SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
Quarterly Report Pursuant to Section 10 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: June 30, 1996
Commission file number: 0-22220
TRI-COUNTY BANCORP, INC.
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(Exact name of registrant as specified in its charter.)
Wyoming 83-0304855
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2201 Main Street, Torrington, Wyoming 82240
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(Address of principal executive offices) (Zip Code)
(307)532-2111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 10 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes[X] No[ ]
Indicate the number of shares outstanding of each of issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.10 par value - 608,749 shares as of August 1,1996.
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Financial
Condition as of June 30, 1996 (unaudited)
and December 31, 1995
Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30, 1996
and 1995 (unaudited)
Condensed Consolidated Statements of Stockholder's
Equity for the Six Months Ended June 30, 1996
(unaudited)
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 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
June 30, Dec 31,
1996 1995
____________ ___________
ASSETS
Cash $ 618,041 $ 350,964
Interest earning deposits at other
financial institions 668,764 557,768
Securities
Available-for-sale at fair value 29,627,586 19,256,695
Held-to-maturity, market value
of $13,431,924(1996) and
$18,583,902(1995) 13,287,199 18,263,560
Loans receivable, net 31,168,205 25,513,700
Loans held for resale 184,570 84,929
Office property and equipment, net 936,484 961,627
Prepaid expenses and other assets 724,663 776,842
____________ ___________
Total Assets $77,215,512 $65,766,085
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Demand deposits $ 351,879 $ 95,320
Savings and NOW deposits 11,543,517 11,052,595
Time deposits 33,558,895 33,435,384
____________ ____________
Total Deposits 45,454,291 44,583,299
Advances from FHLB 18,449,617 7,000,000
Advances by borrowers for taxes and insurance 125,774 116,371
Accounts payable and accrued expenses 188,296 144,077
Deferred income taxes 247,329 425,914
____________ ____________
Total Liabilities $64,465,307 $52,269,661
____________ ____________
Stockholders' Equity
Preferred stock, $.10 par value, 5,000,000
shares authorized, none issued
Common stock, 10,000,000 shares of $.10 par
value authorized, 608,749 (1996) & 640,788
(1995) shares issued & outstanding 74,750 74,750
Additional paid in capital 7,005,684 6,983,901
Retained earnings - substantially restricted 8,308,020 8,125,865
Unearned compensation relating to MSBP & ESOP (566,075) (627,900)
Unrealized gain/(loss) on securities
available-for-sale, net of tax (26,860) 398,026
Treasury stock, 138,751 (1996) and 106,712
(1995) shares, at cost (2,045,314) (1,458,218)
____________ ____________
Total Stockholders' Equity 12,750,205 13,496,424
____________ ____________
Total Liabilities & Stockholders' Equity $77,215,512 $65,766,085
============ ============
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TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Interest Income
Loans $ 625,800 $ 520,510 $1,203,820 $1,047,045
Securities available-for-sale 465,087 305,283 847,496 558,981
Securities held-to-maturity 246,625 288,334 527,820 567,832
Other interest earning assets 4,776 51,381 14,721 74,982
--------- --------- --------- ---------
Total Interest Income 1,342,288 1,165,508 2,593,857 2,278,840
--------- --------- --------- ---------
Interest Expense
Deposits 520,716 522,767 1,049,324 1,012,982
Advances and other borrowings 210,235 66,210 352,023 95,708
--------- --------- --------- ---------
Total Interest Expense 730,951 588,977 1,401,347 1,108,690
--------- --------- --------- ---------
Net Interest Income 611,337 576,531 1,192,510 1,170,150
Provision for credit losses --- (188) --- 288
--------- --------- --------- ---------
Net Interest Income after
Provision for credit losses 611,337 576,719 1,192,510 1,169,862
--------- --------- --------- ---------
Non-interest Income
Gain on sale of loans 10,008 12,843 17,088 18,027
Gain(loss) on sale of
available-for-sale investments --- 508 (1,593) 508
Service charges on deposits 23,137 25,954 47,198 49,189
Other, net 8,413 9,270 14,510 16,649
--------- --------- --------- ---------
Total Non-interest Income 41,558 48,575 77,203 84,373
--------- --------- --------- ---------
Non-interest Expense
Compensation and benefits 180,726 187,238 353,637 359,150
Occupancy and Equipment 71,652 72,156 144,401 142,859
Federal insurance premium 25,553 26,097 51,243 52,194
Other, net 106,304 112,998 214,880 203,107
--------- --------- --------- ---------
Total Non-interest Expense 384,235 398,489 794,161 757,310
--------- --------- --------- ---------
Earnings Before Income Taxes 268,660 226,805 505,552 496,925
Income Taxes 84,100 70,114 163,200 152,300
--------- --------- --------- ---------
Net Earnings $ 184,560 $ 156,691 $ 342,352 $ 344,625
========= ========= ========= =========
Earnings Per Common Share -
Primary $ 0.30 $ 0.24 $ 0.55 $ 0.54
===== ===== ===== =====
Cash Dividends Paid Per Common
Share $ 0.00 $ 0.00 $ 0.25 $ 0.17
===== ===== ===== =====
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TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six months Ended June 30, 1996 (unaudited)
Employee
Additional Stock
Common Paid-In Retained Ownership
Stock Capital Earnings Plan
BALANCE-December 31, 1995 $74,750 $6,983,901 $8,125,865 $(463,450)
Net earnings --- --- 342,352 ---
Repayment of ESOP dept --- --- --- 29,900
Allocation of ESOP shares --- 21,783 --- ---
Amortization of deferred
compensation --- --- --- ---
Change in unrealzed gain
on securities available-
for-sale, net of tax --- --- --- ---
Dividends paid --- --- (160,197) ---
Treaury stock purchased --- --- --- ---
------- ---------- ---------- ---------
BALANCE-June 30, 1996 $74,750 $7,005,684 $8,308,020 $(433,550)
======= ========== ========== =========
Unrealized
Gain on
MSBP Securities
Unearned Available-for Treasury
Compensation sale Stock Total
BALANCE-December 31, 1995 $(164,450) $398,026 $(1,458,218) $13,496,424
Net earnings --- --- --- 342,352
Repayment of ESOP dept --- --- --- 29,900
Allocation of ESOP shares --- --- --- 21,783
Amortization of deferred
compensation 31,925 --- --- 31,925
Change in unrealzed gain
on securities available-
for-sale, net of tax --- (424,886) --- (424,886)
Dividends paid --- --- --- (160,197)
Treaury stock purchased --- --- (587,096) (587,096)
------- ---------- ---------- ---------
BALANCE-June 30, 1996 $(132,525) $ (26,860) $(2,045,314) $12,750,205
======= ========== ========== =========
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TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
June 30,
1996 1995
___________ ____________
Net Cash Provided by Operations $ 352,904 $ 457,546
___________ ____________
Net Investing Activities
Net loan origination & principal payments (164,004) 178,609
Purchase of loans (5,490,591) ---
Purchase of available-for-sale securities (11,655,917) (5,833,981)
Principal payments received on
available-for-sale securities 504,556 60,516
Sale of available-for-sale securities 200,000 4,891,269
Purchase of held-to-maturity securities --- (993,059)
Principal payments rec'd on held-to-
maturity securities 4,974,589 1,094,894
Proceeds from sale of real estate owned 76,831 16,203
Investment in property, equipment, REO (32,913) (206,894)
___________ ____________
Net Cash Used by Investing
Investing Activities (11,587,449) (792,443)
___________ ____________
Financing Activities
Net change in deposits 870,992 (487,438)
Payments received from ESOP 29,900 33,289
Net increase in advances from
borrowers for taxes/insurance escrows 9,403 105,676
FHLB borrowings 11,449,617 4,000,000
Treasury stock purchased (587,097) (433,195)
Cash dividends paid (160,197) (114,685)
___________ ____________
Net Cash Provided by Financing Activities 11,612,618 3,103,647
___________ ____________
Net increase in Cash & Cash Equivalents 378,073 2,768,750
Cash & Cash Equivalents - beginning 908,732 1,465,495
___________ ____________
Cash & Cash Equivalents - ending 1,286,805 $4,234,245
=========== ============
Supplemental Disclosures
Cash paid for Interest $1,360,307 $1,099,471
Cash paid for Income Taxes 143,600 90,000
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TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six month periods ended June 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 six months ended June 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.
NOTE 4 - FDIC INSURANCE ASSESSMENT
Congress is currently considering legislation to resolve financial problems
of the Savings Association Insurance Fund (SAIF). Proposed legislation would
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require a one-time special assessment based on assessable deposits at
March 31, 1995. The actual payment date will be set by the Federal Deposit
Insurance Corporation (FDIC), but will be no later than sixty days after
enactment of the legislation. The legislation is designed to recapitalize
SAIF and assist in the merger of SAIF and the Bank Insurance Fund (BIF).
Based on current proposed legislation, the Bank's one-time assessment is
estimated at $249,305.
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PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion & 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 $11,449,427 or 17.41% during the
first half of 1996.
Securities available-for-sale increased by $10,370,891 during the first six
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 six months ended June 30, 1996, securities available-for-sale
totaling $8,155,917 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.
Securities held-to-maturity decreased by $4,976,361 during the first half 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. The remaining
decrease was the result of the principal payments and prepayments on the
Bank's portfolio of mortgage-backed securities.
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Loans receivable increased $5,654,505 or 22.16% during the first six months
of 1996. During this period, the Bank originated or purchased for portfolio
residential mortgage loans totaling $5,297,886, non-residential mortgage loans
totaling $2,099,716, consumer loans totaling $917,374, a short-term commercial
loan in the amount of $500,000 and other commercial loans totaling $249,158.
By the end of the period, the Bank had received full repayment of the
short-term commercial loan and repayments totaling $3,061,613 on other loans.
Of the total residential and non-residential mortgage loans originated in the
first two quarters, $4,306,556 were adjustable rate and $3,091,046 were fixed
rate mortgages. Purchased loans amounted to 60.6% of all new loan activity
during this period.
LIABILITIES
Deposit balances increased by $870,996 during the first six months of 1996.
The overall increase in deposit balances consisted of increases in non-
interest bearing demand deposits of $256,559, savings and NOW deposits of
$490,922, and time deposits of $123,515.
Advances from FHLB increased by $11,499,617 during the first six months of
1996. As previously discussed, advances totaling $8,000,000 were obtained
during the first six months of 1996 and used to purchase securities
available-for-sale. The 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 $950,000 from FHLB under the Community Investment
Program (CIP) which was used to fund a mortgage loan for a commercial retail
building located in Wheatland, Wyoming. The CIP loan is a twenty year fixed
rate amortizing loan. The balance of the borrowings from FHLB were for terms
of less than one year and the proceeds were used to fund the origination or
purchase of portfolio mortgage loans.
The decrease of $178,585 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 $618,470 during the period which resulted in a
decrease in deferred income taxes.
STOCKHOLDERS' EQUITY
Additional paid in capital increased by $21,783 because of the application
of Statement of Position (SOP) 93-6, Employers' Accounting for Employee Stock
Ownership Plans, of the Accounting Standards Division of the American
Institute of Certified Public Accountants, which requires charging expense
for the fair value of shares committed to be released by an Employee Stock
Ownership Plan and crediting the difference between the fair value and the
cost of the shares to paid in capital.
Retained earnings increased $182,155 as a result of net earnings of $342,352
for the first six months of the year, less a dividend of $0.25 per share paid
in March which totaled $160,197.
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 six months of the year which resulted in a decrease of
$424,886 in stockholders' equity.
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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
Comon Stock in the open market. At June 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 $165,376 or 0.21% of total assets at June 30,
1996 compared to $223,621 or 0.34% at December 31, 1995. The decrease in
non-performing assets of $58,245 was caused by the sale of real estate owned
with a cost basis to the Bank of $76,831 and an increase in the balance of
non-accrual loans of $28,586.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996
INTEREST INCOME
Interest income from loans increased $105,290 during the second 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 during the period
which was $5,700,345 higher in 1996 than in 1995. The increase in the
average balance of loans more than offset a decrease in the average yield on
the portfolio from 8.31% to 8.15%.
The increase in interest income from securities available-for-sale of
$159,804 was the result of an increase of $9,076,456 in the average balance
of securities held during the second quarter of 1996 when compared to the
same period of 1995. An increase in the average yield on the securities from
6.63% to 6.77% also contributed to the increase. See also "Changes in
Financial Condition - Assets."
Interest income from held-to-maturity securities decreased by $41,709 during
the second quarter of 1996 when compared to the same period of 1995. The
decrease was the result of a $2,286,789 decrease in the average balance of
the securities held which more than offset the slight increase in the yield
from 7.33% to 7.35%. See also "Changes in Financial Condition - Assets."
The decrease in income from other interest-earning assets of $46,605 was
caused mainly by a decrease in the average balance of these assets of
$3,135,890. Also, the yield on other interest-earning assets decrease from
5.78% to 5.10%. This category of assets consists primarily of interest-
earning demand and time deposits held at FHLB.
INTEREST EXPENSE
Interest expense on deposits decreased by $2,051 during the second quarter of
1996 when compared to the second quarter of 1995. The decrease in the cost
of deposits was caused by a slight decrease in the average rate paid on
deposits. Maturing time certificates renewed at rates which were somewhat
lower, on average, than the rates previously paid.
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 these borrowings
increased substantially during the last twelve months which resulted in an
increase of $144,025 in interest expense even though the average rate on
advances decreased from 5.66% to 5.15%.
PROVISION FOR CREDIT LOSSES
No provision for credit losses was made during the three months ended June 30,
1996 due to management's assessment that additions were not required.
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NET INTEREST INCOME
Net interest income increased from $576,531 for the three month period ended
June 30, 1995 to $611,337 for the same period of 1996. This increase was due
to an increase of $9,355,432 in the average balance of interest-earning assets
while the difference between the yield on interest-earning assets and the cost
of interest-bearing liabilities remained constant at 2.74% for both periods.
NON-INTEREST INCOME
Non-interest income decreased $7,017 during the second quarter of 1996 when
compared to the second quarter of 1995. Gain on the sale of loans decreased
$2,835 due to a decrease in the volume of loans originated and sold. Service
charges on deposits decreased $2,817 primarily due to fewer overdraft charges
being assessed and collected. During the previous year, shares in a mutual
fund were redeemed at a gain of $508 whereas there were no gains in the
current year.
NON-INTEREST EXPENSE
Non-interest expense decreased $14,254 during the second quarter of 1996 when
compared to the same period of 1995. Compensation and benefits expense
decreased $6,512 due to a decrease in the cost of the Bank's group medical
plan and the payment in the previous year of expenses related to a terminated
defined benefit pension plan. Other expenses decreased $6,694 and was the
result of additional advertising and promotion expenses incurred in the
previous year in conjunction with the completion of a substantial remodeling
project and a related open house. Occupancy and equipment expense and
federal insurance premiums remained at approximately the same level during
the two periods.
INCOME TAXES
The change in income tax is primarily the result of a change in net earnings
before taxes.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
INTEREST INCOME
Interest income from loans increased $156,775 during the first half 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 $3,974,741 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 8.21% to 8.17%. The increase in interest income from
securities available-for-sale of $258,515 was the result of an increase of
$7,734,963 in the average balance of securities held during the second half of
1996 when compared to the same period of 1995. A slight increase in the
average yield on the securities from 6.53% to 6.57% also contributed to the
increase. See also "Changes in Financial Condition - Assets."
Interest income from held-to-maturity securities decreased by $40,012 during
the first six months of 1996 when compared to the same period of 1995. The
decrease was the result of a $1,523,852 decrease in the average balance of
the securities held which more than offset the increase in the yield from
7.20% to 7.44%. 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 $2,174,456. This
category of assets consists primarily of interest-earning demand and time
deposits held at FHLB.
INTEREST EXPENSE
Interest expense on deposits increased $36,342 during the second half of 1996
when compared to the second half of 1995. The increase in the cost of
deposits was caused by an increase in the average rate paid on deposits. The
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average interest rate paid in time certificates was decreasing during the
first six months of 1996 but was higher, on average, than the average rate
paid on new and renewing certificates during the first six 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 $10,083,159 more during the first half 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 $253,315 even though the average interest
rate decreased from 5.24% to 5.12%.
PROVISION FOR CREDIT LOSSES
No provision for credit losses was made during the six months ended June 30,
1996 due to management's assessment that additions were not required.
NET INTEREST INCOME
Net interest income increased from $1,169,862 for the six month period ended
June 30, 1995 to $1,192,510 for the same period of 1996. This increase was
primarily due to an increase of $7,945,741 in the average balance of
interest-earning assets which more than offset a decrease in the interest
rate spread from 2.89% to 2.69%.
NON-INTEREST INCOME
Non-interest income decreased $7,170 during the first half of 1996 when
compared to the first half of 1995. Gain on the sale of loans decreased
$939 due to a decrease in the volume of loans originated and sold. Service
charges on deposits decreased $1,991 mainly due to fewer overdraft charges
being assessed and collected. During the previous year, shares in a mutual
fund were redeemed at a gain of $508 whereas during the current year the
shares were redeemed at a $1,593 loss.
NON-INTEREST EXPENSE
Overall, non-interest expense increased $6,851 during the first six months of
1996. Compensation and benefits decreased by $5,513 due to a decrease in the
costs of the Bank's group medical plan of $3,785 and small decreases in
employee pension plans.
Occupancy and equipment expense and federal insurance premium expense remained
at approximately the same level as the previous year. 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.
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 27.10% during the second
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.
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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 June 30, 1996 amounted to $668,764. 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:
6 Months Ended
June 30,
(in thousands)
1996 1995
_______________
Cash and cash equivalents at beginning of year $ 909 $1,465
______ _____
OPERATING ACTIVITIES:
Net Income 342 345
Adjustments to reconcile net income to net
cash provided by operation activities 11 113
______ ______
Net cash provided by operating activities 353 458
Net cash provided (used) by investing
activities (11,587) (792)
Net cash provided (used) by financing
activities 11,612 3,103
______ ______
Net increase (decrease) in cash
and cash equivalents 378 2,769
______ ______
Cash and cash equivalents at end of period $1,287 $4,234
====== ======
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 June 30, 1996, the Bank had outstanding
commitments of $4,290,602. Certificates of deposit scheduled to mature in
one year or less at June 30, 1996 totaled $23,737,667. 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 June 30, 1996,
as compared to the minimum regulatory requirements:
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Percent Of
Adjusted
Amount Assets
(dollars in thousands)
________________________
TANGIBLE CAPITAL:
Required $ 1,145 1.50%
Actual 10,990 14.40%
_________ ________
Excess $ 9,845 12.90%
========= ========
CORE CAPITAL:
Required $ 2,289 3.00%
Actual 10,990 14.40%
_________ ________
Excess $ 8,701 11.40%
========= ========
RISK BASED CAPITAL:
Required $ 2,293 8.00%
Actual 11,349 39.59%
_________ ________
Excess $ 9,056 31.59%
========= ========
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.
DISPARITY IN INSURANCE PREMIUMS AND SPECIAL ASSESSMENT
Federal law requires that the FDIC maintain the reserve level of the SAIF and
the Bank Insurance Fund ("BIF") at 1.25% of insured deposits. Reserves are
funded through payments by insured institutions of insurance premiums. On
September 30, 1995, due to the BIF reaching the required reserve level, the
FDIC reduced the insurance premiums for members of BIF to a range of between
0.04% and 0.31% of deposits while maintaining the current range of between
0.23% and 0.31% of deposits for members of SAIF. Effective January 1, 1996 a
vast majority of the BIF members are required to pay a maximum of $2,000 in
annual deposit insurance premiums. The FDIC is required to set insurance
premiums independently for members of BIF and SAIF.
A disparity in insurance premiums between those required for SAIF members,
such as the Bank, and BIF members could allow BIF members to attract and
retain deposits at a lower effective cost than that of SAIF members. In the
event BIF members in the Bank's market area, as a result of the reduction
in insurance premiums, increase the interest rates paid on deposits,
competitive pressure would be put on the Bank to raise the interest rates
paid on deposits thus increasing its cost of funds and possibly reducing net
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interest income. An increase in interest expense would also impair the
Bank's ability to maintain low operating costs. This competitive
disadvantage could result in the Bank losing deposits to BIF members who have
a lower cost of funds and are, therefore, able to pay higher rates of interest
on deposits. Although the Bank has other sources of funds, these other
sources may have higher costs than those of deposits, resulting in lower net
yields on loans originated using such funds.
Several alternatives to mitigate the effect of the BIF/SAIF insurance premium
disparity have recently been proposed by the U.S. Congress, federal
regulators, certain industry lobbyists and the executive branch of the United
States Government. One plan that has gained support of several sponsors
would require all SAIF member institutions, including the Bank, to pay a one-
time fee of approximately 0.85% ($0.85 for every $100 of deposits) on the
amount of deposits held by the member institution to recapitalize the SAIF.
If this proposal is enacted by Congress, the effect would be to immediately
reduce the capital of SAIF member institutions by the amount of the fee, and
such amount would be immediately charged to earnings, unless the institutions
are permitted to, and choose to, amortize the expense of the fee over a
period of years. If an 85 basis point (0.85%) assessment was effected, based
on deposits as of December 31, 1995, the Bank's pro rate share would amount
to $249,305 after taxes. If the Bank is required to pay the proposed special
assessment, future deposit insurance premiums are expected to be reduced from
0.23% to approximately 0.06%. Based upon the Bank's deposits as of December
31, 1995, the Bank's deposit insurance expense would decrease by approximately
$75,547 per year after taxes. Management of the Bank is unable to predict
whether this proposal or any similar proposal will be enacted or whether
ongoing SAIF premiums will be reduced to a level comparable to that of BIF
premiums.
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 will, if
signed by the President, among other things, equalize 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 will repeal 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 has $226,000 of post 1987 bad-debt reserves subject to
taxation. Any recapture of the Bank's bad-debt reserves will have an adverse
effect on net income.
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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 June 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
The annual meeting of stockholders of the Company was held on April 24, 1996.
The following directors were elected to serve terms of three years ending in
1999: Carl F. Rupp and David C. Kellam. Also, Dalby, Wendland and Co., P.C.
was ratified as the Company's independent auditors for the fiscal year ending
December 31, 1996.
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.
Exhibit 27: Article Financial Data Schedule
(b) Reports on Form 8-K
On June 7, 1996 the Company filed an 8-K with the SEC announcing the
completion of its stock repurchase program. The Company repurchased 32,039
or 5% of its outstanding common stock over an eight week period in six open
market transactions.
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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 22, 1996 Robert L. Savage
President and Chief Executive Officer
Date: November 22, 1996 Tommy A. Gardner
Vice President and Chief Financial Officer
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