ materially from thos contemplated by the
forward-looking statements include the failure of third parties to adequately
remediate their own Year 2000 issues or the inability of the Company to complete
testing of its hardware and software changes on the time schedules currently
expected. Nevertheless, the Company expects that its Year 2000 compliance
efforts will be successful without any material adverse effects on its business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The amount of sensitivity that a company's assets and liabilities may
have to changes in market interest rates may be measured through the use of a
model which internally generates estimates of the change in net portfolio value
("NPV") over a range of interest rate change scenarios. NPV is the present value
of expected cash flows from assets, liabilities and off-balance sheet contracts.
The NPV ratio, under any interest rate scenario, is defined as the NPV in that
scenario divided by the market value of assets in the same scenario. For
purposes of the NPV table, prepayment assumptions similar to those used in the
Company's 1997 Annual Report, adjusted to reflect current market conditions,
were used. In addition, reinvestment rates used were those in effect for similar
products currently being offered and rates on core deposits were modified to
reflect recent trends. The following table sets forth the Company's NPV as of
September 30, 1998, as calculated by the Company.
<TABLE>
<CAPTION>
Rate in Basis Points
(Rate Shock) Net Portfolio Value Portfolio Value of Assets
------------ ------------------- -------------------------
(dollars in thousands)
$ Amount $ Change Change % NPV Ratio Change % (1)
-------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
200 $226,431 $(76,710) -25.31% 5.65% -20.47%
100 328,017 24,876 8.21% 7.86% 10.73
Static 303,141 -- -- 7.10% --
(100) 304,537 1,396 0.46% 7.03% -0.99
(200) 309,635 6,494 2.14% 7.04% -0.87
</TABLE>
(1) Based on the portfolio value of the Company's assets assuming no change in
interest rates.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires the making of
certain assumptions which may or may
23
<PAGE>
not reflect the manner in which actual yields and costs respond to changes in
actual market interest rates. In this regard, the NPV model presented assumes
that the composition of the Company's interest rate sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV measurements and net interest income models provide an
indication of the Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Company's net
interest income and will differ from actual results.
PART II -- OTHER INFORMATION
- - ----------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable.
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
--------
11.1 Statement re: Computation of Per Share Earnings (1)
27.1 Financial Data Schedule (submitted only with filing in
electronic format)
27.2 Restated Financial Data Schedule (submitted only with filing
in electronic format)
______________________
(1) The computation of per share earnings appears on page 9 of this Quarterly
Report on Form 10-Q.
(b) Reports on Form 8-K
-------------------
Not applicable.
24
<PAGE>
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.
T R FINANCIAL CORP.
(Registrant)
Date: November 16, 1998 By: /s/ John M. Tsimbinos
----------------------------------
John M. Tsimbinos
Chairman of the Board and
Chief Executive Officer
Date: November 16, 1998 By: /s/ Dennis E. Henchy
----------------------------------
Dennis E. Henchy
Executive Vice President
and Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
11.1 Statement re Computation of Per Share Earnings (1)
27.1 Financial Data Schedule (submitted only with filing in electronic format)
27.2 Restated Financial Data Schedule (submitted only with filing in
electronic format).
_____________________
(1) The computation of per share earnings appears on page 9 of this Quarterly
Report on Form 10-Q.
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated condensed statement of financial condition and the
consolidated condensed statement of income and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000898447
<NAME> T R FINANCIAL CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 15,519
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 197,711
<INVESTMENTS-CARRYING> 1,304,158
<INVESTMENTS-MARKET> 1,327,259
<LOANS> 2,378,848
<ALLOWANCE> 15,537
<TOTAL-ASSETS> 4,183,362
<DEPOSITS> 2,141,726
<SHORT-TERM> 103,000
<LIABILITIES-OTHER> 107,058
<LONG-TERM> 1,565,378
0
0
<COMMON> 227
<OTHER-SE> 265,973
<TOTAL-LIABILITIES-AND-EQUITY> 4,183,362
<INTEREST-LOAN> 123,460
<INTEREST-INVEST> 92,136
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 215,596
<INTEREST-DEPOSIT> 71,504
<INTEREST-EXPENSE> 139,587
<INTEREST-INCOME-NET> 76,009
<LOAN-LOSSES> 750
<SECURITIES-GAINS> 7,991
<EXPENSE-OTHER> 34,761
<INCOME-PRETAX> 53,236
<INCOME-PRE-EXTRAORDINARY> 32,056
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,056
<EPS-PRIMARY> 1.93
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 2.54
<LOANS-NON> 12,338
<LOANS-PAST> 1,866
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,917
<CHARGE-OFFS> 514
<RECOVERIES> 384
<ALLOWANCE-CLOSE> 15,537
<ALLOWANCE-DOMESTIC> 15,537
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed statement of financial condition and the consolidated
condensed statement of income and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000898447
<NAME> T R FINANCIAL CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 28,335
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 447,114
<INVESTMENTS-CARRYING> 1,183,541
<INVESTMENTS-MARKET> 1,205,905
<LOANS> 1,966,869
<ALLOWANCE> 14,934
<TOTAL-ASSETS> 3,691,564
<DEPOSITS> 2,321,270
<SHORT-TERM> 39,075
<LIABILITIES-OTHER> 91,178
<LONG-TERM> 1,009,828
0
0
<COMMON> 227
<OTHER-SE> 229,986
<TOTAL-LIABILITIES-AND-EQUITY> 3,691,564
<INTEREST-LOAN> 102,801
<INTEREST-INVEST> 84,832
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 187,633
<INTEREST-DEPOSIT> 84,826
<INTEREST-EXPENSE> 120,227
<INTEREST-INCOME-NET> 67,406
<LOAN-LOSSES> 675
<SECURITIES-GAINS> 3,784
<EXPENSE-OTHER> 34,391
<INCOME-PRETAX> 41,917
<INCOME-PRE-EXTRAORDINARY> 25,210
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,210
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 2.63
<LOANS-NON> 12,293
<LOANS-PAST> 1,525
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,370
<CHARGE-OFFS> 391
<RECOVERIES> 280
<ALLOWANCE-CLOSE> 14,934
<ALLOWANCE-DOMESTIC> 14,934
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
