SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1996
Commission file number: 0-22220
Name of Small Business Issuer: TRI-COUNTY BANCORP, INC.
State of Incorporation or Organization: WYOMING
I.R.S. Employer Identification No.: 83-0304855
Address of Offices: 2201 MAIN STREET, TORRINGTON, WY 82240
Issuer's Telephone Number, Including Area Code: (307)532-2111
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes: X No:
The number of shares outstanding of each of the issuer's classes of common
stock as of November 12, 1996.
Class: $.10 par value common stock
Outstanding: 608,749 shares
Transitional Small Business Disclosure Format (check one): Yes: No: X
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of FinancialCondition as of
September 30, 1996 (unaudited) and December 31, 1995
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1996 and
1995 (unaudited)
Condensed Consolidated Statements of Stockholder's Equity
for the Nine Months Ended September 30, 1996 (unaudited)
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 (unaudited)
Notes to Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis or Plan of Operation
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submissions of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
ASSETS September 30, December 31,
1996 1995
(unaudited)
Cash $ 909,130 $ 350,964
Interest earning deposits at other
financial institutions 196,696 557,768
Securities available-for-sale, at
fair value 30,462,347 19,256,695
Securities held-to-maturity, market
value of $11,925,251 (1996) and
$18,583,902 (1995) 11,741,725 18,263,560
Loans receivable, net 34,350,283 25,513,700
Loans held for resale 181,974 84,929
Office property and equipment, net 923,722 961,627
Prepaid expenses and other assets 708,662 776,842
---------- ----------
Total Assets $79,474,539 $65,766,085
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 321,226 $ 95,320
Savings and NOW deposits 11,372,684 11,052,595
Time deposits 33,179,234 33,435,384
---------- ----------
Total Deposits 44,873,144 44,583,299
Advances from Federal Home Loan Bank 20,954,742 7,000,000
Advances by borrowers for taxes and
insurance 152,048 116,371
Accounts payable and accrued expenses 512,131 144,077
Deferred income taxes 312,296 425,914
---------- ----------
Total Liabilities 66,804,361 52,269,661
---------- ----------
Stockholders' Equity
Preferred stock, $.10 par value,
5,000,000 shares authorized, none
issued 0 0
Common stock, 10,000,000 shares of
$.10 par value authorized, 608,749
(1996) and 640,788 (1995) shares
issued and outstanding 74,750 74,750
Additional paid-in capital 7,017,644 6,983,901
Retained earnings-substantially
restricted 8,129,516 8,125,865
Unearned compensation relating to
Management Stock Bonus Plan and ESOP (543,875) (627,900)
Unrealized gain/(loss) on securities
available-for-sale, net of tax 37,457 398,026
Treasury stock, 138,751(1996) and
106,712 (1995) shares, at cost (2,045,314) (1,458,218)
---------- ----------
Total Stockholders' Equity 12,670,178 13,496,424
---------- ----------
Total Liabilities and Stockholders'
Equity $79,474,539 $65,766,085
========== ==========
-1-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Interest Income
Loans $ 700,633 $ 512,781 $1,904,453 $1,559,826
Securities available-for-sale 488,185 296,747 1,335,682 885,728
Securities held-to-maturity 215,239 317,176 743,058 885,008
Other interest earning assets 5,613 29,804 20,334 104,786
--------- --------- --------- ---------
Total Interest Income 1,409,670 1,156,508 4,003,527 3,435,348
--------- --------- --------- ---------
Interest Expense
Deposits 511,461 530,205 1,560,784 1,543,187
Advances and other borrowings 274,922 77,481 626,945 173,189
--------- --------- --------- ---------
Total Interest Expense 786,383 607,686 2,187,729 1,716,376
--------- --------- --------- ---------
Net Interest Income 623,287 548,822 1,815,798 1,178,972
--------- --------- --------- ---------
Provision for credit losses _ 1,103 _ 1,391
--------- --------- --------- ---------
Net Interest Income After
Provision for Credit Losses 623,287 547,719 1,815,798 1,717,581
--------- --------- --------- ---------
Non-interest Income
Gain on sale of loans 2,678 3,817 19,765 21,844
Gain (loss) on sale of
available-for-sale investments _ 879 (1,593) 1,387
Service charges on deposits 25,821 25,212 73,019 77,666
Other, net 9,842 11,017 24,352 24,401
--------- --------- --------- ---------
Total Non-interest Income 38,341 40,925 115,543 125,298
--------- --------- --------- ---------
Non-interest expense
Compensation and benefits 181,648 182,169 535,285 541,319
Occupancy and equipment 72,609 67,488 217,010 210,347
Federal deposit insurance
premium 26,238 27,701 77,481 79,895
SAIF Capitalization - special
assessment 304,606 _ 304,606 _
Other, net 73,647 93,707 288,527 296,814
--------- --------- --------- ---------
Total Non-interest Expense 658,748 371,065 1,422,909 1,128,375
--------- --------- --------- ---------
Earnings Before Income Taxes 2,880 217,579 508,432 714,504
Income taxes 29,200 72,800 192,400 225,100
--------- --------- --------- ---------
Net Earnings(Loss) $(26,320) $144,779 $ 316,032 $ 489,404
========= ========= ========= =========
Earnings Per Common Share -
Primary $(0.04) $ 0.23 $ 0.53 $ 0.77
====== ====== ====== ======
Cash Dividends Paid Per Common
Share $ 0.25 $ 0.20 $ 0.50 $ 0.37
====== ====== ====== ======
-2-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1996 (unaudited)
Employee
Stock
Common Paid-in Retained Ownership
Stock Capital Earnings Plan
BALANCE - December 31, 1995 $74,750 $6,983,901 $8,125,866 $(463,450)
Net earnings _ _ 316,032 _
Repayment of ESOP debt _ _ _ 37,375
Allocation of ESOP shares _ 33,743 _ _
Amortization of deferred
compensation _ _ _ _
Change in unrealized gain
on securities available-
for-sale, net of tax _ _ _ _
Dividends paid _ _ (312,382) _
Treasury stock purchased _ _ _ _
------- --------- --------- ---------
BALANCE - September 30, 1996 $74,750 $7,017,644 $8,129,516 $(426,075)
======= ========= ========= ========
Unrealized
Gain on
MSBP Securities
Unearned Available- Treasury
Compensation for-sale Stock Total
BALANCE - December 31, 1995 $(164,450) $398,026 $(1,458,218) $13,496,425
Net earnings _ _ _ 316,032
Repayment of ESOP debt _ _ _ 37,375
Allocation of ESOP shares _ _ _ 33,743
Amortization of deferred
compensation 46,650 _ _ 46,650
Change in unrealized gain
on securities available-
for-sale, net of tax _ (360,569) _ (360,569)
Dividends paid _ _ _ (312,382)
Treasury stock purchased _ _ (587,096) (587,096)
-------- -------- --------- ----------
BALANCE - September 30, 1996 $(117,800) $37,457 $(2,045,314) $12,670,178
======== ======== ========= ==========
-3-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
September 30,
1996 1995
Net Cash Provided by Operations $ 606,288 $ 488,784
Net Investing Activities
Principal payments received on held-to-maturity
securities 6,519,699 1,639,834
Purchase of held-to-maturity securities _ (4,993,059)
Purchase of available-for-sale securities (12,683,184) (5,833,981)
Sale of available-for-sale securities 200,000 5,459,431
Principal payments received on available-for-
sale securities 815,218 164,561
Net decrease (increase) in loans 237,138 438,860
Purchase of loans (9,073,721) (866,150)
Proceeds from sale of real estate owned 206,559 16,204
Investment in property and equipment and
real estate owned (49,063) (212,921)
---------- ---------
Net Cash Used By Investing Activities (13,827,354) (4,187,221)
Financing Activities
Net increase(decrease) in deposits 289,846 (796,602)
Net increase(decrease) in advances
from borrowers for taxes and insurance 35,677 146,102
FHLB borrowings 36,467,000 4,500,000
Repayment of FHLB advance (22,512,257) (500,000)
Payments received from ESOP 37,375 41,013
Treasury stock purchased (587,097) (495,182)
Cash dividends paid (312,384) (242,847)
---------- ----------
Net Cash Provided By Financing Activities 13,418,160 2,652,484
---------- ----------
Increase (Decrease) in Cash and Cash Equivalents 197,094 (1,045,953)
Cash and cash equivalents - beginning of period 908,731 1,465,494
---------- ----------
Cash and cash equivalents - end of period $ 1,105,825 $ 419,541
========== ==========
Supplemental Disclosures
Cash paid for:
Interest $ 2,122,443 $ 1,689,927
Income taxes 238,600 205,500
-4-
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 (unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the accounts
of Tri-County Bancorp, Inc. (the "Company"), Tri-County Federal Savings Bank
(formerly Tri-County Federal Savings and Loan Association) (the "Bank") and
First Tri-County Services, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions for Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all
information and disclosures required by generally accepted accounting
principles for complete financial statements. The accompanying consolidated
financial statements do not purport to contain all the necessary financial
disclosures required by generally accepted accounting principles that might
otherwise be necessary in the circumstances and should be read together with
the 1995 consolidated financial statements and notes thereto of Tri-County
Bancorp, Inc. and Subsidiaries included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995. However, all normal recurring
adjustments have been made which, in the opinion of management, are necessary
to the fair presentation of the financial statements.
The results of operations for the three and nine month periods ended September
30, 1996 are not necessarily indicative of the results which may be expected
for the year ending December 31, 1996 or any other period.
See Notes 2, 3 and 4.
NOTE 2 - EARNINGS PER SHARE
Earnings per share for the three months and nine months ended September 30,
1996 and 1995, are computed on a primary basis. Primary earnings per share is
computed using the weighted average number of common shares outstanding, net
of unallocated ESOP shares and the potentially dilutive effect of stock
options. See Exhibit 11.
NOTE 3 - INVESTMENTS
Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. In accordance with SFAS
No. 115, the Company classified its investment securities and mortgage-backed
securities as either "held-to-maturity," "available-for-sale," or "trading."
Management has determined that all applicable securities are either
"held-to-maturity" or "available-for-sale."
Investment and mortgage-backed securities designated as held-to-maturity are
stated at cost adjusted for amortization of the related premiums and accretion
of discounts, computed using the level yield method. The Company has the
positive intent and ability to hold these securities to maturity.
Investment and mortgage-backed securities designated as available-for-sale are
stated at estimated market value. Unrealized gains and losses are aggregated
and reported as a separate component of equity capital, net of deferred taxes.
These securities are acquired with the intent to hold them to maturity, but
they are available for disposal in the event of unforeseen liquidity needs.
-5-
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, the Bank adopted FASB Statement Nos. 114,
"Accounting by Creditors for Impairment of a Loan" and 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." The
provision of these statements is applicable to all loans, uncollateralized as
well as collateralized, except for large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment and loans that are
measured at fair value or at the lower of cost or fair value. Additionally,
such provisions apply to all loans that are renegotiated in troubled debt
restructurings involving a modification of terms.
Statement No. 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent,
except that loans renegotiated as part of a troubled debt restructuring
subsequent to the adoption of Statement Nos. 114 and 118 must be measured for
impairment by discounting the total expected cash flow under the renegotiated
terms at each loan's original effective interest rate.
A loan evaluated for impairment pursuant to Statement No. 114 is deemed to be
impaired when, based on current information and events, it is probable that
the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. An insignificant payment delay,
which is defined by the Bank as up to ninety days, will not cause a loan to be
classified as impaired. A loan is not impaired during the period of delay in
payment if the Bank expects to collect all amounts due, including interest
accrued at the contractual interest rate for the period of delay. Thus, a
demand loan or other loan with no stated maturity is not impaired if the Bank
expects to collect all amounts due, including interest accrued at the
contractual interest rate, during the period the loan is outstanding. All
loans identified as impaired are evaluated independently. The Bank does not
aggregate such loans for evaluation purposes.
The adoption of Statement Nos. 114 and 118 did not have a material adverse
impact on financial conditions or operations. Payment received on impaired
loans are applied first to interest receivable and then to principal.
-6-
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis or Plan of Operation
GENERAL
Tri-County Bancorp, Inc. (the "Company") was incorporated on June 15, 1993,
and is the holding company of Tri-County Federal Savings Bank (the "Bank").
On September 28, 1993, the Bank completed its conversion from a mutual savings
and loan association to a stock form of ownership at which time the Company
issued 747,500 shares of Common Stock and utilized a portion of the proceeds
to acquire all of the issued shares of the Bank.
The Company is headquartered in Torrington, Wyoming and its principal business
currently consists of the operation of its wholly-owned subsidiary, Tri-County
Federal Savings Bank. The Bank's primary business is attracting retail
deposits from the general public and investing those deposits and other
borrowed funds in various loan products, including mortgage-backed and
mortgage-related securities, federal agency securities and other investment
securities.
The Company's results of operations are dependent primarily on its net
interest income, which is the difference between the interest earned on its
assets, primarily its loans and securities portfolios, and its cost of funds,
which consists of the interest paid on its deposits and borrowings. The
Company's net income also is affected by its provision for loan losses as well
as non-interest income, compensation and benefits, occupancy expenses, Federal
deposit insurance premiums, other non-interest expenses, and income tax
expense. Other non-interest expenses consists of real estate lending
operations, legal expenses, accounting services and other miscellaneous costs.
The earnings of the Company are significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
CHANGES IN FINANCIAL CONDITION
ASSETS
The total assets of the Bank increased by $13,708,454 or 20.84% during the
first nine months of 1996.
Securities available-for-sale increased by $11,205,652 during the first nine
months of 1996. Beginning in the fourth quarter of 1994, the Bank began
taking advantage of a relatively inexpensive source of funding available
through the Federal Home Loan Bank of Seattle (FHLB) to purchase financial
instruments with a slightly higher yield than the rate charged by FHLB on the
advances. During the nine months ended September 30, 1996, securities
available-for-sale totaling $11,214,621 were purchased with funds borrowed
from FHLB. Also, callable FHLB notes totaling $4,000,000 were called by the
agency. These securities had been classified held-to-maturity and the Bank
used $3,000,000 of the proceeds to purchase similar securities which were
classified available-for-sale. The purchase of additional securities was
partially offset by principal payments and prepayments of $815,218 on
mortgage-backed securities and an overall decrease in the market value of the
securities of $522,447.
Securities held-to-maturity decreased by $6,521,835 during the first nine
months of 1996. As previously discussed, held-to-maturity agency securities
were called on January 25th, February 2nd and February 20th, in the amounts of
$1,000,000, $2,000,000 and $1,000,000, respectively, and the proceeds were
used to purchase securities classified available-for-sale. Another agency
security with a face value of $1,000,000 matured and was replaced by a
security classified as available-for-sale. The remaining decrease was the
result of the principal payments and prepayments on the Bank's portfolio of
mortgage-backed securities.
-7-
Loans receivable increased $8,836,583 or 34.63% during the first nine months
of 1996. During this period, the Bank originated or purchased for portfolio
residential mortgage loans totaling $8,833,765, non-residential mortgage loans
totaling $3,316,105, consumer loans totaling $1,091,274, a short-term
commercial loan in the amount of $500,000 and other commercial loans totaling
$267,370. By the end of the period, the Bank had received full repayment of
the short-term commercial loan and repayments totaling $4,607,737 on other
loans. Of the total residential and non-residential mortgage loans originated
and purchased in the first three quarters, $7,983,069 were adjustable rate and
$4,166,801 were fixed rate mortgages. Because of a lack of demand for certain
types of loans in the Bank's primary lending area, purchased loans amounted to
63.66% of all new loan activity during this period. The majority of purchased
loans are residential real estate loans in Colorado mountain resort
communities and non-residential real estate loans in western New Mexico.
Purchased loans are subjected to the same underwriting standards and loan
terms as those originated by the Bank for its portfolio.
LIABILITIES
Deposit balances increased by $289,845 during the first nine months of 1996.
The overall increase in deposit balances consisted of increases in
non-interest bearing demand deposits of $225,9063, and savings and NOW
deposits of $320,089, and a decrease in time deposits of $256,150.
Advances from FHLB increased by $13,954,742 during the first nine months of
1996. As previously discussed, advances totaling $8,300,000 were used to
purchase securities classified as available-for-sale. These advances have a
term of approximately one year and were used to purchase adjustable rate
mortgage-backed securities and shares in a mutual fund whose investments are
mortgage-related securities. The Bank was able to lock in a positive spread
over the initial term of the advances and will make a decision whether to
renew the advance and hold the securities or sell the securities and payoff
the advance on or near the maturity date. The Bank also borrowed $1,267,000
from FHLB under the Community Investment Program (CIP) to fund commercial real
estate loans in Wheatland, Wyoming and Breckenridge, Colorado. Other
borrowings from FHLB were used to fund the origination or purchase of
portfolio mortgage loans and were for terms of less than one year.
The increase in accounts payable and accrued expenses was primarily the result
of legislation passed in the third quarter to recapitalize the Savings
Association Insurance Fund (SAIF). This one-time special assessment of 65.7
cents for every $100 of deposits resulted in the accrual of expenses of
$304,606 to be paid by the Bank on November 27, 1996.
The decrease of $113,618 in deferred income taxes 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 by $522,447 during the period which resulted in a
decrease in deferred income taxes. Also, passage of the Small Business
Protection Act of 1996 abolished the percentage of taxable income method of
computing the bad debt deduction which was previously available to many
savings banks. The effect of this tax law change was to increase the
effective tax rate used to compute the deferred tax liability from 31.28% to
34% which required an addition to the deferred income tax account of $26,000
in the third quarter.
STOCKHOLDERS' EQUITY
Additional paid-in capital increased by $33,743 because of the application of
current accounting standards, which requires charging expense for the fair
value of shares committed to be released by an Employee Stock Ownership Plan
-8-
and crediting the difference between the fair value and the cost of the shares
to paid-in capital.
Retained earnings increased $3,651 as a result of net earnings of $316,032 for
the first nine months of the year, less dividends of $0.50 per share paid in
1996 which totaled $312,381.
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 first nine months of the year which resulted in a decrease, net of
deferred income tax, of $360,569 in stockholders' equity.
In March of 1996, the Bank received permission from the Office of Thrift
Supervision (OTS) to repurchase up to 32,039 shares (5%) of its outstanding
Common Stock in the open market. At September 30, 1996, the Bank had
repurchased 32,039 shares at a total cost of $587,096 or an average purchase
price of $18.32 per share.
NON-PERFORMING ASSETS
Non-performing assets totaled $52,149 or 0.07% of total assets at September
30, 1996 compared to $223,621 or 0.34% at December 31, 1995. The decrease in
non-performing assets was the result of the sale of real estate owned which
left the Bank with two real estate loans on a non-accrual status as its only
non-performing assets.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
INTEREST INCOME
Interest income from loans increased $187,852 during the third quarter of 1996
when compared to the same period of 1995. The increase was the result of an
increase in the average balance of loans outstanding which was $9,207,345
higher in 1996 than in 1995. The increase in the average balance of loans
more than offset a slight decrease in the average yield on the portfolio from
8.24% to 8.22%.
The increase in interest income from securities available-for-sale of $191,438
was the result of an increase of $11,923,654 in the average balance of
securities held during the third quarter of 1996 when compared to the same
period of 1995. The increase in the average balance of securities more than
offset a decrease in yield on those securities from 6.70% to 6.59% . See also
"Changes in Financial Condition - Assets."
Interest income from held-to-maturity securities decreased $101,937 during the
third quarter of 1996 when compared to the same period of 1995. The decrease
was the result of a $6,120,789 decrease in the average balance of the
securities held which more than offset the increase in the yield from 7.06%
to 7.26%. See also "Changes in Financial Condition - Assets."
The decrease in income from other interest-earning assets of $24,191 was
caused mainly by a decrease in the average balance of these assets of
$1,476,987. This category of assets consists primarily of interest-earning
demand and time deposits held at FHLB.
INTEREST EXPENSE
Interest expense on deposits decreased by $18,744 during the third quarter of
1996 when compared to the third quarter of 1995. The decrease in the cost of
deposits was caused by a decrease in the average rate paid on deposits from
4.72% to 4.58% and a decrease of $265,741 in the average balance of deposits.
As previously discussed, beginning in the fourth quarter of 1994, the Bank
began taking advantage of a relatively inexpensive source of funding available
through FHLB to purchase financial instruments that yield a slightly higher
-9-
return than the rate charged on the advances. The level of these borrowings
increased substantially during the last twelve months which resulted in an
increase of $197,441 in interest expense even though the average rate on
advances decreased from 6.24% to 5.49%.
PROVISION FOR CREDIT LOSSES
No provision for credit losses was made during the three months ended
September 30, 1996 due to management's assessment that additions were not
required.
NET INTEREST INCOME
Net interest income increased from $548,822 for the three month period ended
September 30, 1995 to $623,287 for the same period of 1996. This increase of
$74,465 was due to an increase of $13,534,369 in the average balance of
interest-earning assets form 1995 to 1996 offset by an increase in
interest-bearing liabilities. The interest rate spread between
interest-earning assets and interest-bearing liabilities remained
approximately the same at 2.60%.
NON-INTEREST INCOME
Non-interest income decreased $2,584 during the third quarter of 1996 when
compared to the third quarter of 1995. Gain on the sale of loans decreased by
$1,139 due to a decrease in the amount of loans originated and sold in the
current quarter. During the previous year, shares in a mutual fund were
redeemed at a gain of $879 whereas there were no gains in the current year.
NON-INTEREST EXPENSE
Non-interest expense increased $287,683 during the third quarter of 1996 when
compared to the same period of 1995. While compensation and benefits remained
unchanged, occupancy and equipment expenses increased $5,121 with the largest
increases in data processing and telephone expenses. As previously stated,
legislation was passed in the third quarter of 1996 which provided for the
recapitalization of the SAIF insurance fund via a one-time special assessment
in the amount of 65.7 cents for every $100 in deposits as of March 31, 1995.
This special assessment totaled $304,606 and was charged to expense in the
current quarter. Pursuant to the above-mentioned legislation, the Bank will
pay, in addition to its normal deposit insurance premium as a member of SAIF,
an amount equal to approximately 6.4 basis points toward the retirement of the
Financing Corporation bonds ("Fico Bonds") issued in the 1980s to assist in
the recovery of the savings and loan industry. Members of the Bank Insurance
Fund ("BIF"), by contrast, will pay, in addition to their normal deposit
insurance premium, approximately 1.3 basis points. Based on total deposits as
of September 30, 1996, had the legislation been in effect, the Bank's Fico
Bond premium would have been approximately $7,180 in addition to its normal
deposit insurance premium. Beginning no later than January 1, 2000, the rate
paid to retire the Fico Bonds will be equal for members of the BIF and the
SAIF. The legislation also provides for the merger of the BIF and the SAIF by
January 1, 1999 provided there are no financial institutions still chartered
as savings associations at that time. Should the insurance funds be merged
before January 1, 2000, the rate paid by all members of this new fund to
retire the Fico Bonds would be equal.
Other expenses decreased $20,060 and was primarily caused by the receipt of
rents on a mini-warehouse property held as real estate owned. The receipt of
the rents from the court appointed trustee exceeded the expenses of caring for
the property and collecting the monthly rents during the foreclosure
proceedings by $17,975. See also "Changes in Financial Condition -
Liabilities."
INCOME TAXES
The change in income tax is primarily the result of a change in net earnings
before taxes. However, passage of the Small Business Protection Act of 1996
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abolished the percentage of taxable income method of computing the bad
debtdeduction which was previously available to many savings banks. The
effect of this tax law change was to increase the effective tax rate used to
compute the deferred tax liability from 31.28% to 34% which required an
addition to the deferred income tax account of $26,000 in the third quarter.
See also "Changes in Financial Condition - Liabilities."
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
INTEREST INCOME
Interest income from loans increased $344,627 during the first nine months of
1996 when compared to the same period of 1995. The increase was the result
of an increase in the average balance of loans outstanding during the period
which was $5,439,852 higher in 1996 than in 1995. Also, the average yield on
the portfolio increased from 8.22% to 8.27%.
The increase in interest income from securities available-for-sale of $449,954
was the result of an increase of $9,927,963 in the average balance of
securities held when compared to the same period of 1995 which more than
offset the decrease in the yield from 6.58% to 6.39%. See also "Changes in
Financial Condition - Assets."
Interest income from held-to-maturity securities decreased by $141,950 during
the first nine months of 1996 when compared to the same period of 1995. The
decrease was the result of a $3,099,456 decrease in the average balance of the
securities held which more than offset the increase in yield from 7.15% to
7.39%. See also "Changes in Financial Condition - Assets."
The decrease in income from other interest-earning assets was caused mainly by
a decrease in the average balance of these assets of $1,942,941. This category
of assets consists primarily of interest-earning demand and time deposits held
at FHLB.
INTEREST EXPENSE
Interest expense on deposits increased $17,597 during the first nine months of
1996 when compared to the first nine months of 1995. The increase in the cost
of deposits was caused by an increase in the average rate paid on deposits.
The average interest rate paid on time certificates was decreasing during the
first nine months of 1996 but was higher, on average, than the average rate
paid on new and renewing certificates during the first nine months of 1995.
As previously discussed, beginning in the fourth quarter of 1994, the Bank
began taking advantage of a relatively inexpensive source of funding available
through FHLB to purchase financial instruments that yield a slightly higher
return than the rate charged on the advances. The level of the borrowings
increased substantially during the last twelve months and averaged $11,731,456
more during the first nine months of 1996 than during the same period of 1995.
The increase in the average balance of advances resulted in an increase in
interest expense of $453,756 even though the average interest rate decreased
from 5.61% to 5.28%.
PROVISION FOR CREDIT LOSSES
No provision for credit losses was made during the nine months ended September
30, 1996 due to management's assessment that additions were not required.
NET INTEREST INCOME
Net interest income increased from $1,718,972 for the nine month period ended
September 30, 1995 to $1,815,798 for the same period of 1996. This increase
of $96,826 was due to an increase of $10,325,369 in the average balance of
interest-earning assets from 1995 to 1996 which earned at the net interest
rate spread of 2.59% which more than offset a net increase of $792,321 in the
average balance of interest bearing liabilities over interest earning assets
and a decrease in the interest rate spread from 2.79% to 2.59%.
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NON-INTEREST INCOME
Non-interest income decreased $9,755 during the first nine months of 1996 when
compared to the first nine months of 1995. Gain on the sale of loans decreased
$2,079 due to a decrease in the volume of loans originated and sold. During
the previous year, shares in a mutual fund were redeemed at a gain of $1,387
whereas during the current year the shares were redeemed at a $1,593 loss.
Service charges on deposits decreased $4,647 mainly due to fewer overdraft
charges being assessed and collected.
NON-INTEREST EXPENSE
Overall, non-interest expense increased $294,534 during the first nine months
of 1996. Compensation and benefits decreased by $6,034 due mainly to a
decrease in the costs of the Bank's employee pension plans. During 1995, the
Bank incurred additional pension expenses while terminating a defined benefit
pension plan. Occupancy and equipment expense increased $6,663 or 3.17% due
to increases in data processing, telephone and maintenance agreement expenses.
Federal deposit insurance premium expense remained at approximately the same
level as the previous year. As previously stated, legislation was passed in
the third quarter of 1996 which provided for the recapitalization of the SAIF
insurance fund via a one-time special assessment in the amount of 65.7 cents
for every $100 in deposits as of March 31, 1995. This special assessment
totaled $304,606 and was charged to expense in the current quarter. Other
expenses increased $11,773 and was primarily caused by payments for consulting
fees in connection with analysis of the Bank's current balance sheet and legal
and professional fees.
INCOME TAXES
The change in income tax is primarily the result of a change in net earnings
before taxes. Additionally, passage of the Small Business Protection Act of
1996 abolished the percentage of taxable income method of computing the bad
debt deduction which was previously available to many savings banks. The
effect of this tax law change was to increase the effective tax rate used to
compute the deferred tax liability from 31.28% to 34% which required an
addition to the deferred income tax account of $26,000 in the third quarter.
See also "Changes in Financial Condition - Liabilities."
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as defined by
the Office of Thrift Supervision regulations. This requirement, which may
vary from time to time, depends upon, among other things, economic conditions
and the amount of cash flows needed for operations and is based upon a
percentage of deposits and short-term borrowings. The required ratio
currently is 5%. The Bank's liquidity averaged 27.38% during the third
quarter of 1996. The Bank adjusts its liquidity levels in order to meet
funding needs for deposit outflows, payment of real estate taxes from escrow
accounts on mortgage loans, repayment of borrowings, when applicable, and loan
funding commitments. The Bank also adjusts its liquidity level as appropriate
to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, amortization and prepayments
of loans and mortgage-backed securities, FHLB advances, sales and maturities
of investments and funds provided from operations. While scheduled loan
amortization and maturing investment securities are a relatively predictable
source of funds, deposit flow and loan prepayments are greatly influenced by
market interest rates, economic conditions and competition. The Bank manages
the pricing of its deposits to maintain a steady deposit balance. In
addition, the Bank invests its excess funds in short-term time deposits which
provide liquidity to meet lending requirements. Interest-bearing deposits at
September 30, 1996 amounted to $196,696. The Bank's liquidity, represented by
cash and cash equivalents, is a product of its operating, investing and
financing activities. These activities are summarized as follows:
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9 Months Ended
September 30,
(in thousands)
1996 1995
Cash and cash equivalents at beginning of year $ 909 $1,465
----- -----
OPERATING ACTIVITIES:
Net Income 316 489
Adjustments to reconcile net income to net
cash provided by operation activities 290 _
----- -----
Net cash provided by operating activities 606 489
Net cash provided(used) by investing activities (13,827) (4,187)
Net cash provided(used) by financing activities 13,418 2,653
------ -----
Net increase (decrease) in cash and cash
equivalents 197 (1,045)
------ -----
Cash and cash equivalents at end of period $ 1,106 $ 420
====== =====
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as Federal funds and interest-bearing deposits. If the Bank requires
funds beyond its ability to generate them internally, borrowing agreements
exist with the FHLB, which provides an additional source of funds.
The Bank anticipates it will have sufficient funds available to meet its
current loan commitments. At September 30, 1996, the Bank had outstanding
commitments of $1,417,223. Certificates of deposit scheduled to mature in one
year or less at September 30, 1996 totaled $26,695,803. Based on past
experience, management believes that a substantial portion of such deposits
will remain with the Bank.
The following table sets forth the Bank's capital position at September 30,
1996, as compared to the minimum regulatory requirements:
Percent Of
Adjusted
Amount Assets
(Dollars in thousands)
TANGIBLE CAPITAL:
Required $ 1,178 1.50%
Actual 10,480 13.35%
------- ------
Excess $ 9,302 11.85%
======= ======
CORE CAPITAL:
Required $ 2,355 3.00%
Actual 10,480 13.35%
------- ------
Excess $ 8,125 10.35%
======= ======
RISK BASED CAPITAL:
Required $ 2,472 8.00%
Actual 10,866 35.16%
------- ------
Excess $ 8,394 27.16%
======= ======
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IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles ("GAAP"), which require the measurement of
financial position and operating results in terms of historical dollars
without considering the change in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike most industrial companies, nearly
all the assets and liabilities of the Company are financial. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
RECAPTURE OF BAD DEBT RESERVE
On August 2, 1996, both the U.S. House of Representatives and the U.S. Senate
passed the Small Business Job Protection Act of 1996. This bill, among other
things, equalized the taxation of thrifts and banks. Previously, thrifts had
been able to deduct a portion of their bad-debt reserves set aside to cover
potential loan losses ("bad-debt reserves"). Furthermore, the bill repealed
current law mandating recapture of thrifts' bad debt reserves if they convert
to banks. Bad debt reserves set aside through 1987 will not be taxed,
however, any reserves taken since January 1, 1988 will be taxed over a six
year period beginning in 1997. Institutions can delay these taxes for two
years if they meet a residential-lending test. The Bank does not believe it
has any excess reserves subject to recapture.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank was engaged in any legal proceeding of a
material nature at September 30, 1996. From time to time, the Bank is a party
to legal proceedings in the ordinary course of business wherein it enforces
its security interest in loans.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement regarding computation of earnings per
share.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
Date: November 12, 1996 /s/ Robert L. Savage
President and Chief Executive Officer
Date: November 12, 1996 /s/ Tommy A. Gardner
Vice President and Chief Financial Officer
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