SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-22220
TRI-COUNTY BANCORP, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
WYOMING
State or Other Jurisdiction of Incorporation or Organization)
83-0304855
(I.R.S. Employer Identification No.)
2201 MAIN STREET, TORRINGTON, WY 82240
(Address of Principal Executive Offices) (Zip Code)
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 5, 1997.
Class Outstanding
$.10 par value common stock 583,749 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 Financial
Condition as of September 30, 1997 (unaudited)
and December 31, 1996...................................1
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1997 and 1996 (unaudited).................2
Condensed Consolidated Statements of Stockholder's
Equity
for the Nine Months Ended September 30, 1997
(unaudited).............................................3
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997
and 1996 (unaudited)....................................4
Notes to Condensed Consolidated Financial
Statements..............................................5
Item 2. Management's Discussion and Analysis or Plan
of Operation............................................7
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................15
Item 2. Changes in Securities..................................15
Item 3. Default Upon Senior Securities.........................15
Item 4. Submissions of Matters to a Vote of Security
Holders 15
Item 5. Other Information......................................15
Item 6. Exhibits and Reports on Form 8-K.......................15
SIGNATURES......................................................16
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
September 30, December 31,
1997 1996
(unaudited)
------------ ------------
ASSETS
Cash $ 643,459 $ 537,194
Interest earning deposits at other financial institutions 729,707 1,751,397
Securities available-for-sale 37,631,754 36,393,415
available-for-sale
Securities held-to-maturity, market value of $8,718,475 8,419,790 10,319,706
(1997) and $10,589,409 (1996)
Loans 38,705,544 35,266,702
receivable, net
Loans held for 274,027 90,000
resale
Office property and equipment, net 918,051 921,681
Prepaid expenses and other assets
850,724 609,923
---------- ----------
Total Assets $88,173,056 $85,890,018
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 584,548 $ 367,480
Savings and NOW 12,960,610 12,199,233
deposits
Time deposits 33,771,216 35,966,345
---------- ----------
Total Deposits 47,316,374 48,533,058
Advance from Federal Home Loan Bank 26,357,867 23,460,492
Advances by borrowers for taxes and insurance 148,807 105,811
Accounts payable and accrued expenses 258,723 234,653
Deferred income taxes 588,235 410,440
---------- ----------
Total Liabilities 74,670,006 72,744,454
---------- ----------
Stockholders'Equity
Preferred stock, $.10 par value, 5,000,000 shares 0 0
authorized, none issued
Common stock, 10,000,000 share of $.10 par value 74,750 74,750
authorized, 583,749(1997) and 608,749(1996) shares
issued and outstanding
Additional paid in capital 7,075,274 7,029,604
Retained earnings - substantially restricted 8,766,363 8,353,630
Unearned compensation relating to Management Stock (426,537) (506,725)
Bonus Plan and ESOP
Unrealized gain/(loss) on securities 658,514 239,619
available-for-sale, net of tax
Treasury stock, 163,751 (1997) and 138,751 (1996) (2,645,314) (2,045,314)
shares, at cost
---------- ----------
Total Stockholders' Equity 13,503,050 13,145,564
---------- ----------
Total Liabilities and Stockholders' Equity $88,173,056 $85,890,018
========== ==========
1
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ---------- ---------- ----------
Interest Income
Loans $784,561 $700,633 $2,272,623 $1,904,453
Securities available-for-sale 658,060 488,185 1,896,819 1,335,682
Securities held-to-maturity 175,108 215,239 550,631 743,058
Other interest earning assets 11,688 5,613 32,574 20,334
--------- --------- --------- ---------
Total Interest Income 1,629,417 1,409,670 4,752,647 4,003,527
--------- --------- --------- ---------
Interest Expense
Deposits 551,876 511,461 1,645,094 1,560,784
Advances and other borrowings 405,400 274,922 1,103,326 626,945
--------- --------- --------- ---------
Total Interest Expense 957,276 786,383 2,748,420 2,187,729
--------- --------- --------- ---------
Net Interest Income 672,141 623,287 2,004,227 1,815,798
Provision for credit losses - - - -
--------- --------- --------- ---------
Net Interest Income After 672,141 623,287 2,004,227 1,815,798
--------- --------- --------- ---------
Provision for Credit Losses - - - -
--------- --------- --------- ---------
Non-interest Income
Gain on sale of loans 6,610 2,678 23,013 19,765
Gain(loss) on sale of (56,726) - (55,554) (1,593)
available-for-sale securities
Service charges on deposits 28,115 25,821 84,431 73,019
Other, net 8,680 9,842 24,627 24,352
--------- --------- --------- ---------
Total Non-interest Income (13,321) 38,341 76,517 115,543
--------- --------- --------- ---------
Non-interest Expense
Compensation and benefits 204,911 181,648 590,505 535,285
Occupancy and equipment 91,732 72,609 253,597 217,010
Federal deposit insurance
premium 7,765 26,238 23,080 77,481
FDIC Capitalization - special
assessment - 304,606 - 304,606
Other, net 84,915 73,647 266,372 288,527
--------- --------- --------- ---------
Total Non-interest Expense 389,323 658,748 1,133,554 1,422,909
--------- --------- --------- ---------
Earnings Before Income Taxes 269,497 2,880 947,190 508,432
Income taxes 58,619 29,200 264,271 192,400
--------- --------- --------- ---------
Net Earnings(Loss) $ 210,878 $ (26,320) $ 682,919 $ 316,032
========= ========= ========= =========
Earnings(Loss) Per Common Share - $0.36 $(0.04) $1.13 $0.53
Primary ==== ===== ==== ====
Cash Dividend Paid Per Common $0.15 $0.25 $0.45 $0.50
Share ==== ==== ==== ====
2
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1997
(unaudited)
Unrealized
Employee Gain on
Additional Stock MSBP Securities
Common Paid-In Retained Ownership Unearned Available- Treasury
Stock Capital Earnings Plan Compensation for-sale Stock Total
-------------------------------------------------------------------------------------------
Balance - December 31, 1996 $74,750 $7,029,604 $8,353,630 $(403,650) $(103,075) $239,619 $(2,045,314) $13,145,564
Net earnings -- -- 682,919 -- -- -- -- 682,919
Repayment of ESOP debt -- -- -- 36,014 -- -- -- 36,014
Allocation of ESOP -- 45,669 -- -- -- -- -- 45,669
shares
Amortization of -- -- -- -- 44,175 -- -- 44,175
deferred compensation
Change in unrealized -- -- -- -- -- 418,895 -- 418,895
gain on securities
available-for-sale,
net of tax
Dividends paid -- -- (270,187) -- -- -- -- (270,187)
Treasury stock -- -- -- -- -- -- (600,000) (600,000)
purchased
------ --------- --------- -------- ------- ------- ---------- ----------
Balance - September 30, 1997 $74,750 $7,075,273 $8,766,362 $(367,636) $(58,900) $658,514 $(2,645,314 $13,503,049
====== ========= ========= ======== ======= ======= ========== ==========
3
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
1997 1996
--------- ---------
Net Cash Provided by Operations $ 405,565 $ 606,288
--------- ---------
Investing Activities
Principal payments received on 1,905,787 6,519,699
held-to-maturity securities
Purchase of available-for-sale (6,626,925) (12,683,184)
securities
Sale of available-for-sale 4,527,850 200,000
available-for-sale
Principal payments received on 1,490,703 815,218
available-for-sale securities
Net decrease(increase) in loans (212,361) 237,138
Purchase of loans (3,260,849) (9,073,721)
Proceeds from sale of 52,392 206,559
real estate owned
Investment in property and equipment and (87,100) (49,063)
real estate owned --------- ---------
Net Cash Provided (Used) by Investing (2,210,503) (13,827,354)
Activities --------- ----------
Financing Activities
Net increase (decrease)in deposits (1,216,684) 289,846
Net increase (decrease) in advances from 42,995 35,677
borrowers for taxes and insurance
FHLB borrowings 41,050,000 36,467,000
Repayment of FHLB advance (38,152,625) (22,512,257)
Payments received from ESOP 36,014 37,375
Treasury stock purchased (600,000) (587,097)
Cash dividends paid (270,188) (312,384)
---------- ----------
Net Cash Provided (Used) by Financing 889,512 13,418,160
Activities ---------- ----------
Increase (Decrease) in Cash and Cash (915,426) 197,094
Equivalents
Cash and cash equivalents - 2,288,592 908,731
beginning of period ---------- ----------
Cash and cash equivalents - $ 1,373,166 $ 1,105,825
end of period ========== ==========
Supplemental Disclosures
Cash paid for:
Interest 2,272,428 2,122,443
Income taxes 307,300 238,600
4
TRI-COUNTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(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 1996 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, 1996.
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 nine-month period ended September 30, 1997 are
not necessarily indicative of the results which may be expected for the year
ending December 31, 1997 or any other period.
See Notes 2 and 3.
NOTE 2 - EARNINGS PER SHARE
Earnings per share for the nine months ended September 30, 1997 and 1996, 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."
5
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.
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 consist 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 $2,283,038 or 2.66% during the first
nine months of 1997.
Securities available-for-sale increased by $1,238,339 during the first nine
months of 1997. Securities totaling $6,702,825 were purchased during the period
and the market value of the portfolio increased by $634,690. These increases
were partially offset by principal payments and prepayments of $1,490,702 on
mortgage-related securities and the sale of securities totaling $4,583,404.
Securities held-to-maturity decreased by $1,899,916. The decrease was the result
of principal payments and prepayments of $1,405,786 on the Bank's portfolio of
mortgage-backed securities and the maturity of an agency security in the amount
of $500,000.
Loans receivable increased $3,438,842 during the first three quarters of 1997.
During this period the Bank originated or purchased portfolio residential
mortgage loans totaling $6,343,314, consumer loans totaling $1,945,650, and a
short-term commercial loan in the amount of $156,000. By the end of the period,
7
the Bank had received full repayment of the short-term commercial loan and
repayments totaling $4,385,486 on other loans. Of the total mortgage loans
originated or purchased during the first three quarters of the year, $3,040,141
were adjustable rate and $5,404,823 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 39% 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 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 decreased by $1,216,684 or 2.51% and consisted of increases of
$217,068 and $761,377 in demand accounts and savings and NOW deposits,
respectively, and a decrease of $2,195,129 in time deposits. The decrease in
time deposits was due, in part, to the scheduled maturity of deposits held by a
local school district, which were originally issued in the fourth quarter of
1996.
Advances from FHLB increased by $2,897,375 during the nine-month period ended
September 30, 1997. The advances were obtained to purchase securities classified
as available-for-sale. The advances have terms of approximately one year and
were used to purchase callable agency securities.
Deferred income taxes increased by $177,795 during the first nine months of 1997
and was mainly the result of the application of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, which requires unrealized
gains and losses on available-for-sale securities to be reported, net of
deferred income taxes, as a separate component of stockholders' equity. The
market value of these securities increased $634,690 during the period, which
resulted in an increase in deferred income taxes. Also, legislation was passed
in August of 1996 which requires the Bank to establish tax reserves for bad
debts and compute additions thereto using a six-year moving average of the
Bank's actual loss experience (the "Experience Method"). The additions to the
tax reserves computed using the Experience Method can, within specified
limitations, be deducted in arriving at taxable income. However, the Bank had
established reserves for loan losses, which totaled $412,000 at September 30,
1997, which will be charged with any subsequent loan losses. Therefore, the Bank
will have a difference in the treatment of loan losses for book and tax purposes
and a deferred tax asset is being established for this difference.
STOCKHOLDERS' EQUITY
The increase in additional paid-in capital of $45,670 was caused by the
application of an accounting standard which requires charging current expense
for the fair value of shares of stock committed to be released by the Bank's
Employee Stock Ownership Plan and crediting the difference between the fair
value and the cost of the shares to paid-in capital.
8
The increase in retained earnings was the result of net earnings totaling
$682,919 which more than offset the decrease in retained earnings caused by the
payments of dividends of $0.45 per share totaling $270,187.
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 that is net of deferred income taxes. The
market value of securities classified as available-for-sale increased during the
first nine months of 1997, which resulted in an increase, net of deferred income
tax, of $418,895 in stockholder's equity.
On July 10, 1997, the Company repurchased 25,000 shares of its outstanding
Common Stock at $24.00 per share for a total cost of $600,000.
COMPARISON OF THE OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997 AND 1996
NET INCOME
Net income increased $237,198 during the third quarter of 1997 when compared to
the same period of 1996. Net interest income increased by $48,854, non-interest
income decreased by $51,662 and non-interest expense decreased by $269,425. The
provision for income taxes increased by $29,419.
INTEREST INCOME
Interest income from loans increased $83,928 or 11.98% for the quarter ended
September 30, 1997. The increase was the result of an increase in the average
balance of loans outstanding of $4,041,369 and an increase in yield on the loans
from 8.22% to 8.23%.
The increase of $561,137 in interest on securities available-for-sale was the
result of an increase in the average balance of securities of $8,298,741 and an
increase in the average yield on the portfolio from 6.59% to 6.94%. The increase
in yield was the result of the purchase of securities, which, on average, had a
higher yield than the yield on the existing portfolio.
Interest on securities held-to-maturity decreased $41,131 and was caused
primarily by a decrease in the average balance of the portfolio of $3,231,852
which offset an increase in the yield on the portfolio from 7.26% to 8.13%. The
increase in yield was the result of the maturity of securities, which, on
average, had a lower yield than the yield on the remaining portfolio. The
proceeds of the maturities were used to fund loans and purchase
available-for-sale securities.
The increase in income from other interest-earning assets of $6,075 was
primarily caused by an increase in the average balance of these assets. This
category of assets consists primarily of interest-earning demand and time
deposits held at FHLB.
INTEREST EXPENSE
Interest expense on deposits increased $40,415 during the third quarter of 1997.
This increase was the result of an increase of $2,591,321 in the average balance
of deposits and an increase in the average cost of deposits from 4.58% to 4.68%.
9
The Bank took advantage of a relatively inexpensive source of funding available
through the FHLB to purchase financial instruments that yield a slightly higher
return than the rate charged on the advances. The average balance of these
borrowings was $6,903,654 greater during the third quarter of 1997 than during
the third quarter of 1996 and the average cost increased from 5.49% to 6.02%
which resulted in an increase of $130,478 in interest expense.
PROVISION FOR LOAN LOSSES
No provision for loan losses was made during the third quarter of 1997. 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 $412,000 at September 30, 1997. While the
Bank maintains its allowance for loan losses at a level which it considers
adequate to provide for potential losses, there can be no assurances that
further additions will not be made to the loss allowance and that such losses
will not exceed the estimated amounts.
NON-INTEREST INCOME
Non-interest income decreased $51,662 during the third quarter of 1997. The
increase in the gain on sale of loans was the result of an increase in the
dollar amount of loans sold. The increase in the loss on sale of
available-for-sale securities was the result of the redemption of $2,000,000 of
shares in a mutual fund. The increase in service charges on deposits of $2,294
was primarily caused by an increase in the number of accounts subject to service
charges.
NON-INTEREST EXPENSE
Overall, non-interest expense decreased $269,425 during the third quarter of
1997.
Compensation and benefits increased by $16,477 in 1997 and was primarily caused
by an increase in overall salaries and pension costs.
Occupancy and equipment expense increased $18,434 and was primarily caused by
increased data processing costs and by increased depreciation expense caused by
the installation of new computer hardware.
Legislation was passed in the third quarter of 1996 that provided for the
recapitalization of the SAIF insurance fund via a one-time special assessment to
the Bank in the amount of $304,606. Because of the recapitalization, the
assessment charged by the fund totaled $330,844 for the third quarter of 1996
while the charge for the third quarter of 1997 was $7,765.
Other, net expenses increased by $18,743 and was primarily the result of the
receipt of rents in the third quarter of 1996 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.
10
INCOME TAXES
The provision for income taxes increased $29,419 for the quarter ended September
30, 1997. This increase was due to an increase in pre-tax income of $266,617.
Further, because the Bank had established reserves for loan losses which will be
charged with any subsequent loan losses and because the Bank will be allowed a
deduction for losses incurred on loans foreclosed after December 31, 1995 for
tax purposes, the Bank will have a difference in the treatment of loan losses
for tax and financial purposes. As previously stated, a deferred tax asset is
being established by the Bank and the effect of this change was a reduction in
the expense for income taxes totaling $17,600 for the third quarter of 1997.
COMPARISON OF THE OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND 1996
NET INCOME
Net income increased $366,887 during the first three quarters of 1997 when
compared to the same period of 1996. Net interest income increased by $188,429,
non-interest income decreased by $39,026 and non-interest expense decreased by
$289,355. The provision for income taxes increased by $71,871.
INTEREST INCOME
Interest income from loans increased $368,170 or 19.33% for the nine-month
period ended September 30, 1997. The increase was the result of an increase of
$5,907,654 in the average balance of loans outstanding. The Bank began
originating and purchasing loans outside its primary lending area, which enabled
the Bank to increase the loan portfolio.
The increase of $561,137 in interest on securities available-for-sale was the
result of an increase in the average balance of securities of $9,779,678 and an
increase in the average yield on the portfolio from 6.39% to 6.72%.
Interest on securities held-to-maturity decreased $192,447 and was caused by a
decrease in the average balance of the portfolio of $7,174,963, which offset an
increase in the yield on the portfolio from 7.39% to 7.96%. The increase in
yield was the result of the maturity of securities that, on average, had a lower
yield than the yield on the entire portfolio. The proceeds of the maturities
were used to fund loans and purchase available-for-sale securities.
The increase in income from other interest-earning assets of $12,240 was
primarily caused by an increase in the average balance of these assets. This
category of assets consists primarily of interest earning demand and time
deposits held at FHLB.
INTEREST EXPENSE
Interest expense on deposits increased $43,894 during the first three quarters
of 1997. This increase was the result of an increase of $2,861,321 in the
average balance of deposits which more than offset the slight decrease in the
average cost of deposits from 4.62% to 4.57%.
11
The Bank took advantage of a relatively inexpensive source of funding available
through the FHLB to purchase financial instruments that yield a slightly higher
return than the rate charged on the advances. The average balance of these
borrowings was $9,821,654 greater during the first three quarters of 1997 than
during the first three quarters of 1996 and the average cost increased from
5.28% to 5.73% which resulted in an increase of $476,381 in interest expense.
The costs of advances taken or renewed after the first three quarters of 1996
were generally higher than the costs prior to the first three quarters of the
previous year.
PROVISION FOR LOAN LOSSES
No provision for loan losses was made during the first nine months of 1997. 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 $412,000 at September 30, 1997. While the
Bank maintains its allowance for loan losses at a level which it considers
adequate to provide for potential losses, there can be no assurances that
further additions will not be made to the loss allowance and that such losses
will not exceed the estimated amounts.
NON-INTEREST INCOME
Non-interest income decreased $39,026 or 33.78% during the first nine months of
1997. The increase in the gain on sale of loans was the result of an increase in
the dollar amount of loans sold. The increase in the loss on sale of
available-for-sale securities was the result of the redemption of $2,000,000 of
shares in a mutual fund. The increase in service charges on deposits of $11,412
was primarily due to an increase in the number of accounts subject to service
charges.
NON-INTEREST EXPENSE
Overall, non-interest expense decreased $289,355 during the first three quarters
of 1997.
Compensation and benefits increased by $33,879 in 1997 and was primarily caused
by an increase in overall salaries, group medical insurance and pension
expenses.
Occupancy and equipment expense increased $35,503 and was primarily caused by
increased data processing costs and by increased depreciation expense caused by
the installation of new computer hardware.
Legislation was passed in the third quarter of 1996 that provided for the
recapitalization of the SAIF insurance fund via a one-time special assessment to
the Bank in the amount of $304,606. Because of the recapitalization, the
assessments charged by the fund totaled $382,087 for the first three quarters of
1996 while the charges for the first three quarters of 1997 were $23,080.
INCOME TAXES
The provision for income taxes increased $71,871 for the nine-month period ended
September 30, 1997. This increase was due primarily to an increase in pre-tax
income. Further, because the Bank had established reserves for loan losses which
will be charged with any subsequent loan losses and because the Bank will be
12
allowed a deduction for losses incurred on loans foreclosed after December 31,
1995 for tax purposes, the Bank will have a difference in the treatment of loan
losses for tax and financial purposes. As previously stated, a deferred tax
asset is being established by the Bank and the effect of this change in the
third quarter of 1997 was a reduction in the expense for income taxes totaling
$53,000.
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 22.49% during the third quarter of 1997. 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 that provide liquidity
to meet lending requirements. Interest-bearing deposits at September 30, 1997
amounted to $729,707. 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:
9 Months Ended
September 30,
(in thousands)
---------------------
1997 1996
Cash and cash equivalents at beginning of
year----------------------------------------- $ 2,289 $ 909
OPERATING ACTIVITIES:
Net Income--------------------------------- 683 342
Adjustments to reconcile net income to
net cash provided by operation
activities--------------------------------- (277) 11
----- ------
Net cash provided by operating activities---- 406 353
Net cash provided (used) by investing
activities----------------------------------- (2,211) (11,587)
Net cash provided (used) by financing
activities----------------------------------- 889 11,612
----- ------
Net increase (decrease) in cash and cash
equivalents---------------------------------- (916) 378
----- ------
Cash and cash equivalents at end of
period--------------------------------------- $ 1,373 $ 1,287
===== ======
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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, 1997, the Bank had outstanding commitments of
$3,205,353. Certificates of deposit scheduled to mature in one year or less at
September 30, 1997 totaled $24,908,708. 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,
1997, as compared to the minimum regulatory requirements:
Percent Of
Adjusted
Amount Assets
--------------------------
(Dollars in thousands)
TANGIBLE CAPITAL:
Required $ 1,306 1.50%
Actual 11,524 13.24%
------ ------
Excess $10,218 11.74%
======= ======
CORE CAPITAL:
Required $ 2,612 3.00%
Actual 11,524 13.24%
------ ------
Excess $ 8,912 10.24%
======== ======
RISK BASED CAPITAL:
Required $ 2,647 8.00%
Actual 11,840 35.78%
------ ------
Excess $ 9,193 27.78%
======== ======
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank was engaged in any legal
proceedings of a material nature at September 30, 1997. 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.
Exhibit 27: FDS (in electronic filing only)
(b) Reports on Form 8-K On July 16, 1997, the Registrant filed Form
8-K announcing the successful completion of the repurchase of
25,000 shares of its outstanding stock in 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 5, 1997 /s/ Robert L. Savage
------------------------- President and Chief Executive Officer
Date: November 5, 1997 /s/ Tommy A. Gardner
------------------------- Vice President and Chief Financial Officer
16