SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X 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, 1999
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
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(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. $6,232,680
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
27, 2000, was $5,804,638 ($10.6875 per share based on 543,124 shares of Common
Stock outstanding).
As of March 27, 2000, there were issued and outstanding 869,444 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, 1999. (Part II) 2. Portions of the Proxy Statement for the Annual
Meeting of Stockholders for the Fiscal Year ended December 31, 1999. (Part III)
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PART I
Item 1. Description of Business
Business of the Company
Tri-County Bancorp, Inc. (the "Company") is a Wyoming corporation and
holding company of Tri-County Bank (the "Bank"). The Company is a unitary
savings and loan holding company which, under existing laws, may engage in
various business activities 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 with an additional branch office in Wheatland, Wyoming and a
new branch in Cheyenne, Wyoming that is scheduled to open in April 2000. The
Bank intends to offer the same products and services in the Cheyenne office as
are currently offered in its Torrington and Wheatland offices. 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 May of 1999 the Bank entered into
agricultural lending and increased its emphasis on commercial business
relationships. 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, New Mexico and Idaho, 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.
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. The Bank's market area will
expand into Laramie County, Wyoming when the Cheyenne branch opens. The Bank's
existing market 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, 1999, over 56% of the Bank's net
loan portfolio of $49.0 million consisted of loans made to entities located in
the Bank's market area. In fiscal 1999, the Bank purchased $5.4 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, and two
regional banks in its market area. Due to their size, many of the Bank's
competitors possess greater financial and marketing resources. 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.
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,
-----------------------------------------
1999 1998
-----------------------------------------
$ % $ %
------- ------- ------- -------
(Dollars in Thousands)
Type of Loans
- -------------
Real Estate - Construction $ 369 0.75% $ 237 0.56%
Real Estate - Residential 34,656 70.77% 32,403 77.06%
Real Estate - Commercial 7,070 14.44% 6,141 14.60%
Real Estate - Agricultural 1,703 3.48% - 0.00%
Commercial Business 806 1.65% 450 1.07%
Commercial Agricultural 883 1.80% - 0.00%
Consumer loans:
Savings account loans 138 0.28% 146 0.35%
Home equity & second mortgages 1,364 2.78% 1,364 3.24%
Vehicle 2,284 4.66% 1,477 3.51%
Overdraft 56 0.11% 47 0.11%
Other 191 0.39% 277 0.66%
Less:
Deferred loan fees (76) -0.16% (78) -0.19%
Allowance for loan & lease loses (464) -0.95% (410) -0.97%
---- ------ ------ ------
Total loans, net $48,980 100.00% $42,054 100.00%
======= ======= ======= =======
The following table sets forth the maturity of the Bank's loan portfolio at
December 31, 1999. The table does not include prepayments. Prepayments totaled
$15.21 million and $13.89 million for the years ended December 31, 1999 and
1998, respectively. All loans are shown as based on contractual maturities.
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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 $ 331 $ 600 $ 565 $ 958 $2,454
1 to 5 Years 2,811 589 - 3,269 6,669
After 5 Years 31,514 7,584 - 1,496 40,594
Nonperfoming - - - - -
------- ------ ---- ----- ------
Total amount due $34,656 $8,773 $ 565 $5,723 $49,717
======= ====== ===== ====== =======
Less:
Allowance for loan losses (464)
Loans in process (197)
Deferred fees and unearned
discounts (76)
------
Loans receivable, net $48,980
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 2000 which have fixed interest rates and which have floating or
adjustable interest rates:
Floating or
Fixed-rate Adjustable Total
rate
--------------------------------------
(In Thousands)
Residential real estate mortgages $17,987 $16,339 $34,326
Commercial real estate mortgages 3,243 4,930 8,173
Construction real estate mortgages -- -- --
Consumer & commercial loans 3,798 966 4,764
------- ------ ------
Total $25,028 $22,235 $47,263
======= ======= =======
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, 1999, the Bank had 32 multi-family and commercial real estate loans
totaling $7.30 million or 14.7% of the Bank's loan portfolio. At December 31,
1999, the largest multi-family and commercial real estate loans had balances of
$178,515 and $871,706 respectively. See "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.
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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, 1999, the Bank had $1.69 million 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, 1999, these
consumer loans totaled $4.03 million, or 8.11%, of the Bank's loan portfolio,
$2.23 million or 4.48% 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 real estate loans of between $50,000 and
$100,000. The approval limit is a function of the loan officers experience,
tenure with the Bank, and position at the Bank. A staff loan committee,
consisting of senior officers of the Bank, can approve loans up to $150,000. 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.
The Bank has two senior loan officers who are "Designated Underwriters"
and are authorized to approve all loans to be sold in the secondary market to
the Federal Home Loan Mortgage Corporation (Freddie Mac) in accordance with
limits as set by Freddie Mac.
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.
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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, 1999, the
Bank's purchased loan portfolio and participation loans totaled $19.9 million,
or 39.9% of the loan portfolio. Of the purchased loan portfolio at December 31,
1999, $15.9 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.
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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, 1999, the Bank had $1.68 million of loan commitments to originate
or purchase mortgage loans.
Loan Servicing. As of December 31, 1999, loans serviced for others totaled
$2.49 million. 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.
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, 1999.
At December 31, 1999, the Bank's five largest aggregate lending
relationships had balances ranging from $1,109,452 to $737,408 with an average
balance of $684,004. These lending relationships involved loans purchased or
originated by the Bank and secured by commercial real estate and single family
residences in Wyoming, New Mexico, Colorado, and Idaho. At December 31, 1999,
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 $76,353 at December 31, 1999.
Nonperforming Assets. The following table sets forth information regarding
non-accrual loans, real estate owned, and other repossessed assets. At December
31, 1999 the Bank had no loans which were considered troubled debt
restructurings within the meaning of SFAS No. 15.
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At December 31,
---------------
1999 1998
(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%
=== ===
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 "watch list", "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 by 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 as "watch list"
are noted for the benefit of Tri-County Bank's management and are classified
because of potential weakness or risk but 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.
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At December 31,
---------------
1999 1998
(In Thousands)
Watch List $ 97 $ 78
=== ===
Classified Assets:
Substandard $ 0 $ 52
Doubtful $ 0 --
Loss $ 0 --
--- ----
Total $ 0 $ 52
=== ====
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.
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, 1999, 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.
-10-
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
At December 31,
---------------
1999 1998
---- ----
(Dollars in Thousands)
Total loans outstanding(1) $49,717 $42,900
======= =======
Average loans outstanding $45,919 $42,782
======= =======
Allowance for loan losses (at beginning of 410 412
period)
Provision for loan losses (credit):
Residential -- --
Commercial real estate -- --
Consumer(1) -- --
Net charge-offs:
Residential -- --
Commercial real estate -- --
Consumer (16) (3)
Net recoveries:
Commercial 70 1
---------- -------- -------
Allowance for loan losses (at end of period) $ 464 $ 410
======== =======
Allowance for loan losses as a percent
of total loans outstanding 1.08% 0.96%
Net loans charged-off as a percent of average
loans outstanding (0.03)% (0.00)%
Allowance for loan losses as a percent
of nonperforming loans N/A N/A
nonperforming loans
- ----------------------
(1) Includes all loans receivable and loans held for sale, adjusted for
deferred loan fees, unearned discounts, and undisbursed loans in process.
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,
------------
1999 1998
---- ----
(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, 1999, the Bank held $1.13 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.
-11-
<PAGE>
Mortgage-backed Securities and Investment Activities
General. At December 31, 1999, the Company had an investment portfolio of
approximately $34.48 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, executive vice president, the chief
financial officer, and the senior lending officer. The chief financial officer
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.
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, 1999, the market value
of the Company's held to maturity portfolio was $7.28 million.
At December 31,
---------------
1999 1998
---- ----
(In Thousands)
Available for sale portfolio
Agency securities $13,575 $5,602
Mortgage related securities 10,151 15,868
Held to maturity portfolio
Agency securities 2,000 501
State and other political subdivisions 173 176
Mortgage related securities 5,064 4,658
Open-ended mutual funds 526 3,960
FHLMC stock 1,099 1,544
FHLB stock 1,887 1,754
----- ---- -----
Total $34,475 $34,063
======= =======
-12-
<PAGE>
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). The yield on tax exempt securities has been computed
on a tax equivalent basis.
<TABLE>
<CAPTION>
At December 31, 1999
----------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Total Investment
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 - - - - 1,000 7.80% 1,000 8.00% 2,000 7.90% 1,980
Available for sale - - 7,782 6.24% 5,793 6.86% - - 13,575 6.50% 13,575
Mortgage-backed securities(1):
Held to maturity 419 5.66% 10 9.27% 346 7.70% 4,290 6.85% 5,065 6.81% 5,124
Available for sale - - - - 564 6.50% 9,587 6.69% 10,151 6.68% 10,151
Tax exempt securities - - - - 75 6.00% 98 6.40% 173 6.23% 173
FHLB Stock(2) N/A N/A N/A N/A N/A N/A N/A N/A 1,887 N/A 1,887
FHLMC Stock(2) N/A N/A N/A N/A N/A N/A N/A N/A 1,099 N/A 1,099
Mutual Funds(2)(3):
ARM Portfolio N/A N/A N/A N/A N/A N/A N/A N/A 526 5.73% 526
----- ----- ----- ----- ----- ----- ----- ----- ------ ----- ------
Total $419 5.66% $7,792 6.84% $7,778 6.48% $14,975 6.73% $34,476 6.68% $34,515
===== ===== ====== ===== ====== ===== ======= ===== ======= ===== =======
- ---------------------------
(1) Included unamortized premiums of $40,687 at December 31, 1999.
(2) Amounts are only included in total columns because these investments do not
have stated maturities.
(3) The mutual fund 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.
</TABLE>
-13-
<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.
Savings accounts, NOW accounts, and money market accounts constituted
$16.22 million, or 31.32% of the Bank's deposit portfolio at December 31, 1999.
Certificates of deposit with original maturities of three to 12 months
constituted $15.36 million or 29.65% of the deposit portfolio. Jumbo
certificates of deposit, with principal amounts of $99,000 or more, constituted
$7.68 million or 14.83% of the portfolio at December 31, 1999. Of that amount,
$668,000 was deposits of the State of Wyoming for which the Bank pledged a $2.0
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,
----------------
1999 1998
---- ----
Interest Rate (In Thousands)
3.01-4.00% $ 257 $ 295
4.01-5.00% 20,039 11,183
5.01-6.00% 12,530 18,531
6.01-7.00% 1,762 761
------ ------
Total $34,588 $30,770
====== ======
The following table sets forth the amount and maturities of time deposits
at December 31, 1999.
Amount Due
--------------------------------------------------------------
December 31, December 31, December 31, December 31,
Interest Rate 2000 2001 2002 2003 Total
- ----------------- --------------------------------------------------------------
3.001%-4.000% 257,475 - - - 257,475
4.001%-5.000% 16,710,034 2,835,569 263,949 228,728 20,038,280
5.001%-6.000% 9,723,251 2,130,951 614,289 61,346 12,529,837
6.001%-7.000% 1,650,013 111,982 - - 1,761,995
7.001%-8.000% - - - - -
----------- ---------- -------- -------- ----------
$28,340,773 $5,078,502 $878,238 $290,074 $34,587,587
=========== ========== ======== ======== ===========
-14-
<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, 1999.
Maturity Period Balances
- --------------- --------
(In Thousands)
Three months or less $3,748
Over three through six months 807
Over six through twelve months 2,585
Over twelve months 541
---
Total $7,681
======
Borrowings
As a member of the FHLB of Seattle, the Bank has access to its advance
program and other credit products. At December 31, 1999, the Bank had $25.56
million borrowings outstanding from the FHLB. As of and for the year ended
December 31, 1999, 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
1999 1998
---- ----
(Dollars in Thousands)
Maximum balance $32,115 $29,135
Average balance 25,088 25,786
Balance at end of period 25,558 23,799
Weighted average rate:
at end of period 5.65% 5.75%
during the period 5.52% 5.50%
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,
1999, the net book value of the Company's investment in the Bank amounted to
$8.44 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, 1999, the Bank was authorized to invest up to approximately $1.74
million in the stock of service corporations. As of December 31, 1999, the net
book value of the Bank's investment in stock, unsecured loans and conforming
loans in its service corporation was $16,474.
Employees
Substantially, all of the activities of the Company are conducted through
the Bank, therefore at December 31, 1999 the Company did not have any salaried
employees. As of December 31, 1999, the Bank had 20 full-time employees and 4
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.
-15-
<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.
-16-
<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, 1999, amounted to approximately $27,200.
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, 1999:
-17-
<PAGE>
Percent of
Adjusted
Amount Assets
------------------
(Dollars in Thousands)
Tangible Capital:
Regulatory requirement $1,311 1.50%
Actual capital 8,216 9.40%
------ -----
Excess $6,905 7.90%
====== =====
Core Capital:
Regulatory requirement $3,495 4.00%
Actual capital 8,216 9.40%
------ -----
Excess $4,721 5.40%
====== =====
Risk-Based Capital:
Regulatory requirement $3,250 8.00%
Actual capital 9,164 22.56%
------ ------
Excess $5,914 14.56%
====== ======
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, 1999 as calculated by the OTS and based on OTS assumptions
utilizing raw data voluntarily provided to the OTS by the Bank.
-18-
<PAGE>
Changes in Interest
Rates in Basis Points Net Portfolio Value NPV as % of Assets
(Rate Shock) (1)
- --------------------- ----------------------------- -----------------------
$ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- --------- ------
(Dollars in Thousands)
+300 bp 7,790 -3,760 -34% 9.45% -378 bp
+200 bp 9,244 -2,506 -21% 10.91% -231 bp
+100 bp 10,577 -1,173 -10% 12.18% -104 bp
0 bp 11,750 13.22%
-100 bp 12,135 385 3% 13.46% +24 bp
-200 bp 12,861 1,111 9% 14.00% +78 bp
-300 bp 13,546 1,796 15% 14.48% +126 bp
- --------------------
(1) Denotes rate shock used to compute interest rate risk capital component.
As of December 31,
1999
RISK MEASURES:
200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as %
of Present Value of Assets 13.22%
Exposure Measure: Post-Shock
NPV Ratio 10.91%
Sensitivity Measure: Change in
NPV Ratio -231 bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of Present
Value of Assets -2.82%
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 because the rules have not been implement by the TS,
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.
-19-
<PAGE>
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 its net
income to date during the calendar year plus its retained net income for the
preceding two years. Any additional capital distributions require prior
regulatory approval. As of December 31, 1999, 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).
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 FHLB, 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, 1999, the
Bank was in compliance with its QTL requirement with 68.93% 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 -- 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.
-20-
<PAGE>
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.
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, 1999, 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, 1999, the Bank had $1.89 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, 1999, the Bank was in compliance with these Federal Reserve Board
requirements.
-21-
<PAGE>
Item 2. Description of Property
(a) Properties.
At December 31, 1999, the Company had a total investment in its land,
buildings and improvements, and fixtures, furniture, and equipment of
$3,140,662, less accumulated depreciation of $1,112,374, for a net carrying
value of $2,028,288.
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
8,760 square feet. The total investment in the property and equipment at the
main office is $1,304,140 with a net book value of $604,160 at December 31,
1999. 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 $117,500 at December
31, 1999.
The Company is in the process of opening a third branch office in Cheyenne,
Wyoming. A parcel of land has been purchased consisting of 4.5 acres of which
one acre will be used as the site for the new branch and the remaining 3.5 acres
will be offered for sale or held for future development jointly by the Bank and
an undetermined third party. At December 31, 1999 costs totaling 1.2 million had
been incurred for the purchase of the entire parcel of land and the ongoing
construction of the new branch. The total cost of the facility is estimated to
be $1.4 million and the projected opening date is in the second quarter of 2000.
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 to the Company is expected from any of such pending claims or
lawsuits.
-22-
<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, 1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Capital Stock" in
the Company's Annual Report to Stockholders for the fiscal year ended December
31, 1999 (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 and related notes and
reports listed under Item 13(a) of this Form 10-KSB 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(a) 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" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for the Company's Annual
Meeting of Stockholders to be held on April 26, 2000 (the "Proxy Statement") 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.
-23-
<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, 1999 and 1998
(b) Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998
(c) Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999 and 1998
(d) Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998
(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.*
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)
13 Annual Report to Stockholders for the fiscal year ended
December 31, 1999
-24-
<PAGE>
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.
There were no reports on Form 8-K filed during the last quarter of
the period covered by this report.
(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 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.
-25-
<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, 2000 By:/s/Robert L. Savage
-------------------------------
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
---------------------------- -------------------------------
Robert L. Savage William J. Rueb
President, Chief Executive Officer Director
and Director (Principal Executive
Officer)
Date: March 30, 2000 Date: March 30, 2000
By:/s/Larry C. Goddard By:/s/Lance H. Griggs
---------------------------- -------------------------------
Larry C. Goddard Lance H. Griggs
Chairman of the Board Director
Date: March 30, 2000 Date: March 30, 2000
By:/s/David C. Kellam By:/s/Tommy A. Gardner
---------------------------- -------------------------------
David C. Kellam Tommy A. Gardner
Director Vice President and Chief Financial
Officer (Principal Accounting and
Financial Officer)
Date: March 30, 2000 Date: March 30, 2000
By:/s/Carl F. Rupp
----------------------------
Carl F. Rupp
Director
Date: March 30, 2000
[COMPANY LOGO]
Tri-County Bancorp, Inc.
1999 Annual Report
<PAGE>
----------------------------------------------------------------
TABLE OF CONTENTS
----------------------------------------------------------------
Selected Financial Data i
----------------------------------------------------------------
Letter to Stockholders ii
----------------------------------------------------------------
Management's Discussion and Analysis 1
----------------------------------------------------------------
Report of Independent Auditors 9
----------------------------------------------------------------
Consolidated Statements of Financial Condition 10
----------------------------------------------------------------
Consolidated Statements of Operations 11
----------------------------------------------------------------
Consolidated Statements of Stockholders' Equity 12
----------------------------------------------------------------
Consolidated Statements of Cash Flows 13
----------------------------------------------------------------
Notes to Consolidated Financial Statements 15
----------------------------------------------------------------
Corporate and Stockholders' Information 31
----------------------------------------------------------------
<PAGE>
SELECTED FINANCIAL DATA
At December 31,
1999 1998 1997 1996 1995
-------------------------------------------
(In Thousands)
BALANCE SHEET DATA Total amount of:
Assets $88,516 $81,308 $89,961 $85,888 $65,766
Loans receivable, net 48,980 42,054 40,425 35,265 25,514
Mortgage-backed & investment
securities - Available for
sale 27,239 28,727 36,526 35,140 18,097
Mortgage-backed & investment
securities - Held to 7,238 5,336 7,987 10,320 18,264
maturity
Deposits 51,809 45,974 45,405 48,533 44,583
FHLB advances 25,558 23,799 29,697 23,460 7,000
Stockholders' equity 10,251 10,421 13,827 13,146 13,496
Year Ended December 31,
1999 1998 1997 1996 1995
-------------------------------------------
(In Thousands)
STATEMENT OF OPERATIONS DATA
Interest income $5,923 $6,173 $6,466 $5,494 $4,600
Net interest income 2,505 2,627 2,744 2,468 2,266
Provision for loan losses -- -- -- -- --
Non-interest income 313 291 105 159 171
Non-interest expenses 1,658 1,564 1,623 1,811(1) 1,458
Net income 794 938 901 540(1) 649
At or For Year Ended December 31,
1999 1998 1997 1996 1995
-------------------------------------------
FINANCIAL RATIOS & OTHER DATA
Return on average assets 0.94% 1.09% 1.02% 0.71%(1) 1.04%
Return on average 7.69% 6.72% 6.68% 4.05%(1) 4.96%
stockholders' equity
Average interest rate spread 2.53% 2.39% 2.48% 2.68% 2.69%
Net yield on average earning
assets 3.07% 3.14% 3.19% 3.35% 3.62%
Non-interest expense to
total assets 1.87% 1.92% 1.80% 2.11%(1) 2.22%
Average equity/average total
assets 12.17% 16.03% 15.20% 16.82% 20.47%
Non-performing loans/total
assets 0.00% 0.00% 0.00% 0.04% 0.03%
Dividends/total income 49.27% 50.13% 42.95% 57.83%(1)37.40%
At or For Year Ended December 31,
1999 1998 1997 1996 1995
-------------------------------------------
PER SHARE INFORMATION(2)
Earnings per share - diluted $0.85 $0.78 $.071 $0.41(1) $0.47
Dividends per share 0.44 0.43 0.33 0.25 0.19
Book value per share 11.31 11.86 11.84 10.80 10.53
- ------------------------------
(1)Includes the effect of a one-time special assessment to recapitalize
the SAIF.
(2)Restated to reflect 100% stock dividend paid December 8, 1997
i
<PAGE>
To Our Stockholders:
Tri-County Bancorp, Inc. achieved a third year of record earnings in 1999.
Earnings per share on a fully diluted basis were $0.85, which exceeded 1998 by
9.0% or $0.07. The tender offer completed in late 1998 reduced the number of
shares outstanding and provided a positive influence to the excellent earnings
per share performance this year. Additionally, as a result of the tender offer
in 1998 capital was reduced by $4.5 million. The loss of capital reduced the
amount of low cost funds available for investment and contributed to a reduction
in total income of $144,000. Both the increase in earnings per share and the
reduction in the dollar amount of earnings were anticipated.
This year was also significant with a 16.5% increase in the loan portfolio, and
an 8.3% increase in deposits (when reduced by a $2,000,000 short term public
deposit at year end). Securities varied by only a small increase over the
previous year. These changes are consistent with the goals of the Company of
increasing loans and deposits while holding the investment portfolio at or below
its present level.
The Company has made other significant changes this past year. The first is our
entrance into agricultural lending and increased emphasis on commercial business
relationships. Joe Guth, our Executive Vice President, joined our Company in May
and has helped to facilitate this change. Secondly, we are in the process of
opening a new branch in Cheyenne, Wyoming. We will emphasize small business
relationships in the Cheyenne market and expect that this new facility will help
shift the asset mix over a period of time to higher yielding and shorter term
loans. As of the writing of this letter, the new Cheyenne branch is close to
completion, and we expect to have it open in early April. The new branch will
have a negative impact on earnings for a few years until it reaches a break-even
point, however, we have set aggressive goals for the branch and expect success.
The Company announced a repurchase of 5% of outstanding common stock in February
2000. We expect to complete this repurchase program soon and at very favorable
prices.
We thank the Stockholders for their continued support of the Company. Please
contact us with your questions about Tri-County Bancorp, Inc.
Sincerely,
Robert L. Savage Larry C. Goddard
President and Chief Executive Officer Chairman of the Board
ii
<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, may engage in various types of business
activities, provided that Tri-County 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 an additional branch office in Wheatland, Wyoming and a
new branch in Cheyenne, Wyoming that is scheduled to open in April 2000. 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, agricultural and commercial
real estate loans, and agricultural and commercial business loans. The Bank's
market area is primarily Goshen and Platte Counties, Wyoming and Scottsbluff
County in western Nebraska and will expand into Laramie County, Wyoming when the
Cheyenne branch opens. The Bank offers its customers several types of real
estate loans, including adjustable-rate and fixed-rate mortgage loans and also
originates multi-family and commercial real estate loans, and consumer loans,
including automobile and home equity loans. In addition, the Bank purchases
loans from 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. The Bank also invests in investment securities
and mortgage-backed securities.
1
<PAGE>
CAPITAL STOCK
Since its issuance in September 1993, the Company's common stock has been traded
over-the-counter on the Nasdaq SmallCap MarketSM appearing under the symbol
"TRIC." The following table reflects the stock price as published by the Nasdaq
statistical report.
DIVIDEND
1998 LOW HIGH DECLARED
First Quarter--03/31/98 $13.13 $15.00 $.10
Second Quarter--06/30/98 $12.50 $16.50 $.11
Third Quarter--09/30/98 $11.50 $13.00 $.11
Fourth Quarter--12/31/98 $11.25 $14.00 $.11
1999
First Quarter--03/31/99 $10.50 $14.69 $.11
Second Quarter--06/30/99 $9.81 $13.31 $.11
Third Quarter--09/30/99 $9.00 $13.75 $.11
Fourth Quarter--12/31/99 $8.25 $11.75 $.11
The number of shareholders of record as of December 31, 1999 was approximately
219. 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, 1999
there were 906,234 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.
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
Total assets of the Bank increased by $7.21 million or 8.86% during the year of
1999. The increase was primarily the result of increases in loans receivable,
securities held to maturity and bank property and equipment which more than
offset decreases in interest earning deposits and securities available for sale.
Interest earning deposits decreased $1.85 million during the period. The
decrease was primarily the result of the funding of loans.
Securities available for sale decreased by $1.49 million during the year ended
December 31, 1999. Securities totaling $3.44 million were sold, principal
payments and prepayments of $5.39 million were received on mortgage-backed
securities, a $1 million agency security was called by the issuer and the market
value of the securities decreased $1.26 million during the period. These
decreases were partially offset by purchases of agency securities totaling $9.5
million.
2
<PAGE>
Securities held to maturity increased by $1.9 million. The increase was the
result of the purchase of agency and mortgage-backed securities totaling $4
million which more than offset principal payments and prepayments of $1.59
million on the Bank's portfolio of mortgage-backed securities and the maturity
of a $500,000 agency security.
Loans receivable increased $6.93 million during the twelve months ended December
31, 1999. During this period, the Bank originated or purchased portfolio
residential mortgage loans totaling $10.03 million, non-residential mortgage
loans totaling $4.15 million, consumer loans totaling $3.14 million, and
commercial loans totaling $1.66 million. During the same period, the Bank
received scheduled principal payments and prepayments totaling $15.21 million on
its loan portfolio. Of the total mortgage loans originated or purchased during
the year, $7.13 million were adjustable rate and $7.05 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 32% of mortgage lending during the
period. The majority of purchased loans are residential and non-residential real
estate loans in Colorado and Idaho mountain resort communities and
non-residential real estate loans along the front range of Colorado. Purchased
loans are subjected to the same underwriting standards and loan terms as those
originated by the Bank for its portfolio.
Bank property and equipment increased by $1.23 million and was primarily the
result of the purchase of land and the continuing construction of a new branch
bank located in Cheyenne, Wyoming. The parcel of land consists of 4.5 acres of
which 1 acre will be used as the site for the new branch and the remaining 3.5
will be offered for sale or held for future development jointly by the Bank and
an undetermined third party. The total cost of the facility is estimated to be
$1.4 million and the projected opening date is in the second quarter of 2000.
The Bank has sufficient liquid assets to fund the cost of the new facility.
LIABILITIES
Deposit balances increased by $5.84 million or 12.69% from $45.97 million at
December 31, 1998 to $51.81 million at December 31, 1999. The net increase
consisted of a decrease of $0.13 million in savings accounts and increases of
$0.31 million, $1.84 million, and $3.82 million in demand deposits, NOW and time
deposits, respectively.
Advances from the Federal Home Loan Bank ("FHLB") increased $1.76 million during
the year of 1999. The advances are a supplement to the Bank's retail deposits
and were used to fund loan originations and to purchase loans and investment
securities.
Deferred income taxes decreased by $0.38 million during the year and was mainly
the result of the application of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which requires unrealized gains and
losses on available for sale securities to be reported, net of deferred income
taxes, as a separate component of stockholders' equity. The market value of
these securities decreased $1.26 million during the period, which resulted in a
decrease in deferred income taxes.
STOCKHOLDERS' EQUITY
Overall, stockholders' equity decreased $0.17 million during the year.
The increase in additional paid-in capital of $211,000 was caused, in part, 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 which resulted in an
increase of $73,000. Also, directors and officers of the Bank exercised stock
options on 28,186 shares, which increased additional paid-in capital by
$138,000.
3
<PAGE>
The increase in retained earnings was the result of net earnings totaling
$794,000 which more than offset the decrease in retained earnings caused by the
payments of dividends of $0.44 per share totaling $391,000.
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 decreased during the
twelve-month period and resulted in a decrease, net of deferred income tax, of
$834,000 in stockholders' equity.
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.
<TABLE>
<CAPTION>
12 Months Ended Dec. 12 Months Ended Dec.
31, 1999 31, 1998
-------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $45,919 $3,681 8.02% $42,012 $3,465 8.25%
Securities - Available for
sale 28,656 1,780 6.21% 33,446 2,099 6.28%
Securities - Hold to maturity 5,615 398 7.09% 6,697 504 7.53%
Other interest-earning assets 1,412 64 4.53% 2,331 105 4.50%
----- -- ----- ---
Total interest-earning assets $81,602 $5,923 7.26% $84,486 $6,173 7.31%
------ ------
Non-interest earning assets 2,730 1,665
----- -----
Total Assets $84,332 $86,151
======= =======
Interest-bearing liabilities:
Interest-bearing demand deposits $11,865 $381 3.21% $8,689 $282 3.25%
Savings deposits 4,268 119 2.79% 4,529 125 2.76%
Time deposits 31,011 1,534 4.95% 31,016 1,645 5.30%
Other borrowings 25,088 1,384 5.52% 25,954 1,494 5.76%
------ ----- ------ -----
Total interest-bearing liabilities $72,232 $3,418 4.73% $70,188 $3,546 5.05%
------ ------
Non-interest bearing demand deposits 719 824
Other non-interest bearing
liabilities 1,143 1,264
----- -----
Total liabilities $74,094 $72,276
Retained earnings 10,238 13,875
------ ------
Total liabilities & retained
earnings $84,332 $86,151
======= =======
Net interest income $2,505 $2,627
====== ======
Interest rate spread 2.53% 2.26%
Net yield on interest earning
assets (Margin) 3.07% 3.11%
Ratio of average interest-earning
assets to interest-bearing
liabilities 112.97% 120.37%
</TABLE>
4
<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 changes in average volume).
<TABLE>
<CAPTION>
12 Months Ended Dec. 31 12 Months Ended Dec. 31
1999 vs. 1998 1998 vs. 1997
-------------------------- --------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------- --------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 322 (97) (9) 216 352 (28) (4) 320
Securities - Available for sale (356) (173) 210 (319) (356) (173) 52 (477)
Securities - Hold to maturity (81) (29) 4 (106) (173) (9) 2 (180)
Other interest-earning assets (41) 1 (1) (41) 61 (9) (8) 44
--- - -- --- -- -- -- --
Total interest-earning assets (156) (298) 204 (250) (116) (219) 42 (293)
Interest-bearing liabilities:
Savings accounts (88) (144) 214 (18) (88) (49) 1 (136)
Other liabilities (50) (62) 2 (110) (39) (1) 0 (40)
--- --- - ---- --- -- - ---
Total interest-bearing
liabilities (138) (206) 216 (128) (127) (50) 1 ( 176)
Net change in interest income (18) (92) 12 (122) 11 (169) 41 (117)
=== === == ==== == ==== == ====
</TABLE>
RESULTS OF OPERATIONS
NET INCOME
Net income decreased $144,000 during the year ended December 31, 1999 when
compared to 1998. Net interest income decreased by $122,000, non-interest income
increased by $23,000 and non-interest expense increased by $94,000.
The provision for income taxes decreased by $49,000.
INTEREST INCOME
Interest income from loans increased $215,000 or 6.22% for the year ended
December 31, 1999. The increase was the result of an increase in the average
balance of loans outstanding of $4.14 million which more than offset a decrease
in yield on the loans from 8.25% to 8.02%.
The decrease of $319,000 in interest and dividends on securities available for
sale was the result of a decrease in the average balance of securities of $4.26
million and a decrease in the average yield on the portfolio from 6.28% to
6.21%. The decrease in yield was the result of the disproportionately greater
principal payments and prepayments on mortgage-backed securities with higher
yields when compared to the overall yield on the portfolio and the purchase of
securities with yields less than the yield on the existing portfolio.
Interest on securities held to maturity decreased $106,000 and was caused
primarily by a decrease in the average balance of the portfolio of $1.08 million
and a decrease in the yield on the portfolio from 7.53% to 7.09%. The decrease
in yield was the result of the disproportionately greater principal payments and
prepayments on mortgage-backed securities with higher yields when compared to
the overall yield on the portfolio.
5
<PAGE>
The decrease in income from other interest-earning assets of $41,000 was
primarily caused by a decrease in the average balance of these assets which more
than offset a slight increase in the yield on this asset. This category of
assets consists primarily of interest-earning demand deposits held at FHLB.
INTEREST EXPENSE
Interest expense on deposits decreased $18,000 during 1999 when compared to
1998. This decrease was the result of a decrease in the average cost of deposits
from 4.64% to 4.31%, which offset an increase of $2.91 million in the average
balance of deposits.
The Bank took advantage of a relatively inexpensive source of funding available
through the FHLB to supplement retail deposits and to purchase financial
instruments that yield a slightly higher return than the rate charged on the
advances. The average balance of these borrowings was $866,000 less during 1999
than 1998 and the average cost of the borrowings decreased from 5.76% to 5.52%
which resulted in an decrease of $110,000 in interest expense.
PROVISION FOR LOAN LOSSES
No provision for loan losses was made during the year ended December 31, 1999.
The allowance for loan losses is based on management's evaluation of the risk
inherent in its loan portfolio after giving due consideration to the changes in
general market conditions and in the nature and volume of the Bank's loan
activity. The Bank intends to continue to provide for loan losses based on its
periodic review of the loan portfolio and general market conditions. The
allowance for loan losses amounted to $464,000 at year-end. 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 loan loss allowance and that such losses will
not exceed the estimated amounts.
NON-INTEREST INCOME
Total non-interest income increased by $23,000 during 1999 when compared to
1998.
Service charges on deposits increased $16,000 mainly because of an increase in
chargeable events and an increase, in November, in the amount of the
non-sufficient funds charge.
The decrease in the gain on the sale of loans of $22,000 was the result of a
decrease in the dollar amount of loans sold.
The Bank sold available for sale securities in 1999 and recognized a gain of
$4,000 while securities sold in the previous year produced gains of $81,000.
The increase in other income was the result of the disposition of property
acquired in 1992 by way of a foreclosure of an office building. The property was
assigned to the Bank per a deficiency judgement and was subsequently redeemed by
the borrower in 1999 at which time the Bank recognized a gain in the amount of
$97,000.
6
<PAGE>
NON-INTEREST EXPENSE
Overall, non-interest expense increased $94,000 during 1999.
Compensation and benefits increased by $48,000 in 1999 and was primarily caused
by the hiring of additional staff. The increase in personnel was necessary to
support the growth of commercial and agricultural lending and the opening of the
new branch in Cheyenne, Wyoming.
Occupancy and equipment expense increased $11,000 and was primarily caused by
increases in utilities, telephone, and building and equipment repairs and
maintenance.
Other expenses increased by $35,000 when compared to the same period of the
previous year. The increase in expenses was mainly caused by increased marketing
expenses regarding the introduction and development of new and existing loan and
deposit products and to inform the Bank's customers of its efforts to become
fully Year 2000 compliant. The Bank also had increases in professional expenses
and supplies.
The Bank has undertaken a project to open a third office in Cheyenne, Wyoming.
Non-interest expense will increase as a result of the staffing and equipping of
this office which is expected to open in April 2000. A reduction in net income
(and possibly losses) compared to prior periods is expected as a result of these
expenses until the new office results in higher overall levels of loan and
deposit activity to offset the additional expenses. The Bank believes that this
expansion should enhance shareholder value and hopes that the decrease in
earnings will not be as great following the end of 2001. This statement of
beliefs concerning the expansion is a forward looking statement. The Private
Securities Litigation Reform Act of 1995 (the "Act") provides protection to
Tri-County in making certain forward looking statements that are accompanied by
the factors that could cause actual results to differ materially from the
forward looking statement. As with any expansion, if the new office or
additional personnel do not ultimately result in increased loan and deposit
activity and increased net income, these expenses would continue to have an
adverse affect on net income past the end of year 2001.
INCOME TAXES
The provision for income taxes decreased by $49,000. The main reason for the
decrease in income taxes was the decrease in income before taxes of $193,000.
YEAR 2000
Like many financial institutions, we rely on computers to conduct our business
and information systems processing. Industry experts were concerned that on
January 1, 2000, some computers might not be able to interpret the new year
properly, causing computer malfunctions. Some banking industry experts remain
concerned that some computers may not be able to property interpret additional
dates in the year 2000. We have operated and evaluated our computer operating
systems since January 1, 2000 and have not identified any errors or experienced
any computer system malfunctions. We will continue to monitor our information
systems to assess whether they are at risk of misinterpreting any future dates
and will develop appropriate contingency plans to prevent any potential system
malfunction or correct any system failures. The Company has not been informed of
any such problem experienced by its vendors or its customers, nor by any of the
municipal agencies that provide services to the Company.
7
<PAGE>
Nevertheless, it is too soon to conclude that there will not be any problems
arising from the Year 2000 problem, particularly at some of the Company's
vendors. The Company will continue to monitor its significant vendors of goods
and services with respect to Year 2000 problems they may encounter as those
issues may effect the Company's financial position, results of operations and
cash flows. The Company does not believe at this time that these potential
problems will materially impact the ability of the Company to continue its
operations, however, no assurance can be given that this will be the case.
The expectations of the Company contained in this section on Year 2000 are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve substantial risks and uncertainties
that may cause actual results to differ materially from those indicated by the
forward-looking statements. All forward-looking statements in this section are
based on information available to the Company on the date of this document, and
the Company assumes no obligation to update such forward-looking 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 necessarily move in the same direction or to the same extent as the
price of goods and service.
8
<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, 1999 and 1998, 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, 1999 and 1998, 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 4, 2000
9
<PAGE>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
1999 1998
----------- -----------
ASSETS
Cash and due from banks $1,187,935 $ 385,804
Interest-bearing deposits with banks 1,128,404 2,979,241
Securities available for sale, at fair value 27,238,804 28,727,466
Securities held to maturity 7,237,691 5,335,700
Loans held for sale, at market value - 435,721
Loans receivable, net of allowance for loan losses
of $464,453 (1999) and $409,984 (1998) 48,979,883 42,054,222
Accrued interest receivable 642,561 450,017
Bank property and equipment 2,028,288 801,141
Other assets 72,270 138,685
------ -------
Total Assets $88,515,836 $81,307,997
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits $ 997,117 $ 690,177
NOW accounts 7,612,597 5,776,145
Savings accounts 8,611,853 8,737,500
Other time deposits 34,587,587 30,770,264
---------- ----------
Total Deposits 51,809,154 45,974,086
Advances from Federal Home Loan Bank 25,558,367 23,799,117
Accounts payable and accrued expenses 370,245 216,841
Advances by borrowers for taxes and insurance 115,691 110,167
Deferred income taxes 411,587 787,119
------- -------
Total Liabilities 78,265,044 70,887,330
========== ==========
Stockholders' Equity
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.10 par value, 10,000,000 shares
authorized, 1,548,611 (1999) and 1,520,425
(1998) shares issued 154,861 152,043
Additional paid-in capital 7,530,906 7,319,578
Retained earnings - substantially restricted 9,663,761 9,260,742
Unearned compensation relating to Employee Stock
Ownership Plan (224,250) (284,050)
Accumulated other comprehensive income 272,904 1,106,701
Treasury stock - 642,377 (1999) and 641,627
(1998) shares, at cost (7,147,390) (7,134,347)
---------- ----------
Total Stockholders' Equity 10,250,792 10,420,667
---------- ----------
Total Liabilities and Stockholders' Equity $88,515,836 $81,307,997
=========== ===========
See accompanying notes.
10
<PAGE>
<TABLE>
<CAPTION>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,680,585 $3,465,184
Interest and dividends on available for sale securities
Taxable interest 1,633,720 1,957,415
Dividends 147,042 141,048
Interest on held to maturity securities
Taxable interest 387,646 498,712
Nontaxable interest 10,496 5,611
Other interest earning assets 63,677 105,045
------ -------
Total Interest Income 5,923,166 6,173,015
--------- ---------
INTEREST EXPENSE
Deposits 2,034,069 2,052,506
Advances 1,383,889 1,493,513
--------- ---------
Total Interest Expense 3,417,958 3,546,019
--------- ---------
Net Interest Income 2,505,208 2,626,996
PROVISION FOR LOAN LOSSES - -
----- -----
Net Interest Income After Provision for Loan Losses 2,505,208 2,626,996
--------- ---------
NONINTEREST INCOME
Service charges on deposits 134,999 119,371
Gain on sale of loans 42,869 65,085
Gain on sale of investments available for sale 3,696 80,940
Other income 131,646 25,296
------- ------
Total Noninterest Income 313,210 290,692
------- -------
NONINTEREST EXPENSE
Compensation and benefits 960,059 911,667
Occupancy and equipment 329,363 318,803
Federal insurance premiums 27,200 27,921
Other expenses 340,974 305,620
------- -------
Total Noninterest Expense 1,657,596 1,564,011
--------- ---------
Income Before Income Taxes 1,160,822 1,353,677
PROVISION FOR INCOME TAXES 366,440 415,614
------- -------
Net Income $ 794,382 $ 938,063
========= =========
EARNINGS PER SHARE
Basic $ .90 $ .83
======= =======
Diluted $ .85 $ .78
======= =======
See accompanying notes.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999 and 1998
Accumulated
Other Employee MSBP
Compre- Additional Stock Unearned
Comprehensive Retained hensive Common Paid-In Treasury Ownership Compen-
Total Income Earnings Income(loss) Stock Capital Stock Plan sation
----- ------ -------- ------------ ----- ------- ----- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance-December 31, 1997 $13,827,184 $8,792,947 $817,476 $149,500 $7,100,600 $(2,645,314) $(343,850) $(44,175)
Comprehensive income
Net earnings 938,063 $ 938,063 938,063 - - - - - -
Unrealized gain on
securities, net of tax
and reclassification
adjustment 289,225 289,225 - 289,225 - - - - -
-------
Comprehensive income $1,227,288
==========
Repayment of ESOP debt 59,800 - - - - - 59,800 -
Allocation of ESOP shares 94,395 - - - 94,395 - - -
Amortization of deferred
compensation 44,175 - - - - - - 44,175
Stock options exercised 127,126 - - 2,543 124,583 - - -
Dividends paid - cash (470,268) (470,268) - - - - - -
Treasury stock purchased (4,489,033) - - - - (4,489,033) - -
--------- ------- ------- ----- ------- --------- ------ ------
Balance-December 31, 1998 10,420,667 9,260,742 1,106,701 152,043 7,319,578 (7,134,347) (284,050) -
Comprehensive income (loss)
Net earnings 794,382 $ 794,382 794,382 - - - - - -
Unrealized (loss) on
securities, net of tax
and reclassification
adjustment (833,797) (833,797) - (833,797) - - - - -
-------
Comprehensive (loss) $ (39,415)
=========
Repayment of ESOP debt 59,800 - - - - - 59,800 -
Allocation of ESOP shares 73,217 - - - 73,217 - - -
Stock options exercised 140,929 - - 2,818 138,111 - - -
Dividends paid - cash (391,363) (391,363) - - - - - -
Treasury stock purchased (13,043) - - - - (13,043) - -
------ ------- ------- ----- ------- ------ ------ ------
Balance-December 31, 1999 $10,250,792 $9,663,761 $272,904 $154,861 $7,530,906 $(7,147,390) $(224,250) $ -
=== ==== =========== ========== ======== ======== ========== =========== ========= ======
See accompanying notes.
</TABLE>
12
<PAGE>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1999 1998
---- ----
OPERATING ACTIVITIES
Net income $ 794,382 $ 938,063
Adjustments to reconcile net income to net cash
provided by operations
Depreciation and amortization 168,596 134,794
Provision for deferred taxes 54,000 (23,000)
Gain on sale of securities available for sale (3,696) (80,940)
Gain on sale of loans (42,869) (65,085)
FHLB stock dividends received (132,800) (128,500)
Unvested forfeitable stock awarded - 44,175
Changes in assets and liabilities
Origination of loans held for sale (3,109,995) (3,862,039)
Proceeds from sale of loans held for sale 3,588,584 3,608,514
Accrued interest receivable (192,544) 205,322
Other assets, net 153,216 556,952
Other liabilities, net 136,320 70,254
------- ------
Net Cash Provided By Operations 1,413,194 1,398,510
--------- ---------
INVESTING ACTIVITIES
Net loan origination and principal repayments on (1,505,741) 4,594,499
loans
Purchase of loans (5,439,723) (6,210,552)
Activity in available for sale securities
Sale proceeds 3,440,721 3,129,251
Maturities, prepayments and calls 6,392,460 18,164,932
Purchases (9,499,420) (12,906,090)
Activity in held to maturity securities
Maturities, prepayments and calls 2,093,251 2,830,392
Purchases (3,998,975) (177,000)
Proceeds from sale of real estate owned - 23,966
Investment in property, equipment and real estate
owned (1,340,639) (29,627)
---------- -------
Net Cash Provided (Used) By Investing Activities $(9,858,066) $9,419,771
----------- ----------
13
<PAGE>
FINANCING ACTIVITIES
Net change in noninterest-bearing demand, savings
and NOW deposits $2,017,744 $2,158,365
Net change in time deposits 3,817,324 (1,589,432)
Advances from Federal Home Loan Bank 15,975,000 12,500,000
Repayment of Federal Home Loan Bank advances (14,215,750) (18,397,500)
Net change in advances by borrowers for taxes and
insurance 5,525 8,901
Dividends paid (391,363) (470,268)
Exercise of stock options 140,929 127,126
ESOP payments received 59,800 59,800
Purchase of treasury stock (13,043) (4,489,033)
------- ----------
Net Cash Provided (Used) by Financing Activities 7,396,166 (10,092,041)
--------- -----------
Increase (Decrease) in Cash and Cash Equivalents (1,048,706) 726,240
Cash and cash equivalents - beginning of period 3,365,045 2,638,805
--------- ---------
Cash and cash equivalents - end of period $2,316,339 $3,365,045
========== ==========
Cash and due from banks $1,187,935 $ 385,804
Interest-bearing deposits with banks 1,128,404 2,979,241
--------- ---------
$2,316,339 $3,365,045
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for
Income taxes $ 255,400 $ 438,600
========= =========
Interest expense $3,414,338 $3,565,230
========== ==========
Noncash transactions
Loans transferred to real estate owned $ - $ 23,966
========== =========
See accompanying notes.
14
<PAGE>
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNT 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 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, 1999 or
1998, 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.
15
<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 statement.
Loans Held for Sale
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 approximated their
estimated market value.
Servicing
The Bank sells certain loans to the Federal Home Loan Mortgage Corporation
(FHLMC) with servicing retained. Capitalized servicing rights are reported in
other assets and are amortized into noninterest income 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, 1999 or 1998.
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.
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.
16
<PAGE>
Impairment of Long-Lived Assets
Loans are considered to be impaired and an impairment loss recognized when
expected future cash flows are less than the asset's carrying value. No assets
were considered impaired at December 31, 1999 or 1998.
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 (SFAS 123), Accounting for Stock-Based Compensation, 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, 1999 and 1998. 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
Basic earnings per share represents income available to each share of common
stock outstanding during the reporting period. Diluted earnings per share
represents income available to each share of common stock outstanding during the
reporting period adjusted for the potential issuance of common shares for stock
options.
The calculation of basic and diluted earnings per share for the years ended
December 31 is as follows:
1999 1998
---- ----
Net income $794,382 $ 938,063
======== =========
Average common shares outstanding 885,897 1,127,425
Dilutive effect of stock options 50,303 74,227
------ ------
936,200 1,201,652
======= =========
Earnings per share
Basic $ .90 $ .83
Diluted $ .85 $ .78
17
<PAGE>
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The effective date of SFAS 133 was deferred until June 15,
2000 with the issuance of SFAS No. 137.
The adoption of SFAS 133 is not expected to have a material effect on
Tri-County's financial statements.
NOTE 2 - SECURITIES
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available for Sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1999
Debt Securities
U.S. Agency securities $13,999,671 $ - $(424,516) $13,575,155
U.S. Agency mortgage-backed securities 10,379,986 24,521 (253,343) 10,151,164
---------- ------ -------- ----------
Total Debt Securities 24,379,657 24,521 (677,859) 23,726,319
---------- ------ -------- ----------
Equity Securities
FHLMC stock 22,871 1,076,415 - 1,099,286
Mutual funds
ARM portfolio 536,085 - (9,586) 526,499
FHLB stock 1,886,700 - - 1,886,700
--------- --------- ------ ---------
Total Equity Securities 2,445,656 1,076,415 (9,586) 3,512,485
--------- --------- ------ ---------
$26,825,313 $1,100,936 $(687,445) $27,238,804
=========== ========== ========= ===========
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>
18
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1999
U.S. Agency securities $2,000,000 $ - $(19,690) $1,980,310
State and other political subdivisions 173,278 - - 173,278
U.S. Agency mortgage-backed securities 5,064,413 73,263 (14,155) 5,123,521
--------- ------ ------- ---------
$7,237,691 $ 73,263 $(33,845) $7,277,109
========== ========= ======== ==========
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
========== ========= ==== ==========
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1999, 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>
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ - $ -
Due after one year through five years 8,000,000 7,782,125 - -
Due after five years through ten years 5,999,671 5,793,030 173,278 173,278
Due after ten years - - 2,000,000 1,980,310
--------- --------- --------- ---------
13,999,671 13,575,155 2,173,278 2,153,588
Mortgage-backed securities 10,379,986 10,151,164 5,064,413 5,123,521
---------- ---------- --------- ---------
$24,379,657 $23,726,319 $7,237,691 $7,277,109
=========== =========== ========== ==========
</TABLE>
Sales of securities available for sale during the years ended December 31
follows:
Proceeds Gross Gains Gross Losses
-------- ----------- ------------
1999 $3,440,721 $33,096 $(29,906)
1998 $3,129,251 $127,048 $(46,108)
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
1999 $11,751,071 $11,346,968
1998 $9,769,442 $9,830,029
19
<PAGE>
NOTE 3 - LOANS RECEIVABLE
December 31,
1999 1998
---- ----
Real estate - mortgage $34,657,019 $32,403,370
Real estate - commercial 7,070,295 6,141,006
Real estate - agriculture 2,580,403 -
Real estate - construction 564,900 414,250
Commercial 810,791 449,949
Installment loans to individuals 4,033,212 3,310,068
--------- ---------
49,716,620 42,718,643
Less:
Allowance for loan losses (464,453) (409,984)
Unadvanced loan funds (196,639) (176,848)
Deferred loan fees (75,645) (77,589)
------- -------
$48,979,883 $42,054,222
=========== ===========
A summary of the changes in the allowance for loan losses is as follows:
Years Ended December 31,
1999 1998
---- ----
Beginning of the period $409,984 $412,456
Provision for losses - -
Loan charge-offs (16,101) (2,738)
Recoveries 70,570 266
------ ---
$464,453 $409,984
======== ========
Loans serviced for others are not included in the accompanying consolidated
statements of financial condition. The unpaid principal balances of mortgage
loans serviced for others at December 31 were $2,492,400 (1999) and $586,000
(1998). The balance of capitalized rights, net of valuation allowances, included
in other assets at December 31 was $14,599 (1999) and $3,692 (1998).
NOTE 4 - PROPERTY AND EQUIPMENT
December 31,
1999 1998
---- ----
Land $ 791,634 $ 65,776
Building and improvements 1,115,984 1,115,984
Furniture, fixtures and equipment 654,367 614,764
Construction-in-progress 578,677 -
------- ---------
3,140,662 1,796,524
Less accumulated depreciation (1,112,374) (995,383)
---------- --------
$2,028,288 $ 801,141
========== =========
Depreciation expense for the years ended December 31 was $116,991 (1999) and
$115,365 (1998).
20
<PAGE>
NOTE 5 - DEPOSITS
At December 31, 1999, scheduled maturities of certificates of deposit were as
follows:
Year
----
2000 $28,340,773
2001 5,078,502
2002 878,238
2003 290,074
-------
$34,587,587
===========
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
$8,760,495 (1999) and $5,200,407 (1998) (see Note 2).
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the FHLB at December 31 were $25,558,367 (1999) and $23,799,117
(1998). The following table summarizes the maturities of the FHLB advances:
Year
----
2000 4.71% - 6.08% $7,225,000
2001 5.39% - 6.74% 5,550,000
2002 5.59% 2,000,000
2003 5.10% 1,000,000
2004 4.97% - 5.45% 5,000,000
Thereafter 5.45% - 6.13% 4,783,367
----------
$25,558,367
===========
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.
NOTE 7 - INCOME TAXES
The provisions for federal income taxes are as follows:
Years ended December 31,
1999 1998
---- ----
Current $312,440 $438,614
Deferred 54,000 (23,000)
------ -------
$366,440 $415,614
======== ========
21
<PAGE>
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,
1999 1998
---- ----
Joint venture income $ - $ 32,000
Loan origination fees 1,278 4,000
Bad debt reserve 159,722 139,000
Net unrealized loss on available for sale securities 225,394 4,300
Less: valuation allowance - -
------- -------
Total Deferred Assets 386,394 179,300
------- -------
Federal Home Loan Bank stock dividends (412,046) (366,900)
Net unrealized gain on available for sale securities (365,981) (574,482)
Accelerated depreciation (19,954) (25,037)
------- -------
Total Deferred Liabilities (797,981) (966,419)
-------- --------
Net Deferred Liabilities $(411,587) $(787,119)
========= =========
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent in 1999 and 1998 to income before income
taxes as a result of the following:
Years ended December 31,
1999 1998
---- ----
Normal "expected" corporate taxes $392,350 $460,250
Change in tax provision resulting from
Income tax refunds (17,000) (15,500)
Other (8,910) (29,136)
------ -------
$366,440 $415,614
======== ========
Tri-County and its subsidiaries file a consolidated income tax return. Excess of
bad debt reserves for income tax purposes over book provision for the Bank at
December 31, 1999 were approximately $1,453,000. 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.
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:
1999 1998
---- ----
Balance, beginning of year $159,494 $147,593
New loans 266,112 91,420
Repayments (290,318) (79,519)
-------- -------
Balance, end of year $135,288 $159,494
======== ========
22
<PAGE>
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 $299,582 (1999) and
$436,815(1998).
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 10% of their
qualifying compensation. Tri-County's expense was $19,686 (1999) and $18,489
(1998).
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
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. In 1999, the board of directors authorized stock repurchase on
an individual transaction basis. The Company repurchased 750 shares for $13,043.
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.
A summary of Tri-County's Option Plan as of December 31 follows:
1999 1998
---- ----
Exercise Exercise
Shares Price Shares Price
------ ------ ------ -----
Outstanding, beginning of the year 118,097 $5.00 143,522 $5.00
Granted - - - -
Exercised (28,186) $5.00 (25,425) $5.00
Canceled - - - -
------ ------
Outstanding, end of the year 89,911 $5.00 118,097 $5.00
====== =======
Options exercisable at the end of the year 89,911 $5.00 118,097 $5.00
Employee Stock Ownership Plan
Tri-County sponsors an employee stock ownership plan (ESOP) that covers
substantially all employees. 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 the
third quarter of 2003 and is included in the accompanying consolidated financial
statements as a reduction in stockholders' equity. At December 31 the balance of
the note was $224,250 (1999) and $284,050 (1998).
23
<PAGE>
The ESOP loan payments are provided by the Bank's contributions to the ESOP and
by dividends received on Tri-County's stock held by the ESOP's trustee. Through
the second quarter of 1999, the Bank's ESOP contributions were based on the
note's scheduled principal and interest payments, net of Tri-County cash
dividends received. Beginning with the third quarter of 1999, Tri-County's board
of directors elected to have dividends received by the ESOP allocated directly
to plan participants.
The shares held by the ESOP are released in the proportion each year's principal
payment bears to the total principal payments. Released stock is allocated based
on the ratio of each participating employee's eligible compensation to the total
eligible compensation. Currently, shares are released at 11,960 shares per year.
The Bank's ESOP contributions are recorded as compensation expense and totaled
$117,372 (1999) and $133,524 (1998). Dividends used to satisfy note payments
were $38,419 (1999) and $51,428 (1998). As of December 31 the ESOP held 44,850
(1999) and 56,810 (1998) unallocated shares. The unallocated shares' fair value
at December 31 (based on NASDAQ) was $464,601 (1999) and $704,444 (1998).
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.
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, 1999, the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999, the most recent notification from applicable regulatory
agencies categorize the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum ratios as set forth in the following table (amounts in
thousands):
24
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
-----------------------------------------------------
Dollars Ratio Dollars Ratio Dollars Ratio
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Total Capital (to risk-weighted assets) $9,164 22.6% $3,250 8.0% $4,063 10.0%
Tier 1 Capital (to risk-weighted assets) $8,216 20.2% $1,625 4.0% $2,438 6.0%
Tier 1 Capital (to adjusted total assets) $8,216 9.4% $3,495 4.0% $4,369 5.0%
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 adjusted total assets) $8,307 10.4% $3,195 4.0% $3,993 5.0%
</TABLE>
NOTE 13 - OFF-BALANCE SHEET ACTIVITIES
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.
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, 1999:
Loan commitments $1,680,490
Lines of credit $1,677,701
Available overdraft protection $ 193,666
The loan commitments ($299,819 fixed rate and $1,380,671 adjustable rate) are at
interest rates ranging from 6.27% to 8.5%. Tri-County's loan commitments include
commitments to purchase loans in western Colorado ($387,000) as well as
commitments to extend credit to customers in Tri-County's market area.
Tri-County's market area primarily consists of eastern Wyoming. Agriculture and
related support industries are a significant factor in the primary market area's
economy.
25
<PAGE>
Tri-County purchases loans in other market areas through mortgage banking
relationships. The majority of the purchased loans are in certain resort areas
of Colorado and Idaho. These loans comprise approximately 43% of the loan
portfolio.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Construction-in-Progress
Tri-County is building a branch office in Cheyenne, Wyoming and anticipates it
will be completed in March 2000. Construction costs through December 31, 1999
are included in the accompanying consolidated statement of financial position
(see Note 4). Subsequent to December 31, 1999, approximately $178,000 in costs
have been incurred in the construction of the building.
Estimated cost to complete the building is $438,700.
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, 1999 and 1998.
Year 2000 Compliance
Tri-County relies upon computers for the daily conduct of its business and for
general data processing. Accordingly, a Year 2000 Contingency Plan (the Plan)
was developed and implemented by the Bank to address year 2000 issues. The
Bank's ability to process data and provide financial services and products was
unaffected by the change to the year 2000. The Plan identified dates beyond
January 1, 2000 as potential problem dates; therefore, the Bank is continuing to
monitor these dates. It is the Bank's assertion that its plan and procedures are
adequate to mitigate any adverse outcomes.
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, 1999,
the liquidation account was $1,328,247 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.
26
<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, 1999 and 1998:
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
<S> <C> <C> <C>
1999
Unrealized holding losses arising during the period $(1,259,632) $ 428,274 $(831,358)
Less reclassification adjustment for gains realized in net earnings (3,696) 1,257 (2,439)
------ ----- ------
Net Unrealized Losses $(1,263,328) $ 429,531 $(833,797)
=========== ========= =========
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
========= ========= ========
</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.
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.
27
<PAGE>
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, 1999 December 31, 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Assets for which fair value approximates book value $ 2,958,900 $ 2,958,900 $ 4,250,783 $ 4,250,783
Securities $34,476,495 $34,515,913 $34,063,166 $34,201,688
Loans $48,979,883 $48,646,126 $42,054,222 $42,667,077
Financial liabilities
Liabilities for which fair value approximates book value $17,591,812 $17,591,812 $15,420,663 $15,420,663
Time deposits $34,587,587 $34,577,196 $30,770,264 $30,892,273
Long-term debt $25,558,367 $25,034,584 $23,799,117 $23,862,484
Off-balance sheet commitments $ 3,551,857 $ 3,551,857 $ 1,798,800 $ 1,798,800
</TABLE>
28
<PAGE>
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
CONDENSED PARENT COMPANY ONLY
STATEMENTS OF CONDITION
December 31,
1999 1998
---- ----
Assets
Cash $ 249,071 $ 157,539
Investment in subsidiary 8,440,088 8,591,255
Securities available for sale 526,499 530,780
Other assets, net 760,974 32,770
------- ------
Total Assets $9,976,632 $9,312,344
========== ==========
Liabilities and stockholders' equity
Other liabilities $ 5,071 $ 1,879
Stockholders' equity 9,971,561 9,310,465
--------- ---------
Total Liabilities and Stockholders' Equity $9,976,632 $9,312,344
========== ==========
STATEMENTS OF OPERATIONS
Years ended December 31,
1999 1998
---- ----
Revenue
Equity in earnings of subsidiary $ 775,616 $ 917,644
Other income 49,020 57,285
Expense
Operating expenses (47,254) (52,416)
Income tax benefit 17,000 15,550
------ ------
Net Income $794,382 $ 938,063
======== =========
29
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Years ended December 31,
1999 1998
---- ----
<S> <C> <C>
Operating activities
Net income $ 794,382 $ 938,063
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Earnings of subsidiary (775,616) (917,644)
Amortization of organization expense - 801
(Increase) decrease in other assets and accrued liabilities 2,301 8,386
----- -----
Net Cash Provided (Used) by Operating Activities 21,067 29,606
------ ------
Investing activities
Purchase of property (725,858) -
Dividends received 1,000,000 4,650,000
--------- ---------
Net Cash Provided by Investing Activities 274,142 4,650,000
------- ---------
Financing activities
Dividends paid (391,363) (470,268)
Stock options exercised 140,929 127,126
ESOP payments received 59,800 59,800
Treasury stock purchased (13,043) (4,489,033)
------- ----------
Net Cash Used by Financing Activities (203,677) (4,772,375)
-------- ----------
Net Increase (Decrease) in Cash 91,532 (92,769)
Cash and cash equivalents - beginning of period 157,539 250,308
------- -------
Cash and cash equivalents - end of period $ 249,071 $ 157,539
========= =========
</TABLE>
30
<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
JOHN MAIER
110 West 22nd Avenue
Torrington, Wyoming 82240
SPECIAL COUNSEL
MALIZIA SPIDI & FISCH, PC
1301 K Street, N.W., Suite 700 E
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 & TRUST, INC.
12039 West Alameda Parkway, Suite Z-2
Lakewood, Colorado 80228
MARKET MAKERS
The following firms are currently market makers in the Company's shares:
Keefe, Bruyette & Woods, Inc. - New York, New York
Spear, Leeds & Kellogg - New York, New York
FORM 10-KSB
A copy of Form 10-KSB for the year ended December 31, 1999, 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 26, 2000 at Tri-County Bank's main office, 2201 Main
Street, Torrington, Wyoming.
31
<PAGE>
MAIN OFFICE 2201 Main Street, P.O. Box 1057 Torrington, Wyoming 82240
Telephone - (307) 532-2111
Fax - (307) 532-7631
Email - [email protected]
Web Site - www.tricobank.com
BRANCH OFFICES
957 Maple, P.O. Box 337
Wheatland, Wyoming 82201
Telephone - (307) 322-9215
Fax - (307) 322-4080
421 Vandehei Avenue, P.O. Box 3260
Cheyenne, Wyoming 82003
Telephone - (307) 778-0021
Fax - (307) 778-0022
EXECUTIVE OFFICERS
Robert L. Savage
President & Chief Executive Officer
Joseph P. Guth
Executive Vice President
Earl F. Warren, Jr.
Senior Vice President
Tommy A. Gardner
Vice President & Chief Financial Officer
STAFF
Thomas W. Bass, President & Branch Manager
Roseanne L. Burnett, Vice President & Branch Manager
Jane E. Faber, Assistant Secretary
Richard R. Yates, Vice President
Pamela D. Cundall
Pam J. Heilbrun
Colleen M. Holtzclaw
Nancy A. Martin
Brita F. Mehling
Terri J. Pindell
Cheryl A. Rutt
Becky J. Shaffer
Linda L. Smith
Darlene L. Sorge
Debra K. Stoeger
Lynette K. Strecker
Scott L. Vasko
Mona Kay Williams
32
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 4, 2000, on our audits of the
consolidated financial statements of Tri-County Bancorp, Inc. as of December 31,
1999 and 1998, 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, 2000
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<PERIOD-END> Dec-31-1999
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