SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB (Mark One) Annual report pursuant to section 13 or 15 (d) of the
Securities Exchange Act of 1934 (No fee required) For the fiscal year ended
December 31, 1998
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required) For the transition period from to .
Commission File No. 0-22220
TRI-COUNTY BANCORP, INC.
------------------------
(Name of Small Business Issuer in Its Charter)
Wyoming 83-0304855
- ------- ----------
(State or Other Jurisdiction of Incorporation I.R.S. Employer or
Organization) Identification No.
2201 Main Street, Torrington, Wyoming 82240
- ------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (307) 532-2111
--------------
Securities registered under to Section 12(b) of the Exchange Act: None
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $6,571,867
The registrant's voting stock trades on the Nasdaq SmallCap Market under
the symbol "TRIC." The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the average bid and asked price of
the registrant's Common Stock as reported by the Nasdaq SmallCap Market on March
29, 1999, was $10,243,533 ($11.66 per share based on 878,798 shares of Common
Stock outstanding).
As of March 29, 1999, there were issued and outstanding 878,798 shares of
the registrant's Common Stock.
Transition Small Business Disclosure Format (check one): YES NO X
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1998. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended December 31, 1998. (Part III)
1
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PART I
Item 1. Business
Business of the Company
Tri-County Bancorp, Inc. (the "Company") is a Wyoming corporation and
savings and loan holding company of Tri-County Federal Savings Bank (the
"Bank"). The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage provided the Bank retains a specified amount of its
assets in housing-related investments. The office of the Company is located at
2201 Main Street, Torrington, Wyoming and its telephone number is (307)
532-2111.
Business of the Bank
The Bank is a federally chartered savings bank headquartered in
Torrington, Wyoming. The Bank's deposits have been federally insured since 1936
and are currently insured by the Savings Association Insurance Fund ("SAIF").
The Bank is primarily engaged in the business of attracting deposits from
the general public and using those deposits, together with other funds, to
originate mortgage loans for the purchase of residential properties and to
purchase mortgage-backed and investment securities. The Bank offers a full range
of single and multi-family mortgages, consumer loans, commercial real estate
loans, and second mortgage loans. In addition to originating loans in its market
area, the Bank also purchases mortgage loans, including participations, secured
by properties located primarily in Wyoming, Colorado and New Mexico,
mortgage-backed securities, and investment securities. These additional earning
assets are funded with the excess deposits and borrowed funds from the Federal
Home Loan Bank of Seattle ("FHLB").
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of and owns capital stock in the
FHLB, which is one of the 12 regional banks in the FHLB System.
The principal sources of funds for the Bank's lending activities are
deposits, borrowed funds from the FHLB, and the amortization, repayment, and
maturity of loans, investment securities, and mortgage-backed securities.
Principal sources of income are interest and fees on loans, mortgage-backed
certificates, investment securities, and deposits held in other financial
institutions. The Bank's principal expense is interest.
The Bank's home office is located at 2201 Main Street, Torrington,
Wyoming, and the Bank's telephone number is (307) 532-2111.
Market Area - Competition
The Bank primarily has focused on serving its customers located in the
communities of Torrington and Wheatland, Wyoming, which is where the Bank's
offices are located. The Bank is the only local thrift serving its market area.
Goshen and Platte Counties, Wyoming, and Scottsbluff County, Nebraska is
considered to be the Bank's primary market area. This area was founded on
agriculture, which continues to play a significant role in the economy. Some of
the larger crops include sugar beets, corn, and dry beans. Agriculture and its
related support industries account for the largest portion of the area's labor
force. The success of agriculture is subject to various factors, including, but
not limited to, weather and foreign competition. Other significant employers
include local government (schools and utilities) and retail trade. At December
31, 1998, over 58% of the Bank's net loan portfolio of $42.0 million consisted
of loans made to entities located in the Bank's market area. In fiscal 1998, the
Bank purchased $6.2 million of mortgage loans (including participations inside
its market area and outside its market area, primarily in Colorado).
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The Bank encounters strong competition both in the attraction of deposits
and origination of real estate and other loans. Its most direct competition for
deposits has come from two locally headquartered commercial banks, branches of
one regional savings association, and one regional bank in its market area. Due
to their size, many of the Bank's competitors possess greater financial and
marketing resources. Based on published figures, the Bank is the only thrift
headquartered in its market area. The Bank competes for deposits by offering
depositors competitive interest rates and a high level of personal service.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings associations.
This competition for loans has increased in recent years as a result of the
large number of institutions choosing to compete in the Bank's market area. The
Bank competes for loans primarily through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers.
In March of 1999, the Bank filed a notice with the Office of Thrift
Supervision to establish a branch office in Cheyenne, Wyoming. The Bank intends
to offer the same products and services in the Cheyenne office as are currently
offered in its Torrington and Wheatland offices.
Lending Activities
General. Set forth below is selected data relating to the composition of
the Bank's loan portfolio by type of loan on the dates indicated.
At December 31,
------------------------------------
1998 1997
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$ % $ %
-------- ------- -------- -------
(Dollars in Thousands)
Type of Loans
Real Estate - Construction 237 0.56% 1,537 3.80%
Real Estate - Residential 32,403 77.05% 30,923 76.49%
Real Estate - Commercial 6,141 14.60% 5,096 12.61%
Commercial Business 450 1.07% 472 1.17%
Consumer loans:
Savings account loans 146 0.36% 170 0.43%
Home equity & second mortgages 1,364 3.24% 1,065 2.63%
Automobile 1,477 3.51% 1,391 3.44%
Overdraft 47 0.11% 37 0.09%
Other 277 0.66% 248 0.61%
Less:
Deferred loan fees (78) -0.19% (102) -0.25%
Allowance for loan & lease losses (410) -0.97% (412) -1.02%
------- ------- ------- ------
Total loans, net $42,054 100.00% $40,425 100.00%
======= ======= ======= =======
The following table sets forth the maturity of the Bank's loan portfolio at
December 31, 1998. The table does not include prepayments. Prepayments totaled
$13.89 million and $5.75 million for the years ended December 31, 1998 and 1997,
respectively. All loans are shown as based on contractual maturities.
3
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<TABLE>
<CAPTION>
Residential Commercial Construction Consumer &
Real Estate Real Estate Real Estate Commercial
Mortgages Mortgages Mortgages Loans Total
----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual $ - $ - $ - $ - $ -
------- ------ ----- ------ -------
Amount Due
Within Year $ 535 $ 34 $ 414 $ 317 $ 1,300
1 to 5 Years 3,199 120 - 2,246 5,565
After 5 Years 28,669 5,987 - 1,198 35,854
Nonperfoming - - - - -
- ------------ ------- ------ ----- ------ -------
Total amount due $32,403 $6,141 $ 414 $3,761 $42,719
======= ====== ===== ====== =======
Less:
Allowance for loan losses (410)
Loans in process (177)
Deferred fees and unearned discounts (78)
-------
Loans receivable, net $42,054
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1998 which have fixed interest rates and which have floating or
adjustable interest rates:
Commercial
Floating or
Fixed-rate Adjustable rate Total
------------------------------------
(In Thousands)
Residential real estate mortgages $18,708 $13,696 $32,404
Commercial real estate mortgages 2,774 3,368 6,142
Construction real estate mortgages 412 - 412
Consumer & commercial loans 2,761 1,000 3,761
------- ------- -------
Total $24,655 $18,064 $42,719
======= ======= =======
One- to Four-Family Mortgages. Historically, the Bank's primary lending
activity consists of the origination of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in the Bank's primary
market area. The Bank also purchases mortgage loans (including participations)
outside its market area to supplement loan demand in its area. A majority of
these loans are purchased from a mortgage banker in Colorado and are secured by
single family homes (usually second homes) or condominiums located in the
central Colorado mountain resort areas.
The Bank currently offers adjustable-rate mortgages that adjust every year
and have terms from 10 to 30 years, and fixed-rate mortgage loans with terms of
primarily 10 to 30 years. Adjustable rate loans originated prior to 1994 were
primarily based on the National Monthly Median Cost of Funds with a limit on
increases of 1% per year and 4% over the life of the loan. Beginning in 1994,
the Bank began basing all adjustable-rate loans primarily on the one year
Treasury Note Constant Maturities Index with a limit on increases of 2% per year
and 6% over the life of the loan. In 1995, the Bank began offering mortgages
with fixed rates for 3 and 5 year terms. The loans then convert to fully indexed
adjustable rate loans based on the one year Treasury Note Constant Maturities
index. The loans are popular with the borrowers in Colorado purchasing second
family homes. These loans are called 3-one's and 5-one's, respectively. The Bank
considers the market factors and competitive rates on loans as well as its own
cost of funds when determining the rates on the loans that it offers.
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The Bank's residential mortgage lending includes 15- and 30-year
fixed-rate loans, Federal Housing Administration ("FHA") loans, Veterans
Administration ("VA") loans, Farmers Home Administration ("FmHA") loans, and
State of Wyoming subsidized loans as well as adjustable-rate mortgage loans.
Generally, the Bank sells all fixed-rate loans with maturities in excess of 15
years.
The Bank's origination of fixed-rate mortgage loans versus adjustable-rate
mortgage loans is determined on an on-going basis and is based on changes in
market interest rates and consumer preferences. The primary purpose of offering
adjustable-rate mortgage loans and 10- and 15-year fixed-rate loans is to make
the Bank's loan portfolio more interest rate sensitive. Generally, during
periods of rising interest rates, the risk of default on an adjustable-rate
mortgage is considered to be greater than the risk of default on a fixed-rate
loan due to the upward adjustment of interest costs to the borrower. To help
reduce such risk, the Bank qualifies the loan at 2% above the fully-indexed
rate, as opposed to the original interest rate. The Bank does not originate
adjustable-rate mortgage loans with negative amortization.
Regulations limit the amount that a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Bank's lending policies, however, generally
limit the maximum loan-to-value ratio to 80% of the appraised value of the
property, based on an independent appraisal. When the Bank makes a loan in
excess of 80% of the appraised value or purchase price, private mortgage
insurance is generally required for at least the amount of the loan in excess of
80% of the appraised value. The Bank generally does not make non-owner occupied
one- to four-family loans in excess of 75% of the appraised value. The
loan-to-value ratio, maturity, and other provisions of the residential real
estate loans made by the Bank reflect the policy of making loans generally below
the maximum limits permitted under applicable regulations.
One- to four-family residential real estate loans are normally originated
for the Bank's portfolio. In some cases, borrowers prepay their loans in full
upon the sale of the property pledged as security or upon refinancing the
original loan. In addition, substantially all of the mortgage loans in the
Bank's portfolio contain due-on-sale clauses providing that the Bank may declare
the unpaid amount due and payable upon the sale of the property securing the
loan. Thus, average loan maturity is a function of, among other factors, the
level of purchase and sale activity in the real estate market, prevailing
interest rates, and the interest rates payable on outstanding loans.
Multi-Family and Commercial Real Estate Loans. In order to enhance the
yield on its assets, the Bank originates and participates with other financial
institutions in permanent loans secured by multi-family and commercial real
estate. These loans are originated in amounts up to 75% of the appraised value
of the property. Such appraised value is determined by an independent appraiser.
The Bank's multi-family and commercial real estate loans are permanent loans
secured by approved property such as apartments, small office buildings, retail
stores, small strip plazas, and other non-residential buildings. The Bank
originates multi-family and commercial real estate loans with amortization
periods of 15 to 25 years, primarily as adjustable rate mortgages. As of
December 31, 1998, the Bank had 23 multi-family and commercial real estate loans
totaling $6,200,473, or 14.7% of the Bank's loan portfolio. Of the $6,200,473,
$59,467 at December 31, 1998 involved a loan secured by multi-family real
estate. At December 31, 1998, the largest multi-family and commercial real
estate loans had balances of $59,467 and $894,664, respectively. See
"Origination, Purchase, and Sale of Loans" and "-- Loans-to-One Borrower."
Loans secured by multi-family and commercial real estate generally involve
a greater degree of risk than residential mortgage loans and carry larger loan
balances. This increased credit risk is a result of several factors, including
the concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired.
5
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Commercial Business Loans. Regulations authorize the Bank to make secured
or unsecured loans for commercial, corporate, business, and agricultural
purposes. The aggregate amount of such loans outstanding may not exceed 10% of
the Bank's assets. As of December 31, 1998, the Bank had $449,949 in commercial
business loans outstanding.
Consumer Loans. Consumer loans consist of savings account loans, home
improvement loans, home equity lines-of-credit, second mortgage loans,
automobile loans, and personal unsecured loans. As of December 31, 1998, these
consumer loans totaled $3.31 million, or 7.87%, of the Bank's loan portfolio,
$1.48 million or 3.51% of which consisted of automobile loans. The Bank has
actively sought consumer loans within its market area, however, competition for
such loans and the low loan demand in the Bank's lending area effects the volume
of such originations. Consumer lending has permitted the Bank to obtain greater
yields and, at the same time, expose the institution to a smaller amount of
interest rate risk, as most consumer loans do not extend beyond five years.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. In addition, the stability of the applicant's monthly income from primary
employment is considered during the review process. Creditworthiness of the
applicant is of primary consideration; however, the review process also includes
a comparison of the value of the security in relation to the proposed loan
amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. Further, consumer loan collections are dependent on the borrower's
continuing financial stability, and therefore are more likely to be adversely
affected by job loss, divorce, illness, or personal bankruptcy. Finally, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered in
the event of default. The Bank has a consumer loan loss allowance, based on
general economic conditions and prior loss experience.
Loan Solicitation and Processing. The Bank's sources of mortgage loan
applications are referrals from existing or past customers and realtors, walk-in
customers, and advertising.
The loan approval process can take one of three forms. Loan officers at
each branch have authority to approve all loans up to $25,000. A staff loan
committee, consisting of senior officers of the Bank, can approve loans up to
$65,000. Any loan above the staff loan committee lending limit must be submitted
to the Loan Committee of the Board of Directors, which meets once a week. The
original lending officer presents the proposed loan at each of these two
committees. However, the original lending officer cannot vote on a loan that the
officer presents for approval. The Loan Committee of the Board of Directors
consists of at least three directors. All insider loans must be approved by the
majority of the Board with all interested directors abstaining from voting. The
Board of Directors ratifies all loans approved by officers or committees.
In processing loans, the Bank utilizes forms, procedures, and requirements
that conform to those of the secondary market. This process provides the Bank
with the capability of selling loans not held in its loan portfolio and
management believes such efforts also enhance the value of the Bank's loan
portfolio.
The Bank uses fee appraisers on most real estate related transactions. It
is the Bank's policy to obtain title insurance on all real estate transactions
and to obtain flood (if applicable), fire, and casualty insurance on all loans
that require security.
6
<PAGE>
Originated mortgage loans in the Bank's loan portfolio generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event that the borrower transfers
ownership of the property without the Bank's consent.
Purchase and Sale of Loans. The Bank's purchases in the secondary market
are dependent upon the demand for mortgage credit in the local market area and
the inflow of funds from traditional sources. Purchases of loans enable the Bank
to utilize available funds more quickly and to obtain a yield higher than could
generally be obtained in the alternative investment vehicles. The purchase of
such loans is part of the Bank's strategy to make its overall loan portfolio
more sensitive to current market conditions and interest rates.
The Bank purchases residential first mortgage ARM loans that meet the
Bank's underwriting standards, which generally follow FHLMC and FNMA guidelines,
except that the Bank will generally purchase loans up to $500,000, which exceeds
the limit up to which FHLMC and FNMA may purchase loans. The majority of these
loans purchased are sold by the seller without recourse. It is the Bank's policy
to limit the purchase of loan packages secured by properties in a single
subdivision or condominium project.
The Bank reviews each purchased loan as if it were originating the loan
according to its underwriting standards. All loans must be documented, including
an original appraisal that substantiates the value of the subject property at
the time of origination of the loan. The Bank obtains from the seller a
duplicate copy of each original loan file, which generally includes an executed
loan application and mortgage note, financial statements and credit reports of
the borrower, appraisal and title insurance. The Bank may purchase a qualifying
loan up to $500,000 with a loan-to-value ratio of up to 80% based on the
original appraisal of the property.
The Bank purchases only ARM loans with interest rates that adjust on a
monthly, semi-annual and annual basis. Currently, all purchased ARM loans adjust
annually after the initial fixed period of 3 or 5 years. Most of the ARMs are
indexed to interest rates at a margin of 288 basis points above a recognized
index, usually the one year Treasury Note Constant Maturities Index. This cost
of funds index generally lags the current market interest rates. The Bank does
not purchase loans that provide for negative amortization.
Most of the loans purchased are secured by real estate located outside of
Wyoming, including Colorado, Idaho and New Mexico. At December 31, 1998, the
Bank's purchased loan portfolio and participation loans totaled $18.3 million,
or 42.8% of the loan portfolio. Of the purchased loan portfolio at December 31,
1998, $14.0 million are Colorado loans.
The sale of loans is generally limited to fixed-rate mortgage loans with
maturities greater than 15 years and government guaranteed loans. All
adjustable-rate loans are held in the loan portfolio. The Bank presently sells
individual loans to a mortgage banking company and to the Wyoming Community
Development Authority, with servicing released. The loans are sold on a
non-recourse basis. Mortgage loans are primarily made with standard forms and
documentation to allow for future sale in the secondary market. Beginning in
1998, the Bank started selling loans to the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). Generally, the Bank retains the servicing on these
loans. See "Loan Servicing" below for additional information.
Loan and Rate Commitments. At the customer's request, the Bank will commit
to an interest rate for up to 60 days to prospective borrowers upon receipt of a
mortgage loan application. As such, the Bank is exposed to a 60 day fluctuation
on mortgage applications only for loans originated for its portfolio. In
addition, loan commitments, which are generally written, are not made until the
loan is approved in accordance with the Bank's loan underwriting policy. At
December 31, 1998, the Bank had $994,350 of loan commitments to originate or
purchase mortgage loans.
Loan Servicing. As of December 31, 1998, loans serviced for others totaled
$586,253. The majority of serviced loans are individual loans sold to Freddie
Mac. The Bank receives an annual servicing fee equal to one quarter of one
percent of the average balance of these loans.
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Loans-to-One Borrower. Current regulations limit loans-to-one borrower in
an amount equal to 15% of unimpaired capital and unimpaired surplus on an
unsecured basis and an additional amount equal to 10% of unimpaired capital and
unimpaired surplus if the loan is secured by readily marketable collateral
(generally, financial instruments, not real estate) or $500,000, whichever is
higher. Penalties for violations of the loan-to-one borrower statutory and
regulatory restrictions include cease and desist orders, the imposition of a
supervisory agreement, and civil money penalties. The Bank's maximum loan-to-one
borrower limit was $1.3 million as of December 31, 1998.
At December 31, 1998, the Bank's five largest aggregate lending
relationships had balances ranging from $1,167,126 to $744,460 with an average
balance of $908,130. These lending relationships involved loans purchased from
1996 to 1998 and are secured by commercial real estate and single family
residences in New Mexico, Colorado, and Idaho. At December 31, 1998, all of
these loans were current.
Loan Delinquencies. The Bank's collection procedures provide that when a
mortgage loan is past due, a telephone call is made to the borrower within 30
days. If the delinquency continues, subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 90 days or more,
management initiates foreclosure proceedings unless other repayment arrangements
are made. Collection procedures for non-mortgage loans generally begin after a
loan is 30 days delinquent.
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when the loan becomes 90 days delinquent and, in the opinion
of management, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income.
Loans 60 - 90 days delinquent totaled $93,270 at December 31, 1998.
Nonperforming Assets. The following table sets forth information regarding
non-accrual loans, real estate owned, and other repossessed assets. At December
31, 1998 the Bank had no loans which were considered troubled debt
restructurings within the meaning of SFAS No. 15.
At December 31,
---------------
1998 1997
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units $ 0 $ 0
All other mortgage loans 0 0
--- ---
Total $ 0 $ 0
=== ===
Accruing consumer loans which are contractually past
due 90 days or more $ 0 $ 0
=== ===
Total nonperforming $ 0 $ 0
=== ===
Real estate owned, net $ 0 $ 0
=== ===
Total nonperforming assets $ 0 $ 0
=== ===
Total nonperforming loans to net loans 0% 0%
=== ===
Total nonperforming loans to total assets 0% 0%
=== ===
Total nonperforming assets to total assets 0% 0%
=== ===
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Interest income not recorded on loans accounted for on a non-accrual basis
under the original terms of such loans was $0 and $0 for the years ended
December 31, 1998 and 1997, respectively. The Bank did not include any interest
income on non-accrual loans during the periods indicated. It is the Bank's
general policy to accrue interest only on loans less than 91 days delinquent.
Once loans are 91 days delinquent, the Bank reverses previously accrued but
unpaid interest.
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions, which covers all problem assets,
including assets that previously had been treated as "scheduled items." Under
this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets designated "special mention" by
management are assets included on the Bank's internal watchlist because of
potential weakness but which do not currently warrant classification in one of
the aforementioned categories.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances that
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS,
which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At December 31,
---------------
1998 1997
(In Thousands)
Special mention assets $ 78 $ 61
=== ===
Classified Assets:
Substandard $ 52 $ 64
Doubtful -- --
Loss -- --
--- ---
Total $ 52 $ 64
=== ===
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the lower of the
cost or fair value less estimated costs to sell. Valuations are periodically
performed by management and subsequent charges to income are taken when it is
determined that the carrying value of the property exceeds the fair value less
estimated costs to sell.
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The Bank records loans as in-substance foreclosures if the borrower has
little or no equity in the property based upon its documented current fair value
and if the borrower has effectively abandoned control of the collateral or has
continued to retain control of the collateral but because of the current
financial status of the borrower it is doubtful the borrower will be able to
repay the loan in the foreseeable future. In-substance foreclosures are
accounted for as real estate acquired through foreclosure, however, title to the
collateral has not been acquired by the Bank. There may be significant other
expenses incurred such as attorney and other extraordinary servicing costs
involved with in-substance foreclosures. At December 31, 1998, the Bank did not
have any loans classified as an in-substance foreclosure.
The Bank held real estate owned, which consisted of one property. The
property consists of a tract of undeveloped one-to-four-family residential lots
and a single family dwelling. The value of the property on the records of the
Bank is zero.
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in the
Bank's loan portfolio after management has evaluated a number of factors,
including, historical experience, the volume and type of lending conducted by
the Bank, industry standards, the amount of nonperforming assets, current
general economic conditions as they relate to the Bank's loan portfolio, and
other factors related to the collectibility of the Bank's loan portfolio. Such
evaluation, which includes a review of all loans of which full collectibility of
interest and principal may not be reasonably assured, considers, among other
matters, the estimated net realizable value of the underlying collateral.
Management will continue to review the entire loan portfolio to determine the
extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses that may be realized in the future and that additional
provisions for losses will not be required.
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
At December 31,
1998 1997
---- ----
(Dollars in Thousands)
Total loans outstanding(1) $42,900 $40,954
====== ======
Average loans outstanding 42,782 37,581
====== ======
Allowance for loan losses (at beginning of period) 412 415
Provision for loan losses (credit):
Residential -- --
Commercial real estate -- --
Consumer(1) -- --
Net charge-offs:
Residential -- --
Commercial real estate -- --
Consumer (3) (4)
Net recoveries:
Consumer 1 1
------ ------
Allowance for loan losses (at end of period) $ 410 $ 412
====== ======
Allowance for loan losses as a percent of total
loans outstanding 0.96% 1.01%
Net loans charged-off as a percent of average
loans outstanding (0.00)% (0.02)%
Allowance for loan losses as a percent of
nonperforming loans N/A N/A
- ----------------------
(1) Includes all loans receivable and loans held for sale, adjusted for
deferred loan fees, unearned discounts, and undisbursed loans in process.
10
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for losses on real estate owned and other repossessed assets at the
dates indicated:
At or for the year ended
December 31,
------------
1998 1997
---- ----
(Dollars in Thousands)
Total real estate owned and in judgment $ 32 $ 32
==== ====
Allowance balances - beginning $ 32 $ 32
Provision -- --
Charge-offs -- --
Recoveries -- --
--- ---
Allowance balances - ending $ 32 $ 32
==== ====
Allowance for losses on real estate owned and
in judgment to net real estate owned and in judgment 100.00% 100.00%
====== ======
Interest-Bearing Accounts
At December 31, 1998, the Bank held $2.97 million in interest-bearing
demand deposits in other financial institutions principally with the FHLB of
Seattle. The Bank maintains these accounts in order to maintain liquidity and
improve the interest-rate sensitivity of its assets.
Mortgage-backed Securities and Investment Activities
General. At December 31, 1998, the Company had an investment portfolio of
approximately $34.06 million, consisting primarily of United States agency and
mortgage-related securities and open-ended mutual funds whose underlying assets
are high quality fixed-rate and adjustable-rate mortgage-backed securities. The
Company will continue to seek high quality investments with short to
intermediate maturities and durations of from one to five years as permitted by
OTS regulations.
The investment policy of the Bank was approved by the Board of Directors
and is implemented by the Investment/Asset Liability Management Committee, which
consists of the chief executive officer, the chief financial officer, and the
senior lending officer. The controller of the Bank serves as the investment
manager. Generally, the investment policy of the Bank is to invest funds among
various categories of investments and to select maturities based on the Bank's
asset/liability management policies, concern for highest investment quality,
liquidity needs, and performance objectives. The investment activities of the
Bank consist primarily of mortgage-backed securities and other securities,
consisting primarily of securities issued or guaranteed by the U.S. government
or agencies thereof.
In 1995, the Board of the Bank and management made a decision to increase
its investment activities to utilize the credit capacity of the Bank, and its
excess liquidity. The result of this change has been to add investments in
adjustable rate mortgage backed securities financed with advances from the FHLB
of Seattle. The maturity of the advance is closely matched with the interest
rate adjustment on the mortgage backed security. This has allowed the Bank to
increase net interest income with little increase in interest rate risk. The
intent is to maintain this portfolio and increase the balances when
opportunities to make a reasonable spread on the investment are available. The
Bank has used two different advisors in this strategy neither of which is a
securities broker.
11
<PAGE>
Investment Portfolio. The following table sets forth the amortized cost of
the Company's held to maturity investment portfolio, the market value of its
available for sale investment portfolio, the market value of its investment in
mortgage-related open-ended mutual funds and FHLMC stock, and the cost of its
FHLB stock and interest-bearing deposits. At December 31, 1998, the market value
of the Company's held to maturity portfolio was $5.47 million.
At December 31,
---------------
1998 1997
---- ----
(In Thousands)
Available for sale portfolio
Agency securities $ 5,602 $13,585
Mortgage related securities 15,868 13,789
Held to maturity portfolio
Agency securities 501 503
State and other political subdivisions 176 --
Mortgage related securities 4,658 7,484
Open-ended mutual funds 3,960 6,428
FHLMC stock 1,544 1,099
FHLB stock 1,754 1,625
----- -----
Total $34,063 $44,513
======= =======
Investment and Mortgage-backed Portfolio Maturities. The following table
sets forth certain information regarding the carrying values, weighted average
yields and maturities of the Bank's investment and mortgage-backed securities
portfolios (including those held to maturity and held for sale).
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------------------------------
One year or One to Five Five to Ten More than Ten Total investment
Less Years Years Years Securities
---------------- ---------------- ---------------- ---------------- ---------------- ------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. agency obligations:
Held to maturity 501 8.35% - 0.00% - 0.00% - 0.00% 501 8.35% 514
Available for sale - 0.00% 2,540 6.45% 3,062 7.48% - 0.00% 5,602 7.01% 5,602
Mortgage-backed securities(1)
Held to maturity 239 6.80% 662 5.76% 532 7.69% 3,225 8.16% 4,658 7.74% 4,784
Available for sale - 0.00% - 0.00% 2,132 6.41% 13,737 6.75% 15,869 6.70% 15,869
Tax exempt securities - 0.00% 75 6.00% 101 6.40% 176 6.23% 176
FHLB Stock(2) N/A N/A N/A N/A N/A N/A N/A N/A 1,754 N/A 1,754
FHLMC Stock(2) N/A N/A N/A N/A N/A N/A N/A N/A 1,544 N/A 1,544
Mutual Funds(2)(3):
ARM Portfolio N/A N/A N/A N/A N/A N/A N/A N/A 1,031 5.39% 1,031
LongTerm Mortgage Portfolio N/A N/A N/A N/A N/A N/A N/A N/A 2,928 6.08% 2,928
---- ----- ----- ----- ----- ----- ------ ----- ------ ----- ------
Total 740 7.85% 3,202 6.31% 5,801 7.09% 17,063 7.01% 34,063 6.84% 34,202
==== ===== ===== ===== ===== ===== ====== ===== ====== ===== ======
</TABLE>
- ---------------------------
(1) Included unamortized premiums of $70,245 at December 31, 1998.
(2) Amounts are only included in total columns because these investments do not
have stated maturities.
(3) The mutual funds are open-ended funds registered under the Investment
Company Act of 1940. The Funds invest in various securities that federal
savings and loan associations can invest in directly. Shay Assets
Management Co. serves as the fund's investment advisor.
12
<PAGE>
Sources of Funds
Deposits. Consumer and commercial deposits are attracted principally from
within the Bank's primary market area through the offering of a broad selection
of deposit instruments including regular savings, money market deposits, term
certificate accounts (including jumbo certificates in denominations of $99,000
or more), and individual retirement accounts. Deposit account terms vary
according to the minimum balance required, the time period the funds must remain
on deposit, and the interest rate, among other factors. The Bank does not obtain
funds through brokers, nor does it actively solicit funds outside of the State
of Wyoming.
The interest rates paid by the Bank on deposits can be set daily at the
direction of management and are determined by evaluating the following factors:
(i) the interest rates offered by other local savings institutions, and the
degree of competition the Bank wishes to maintain; (ii) the Bank's anticipated
need for cash and the timing of that desired cash flow; (iii) the cost of
borrowing from other sources versus the cost of acquiring funds through customer
deposits; and (iv) the Bank's anticipation of future economic conditions and
related interest rates. The Bank has not used above-market rates in recent years
to attract deposits.
Regular savings, NOW accounts, and money market accounts constituted
$15.20 million, or 33.07% of the Bank's deposit portfolio at December 31, 1998.
Certificates of deposit with original maturities of three to 12 months
constituted $14.63 million or 31.83% of the deposit portfolio. Jumbo
certificates of deposit, with principal amounts of $99,000 or more, constituted
$4.48 million or 9.74% of the portfolio at December 31, 1998. Of that amount,
$812,000 was deposits of the State of Wyoming for which the Bank pledged a $3.0
million Federal Home Loan Bank (FHLB) debenture.
The following table sets forth the time deposits in the Bank classified by
rates as of the dates indicated.
At December 31,
--------------
1998 1997
---- ----
Interest Rate (In Thousands)
3.01-4.00% $ 295 $ --
4.01-5.00% 11,183 4,642
5.01-6.00% 18,531 26,980
6.01-7.00% 761 738
------ ------
Total $30,770 $32,360
====== ======
The following table sets forth the amount and maturities of time deposits
at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------------
December 31, December 31, December 31, December 31,
1999 2000 2001 2002 Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST RATE
3.001% -4.000% $ 295,336 $ - $ - $ - $ 295,336
4.001% -5.000% 9,965,086 1,082,664 135,655 - 11,183,405
5.001% -6.000% 13,201,381 3,058,031 1,785,151 486,261 18,530,824
6.001% -7.000% 298,137 407,371 55,191 - 760,699
---------- ---------- ---------- -------- -----------
$23,759,940 $4,548,066 $1,975,997 $486,261 $30,770,264
=========== ========== ========== ======== ===========
</TABLE>
13
<PAGE>
The following table indicates the amount of the Bank's certificate accounts
of $100,000 or more by time remaining until maturity as of December 31, 1998.
Maturity Period Balances
- --------------- --------
(In Thousands)
Three months or less $1,380
Over three through six months 200
Over six through twelve months 2,145
Over twelve months 751
------
Total $4,476
======
Borrowings
As a member of the FHLB of Seattle, the Bank has access to its advance
program and other credit products. At December 31, 1998, the Bank had $23.80
million borrowings outstanding from the FHLB. As of and for the year ended
December 31, 1998, the Bank had no other borrowings. The Bank matches FHLB
advances with mortgage-backed securities with similar maturity to take advantage
of the difference (or spread) between the rate paid on the advances and the
yield on the securities. The following table sets forth certain information
about the Bank's FHLB advances at the dates indicated.
As of and for the Years Ended
-----------------------------
1998 1997
---- ----
(Dollars in Thousands)
Maximum balance $29,135 $30,901
Average balance 25,786 26,624
Balance at end of period 23,799 29,697
Weighted average rate:
at end of period 5.75% 5.79%
during the period 5.50% 5.75%
Subsidiary Activity
In September 1993, the Company acquired all of the capital stock of the
Bank. The officers of the Company consist of the officers of the Bank. The
Company is organized as a savings and loan holding company. As of December 31,
1998, the net book value of the Company's investment in the Bank amounted to
$8.59 million.
The Bank has one wholly-owned subsidiary corporation, First Tri-County
Service, Inc. ("FTCS"). FTCS was incorporated in the State of Wyoming in August
1982 and is engaged in the sale of life, credit life, and disability insurance.
The Bank is permitted to invest up to 2% of its assets in the capital stock of
subsidiary corporations or in loans (secured or unsecured) to those entities. An
additional investment of 1% of assets is allowed if the additional investment is
used for community development purposes. Based upon the 2% limitation, as of
December 31, 1998, the Bank was authorized to invest up to approximately $1.62
million in the stock of service corporations. As of December 31, 1998, the net
book value of the Bank's investment in stock, unsecured loans and conforming
loans in its service corporation was $15,755.
Employees
Substantially, all of the activities of the Company are conducted through
the Bank, therefore at December 31, 1998, the Company did not have any salaried
employees. As of December 31, 1998, the Bank had 17 full-time employees and
three part-time employees. None of the Bank's employees are represented by a
collective bargaining group. The Bank believes that its relationship with its
employees is good.
14
<PAGE>
Regulation
Set forth below is a brief description of certain laws that related to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "--
Regulation of the Bank -- Qualified Thrift Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Subject to appropriate regulatory approvals, a bank holding company can
acquire control of a savings association, and if it controls a savings
association, merge or consolidate the assets and liabilities of the savings
association with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. Generally, federal savings
associations can acquire or be acquired by any insured depository institution.
Federal Securities Law. The Company is subject to filing and reporting
requirement by virtue of having its common stock registered under the Securities
Exchange Act of 1934. Furthermore, company stock held by persons who are
affiliates (generally officers, directors and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Regulation of the Bank
General. The Bank is subject to supervision and examination by the OTS. In
addition, the Bank is insured by and subject to certain regulations of the FDIC
and is a member of the FHLB. The Bank is also subject to various requirements
and restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types, amount and terms and
conditions of loans that may be granted and limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the Bank.
15
<PAGE>
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan or
the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system, a bank or thrift pays within a range of 0 cents to 27 cents per
$100 of domestic deposits, depending upon the institution's risk classification.
This risk classification is based on an institution's capital group and
supervisory subgroup assignment. In addition, the FDIC is authorized to increase
such deposit insurance rates, on a semi-annual basis, if it determines that such
action is necessary to cause the balance in the SAIF to reach the designated
reserve ratio of 1.25% of SAIF-insured deposits within a reasonable period of
time. The FDIC also may impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC. The Bank's federal deposit insurance premium expense for the fiscal
year ended December 31, 1998, amounted to approximately $27,921.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
4% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
Savings associations with a greater than "normal" level of interest rate
exposure will, in the future, be subject to a deduction for an interest rate
risk ("IRR") component may be from capital for purposes of calculating their
risk-based capital requirement. See "-- Net Portfolio Value."
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of December 31, 1998:
Percent of
Adjusted
Amount Assets
------ ----------
(Dollars in Thousands)
Tangible Capital:
Regulatory requirement $1,198 1.50%
Actual capital 8,307 10.41%
----- ------
Excess $7,109 8.91%
====== ======
Core Capital:
Regulatory requirement $3,195 4.00%
Actual capital 8,307 10.41%
----- ------
Excess $5,112 6.41%
====== ======
Risk-Based Capital:
Regulatory requirement $2,783 8.00%
Actual capital 8,717 25.06%
----- ------
Excess $5,934 17.06%
====== ======
16
<PAGE>
Effect of Inflation and Changing Prices. The Bank's financial statements
and related data presented herein have been prepared in accordance with
generally accepted accounting principles ("GAAP"), which require the measurement
of financial position and operating results in terms of historical dollars,
without considering changes in the relative purchasing power of money over time
due to inflation. Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or with the same magnitude as the
prices of goods and services.
Net Portfolio Value. The OTS requires the computation of amounts by which
the net present value of an institution's cash flows from assets, liabilities,
and off balance sheet items (the institution's net portfolio value, or "NPV")
would change in the event of a range of assumed changes in market interest
rates. The OTS also requires the computation of estimated changes in net
interest income over a four-quarter period. These computations estimate the
effect of an institution's NPV and net interest income of instantaneous and
permanent 1% to 4% increases and decreases in market interest rates. In the
Bank's interest rate sensitive policy, the Board of Directors has established a
maximum decrease in net interest income and maximum decreases in NPV given these
instantaneous changes in interest rates.
An institution's interest rate risk is measured as the change to its NPV as
a result of a hypothetical 200 basis point change in market interest rates. A
resulting change in NPV of more than 2% of the estimated market value of its
assets will require the institution to deduct from its capital 50% of that
excess change. The rules provide that the OTS will calculate the IRR component
quarterly for each institution. The following table presents the Bank's NPV at
December 31, 1998 as calculated by the OTS and based on OTS assumptions
utilizing raw data voluntarily provided to the OTS by the Bank.
Changes in Interest
Rates in Basis Points
(Rate Shock) (1) Net Portfolio Value NPV as % of Assets
- ---------------------- ------------------------------ -------------------
$ Amount $ Change % Change NPV Ratio Change
(Dollars in Thousands)
+400 bp 6,559 -5,143 -44% 8.66% -546 bp
+300 bp 8,288 -3,414 -29% 10.63% -349 bp
+200 bp 9,633 -2,069 -18% 12.07% -205 bp
+100 bp 10,803 -899 -8% 13.26% -86 bp
0 bp 11,702 14.12%
-100 bp 12,445 743 +6% 14.78% +67 bp
-200 bp 13,212 1,510 +13% 15.45% +133 bp
-300 bp 14,214 2,512 +21% 16.32% +220 bp
-400 bp 15,237 3,535 +30% 17.18% +306 bp
- ----------------------
(1) Denotes rate shock used to compute interest rate risk capital component.
17
<PAGE>
As of December 31,
1998
------------------
RISK MEASURES:
200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as %
of Present Value of Assets 14.12%
Exposure Measure: Post-Shock
NPV Ratio 12.07%
Sensitivity Measure:Change in NPV Ratio -205 bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of Present
Value of Assets -2.49%
Interest Rate Risk Capital Component --
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
Although the Bank is not subject to the interest rate risk component
reduction discussed above, the Bank is still subject to interest rate risk and,
as can be seen above, rising interest rates will reduce the Bank's NPV. The OTS
has authority to require otherwise exempt institutions to comply with the rule
concerning interest rate risk.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
December 31, 1998, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
In addition, the Bank may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Bank below the amount required for the liquidation account to be established
pursuant to the Bank's Plan of Conversion. Finally, a savings association is
prohibited from making a capital distribution if, after making the distribution,
the savings association would be undercapitalized (not meet any one of its
minimum regulatory capital requirements).
18
<PAGE>
Qualified Thrift Lender Test. Savings institutions must meet a QTL test. If
the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Seattle. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. An association must be in compliance with the QTL test on a
monthly basis in nine out of every twelve months. As of December 31, 1998, the
Bank was in compliance with its QTL requirement with 88.15% of its assets
invested in QTIs.
A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations: (i)
the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Loans-to-One Borrower. See "-- Business of the Bank -- Origination, Sale,
and Purchase of Loans -- Loans-to-One Borrower."
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. Federal law requires public disclosure of an institution's
CRA rating and requires the OTS to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered system. The Bank received
an "outstanding" rating as a result of its last evaluation in March, 1998.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital;
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company that would be under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of any affiliate that is
not a subsidiary. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case-by-case basis.
19
<PAGE>
Regulations require the Bank (i) to extend credit to its officers,
directors, and 10% shareholders, as well as to entities that such persons
control on terms substantially similar to those offered to unaffiliated
individuals, (ii) place limits on the amount of loans the Bank may make to such
persons based, in part, on the Bank's capital position, and (iii) require
certain approval procedures to be followed. An exception to this limitation is
made where there is an employee benefit program that provides for extensions of
credit to insiders that are widely available to employees of the Bank and does
not give preference to an insider over other employees of the Bank.
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At December 31, 1998, the Bank's required
liquid asset ratio is 4%.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Seattle,
which is one of 12 regional FHLBs that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Seattle in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1998, the Bank had $1.75 million in
FHLB stock, which was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1998, the Bank was in compliance with these Federal Reserve Board
requirements.
20
<PAGE>
Item 2. Description of Property
(a) Properties.
Currently, the Company does not own real property but utilizes the offices
of the Bank. The Bank operates from its main office located in downtown
Torrington at 2201 Main Street, Torrington, Wyoming 82240 and from a branch
office located at 957 Maple Street, Wheatland, Wyoming 82201. The Bank owns both
office facilities. The main office was opened in 1935 and the present facility
has 4,380 square feet. The total investment in the property and equipment at the
main office is $1,266,689 with a net book value of $660,741 at December 31,
1998. The Wheatland branch was opened in June 1979 with the present facility
being built in July 1980. The total investment in the property and equipment at
the Wheatland branch is $529,834 with a net book value of $140,399 at December
31, 1998.
At December 31, 1998, the Bank had a total investment in its land,
buildings and improvements, and fixtures, furniture, and equipment of
$1,796,523, less accumulated depreciation of $995,383, for a net carrying value
of $801,140.
The Company has a contract to purchase 4.4 acres of land in the vicinity of
the intersection of Hynds Boulevard and Vandehei Avenue in Cheyenne, Wyoming.
The Company plans to complete the purchase of land in April of 1999 and the Bank
intends to open a branch office on the site in the third quarter of 1999. See
the "Management Discussion and Analysis of Financial Condition and Results of
Operation" section of the Annual Report for a discussion of the financial
implications of this endeavor.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. All of the Bank's investment
policies are reviewed and approved by the Board of Directors of the Bank, and
such policies, subject to regulatory restrictions (if any), can be changed
without a vote of stockholders. The Bank's investments are primarily acquired to
produce income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business -- Lending Activities," "Item 1. Business -- Regulation of the
Bank," and "Item 2. Description of Property. (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business --
Lending Activities" and "Item 1. Business -- Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business -- Lending
Activities," "Item 1. Business -- Regulation of the Bank," and "Item 1.
Business -- Subsidiary Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
The Bank, from time to time, is a party to ordinary routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Bank. In the opinion of management,
no material loss is expected from any of such pending claims or lawsuits.
21
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
PART II
Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters
The information contained under the section captioned "Market and Dividend
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended December 31, 1998 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
Item 7. Financial Statements
The Company's consolidated financial statements required herein are
incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(b) of the Exchange Act
The information contained under the section captioned "I -- Information
with respect to Nominees for Director, Directors Continuing in Office, and
Executive Officers" in the Company's definitive proxy statement for the
Company's Annual Meeting of Stockholders to be held on April 28, 1999 (the
"Proxy Statement") which is incorporated herein by reference.
Item 10. Executive Compensation
The information contained under the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
22
<PAGE>
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "I -- Information with respect to
Nominees for Director, Directors Continuing in Office, and Executive
Officers" in the Proxy Statement.
(c) Changes in Control
Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" and
"Voting Securities and Principal Holders Thereof" in the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K
(a)(1)The Consolidated Financial Statements and Independent Auditors' Reports
included in the Annual Report, listed below, are incorporated herein by
reference.
1. Independent Auditors' Reports
2. Tri-County Bancorp, Inc. and Subsidiary
(a) Consolidated Statements of Financial Condition at December 31,
1998 and 1997
(b) Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997
(c) Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998 and 1997
(d) Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997
(e) Notes to Consolidated Financial Statements
(a)(2) All schedules have been omitted because the required information is
either inapplicable or included in the Notes to Consolidated Financial
Statements.
(a)(3) Exhibits are either filed or attached as part of this Report or
incorporated herein by reference.
3.1 Articles of Incorporation of Tri-County Bancorp, Inc.*
3.2 Bylaws of Tri-County Bancorp, Inc.*
4 Specimen Stock Certificate**
10.1 1993 Stock Option Plan*
10.2 Management Stock Bonus Plan and Trust*
11 Statement re: Computation of Per Share Earnings (see Footnote
1 in the Annual Report)
23
<PAGE>
13 Annual Report to Stockholders for the fiscal year ended
December 31, 1998
21 Subsidiaries of the Registrant (See information provided at
"Item 1. Business -- Subsidiary Activity").
23 Consent of Dalby, Wendland & Co., P.C.
27 Financial Data Schedule***
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during 1998.
(c) Exhibits to this Form 10-KSB are attached or incorporated by reference as
stated above.
- ----------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (33-65162) declared effective by the Commission on August 12,
1993.
** Incorporated by reference to the Annual Securities Report on Form 10-KSB
for the fiscal year ended December 31, 1994 (File No. 0-22220) filed with
the SEC.
*** In electronic filing only.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRI-COUNTY BANCORP, INC.
Dated: March 30, 1999 By:/s/Robert L. Savage
President, Chief Executive Officer,
and Director (Duly Authorized
Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By:/s/ Robert L. Savage By:/s/ William J.Rueb
President, Chief Executive Officer Director
and Director (Principal Executive
Officer)
Date: March 30, 1999 Date: March 30, 1999
By:/s/ Larry C. Goddard By:/s/ Lance H. Griggs
Chairman of the Board Director
Date: March 30, 1999 Date: March 30, 1999
By:/s/ David C. Kellam By:/s/ Tommy A. Gardner
Director Vice President, Principal
Accounting and Financial
Officer
Date: March 30, 1999 Date: March 30, 1999
By:/s/ Carl F. Rupp
Director
Date: March 30, 1999
[COMPANY LOGO]
Tri-County Bancorp, Inc.
1998 Annual Report
<PAGE>
----------------------------------------------------------------
TABLE OF CONTENTS
----------------------------------------------------------------
Selected Financial Data 1
----------------------------------------------------------------
Letter to Stockholders 2
----------------------------------------------------------------
Management's Discussion and Analysis 3
----------------------------------------------------------------
Report of Independent Auditors 10
----------------------------------------------------------------
Consolidated Statements of Financial Condition 11
----------------------------------------------------------------
Consolidated Statements of Operations 12
----------------------------------------------------------------
Consolidated Statements of Stockholders' Equity 13
----------------------------------------------------------------
Consolidated Statements of Cash Flows 14
----------------------------------------------------------------
Notes to Consolidated Financial Statements 16
----------------------------------------------------------------
Corporate and Stockholders' Information 33
----------------------------------------------------------------
<PAGE>
SELECTED FINANCIAL DATA
At December 31,
1998 1997 1996 1995 1994
-------------------------------------------
(In Thousands)
BALANCE SHEET DATA
Total amount of:
Assets $81,308 $89,961 $85,888 $65,766 $59,583
Loans receivable, net 42,054 40,425 35,265 25,514 24,439
Mortgage-backed & investment
securities - Available for
sale 28,727 36,526 35,140 18,097 15,621
Mortgage-backed & investment
securities - Held to
maturity 5,336 7,987 10,320 18,264 15,407
Deposits 45,974 45,405 48,533 44,583 45,589
FHLB advances 23,799 29,697 23,460 7,000 1,000
Stockholders' equity 10,421 13,827 13,146 13,496 12,705
Year Ended December 31,
1998 1997 1996 1995 1994
-------------------------------------------
(In Thousands)
STATEMENT OF OPERATIONS
DATA
Interest income $6,173 $6,466 $5,494 $4,600 $4,100
Net interest income 2,627 2,744 2,468 2,266 2,396
Provision for loan losses -- -- -- -- --
Non-interest income 291 105 159 171 71
Non-interest expenses 1,564 1,623 1,811(1) 1,458 1,416
Net income 938 901 540(1) 649 764
At or For Year Ended December 31,
1998 1997 1996 1995 1994
-------------------------------------------
FINANCIAL RATIOS & OTHER
DATA
Return on average assets 1.09% 1.02% 0.71%(1) 1.04% 1.28%
Return on average
stockholders' equity 6.72% 6.68% 4.05%(1) 4.96% 5.89%
Average interest rate spread 2.39% 2.48% 2.68% 2.69% 3.30%
Net yield on average earning
assets 3.14% 3.19% 3.35% 3.62% 4.12%
Non-interest expense to
total assets 1.92% 1.80% 2.11%(1) 2.22% 2.38%
Average equity/average total
assets 16.03% 15.20% 16.82% 20.47% 22.14%
Non-performing loans/total
assets 0.00% 0.00% 0.04% 0.03% 0.39%
At or For Year Ended December 31,
1998 1997 1996 1995 1994
-------------------------------------------
PER SHARE INFORMATION(2)
Earnings per share - diluted $0.78 $.071 $0.41(1) $0.47 $0.53
Dividends per share 0.43 0.33 0.25 0.19 0.11
Book value per share 11.86 11.84 10.80 10.53 9.42
_____________________________
(1) Includes the effect of a one-time special assessment to recapitalize the
SAIF.
(2) Restated to reflect 100% stock split effect by a 100% stock dividend paid
December 8, 1997.
1
<PAGE>
To Our Stockholders:
Tri-County Bancorp, Inc. achieved a second year of record earnings in
1998. Earnings for the Company were $938,063, which exceeded the previous
year by 4.1%. Earnings per share also increased to record levels of $.78
per share on a fully diluted basis and exceeded 1997 by 9.9%. The Company
paid dividends of $.43 per share in 1998 as compared to $.33 in 1997, an
increase of 30.3%.
In December of last year, we completed a very successful tender offer for
our shares that reduced the shares outstanding by 24.7%. As a result of
the tender offer, 314,125 shares were purchased for $14.00 per share.
Including all associated expenses, the tender offer cost the Company close
to $4.5 million. This reduction in capital will help to produce a higher
return on equity and increase earnings per share. The reduction in shares
outstanding from the tender offer will also make it necessary for
Tri-County Bancorp, Inc. to delist from the Nasdaq Small Cap market. We
plan to list our stock on the OTC electronic bulletin board as an
alternative place to buy and sell our common stock.
Assets of the Company declined $8.7 million due to maturities, calls of
callable securities, and prepayments of mortgage backed securities that
were not totally offset by loan growth. The offsetting decline on the
liability side of the ledger occurred in reduced borrowings and a
reduction in capital from the tender offer. We allowed the Bank to
decrease in size because low interest rates in 1998 did not make it as
attractive to continue to invest in additional securities that were
financed with borrowings.
In March of 1999, the Bank announced plans to open a branch, our third
office, on the northwest side of Cheyenne, Wyoming. Management plans to
have the new branch open by late summer this year. Cheyenne is the largest
city in the State of Wyoming and offers an excellent opportunity for the
Bank.
As always, thank you for your continued support, and please contact us
with your questions about Tri-County Bancorp, Inc.
Sincerely,
/s/Robert L. Savage /s/Larry C. Goddard
President and Chief Executive Officer Chairman of the Board
2
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE COMPANY'S BUSINESS
Tri-County Bancorp, Inc. (the "Company") is a unitary savings and loan holding
company which, under existing laws, generally is not restricted in the types of
business activities in which it may engage provided that Tri-County Federal
Savings Bank ("the Bank") retains a specified amount of its assets in
housing-related investments. At the present time, since it does not conduct any
active business, the Company does not intend to employ any persons other than
officers, using the support staff from the Bank from time to time to meet its
administrative needs.
The Bank is a federally chartered stock savings bank headquartered in
Torrington, Wyoming with one additional branch office in Wheatland, Wyoming. The
Bank was founded in 1935 as a federally chartered savings and loan association
under the name Tri-County Federal Savings and Loan Association. The Bank's
deposits are federally insured by the Savings Association Insurance Fund
("SAIF"). The Bank converted from mutual to stock form in September 1993.
The Bank is primarily engaged in attracting deposits from the general public and
using those funds to originate real estate loans on one-to-four family
residences and, to a lesser extent, consumer loans, commercial real estate
loans, and commercial business loans. The Bank's market area is primarily Goshen
and Platte Counties, Wyoming and Scottsbluff County in western Nebraska. The
Bank expects to expand into the Cheyenne, Wyoming area with a new branch in the
third quarter of 1999. In addition, the Bank invests in investment securities
and mortgage-backed securities. The Bank offers its customers several types of
real estate loans, including adjustable-rate and fixed-rate mortgage loans. The
Bank has also been an originator of multi-family and commercial real estate
loans, and consumer loans, including automobile and home equity loans. The Bank
also purchases loans and participates in loans with other financial and mortgage
banking institutions on a case by case basis. These activities are conducted in
Wyoming and other Rocky Mountain States.
CAPITAL STOCK
Since its issuance in September 1993, the Company's common stock has been traded
over-the-counter on the Nasdaq Stock MarketSM appearing under the symbol "TRIC."
The following table reflects the stock price as published by the Nasdaq
statistical report. Prices are adjusted to reflect a 2 for 1 stock dividend on
December 8, 1998.
DIVIDEND
1997 LOW HIGH PAID
First Quarter--03/31/97 $9.00 $9.50 $.075
Second Quarter--06/30/97 $9.50 $10.63 $.075
Third Quarter--09/30/97 $10.75 $12.25 $.075
Fourth Quarter--12/31/97 $11.50 $15.00 $.100
1998
First Quarter--03/31/98 $13.13 $15.00 $.100
Second Quarter--06/30/98 $12.50 $16.50 $.110
Third Quarter--09/30/98 $11.50 $13.00 $.110
Fourth Quarter--12/31/98 $11.25 $14.00 $.110
3
<PAGE>
The number of shareholders of record as of December 31, 1998 was approximately
169. This does not reflect the number of persons or entities who held stock in
nominee or "street" name through various brokerage firms. At December 31, 1998,
there were 878,798 shares outstanding. The Company completed a tender offer for
stock in December of 1998 whereby 314,125 shares were purchased at a price of
$14.00 per share. Additionally, 25,425 options were exercised in December of
1998.
The Company's ability to pay dividends to stockholders is dependent upon the
dividends it receives from the Bank. The Bank may not declare or pay a cash
dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock form, or (2) the regulatory capital requirements imposed by the
Office of Thrift Supervision ("OTS"), the Bank's chartering authority and
primary federal regulator.
FINANCIAL CONDITION
ASSETS
The total assets of the Bank decreased by $8.65 million or 9.62% during 1998.
The decrease is primarily the result of the sale or maturity of investment
securities. These funds were used to repay Federal Home Loan Bank advances and
to repurchase Tri-County Bancorp stock.
Interest earning deposits increased $.93 million during the period. The increase
was the result of a decision by the Management of the Bank to hold more
short-term deposits in the existing interest rate environment.
Securities available for sale decreased by $7.80 million during 1998. Securities
totaling $12.00 million matured, were either redeemed by the issuing agency, or
were sold. Furthermore, principal payments and prepayments of $6.22 million were
received from mortgage-backed securities during the period. These decreases were
partially offset by purchases totaling $12.91 million and an increase in the
market value of the portfolio of $.44 million.
Securities held to maturity decreased by $2.65 million. The decrease was the
result of principal payments and prepayments of $2.84 million on the Bank's
portfolio of mortgage-backed securities which more than offset the purchase of
tax-exempt bonds in the amount of $177,000.
Loans receivable increased $1.63 million during 1998. During this period, the
Bank originated or purchased portfolio residential mortgage loans totaling
$10.49 million, non-residential mortgage loans totaling $1.73 million, consumer
loans totaling $3.17 million, and commercial loans in the amount of $.21
million. During the same period, the Bank received scheduled principal payments
and prepayments totaling $13.89 million on its loan portfolio. Of the total
mortgage loans originated or purchased during the year, $6.45 million were
adjustable-rate and $5.77 million were fixed-rate loans. Because of a lack of
demand for certain types of loans in the Bank's primary lending area, purchased
loans totaled 51% of mortgage lending during the period. The majority of
purchased loans are residential and non-residential real estate loans in
Colorado and Idaho mountain-resort communities. Purchased loans are subjected to
the same underwriting standards and loan terms as those originated by the Bank
for its portfolio. Bank property and equipment is expected to increase in 1999
due to the purchase of property for the construction of a new branch in
Cheyenne, Wyoming.
4
<PAGE>
LIABILITIES
Deposit balances increased by $.56 million or 1.25% from $45.41 million at
December 31, 1997 to $45.97 million at December 31, 1998. The increase consisted
of an increase of $3.58 million in demand and NOW deposits and decreases of
$1.43 million and $1.59 million in savings and time deposits, respectively. The
decrease in time deposits was due, in part, to the scheduled maturity of a
deposit held by a local school district which was originally issued in the
previous year.
Advances from FHLB decreased by $5.89 million during the twelve months ended
December 31, 1998. The change was caused by a decrease in the amount of advances
obtained or renewed to purchase or carry securities classified as available for
sale.
Deferred income taxes increased by $126,000 during the year and was mainly the
result of the application of SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, which requires unrealized gains and losses on
available for sale securities to be reported, net of deferred income taxes, as a
separate component of stockholders' equity. The market value of these securities
increased $438,000 during the period, which resulted in an increase in deferred
income taxes.
STOCKHOLDERS' EQUITY
The increase in additional paid-in capital of $219,000 was caused by the
application of an accounting standard which requires charging current expense
for the fair value of shares of stock committed to be released by the Bank's
Employee Stock Ownership Plan and crediting the difference between the fair
value and the cost of the shares to paid-in capital.
The increase in retained earnings was the result of net earnings totaling $.94
million which more than offset the decrease in retained earnings caused by the
payments of dividends of $0.43 per share totaling $.47 million.
As discussed earlier, SFAS No. 115 requires unrealized gains and losses on
securities classified available for sale to be shown as a separate component of
stockholders' equity in an amount which is net of deferred income taxes. The
market value of securities classified as available for sale increased during
1998 and resulted in an increase, net of deferred income tax, of $.29 million in
stockholder's equity.
The increase in treasury stock of $4.49 million was the result of the repurchase
of 314,125 shares pursuant to the Company's tender offer completed in December
of 1998. The shares were repurchased at a price of $14.00 per share which, when
added to the costs of legal, consulting, printing and other fees, brought the
average cost of repurchase to $14.31 per share.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to average balance
sheets and reflects the average yield on assets and average cost of liabilities
for the periods indicated and the average yields earned and rates paid. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods presented.
Average balances are derived from month-end balances. Management does not
believe that the use of month-end instead of daily average balances has caused
any material difference in the information presented.
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable $41,782 $3,465 8.29% $37,581 $3,145 8.37%
Securities-Available for sale 32,914 2,099 6.38% 38,213 2,576 6.74%
Securities-Held to maturity 6,697 504 7.53% 8,964 684 7.63%
Other interest-earning assets 2,331 105 4.50% 1,165 61 5.24%
------- ------ ------- ------
Total interest-earning assets $83,724 $6,173 7.37% $85,923 $6,466 7.53%
Non-interest earning assets 1,948 ------ 2,278 ------
------- -------
Total Assets $85,672 $88,201
======= =======
Interest-bearing liabilities:
Deposits $45,203 $2,052 4.54% $47,111 $2,188 4.64%
Other borrowings 25,954 1,494 5.76% 26,625 1,534 5.76%
------- ------ ------- ------
Total interest-bearing
liabilities 71,157 $3,546 4.98% 73,736 $3,722 5.05%
Non-interest bearing liabilities 1,558 ------ 1,057 ------
------- -------
Total liabilities 72,715 74,793
Retained earnings 12,957 13,408
------- -------
Total liabilities and
Retained earnings $85,672 $88,201
======= =======
Net interest income $2,627 $2,744
====== ======
Interest rate spread 2.39% 2.48%
Net yield on interest earning assets 3.14% 3.19%
Ratio of average interest-earning
assets to interest-bearing
liabilities 117.66% 116.53%
</TABLE>
6
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (i) changes in volume (changes in average
volume multiplied by old rate); (ii) changes in rates (changes in rate
multiplied by old average volume); (iii) changes in rate/volume (changes in rate
multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 vs. 1997 1997 vs. 1996
-------------------------------- ---------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------------- ---------------------------------
Volume Rate Rate/Volume Net Volume Rate Rate/Volume Net
------ ---- ----------- ----- ------ ---- ----------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 352 (28) (4) 320 478 29 5 512
Securities-Available for sale (356) (173) 52 (477) 625 50 17 692
Securities-Held to maturity (173) (9) 2 (180) (276) 23 (7) (260)
Other interest-earning assets 61 (9) (8) 44 54 (10) (15) 29
----- ----- --- ----- ----- ---- ---- -----
Total interest-earning assets (116) (219) 42 (293) 881 92 0 973
Interest-bearing liabilities:
Deposit accounts (88) (49) 1 (136) 65 41 0 106
Other liabilities (39) (1) 0 (40) 480 73 37 590
----- ----- --- ----- ----- ---- ---- -----
Total interest-bearing
liabilities (127) (50) 1 (176) 545 114 37 696
Net change in interest income 11 (169) 41 (117) 336 (22) (37) 277
===== ===== === ===== ===== ==== ==== =====
</TABLE>
RESULTS OF OPERATIONS
NET INCOME
Net income increased $37,000 during the year ended December 31, 1998 when
compared to the same period of 1997. Net interest income decreased by $117,000,
non-interest income increased by $185,000 and non-interest expense decreased by
$59,000. The provision for income taxes increased by $90,000.
INTEREST INCOME
Interest income from loans increased $320,000 or 10.18% for the year ended
December 31, 1998. The increase was the result of an increase in the average
balance of loans outstanding of $4.20 million which more than offset a decrease
in yield on the loans from 8.37% to 8.29%.
7
<PAGE>
The decrease of $478,000 in interest on securities available for sale was the
result of a decrease in the average balance of securities of $5.30 million and a
decrease in the average yield on the portfolio from 6.74% to 6.38%. The decrease
in yield was the result of the purchase of securities, which, on average, had a
lower yield than the yield on the existing portfolio.
Interest on securities held to maturity decreased $180,000 and was caused
primarily by a decrease in the average balance of the portfolio of $2.28 million
and a decrease in the yield on the portfolio from 7.63% to 7.53%. The decrease
in yield was the result of the higher level of principal prepayments on the
higher yielding mortgage-backed securities in the portfolio.
The increase in income from other interest-earning assets of $44,000 was
primarily caused by an increase in the average balance of these assets. This
category of assets consists primarily of interest-earning demand deposits held
at FHLB.
INTEREST EXPENSE
Interest expense on deposits decreased $136,000 during 1998. This decrease was
the result of a decrease of $1.91 million in the average balance of deposits and
a decrease in the average cost of deposits from 4.64% to 4.54%.
The Bank took advantage of a relatively inexpensive source of funding available
through the FHLB to purchase financial instruments that yield a slightly higher
return than the rate charged on the advances. The average balance of these
borrowings was $.67 million less during 1998 than during 1997 while the average
cost of the borrowings remained unchanged at 5.76% which resulted in a decrease
of $41,000 in interest expense.
PROVISION FOR LOAN LOSSES
No provision for loan losses was made during the year of 1998. The allowance for
loan losses is based on Management's evaluation of the risk inherent in its loan
portfolio after giving due consideration to the changes in general market
conditions and in the nature and volume of the Bank's loan activity. The Bank
intends to continue to provide for loan losses based on its periodic review of
the loan portfolio and general market conditions. The allowance for loan losses
amounted to $410,000 at December 31, 1998, which was 0.96% of total loans
outstanding. While the Bank maintains its allowance for loan losses at a level
which it considers adequate to provide for potential losses, there can be no
assurances that further additions will not be made to the loss allowance and
that such losses will not exceed the estimated amounts.
NON-INTEREST INCOME
Non-interest income increased $185,000 during 1998.
The increase in the gain on sale of loans of $35,000 was the result of an
increase in the dollar amount of loans sold. Gain on sale of available for sale
securities increased $152,000 during 1998. In 1997, shares of a mutual fund were
redeemed at a loss of $71,000 whereas the sales and redemptions of securities in
the current year netted a $81,000 gain.
NON-INTEREST EXPENSE
Overall, non-interest expense decreased $59,000 during the year ended December
31, 1998.
Compensation and benefits increased by $21,000 in 1998 and was primarily caused
by an increase in overall salaries and pension costs.
Occupancy and equipment expense decreased $12,000 and was primarily caused by
decreases in data processing costs and equipment depreciation.
8
<PAGE>
Other, net expenses decreased by $65,000 and was primarily the result of the
Company's abandonment of its efforts to establish a de novo bank in Colorado in
1997 and the charging of those costs to expense.
In March of 1999, the Bank announced its intention to open an additional branch
in Cheyenne, Wyoming. The Company has a contract to purchase 4.4 acres of land
for approximately $725,000. Planning for the construction of the building and
other plans for the site have just begun. Costs associated with opening,
staffing and equipping the branch will result in increased expenses and reduced
net income until we can achieve certain levels of deposit and loan activity.
This situation is expected to continue for at least the next 18 months. We do
not believe the decrease in earnings will be prolonged and in the long term,
this expansion of markets, personnel, and products and services should enhance
shareholder value. However, as with any expansion, if the new branch or
additional personnel do not ultimately result in increased deposit and loan
activity and increased net interest income, these expenses would continue to
have an adverse affect on net income.
INCOME TAXES
The provision for income taxes increased $90,000 for the year ended December 31,
1998. The increase was due to an increase in taxable income and to the
establishment, in the prior year, of a deferred tax asset resulting from the
difference between financial and tax accounting for losses incurred from
mortgage loan foreclosure and disposition.
YEAR 2000 READINESS
For a discussion of the Company's effort to address the computer issues
regarding the year 2000, see Note 14 to the Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Bank and notes thereto, presented elsewhere
herein, have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, nearly all of the assets and liabilities of
the Bank are monetary. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessary move in the same direction or to the same extent as the
price of goods and service.
9
<PAGE>
9
<PAGE>
Board of Directors
Tri-County Bancorp, Inc. and Subsidiaries
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated statements of financial condition
of Tri-County Bancorp, Inc. and Subsidiaries (Tri-County) as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of Tri-County's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial condition of
Tri-County Bancorp, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ DALBY, WENDLAND & CO., P.C.
Grand Junction, Colorado
February 5, 1999
10
<PAGE>
<TABLE>
<CAPTION>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Cash and due from banks $ 385,804 $ 588,114
Interest-bearing deposits with banks 2,979,241 2,050,691
Securities available for sale, at fair value 28,727,466 36,526,012
Securities held to maturity 5,335,700 7,987,250
Loans held for sale, at market value 435,721 117,111
Loans receivable, net of allowance for loan losses of
$409,984 (1998) and $412,456 (1997) 42,054,222 40,425,290
Accrued interest receivable 450,017 655,339
Bank property and equipment 801,141 886,879
Other assets 138,685 725,541
------- -------
Total Assets $81,307,997 $89,962,227
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits $ 690,177 $ 541,509
Now accounts 5,776,145 2,341,052
Savings accounts 8,737,500 10,162,896
Other time deposits 30,770,264 32,359,696
---------- -----------
Total Deposits 45,974,086 45,405,153
Advances from Federal Home Loan Bank 23,799,117 29,696,617
Accounts payable and accrued expenses 216,841 270,882
Advances by borrowers for taxes and insurance 110,167 101,266
Deferred income taxes 787,119 661,125
------- -------
Total Liabilities 70,887,330 76,135,043
---------- ----------
Stockholders' Equity
Preferred stock, $.10 par value, authorized 5,000,000
shares, none issued or outstanding - -
Common stock, $.10 par value, authorized 10,000,000 shares,
1,520,425 (1998) and 1,495,000 (1997) shares issued 152,043 149,500
Additional paid-in capital 7,319,578 7,100,600
Retained earnings - substantially restricted 9,260,742 8,792,947
Unearned compensation relating to Employee
Stock Ownership Plan (284,050) (343,850)
Unearned compensating relating to Management Stock
Bonus Plan - (44,175)
Unrealized gain on securities available for sale, net of tax 1,106,701 817,476
Treasury stock-641,627(1998) and
327,502(1997) shares, at cost (7,134,347) (2,645,314)
---------- ----------
Total Stockholders' Equity 10,420,667 13,827,184
---------- ----------
Total Liabilities and Stockholders' Equity $81,307,997 $89,962,227
=========== ===========
</TABLE>
See accompanying notes.
11
<PAGE>
<TABLE>
<CAPTION>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,465,184 $3,144,917
Interest and dividends on available for sale securities
Taxable interest 1,957,415 2,459,395
Dividends 141,048 117,050
Interest on held to maturity securities
Taxable interest 498,712 683,848
Nontaxable interest 5,611 -
Other interest earning assets 105,045 61,236
------- ------
Total Interest Income 6,173,015 6,466,446
========= =========
INTEREST EXPENSE
Deposits 2,052,506 2,188,492
Advances 1,493,513 1,534,093
--------- ---------
Total Interest Expense 3,546,019 3,722,585
--------- ---------
Net Interest Income 2,626,996 2,743,861
PROVISION FOR LOAN LOSSES - -
--------- ---------
Net Interest Income After
Provision for Loan Losses 2,626,996 2,743,861
--------- ---------
NONINTEREST INCOME
Service charges on deposits 119,371 112,449
Gain on sale of loans 65,085 35,420
Gain (loss) on sale of investments available for sale 80,940 (71,421)
Other income 25,296 28,973
------ ------
Total Noninterest Income 290,692 105,421
======= =======
NONINTEREST EXPENSE
Compensation and benefits 911,667 891,096
Occupancy and equipment 318,803 330,726
Federal insurance premiums 27,921 30,518
Other expenses 305,620 370,476
Total Noninterest Expense 1,564,011 1,622,816
--------- ---------
Income Before Income Taxes 1,353,677 1,226,466
PROVISION FOR INCOME TAXES 415,614 325,462
------- -------
Net Income $ 938,063 $ 901,004
========= =========
EARNINGS PER SHARE
Basic $ .83 $ .75
======= =======
Diluted $ .78 $ .71
======= =======
</TABLE>
See accompanying notes.
12
<PAGE>
<TABLE>
,CAPTION>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998 and 1997
Unrealized Gain
Comprehensive Retained on Securities Common
Total Income Earning Available for Sale Stock
----------- ------------- --------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1997 $13,145,564 $8,353,630 $ 239,619 $74,750
Comprehensive income
Net earnings 901,004 $ 901,004 901,004 - -
Other comprehensive income, net of tax
Unrealized gain on securities, net of
reclassification 577,857 577,857 - 577,857 -
---------
Comprehensive income $1,478,861
==========
Repayment of ESOP debt 59,800 - - -
Allocation of ESOP shares 70,996 - - -
Amortization of deferred compensation 58,900 - - -
Dividends paid - cash (386,937) (386,937) - -
Two for one stock split effected as a
stock dividend - (74,750) - 74,750
Treasury stock purchased (600,000) - - -
------- ------ ------- ------
Balance - December 31, 1997 13,827,184 8,792,947 817,476 149,500
Comprehensive income
Net earnings 938,063 $ 938,063 938,063 - -
Other comprehensive income, net of tax
Unrealized gain on securities, net of
reclassification adjustment 289,225 289,225 - 289,225 -
-------
Comprehensive income $1,227,288
==========
Repayment of ESOP debt 59,800 - - -
Allocation of ESOP shares 94,395 - - -
Amortization of deferred compensation 44,175 - - -
Stock options exercised 127,126 - - 2,543
Dividends paid - cash (470,268) (470,268) - -
Treasury stock purchased (4,489,033) - - -
--------- ------- ---------- --------
Balance - December 31, 1998 $10,420,667 $9,260,742 $1,106,701 $152,043
=========== ========== ========== ========
</TABLE>
See accompanying notes.
13
<PAGE>
<TABLE>
<CAPTION>
Additional MSBP
Paid-In Treasury Employee Stock Unearned
Capital Stock Ownership Plan Compensation
---------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Balance - January 1, 1997 $7,029,604 $(2,045,314) $(403,650) $(103,075)
Comprehensive income
Net earnings - - - -
Other comprehensive income, net of tax
Unrealized gain on securities, net of
reclassification - - - -
Comprehensive income
Repayment of ESOP debt - - 59,800 -
Allocation of ESOP shares 70,996 - - -
Amortization of deferred compensation - - - 58,900
Dividends paid - cash - - - -
Two for one stock split effected as a
stock dividend - - - -
Treasury stock purchased - (600,000) - -
------- -------- ------ -------
Balance - December 31, 1997 7,100,600 (2,645,314) (343,850) (44,175)
Comprehensive income
Net earnings - - - -
Other comprehensive income, net of tax
Unrealized gain on securities, net of
reclassification adjustment - - - -
Comprehensive income
Repayment of ESOP debt - - 59,800 -
Allocation of ESOP shares 94,395 - - -
Amortization of deferred compensation - - - 44,175
Stock options exercised 124,583 - - -
Dividends paid - cash - - - -
Treasury stock purchased - (4,489,033) - -
---------- ----------- --------- -----
Balance - December 31, 1998 $7,319,578 $(7,134,347) $(284,050) $ -
========== =========== ========= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 938,063 $ 901,004
Adjustments to reconcile net income to net cash provided by operations
Depreciation and amortization 134,794 89,258
Provision for deferred taxes (23,000) (47,000)
(Gain) loss on sale of securities available for sale (80,940) 71,421
Gain on sale of loans (65,085) (35,420)
FHLB stock dividends received (128,500) (106,400)
Unvested forfeitable stock awarded 44,175 58,900
Changes in assets and liabilities
Origination of loans held for sale (3,862,039) (1,603,145)
Proceeds from sale of loans held for sale 3,608,514 1,611,454
(Increase) decrease in accrued interest receivable 205,322 (129,260)
Other assets, net 556,952 (652,080)
Other liabilities, net 70,254 76,061
------ ------
Net Cash Provided By Operations 1,398,510 234,793
--------- -------
INVESTING ACTIVITIES
Net loan origination and principal repayments on loans 4,594,499 697,364
Purchase of loans (6,210,552) (5,869,928)
Activity in available for sale securities
Sale proceeds 3,129,251 5,227,850
Maturities, prepayments and calls 18,164,932 3,321,899
Purchases (12,906,090) (7,765,700)
Activity in held to maturity securities
Maturities, prepayments and calls 2,830,392 2,339,685
Purchases (177,000) -
Proceeds from sale of real estate owned 23,966 75,786
Investment in property, equipment and real estate owned (29,627) (89,574)
------- -------
Net Cash Provided (Used) By Investing Activities $9,419,771 $(2,062,618)
---------- -----------
</TABLE>
See accompanying notes.
14
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
---------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Net change in noninterest bearing demand, savings and NOW deposits $2,158,365 $ 478,820
Net change in time deposits (1,589,432) (3,606,649)
Advances from Federal Home Loan Bank 12,500,000 53,218,250
Repayment of Federal Home Loan Bank advances (18,397,500) (46,982,125)
Net change in advances by borrowers for taxes and insurance 8,901 (3,121)
Dividends paid (470,268) (386,937)
Exercise of stock options 127,126 -
ESOP payments received 59,800 59,800
Purchase of treasury stock (4,489,033) (600,000)
---------- --------
Net Cash Provided (Used) by Financing Activities (10,092,041) 2,178,038
----------- ---------
Increase in Cash and Cash Equivalents 726,240 350,213
Cash and cash equivalents - beginning of period 2,638,805 2,288,592
--------- ---------
Cash and cash equivalents - end of period $3,365,045 $2,638,805
========== ==========
Cash and due from banks $ 385,804 $ 588,114
Interest-bearing deposits with banks 2,979,241 2,050,691
--------- ---------
$3,365,045 $2,638,805
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 438,600 $ 367,300
========= =========
Interest expense $3,565,230 $3,729,293
========== ==========
Noncash transactions
Loans transferred to real estate owned $ 23,966 $ 34,367
========= =========
</TABLE>
15
<PAGE>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Tri-County Bancorp, Inc. (Tri-County) is a bank holding company organized under
Wyoming law in 1993 and headquartered in Torrington, Wyoming. Through its
subsidiaries, Tri-County provides a variety of banking services to customers in
its primary market area of eastern Wyoming.
Basis of Presentation The consolidated financial statements include the accounts
of Tri-County, its wholly-owned subsidiaries, Tri-County Federal Savings Bank
(the Bank) and First Tri-County Services, Inc. The investment in the
subsidiaries is accounted for using the equity method of accounting. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform
with the current year's presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial
statements. Actual results could differ from those estimates.
Cash and Cash Equivalents For the purpose of reporting cash flows, cash and cash
equivalents include cash on hand, demand deposits at other financial
institutions and overnight deposits.
Securities Securities that Tri-County has both the positive intent and ability
to hold to maturity are classified as securities held to maturity and are
carried at amortized cost, adjusted for amortization of premium or accretion of
discount using the interest method. Securities that may be sold prior to
maturity for asset/liability management purposes, or that may be sold in
response to changes in interest rates, to changes in prepayment risk, to
increase regulatory capital or other similar factors, are classified as
securities available for sale and carried at fair value with any adjustments to
fair value, after tax, reported as a separate component of stockholders' equity.
Declines in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses. Securities purchased for trading
purposes are held in the trading portfolio at fair value, with changes in fair
value included in noninterest income. Tri-County had no trading securities at
December 31, 1998 or 1997, or during the years then ended.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on securities
using the interest method. Gains and losses on the sale of securities are
recorded on the trade date and are calculated using the specific-identification
method.
16
<PAGE>
Federal Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank (FHLB), is required to
maintain an investment in capital stock of the FHLB. No ready market exists for
the FHLB stock, and it has no quoted market value. The stock is carried at cost
and is assumed to have a market value which is equal to cost. The stock is
included in securities available for sale in the accompanying consolidated
financial statements.
Mortgage Banking Operations
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by a charge to income.
The cost of loans held for sale at December 31, 1998 and 1997 approximated their
estimated market value.
In 1998 the Bank began selling certain loans to the Federal Home Loan Mortgage
Corporation (FHLMC) with servicing retained. The cost of mortgage servicing
rights is amortized in proportion to, and over the period of estimated net
servicing revenue. Impairment of mortgage servicing rights is assessed at each
reporting date based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market interest rate.
For purposes of measuring impairment, the rights are stratified by loan type and
interest rate. The amount of impairment recognized, through a valuation
allowance, is the amount by which the capitalized mortgage servicing rights for
a stratum exceed their fair value.
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at the principal
amount outstanding, net of deferred loan fees, discounts, and the allowance for
loan losses. Interest on loans is calculated by using the simple interest method
on the balance of the principal amount outstanding. Interest income on loans
receivable is accrued as earned based on the principal balance outstanding.
Tri-County discontinues the accrual of interest when the related loan is 90 days
delinquent. Net direct loan origination costs/fees, when material, are deferred
and amortized over the term of the loan as a yield adjustment.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed. For
impaired loans, cash receipts are applied entirely against principal until the
loan has been collected in full, after which time any additional cash receipts
are recognized as interest income. Tri-County had no significant loans
considered impaired or on non-accrual status at December 31, 1998 or 1997.
Allowance for Loan Losses
The allowance for loan losses reflects management's judgment as to the level
considered adequate to absorb potential losses inherent in the loan portfolio.
This judgment is based on a review of individual loans, historical loss
experience, economic conditions, portfolio trends and other factors. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by provisions
charged to earnings and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in the estimation
process, management's estimate of credit losses inherent in the loan portfolio
and the related allowance may change in the near term.
17
<PAGE>
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
(SFAS 121) establishes accounting standards for determining and measuring
impairment of certain long-lived assets. Under provision of SFAS 121, impairment
losses are recognized when expected future cash flows are less than the asset's
carrying value. No assets were considered impaired at December 31, 1998 or 1997.
Other Real Estate
Other real estate, acquired through partial or total satisfaction of loans, is
included in other assets and carried at the lower of cost or fair value less
estimated costs of disposition. At the date of acquisition, any losses are
charged to the allowance for loan losses. Subsequent write-downs are included in
noninterest expense. Realized losses from disposition of the property and
declines in fair value that are considered permanent are charged to the reserve
for other real estate, as applicable.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) allows an
entity to choose to compute compensation expense related to stock options using
a fair value method or continue to use the intrinsic value method. If the
intrinsic value method is chosen, then Tri-County will be required to present
pro forma data for all awards granted in future fiscal years. If the fair value
method is selected, SFAS 123 would be effective.
Tri-County had no stock option transactions that would require the
implementation of SFAS 123 in the years ended December 31, 1998 and 1997. It is
currently anticipated that Tri-County will continue to account for stock-based
compensation plans under the intrinsic value method. Final determination of the
method selected will be done in the year Tri-County has transactions covered by
this accounting pronouncement.
Earnings Per Share
Earnings per share are calculated in accordance with SFAS No. 128, Earnings per
Share. Basic earnings per share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting period.
Diluted earnings per share is the amount of earnings available to each share of
common stock outstanding during the reporting period adjusted for the potential
issuance of common shares for stock options.
18
<PAGE>
The calculation of basic and diluted earnings per share for the years ended
December 31 is as follows:
1998 1997
---- ----
Net income $ 938,063 $ 901,004
========= =========
Average common shares outstanding 1,127,425 1,194,347
Dilutive effect of stock options 74,227 79,678
------ ------
$1,201,652 $1,274,025
========== ==========
Earnings per share
Basic $ .83 $ .75
Diluted $ .78 $ .71
Average common shares outstanding and the dilutive effect of stock options have
been adjusted for Tri-County's December 8, 1997 two-for-one stock split effected
as a dividend.
New Accounting Standards
In October 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS 133 is effective for fiscal years beginning after June
15, 1999.
In November 1998, FASB issued SFAS 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. SFAS 134 is an amendment to SFAS 65, Accounting
for Certain Mortgage Banking Activities, and conforms the subsequent accounting
for securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a nonmortgage banking enterprise.
The adoption of SFAS 133 and 134 is not expected to have a material effect on
Tri-County's financial statements.
NOTE 2 - SECURITIES
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Securities Available for Sale Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1998
-----------------
Debt Securities
U.S. Agency securities $ 5,497,441 $ 104,134 $ - $ 5,601,575
U.S. Agency mortgage-backed securities 15,803,325 70,322 (5,140) 15,868,507
---------- ------ ------ ----------
Total Debt Securities 21,300,766 174,456 (5,140) 21,470,082
---------- ------- ------ ----------
Equity Securities
FHLMC stock 23,459 1,520,335 - 1,543,794
Mutual funds
ARM portfolio 1,036,085 505 (5,305) 1,031,285
Mortgage securities performance portfolio 2,936,437 - (8,032) 2,928,405
FHLB stock 1,753,900 - - 1,753,900
--------- ----- ----- ---------
Total Equity Securities 5,749,881 1,520,840 (13,337) 7,257,384
--------- --------- ------- ---------
$27,050,647 $1,695,296 $(18,477) $28,727,466
=========== ========== ======== ===========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Securities Available for Sale Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1997
-----------------
Debt Securities
U.S. Agency securities $13,496,353 $ 108,732 $ (20,000) $13,585,085
U.S. Agency mortgage-backed securities 13,621,365 190,988 (23,240) 13,789,113
---------- ------- ------- ----------
Total Debt Securities 27,117,718 299,720 (43,240) 27,374,198
---------- ------- ------- ----------
Equity Securities
FHLMC stock 25,662 1,073,436 - 1,099,098
Mutual funds
ARM portfolio 536,085 - (2,095) 533,990
Mortgage securities performance portfolio 5,982,545 - (89,219) 5,893,326
FHLB stock 1,625,400 - - 1,625,400
--------- -------- -------- ---------
Total Equity Securities 8,169,692 1,073,436 (91,314) 9,151,814
--------- --------- ------- ---------
$35,287,410 $1,373,156 $(134,554) $36,526,012
=========== ========== ========= ===========
Securities Held to Maturity
December 31, 1998
-----------------
U.S. Agency securities $ 501,286 $13,089 $ - $ 514,375
State and other political subdivisions 175,949 - - 175,949
U.S. Agency mortgage-backed securities 4,658,465 125,433 - 4,783,898
--------- ------- ------- ---------
$5,335,700 $138,522 $ - $5,474,222
========== ======== ======= ==========
December 31, 1997
-----------------
U.S. Agency securities $ 503,321 $18,394 $ - $ 521,715
U.S. Agency mortgage-backed securities 7,483,929 264,543 (9,196) 7,739,276
--------- ------- ------ ---------
$7,987,250 $282,937 $(9,196) $8,260,991
========== ======== ======= ==========
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1998, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
--------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 501,286 $ 514,375 $ - $ -
Due after one year through five years - - 2,500,000 2,540,535
Due after five years through ten years 75,000 75,000 2,997,441 3,061,040
Due after ten years 100,949 100,949 - -
------- ------- ----- -----
677,235 690,324 5,497,441 5,601,575
Mortgage-backed securities 4,658,465 4,783,898 15,803,325 15,868,507
--------- --------- ---------- ----------
$5,335,700 $5,474,222 $21,300,766 $21,470,082
========== ========== =========== ===========
</TABLE>
20
<PAGE>
Sales of securities available for sale during the years ended December 31
follows:
Proceeds Gross Gains Gross Losses
-------- ----------- ------------
1998 $3,129,251 $127,048 $(46,108)
1997 $5,227,850 $ 1,173 $(72,594)
Tri-County pledges investments for public deposits held in excess of $100,000
(see Note 5). The carrying and fair values of the pledged investments at
December 31 follows:
Carrying Fair
Value Value
----------- ----------
1998 $9,769,442 $9,830,029
1997 $9,085,820 $9,119,775
NOTE 3 - LOANS RECEIVABLE
December 31,
1998 1997
------------ -------------
Real estate - mortgage $32,403,370 $31,395,063
Real estate - commercial 6,141,006 4,623,723
Real estate - construction 237,402 1,537,295
Commercial 449,949 472,418
Installment loans to individuals 3,310,068 2,911,036
--------- ---------
42,541,795 40,939,535
Less:
Allowance for loan losses 409,984) (412,456)
Deferred loan fees (77,589) (101,789)
------- --------
$42,054,222 $40,425,290
=========== ===========
A summary of the changes in the allowance for loan losses is as follows:
Year Ended December 31,
1998 1997
----------- ------------
Beginning of the period $412,456 $415,447
Provision for losses - -
Loan charge-offs (2,738) (3,637)
Recoveries 266 646
--- ---
$409,984 $412,456
======== ========
Loans serviced by Tri-County for the benefit of others at December 31 were
approximately $586,000 (1998) and $164,000 (1997).
21
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT
December 31,
1998 1997
----------- -----------
Land $ 65,776 $ 65,776
Building and improvements 1,115,984 1,102,357
Furniture, fixtures and equipment 614,764 598,764
------- -------
1,796,524 1,766,897
Less accumulated depreciation (995,383) (880,018)
-------- --------
$ 801,141 $ 886,879
========= =========
Depreciation expense for the years ended December 31 was $115,365 (1998) and
$124,426 (1997).
NOTE 5 - DEPOSITS
At December 31, 1998, scheduled maturities of certificates of deposit were as
follows:
Year
----
1999 $23,759,940
2000 4,548,066
2001 1,975,997
2002 486,261
-------
Total $30,770,264
===========
The Federal Deposit Insurance Corporation (FDIC), an agency of the U.S.
Government, insures all depositors up to $100,000 in accordance with the rules
and regulations of the FDIC. Deposits in excess of $100,000 at December 31 were
$5,200,407 (1998) and $5,207,027 (1997) (see Note 2).
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the FHLB at December 31 were $23,799,117 (1998) and $29,696,617
(1997). The following table summarizes the maturities of the FHLB advances:
Year
1999 5.92% - 6.07% $5,168,250
2000 4.71% - 6.08% 2,800,000
2001 4.65% - 5.83% 4,000,000
2002 5.39% - 5.62% 8,000,000
2003 4.88% - 5.10% 3,000,000
2016 5.96% 830,867
----------
$23,799,117
===========
Pursuant to a blanket pledge agreement with the FHLB, the advances are secured
by the FHLB stock, real estate loans and other securities not otherwise pledged.
22
<PAGE>
NOTE 7 - INCOME TAXES
The provisions for federal income taxes are as follows:
Year ended December 31,
1998 1997
----------- -----------
Current $438,614 $372,462
Deferred (23,000) (47,000)
------- -------
$415,614 $325,462
======== ========
Deferred income taxes and benefits are provided for significant income and
expense items recognized in different years for tax and financial reporting
purposes. Temporary differences which give rise to significant deferred tax
assets (liabilities) follow:
December 31,
1998 1997
----------- -----------
Joint Venture income $ 32,000 $ 20,000
Loan origination fees 4,000 5,000
Bad debt reserve 139,000 88,000
Net unrealized loss on available for sale
securities 4,300 -
Less: valuation allowance - -
------ ------
Total Deferred Assets 179,300 113,000
------- -------
Federal Home Loan Bank stock dividends (366,900) (323,000)
Net unrealized gain on available for sale
securities (574,482) (421,125)
Accelerated depreciation (25,037) (30,000)
------- -------
Total Deferred Liabilities (966,419) (774,125)
-------- --------
Net Deferred Liabilities $(787,119) $(661,125)
========= =========
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent in 1998 and 1997 to income before income
taxes as a result of the following:
Year ended December 31,
1998 1997
----------- -----------
Normal "expected" corporate taxes $460,250 $417,000
Change in tax provision resulting from
Income tax refunds (15,500) (62,690)
Other (29,136) (28,848)
------- -------
$415,614 $325,462
======== ========
Tri-County and its subsidiaries file a consolidated income tax return. Excess of
bad debt reserves for income tax purposes over book provisions for the Bank at
December 31, 1998 were approximately $1,400,000. No deferred income tax
liability has been provided for these reserves. If such reserves are used for
purposes other than to absorb the Bank's bad debts, the amount used is subject
to the then current federal corporate tax rates. Tri-County and its subsidiaries
are not subject to state income taxes.
23
<PAGE>
NOTE 8 - RELATED PARTY TRANSACTIONS
Tri-County has had, and may be expected to have in the future, financial
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have been made in compliance with federal regulations.
Activity in loans to related parties for the years ended December 31 is as
follows:
1998 1997
----------- -----------
Balance, beginning of year $147,593 $209,739
New loans 91,420 10,300
Repayments (79,519) (72,446)
------- -------
Balance, end of year $159,494 $147,593
======== ========
Terms and rates of interest on deposit accounts of directors and officers are
substantially the same as those extended to unrelated Tri-County customers. At
December 31 deposits of related parties totaled $436,815 (1998) and $458,941
(1997).
NOTE 9 - EMPLOYEE RETIREMENT PLAN
Tri-County sponsors a 401(k) plan where Tri-County matches up to 3% of the
employees qualifying compensation. Employees may contribute up to 12% of their
qualifying compensation. Tri-County's expense was $18,489 (1998) and $17,054
(1997).
NOTE 10 - STOCK REPURCHASE PLAN
On October 16, 1998, the Board of Directors of Tri-County authorized a stock
repurchase plan (the Plan). The Plan provided for the purchase of up to $4.5
million (including expenses) of the shares of its common stock, $0.10 par value
(the Shares) for cash. On December 9, 1998, the Plan culminated with the
purchase of 314,125 shares at $14 per share. Including expenses, $4,489,033 was
recorded in the accompanying consolidated statement of stockholders' equity as
an addition to Treasury Stock.
NOTE 11 - STOCK BENEFIT PLANS
Stock Option Plan
Tri-County adopted a stock option plan (Option Plan) whereby stock options of
149,500 common shares may be granted to directors and officers of the Bank.
Options granted under the Option Plan may be either options that qualify as
Incentive Stock Options as defined in Section 422 of the Internal Revenue Code
of 1986, as amended, or options that do not qualify. In the event of a change in
control, as defined, all options are immediately exercisable.
On September 28, 1993, qualified stock options were granted for the purchase of
143,522 shares exercisable at the market price at the date of grant of $5 per
share. All options expire ten years from the date of the grant. The options
vested over a 5 year period.
24
<PAGE>
A summary of Tri-County's Option Plan as of December 31 follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of the year 143,522 $5.00 143,522 $5.00
Granted - -
Exercised 25,425 $5.00 -
Canceled - -
------- -------
Outstanding, end of the year 118,097 $5.00 143,522 $5.00
======= ===== ======= =====
Options exercisable at the end year 118,097 $5.00 138,138 $5.00
======= ===== ======= =====
</TABLE>
Employee Stock Ownership Plan
Tri-County sponsors an employee stock ownership plan (ESOP). Tri-County issued
stock for a note receivable from the ESOP, which is unconditionally guaranteed
by the Bank. The note is at prime (determined at the beginning of each quarter),
payable quarterly through 2003. The ESOP's loan payments are provided by the
Bank's contributions to the ESOP and dividends on Tri-County's stock held by the
ESOP's Trustee.
Since the Bank guarantees the note, the receivable is reflected as a reduction
of stockholders' equity in the consolidated financial statements. At December 31
the balance was $284,050 (1998) and $343,850 (1997).
The ESOP covers substantially all employees. The Bank's ESOP contributions are
based on the note's scheduled principal and interest payments, net of
Tri-County's cash dividends paid to the ESOP. The released stock is allocated
based upon the ratio of each participating employee's eligible compensation to
total eligible compensation. The shares held by the ESOP are released in the
proportion each year's principal payment bears to the total principal payments
due. This is currently scheduled at 11,960 shares per year.
The Bank's ESOP contributions are recorded as compensation expense and totaled
$133,524 (1998) and $126,553 (1997). Dividends used to satisfy note payments
were $50,663 (1998) and $38,292 (1997). As of December 31 the ESOP held 55,030
(1998) and 66,990 (1997) unallocated shares. The unallocated shares' fair value
at December 31 (based on NASDAQ) was $682,372 (1998) and $913,744 (1997).
Management Stock Bonus Plan
Tri-County and the Bank adopted a management stock bonus plan (MSBP) to enable
the Bank to attract and retain experienced and capable personnel in key
positions of responsibility. A total of 59,800 shares of restricted stock were
awarded on September 28, 1993, the conversion date, in the form of restricted
stock payable over a five-year vesting period, at 20 percent per year, beginning
September 28, 1994. Tri-County recognized compensation expense in the amount of
the fair market value of the common stock at the grant date, prorata over the
years during which the shares were payable. The unvested shares were entitled to
all voting and other stockholder rights, except that the shares, while
restricted, cannot be sold, pledged or otherwise disposed of, and are required
to be held in escrow.
Through December 31, 1997, unamortized deferred compensation related to the MSBP
is deducted from stockholders' equity. As of December 31, 1998, all MSBP shares
were distributed and all deferred compensation expense recognized.
25
<PAGE>
NOTE 12 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators. These actions, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, banks must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require banks to maintain minimum amounts and ratios of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined). Management
believes that, as of December 31, 1998, the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1998, the most recent notification from applicable regulatory
agencies categorize the Bank as adequately capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized, the Bank must maintain minimum ratios as set forth in the following
table (amounts in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Dollars Ratio Dollars Ratio Dollars Ratio
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Total Capital (to risk-weighted assets) $8,717 25.1% $2,783 8.0% $3,479 10.0%
Tier 1 Capital (to risk-weighted assets) $8,307 23.9% $1,392 4.0% $2,087 6.0%
Tier 1 Capital (to total adjusted assets) $8,307 10.4% $3,195 4.0% $3,993 5.0%
December 31, 1997
Total Capital (to risk-weighted assets) $12,185 34.0% $2,784 8.0% $3,480 10.0%
Tier 1 Capital (to risk-weighted assets) $11,842 34.0% $1,392 4.0% $2,088 6.0%
Tier 1 Capital (to adjusted total assets) $11,842 13.3% $2,664 4.0% $4,438 5.0%
total assets)
</TABLE>
NOTE 13 - CONCENTRATION OF CREDIT RISK
In the normal course of business, Tri-County enters into commitments to extend
credit with off-balance-sheet risk to meet the financing needs of its customers.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. As some commitments normally expire without
being drawn upon, the total commitment amount does not necessarily represent
future cash requirements.
26
<PAGE>
Tri-County evaluates each customer's credit worthiness on a case-by-case basis,
using the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. The amount and type of collateral
obtained, if deemed necessary by Tri-County upon extension of credit, is based
upon management's credit evaluation. Tri-County's underwriting policies for
mortgage loans generally require a maximum loan-to-value of 80% for owner
occupied residential loans and 75% on non-owner occupied one-to-four family
loans. Owner occupied residential loans in excess of 80% are generally required
to obtain private mortgage insurance.
Tri-County had the following commitments at December 31, 1998:
Loan commitments $994,350
Lines of credit $632,850
Available overdraft protection $171,600
The loan commitments ($476,850 fixed rate and $517,500 adjustable rate) are at
interest rates ranging from 6.5% to 8.0%.
Tri-County's loan commitments include commitments to purchase loans in western
Colorado ($517,500) as well as commitments to extend credit to customers in
Tri-County's market area. The market area primarily consists of eastern Wyoming.
Agriculture and related support industries are a significant factor in the
primary market area's economy.
The loans purchased in Colorado, through a mortgage banking relationship, are
located in various resort areas and comprise approximately 35% of the loan
portfolio.
NOTE 14 - CONTINGENCIES
Self-Insured Health Plan
The Bank sponsors a self-insured health plan for eligible employees. The Plan
provides for payment by the Bank of health claims up to $3,000 per eligible
employee, with reinsurance coverage for all claims greater than $3,000. An
estimate of claims incurred but not reported and claims reported but not funded
is included in accounts payable at December 31, 1998 and 1997.
Year 2000 Compliance
The year 2000 problem exists because many computer programs use only the last
two digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the year 1900 rather than 2000. An additional
issue is that 1900 was not a leap year, whereas the year 2000 is. Therefore,
some programs may not properly provide for February 29, 2000. This anomaly could
result in miscalculations when processing critical date-sensitive information
after December 31, 1999.
27
<PAGE>
The following discussion of the implications of the year 2000 problem for
Tri-County contains numerous forward-looking statements based on inherently
uncertain information. The cost of the project and the date on which Tri-County
plans to complete the internal year 2000 modifications are based on management's
best estimates, which were derived utilizing a number of assumptions of future
events including the continued availability of internal and external resources,
third party modifications and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse affect on Tri-County.
In addition, Tri-County places a high degree of reliance on its third party
processor and computer systems of other financial institutions. Although
Tri-County is assessing the readiness of these other parties and preparing
contingency plans, there can be no guarantee that the failure of these other
parties to modify their systems in advance of December 31, 1999 would not have a
material adverse affect on Tri-County.
During 1998, Tri-County adopted a Year 2000 Action Plan (the Plan) and
established a Year 2000 Committee (the Committee). The objectives of the Plan
and the Committee are to prepare Tri-County for the new millennium. As
recommended by the Federal Financial Institutions Examination Council (FFIEC),
the Plan encompasses the following phases: Awareness, Assessment, Renovation,
Validation and Implementation. These phases will enable Tri-County to identify
risks, develop an action plan, perform adequate testing and complete
certification that its processing systems will be year 2000 ready. Execution of
the Plan is on target. Tri-County is currently in the Renovation and Validation
phases, which include program changes, hardware and software upgrades and system
replacements, if necessary. Concurrently, Tri-County is addressing some issues
related to the subsequent phases.
Prioritization of the most critical applications has been addressed, along with
contract and service agreements. The primary operating software for Tri-County
is obtained and maintained by an external service center (the Service Center).
The Service Center has completed its Renovation phase and is in the Validation
phase. Tri-County successfully completed extensive validation testing of the
Service Center's renovated system in September 1998. Tri-County has contacted
all other major vendors and suppliers regarding their year 2000 state of
readiness. Each of these third parties has delivered written assurance to
Tri-County that they expect to be year 2000 compliant prior to the year 2000.
These third parties also supply, at least quarterly, an update of their
progress. Tri-County has contacted all material customers and non-information
technology suppliers (i.e. utility systems, telephone systems and security
systems) regarding their year 2000 state of readiness.
Tri-County is unable to test the Year 2000 readiness of its significant
suppliers of utilities, and is relying on the utility companies' internal
testing and representations to provide the required services that drive its data
systems.
As a practical matter, individual mortgage loan, consumer loan and smaller
commercial loan customers were not contacted regarding their Year 2000
readiness. It was deemed to be beyond the scope of Tri-County's testing
parameters to contact these borrowers. Further, most of these are individuals
with adequate collateral for their loans.
28
<PAGE>
The Renovation phase is targeted for completion by March 31, 1999. The
Validation phase, which involves testing of changes to hardware and software,
accompanied by monitoring and testing with vendors, is targeted for completion
by June 30, 1999. The Implementation phase, to certify that systems are year
2000 ready and to assure any new systems are compliant on a going-forward basis,
is targeted for completion by September 30, 1999.
Costs will be incurred to replace noncompliant computers and software.
Tri-County does not anticipate that the related overall costs will be material
in any single year. Tri-County estimated its cost for compliance to be
approximately $25,000 over the three year period from 1998 to 2000, of which
none was incurred as of December 31, 1998. Tri-County does not separately track
the internal personnel costs incurred for the year 2000 compliance.
No assurance can be given that the Plan will be completed successfully by the
year 2000, in which event Tri-County could incur significant costs. If the
Service Center is unable to resolve the potential problem in time, Tri-County
would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a significant adverse
impact on the consolidated financial statements of Tri-County.
The FFIEC has provided guidelines for establishing a Contingency Plan for all
possible year 2000 failures. Tri-County began formulating a Year 2000
Contingency Plan in 1998. The objective of the Contingency Plan is to prepare
for any year 2000 failure that could result from internal software and hardware,
the Service Center, and/or third parties (utilities, telephone, suppliers, and
other banks). The Contingency Plan is updated continually based on new
information from third parties and other vendors on their year 2000 conversions.
Tri-County will attempt to monitor these uncertainties by continuing to request
an update on all critical and important vendors throughout the remainder of
1999. If Tri-County identifies any concern related to any critical or important
vendor, the contingency plans will be implemented immediately to assure
continued service to its customers.
Other
In the normal course of business, Tri-County is involved in various legal
actions arising from its lending and collection activities. In the opinion of
management, the outcome of these legal actions will not significantly affect the
consolidated financial position of Tri-County.
NOTE 15 - STOCKHOLDERS' EQUITY
In 1993, Tri-County was formed when the Bank converted from a mutual to a stock
form of ownership. A "liquidation account" was established that restricts a
portion of net worth for the benefit of deposit accounts at the Bank at the time
of the conversion. Eligible account holders who close their accounts cause a
corresponding reduction in the liquidation account. Except for the repurchase of
stock, payment of dividends and complete liquidation, the existence of the
account does not restrict the use of the Bank's net worth. At December 31, 1998,
the liquidation account was $1,538,019 as compared to $6,432,095 at inception.
Payment of dividends to Tri-County by the Bank are subject to the above
restriction as well as various other regulatory restrictions and approvals.
29
<PAGE>
NOTE 16 - COMPREHENSIVE INCOME
Effective January 1, 1998, Tri-County adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial condition. Tri-County's only item of other comprehensive
income is the unrealized gain (loss) on securities available for sale, which is
reported net of tax effect. The following schedule reflects the unrealized
holding gains arising during the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
<S> <C> <C> <C>
For the year ended December 31, 1998
Unrealized holding gains arising during the period $519,159 $(176,514) $342,645
Less reclassification adjustment for gains
realized in net earnings (80,940) 27,520 (53,420)
------- ------ -------
Net Unrealized Gains $438,219 $(148,994) $289,225
======== ========= ========
For the year ended December 31, 1997
Unrealized holding gains arising during the period $804,120 $(273,401) $530,719
Less reclassification adjustment for losses
realized in net earnings 71,421 (24,283) 47,138
------ ------- ------
Net Unrealized Gains $875,541 $(297,684) $577,857
======== ========= ========
</TABLE>
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced sale or
liquidation, and is best evidenced by a quoted market price, if one exists.
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information.
Where available, quoted market prices are used. In other cases, fair values are
based on estimates using present value or other valuation techniques. These
techniques involve uncertainties and are significantly affected by the
assumptions used and judgments made regarding risk characteristics of various
financial instruments, discount rates, estimates of future cash flows, future
expected loss experience and other factors. Changes in assumptions could
significantly affect these estimates and the resulting fair values. Derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in an immediate sale of the
instrument. Also, because of differences in methodologies and assumptions used
to estimate fair values, Tri-County's fair values should not be compared to
those of other financial institutions.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market of Tri-County.
The following summary presents the methodologies and assumptions used to
estimate the fair value of Tri-County's financial instruments.
30
<PAGE>
Assets for Which Fair Value Approximates Carrying Value: The fair value of
certain financial assets carried at cost, including cash and due from banks,
deposits with banks, and accrued interest receivable are considered to
approximate their respective carrying values due to their short-term nature and
negligible credit losses. In addition, as discussed in Note 1, Tri-County valued
loans held for sale at fair value.
Federal Home Loan Bank Stock: As discussed in Note 1, the stock's fair value
approximates carrying value due to the limited marketability.
Securities: Held to maturity securities are carried at amortized costs.
Available for sale securities are carried at fair value. Fair value of actively
traded securities is determined by the secondary market, while the fair value of
nonactively traded securities is based on independent broker quotations.
Loans: Loans are valued using methodologies suitable for each loan type.
Variable rate loans that reprice frequently and have no significant change in
credit risk, fair value is assumed to approximate carrying amount. Fair value of
other loans is estimated using a discounted cash flow analysis based on interest
rates currently offered for similar loan products.
Liabilities for Which Fair Value Approximates Carrying Value: The fair value of
accounts payable, accrued liabilities and accrued interest payable is considered
to approximate their respective book values due to their short-term nature. By
definition, fair values of deposits with no stated maturities, such as demand
deposits, savings and NOW accounts and money market deposit accounts are equal
to the amounts payable on demand at the reporting date.
Time Deposits: The fair value of time deposits is estimated by discounting cash
flows based on contractual maturities at current interest rates offered for
similar products.
Long-Term Debt: The valuation of long-term debt with floating rates is estimated
to be the same as carrying value. Fair value of long-term debt with fixed rates
is estimated based on quoted market prices for similar issues, or by using
current rates offered to Tri-County for debt of the same remaining maturity.
Unused Commitments and Lines of Credit: Tri-County has reviewed the unfunded
portion of commitments to extend credit as well as lines of credit and available
overdraft protection. The fair value of such financial instruments is considered
to equal the amounts payable on demand at the reporting date.
Following are the estimated fair values of Tri-County's financial instruments:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets
Assets for which fair value approximates book value $4,250,486 $4,250,486 $5,021,975 $5,021,975
Securities $32,309,266 $32,448,838 $44,513,262 $44,787,003
Loans $42,054,222 $42,667,077 $40,425,288 $41,149,803
Financial liabilities
Liabilities for which fair value approximates book value $15,660,721 $15,660,721 $14,077,029 $14,077,029
Time deposits $30,770,264 $30,892,273 $32,359,696 $32,436,396
Long-term debt $23,799,117 $23,862,484 $29,696,616 $29,573,248
Off-balance sheet commitments $1,798,800 $1,798,800 $2,066,900 $2,066,900
</TABLE>
31
<PAGE>
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONDENSED PARENT COMPANY ONLY
STATEMENTS OF CONDITION
December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets
Cash $ 157,539 $ 250,308
Investment in subsidiary 8,591,255 12,229,216
Securities available for sale 530,780 533,990
Other assets, net 32,770 40,952
------ ------
Total Assets $9,312,344 $13,054,466
========== ===========
Liabilities and stockholders' equity
Other liabilities $ 1,879 $ 1,965
Stockholders' equity 9,310,465 13,052,501
--------- ----------
Total Liabilities and Stockholders' Equity $9,312,344 $13,054,466
========== ===========
STATEMENTS OF OPERATIONS
Year ended December 31,
1998 1997
----------- -----------
Revenue
Equity in earnings of subsidiary $917,644 $911,272
Other income 57,285 82,734
Expense
Operating expenses (52,416) (118,002)
Income tax benefit 15,550 25,000
------ ------
Net Income $938,063 $901,004
======== ========
STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997
----------- -----------
Operating activities
Net income $ 938,063 $901,004
Adjustments to reconcile net income to net
Earnings of subsidiary (917,644) (911,272)
Amortization of organization expense 801 1,068
Loss on sale of securities - 1,751
(Increase)decrease in other assets and accrued liabilities 8,386 (28,106)
----- -------
Net Cash Provided (Used) by Operating Activities 29,606 (35,555)
------ -------
Ivesting activities
Sale of securities available for sale - 600,000
Dividends received 4,650,000 -
--------- --------
Net Cash Provided by Investing Activities 4,650,000 600,000
========= =======
Financing activities
Dividends paid (470,268) (386,937)
Stock options exercised 127,126 -
ESOP payments received 59,800 59,800
Treasury stock purchased (4,489,033) (600,000)
---------- --------
Net Cash Used by Financing Activities (4,772,375) (927,137)
---------- --------
Net Decrease in Cash (92,769) (362,692)
Cash and cash equivalents - beginning of period 250,308 613,000
------- -------
Cash and cash equivalents - end of period $ 157,539 $250,308
========= ========
</TABLE>
32
<PAGE>
DIRECTORS
LARRY C. GODDARD, Chairman
ROBERT L. SAVAGE, President & Chief Executive Officer
CARL F. RUPP, Secretary
LANCE H. GRIGGS
DAVID C. KELLAM
WILLIAM J. RUEB
AUDITORS
DALBY, WENDLAND & CO., P.C.
464 Main Street, P.O. Box 430
Grand Junction, Colorado 81502
LEGAL COUNSEL SPECIAL COUNSEL
JOHN MAIER MALIZIA, SPIDI, SLOANE & FISCH P.C.
110 West 22nd Avenue 1301 K Street, N.W., Suite 700 E
Torrington, Wyoming 82240 Washington, D.C. 20005
REGISTRAR AND STOCK TRANSFER AGENT
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and/or address should be directed to the stock transfer agent and
registrar in writing.
ATTN: Investor Relations
AMERICAN SECURITIES TRANSFER, INCORPORATED
938 Quail Street, Suite 101
Lakewood, Colorado 80215-5513
MARKET MAKERS
As of December 31, 1998, the following firms were market makers in the Company's
shares:
Friedman, Billings, Ramsey & Co., Inc. - Washington D.C.
Keefe, Bruyette & Woods, Inc. - New York, New York
FORM 10-KSB
A copy of Form 10-KSB for the year ended December 31, 1998, excluding exhibits,
as filed with the Securities and Exchange Commission, will be furnished without
charge to stockholders upon request to the Secretary, Tri-County Bancorp, Inc.,
P.O. Box 1057, Torrington, Wyoming 82240.
ANNUAL MEETING
The annual meeting of stockholders of Tri-County Bancorp, Inc. will be held at
3:00 p.m. on April 28, 1999 at Tri-County Federal Savings Bank's main office,
2201 Main Street, Torrington, Wyoming.
33
<PAGE>
MAIN OFFICE BRANCH OFFICE
2201 Main Street, P.O. Box 1057 957 Maple, P.O. Box 337
Torrington, Wyoming 82240 Wheatland, Wyoming 82201
Telephone - (307) 532-2111 Telephone - (307) 322-9215
Fax - (307) 532-7631 Fax - (307) 322-4080
Email - [email protected]
EXECUTIVE OFFICERS
Robert L. Savage
President & Chief Executive Officer
Earl F. Warren, Jr.
Senior Vice President
Tommy A. Gardner
Vice President & Chief Financial Officer
STAFF
Roseanne L. Burnett, Vice President & Branch Manager
Jane E. Faber, Assistant Secretary
Richard R. Yates, Vice President
Pam J. Heilbrun
Colleen M. Holtzclaw
Nancy A. Martin
Brita F. Mehling
Michele L. Nation
Terri J. Pindell
Becky J. Shaffer
Linda L. Smith
Darlene L. Sorge
Debra K. Stoeger
Lynette K. Strecker
Diana R. Toner
Scott L. Vasko
Mona Kay Williams
34
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Form 10-KSB of Tri-County
Bancorp, Inc. of our report dated February 5, 1999, on our audits of the
consolidated financial statements of Tri-County Bancorp, Inc. as of December 31,
1998 and 1997, and for the years then ended, which report is included in the
Annual Report.
/s/ Dalby, Wendland & Co. P.C.
Grand Junction, Colorado
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 385,804
<INT-BEARING-DEPOSITS> 2,979,241
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,727,466
<INVESTMENTS-CARRYING> 5,335,700
<INVESTMENTS-MARKET> 5,474,222
<LOANS> 42,054,222
<ALLOWANCE> 409,984
<TOTAL-ASSETS> 81,307,997
<DEPOSITS> 45,974,086
<SHORT-TERM> 7,683,000
<LIABILITIES-OTHER> 24,913,244
<LONG-TERM> 16,116,117
0
0
<COMMON> 152,043
<OTHER-SE> 10,268,624
<TOTAL-LIABILITIES-AND-EQUITY> 81,307,997
<INTEREST-LOAN> 3,465,184
<INTEREST-INVEST> 2,602,786
<INTEREST-OTHER> 105,045
<INTEREST-TOTAL> 6,173,015
<INTEREST-DEPOSIT> 2,052,506
<INTEREST-EXPENSE> 3,546,019
<INTEREST-INCOME-NET> 2,626,996
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 80,940
<EXPENSE-OTHER> 1,564,011
<INCOME-PRETAX> 1,353,677
<INCOME-PRE-EXTRAORDINARY> 938,063
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 938,063
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 3.14
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 130,940
<ALLOWANCE-OPEN> 412,456
<CHARGE-OFFS> 2,738
<RECOVERIES> 266
<ALLOWANCE-CLOSE> 409,984
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 409,984
</TABLE>
