-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HM5hpKSc98cfqWBA8YQ9iZwMmQG9c6v8oZp/HzHPnDn4ByZF0Byvyjr/zG7BWpLh IK6KvACSPlwrAOrSdtHabA== 0000950109-98-004161.txt : 19980813 0000950109-98-004161.hdr.sgml : 19980813 ACCESSION NUMBER: 0000950109-98-004161 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRI COUNTY FINANCIAL CORP /MD/ CENTRAL INDEX KEY: 0000855874 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 520692188 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18279 FILM NUMBER: 98683015 BUSINESS ADDRESS: STREET 1: 3035 LEONARDTOWN RD STREET 2: P O BOX 38 CITY: WALDORF STATE: MD ZIP: 20601 BUSINESS PHONE: 3016455601 MAIL ADDRESS: STREET 1: 3035 LEONARDTOWN ROAD CITY: WALDORF STATE: MD ZIP: 20601 10-Q 1 2ND QUARTER REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1998 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 0-18279 ---------------------------------------------- Tri-County Financial Corporation --------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 52-1652138 - ------------------------------- --------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3035 Leonardtown Road, Waldorf, Maryland 20601 - ------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) (301) 645-5601 ------------------------------------------------ (Registrant's telephone number, including area code) ------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 the issuer's classes of common stock, as of the latest practical date. As of August 4, 1998 registrant had outstanding 793,817 shares of Common Stock. TRI-COUNTY FINANCIAL CORPORATION FORM 10-Q INDEX ----------------------------------------------------------------- PART I - FINANCIAL INFORMATION Page Item 1 - Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 2 Consolidated Statements of Income and Comprehensive Income - Three and Six Months Ended June 30, 1998 and 1997 3 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 4 - 5 Notes to Consolidated Financial Statements 6 - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 12 PART II - OTHER INFORMATION 13 - 14 Item 6 - Exhibits SIGNATURES 15 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997 - ------------------------------------------------------------------ June 30, December 31, 1998 1997 ASSETS
Cash and due from banks $ 801,597 $ 650,923 Interest-bearing deposits with banks 4,990,009 5,169,830 Investment securities available for sale - at fair value 49,989,717 52,878,583 Investment securities held to maturity - at amortized cost 1,727,565 1,149,137 Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 1,730,350 1,724,000 Loans held for sale 1,300,976 1,698,872 Loans receivable - net of allowance for loan losses of $1,425,536 and $1,370,466, respectively 126,883,692 121,866,762 Premises and equipment, net 4,311,615 4,189,222 Accrued interest receivable 1,413,553 1,276,376 Other assets 863,958 584,655 ------------ ------------ TOTAL ASSETS $194,013,032 $191,188,360 ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES: Noninterest-bearing deposits $ 7,592,449 $ 7,196,053 Interest-bearing deposits 136,828,167 135,080,024 ------------ ------------ Total deposits 144,420,616 142,276,077 Other borrowed funds 11,899,079 12,523,210 Long-term debt 16,576,979 16,678,610 Accrued expenses and other liabilities 821,970 624,384 ------------ ------------ Total liabilities 173,718,644 172,102,281 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock - par value $.01; authorized - 15,000,000 shares; issued 810,006 and 782,866 shares, respectively 8,100 7,827 Surplus 7,269,292 6,574,162 Retained earnings 12,694,628 12,256,443 Accumulated other comprehensive income 529,353 442,032 Unearned ESOP shares (206,985) (194,385) ------------ ------------ Total stockholders' equity 20,294,388 19,086,079 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $194,013,032 $191,188,360 ============ ============
See notes to consolidated financial statements. 2 TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 - ---------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ---------------- ---------------- 1998 1997 1998 1997 INTEREST INCOME: Interest and fees on loans $2,905,591 $2,742,295 $5,753,207 $5,355,012 Taxable interest and dividends on investment securities 947,644 950,732 1,842,052 1,890,834 Interest on deposits with banks 28,845 54,165 63,081 77,775 ---------- ---------- ---------- ---------- Total interest income 3,882,080 3,747,192 7,658,340 7,323,621 ---------- ---------- ---------- ---------- INTEREST EXPENSE: Interest on deposits 1,410,750 1,388,152 2,833,682 2,797,799 Interest on other borrowed funds 159,869 251,046 348,297 470,582 Interest on long-term debt 227,066 173,083 457,748 277,531 ---------- ---------- ---------- ---------- Total interest expense 1,797,685 1,812,281 3,639,727 3,545,912 ---------- ---------- ---------- ---------- NET INTEREST INCOME 2,084,395 1,934,911 4,018,613 3,777,709 PROVISION FOR LOAN LOSSES 60,000 60,000 120,000 120,000 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,024,395 1,874,911 3,898,613 3,657,709 ---------- ---------- ---------- ---------- NONINTEREST INCOME: Loan appraisal, credit and miscellaneous charges 109,778 91,694 222,290 177,242 Net gains on sale of loans held for sale 124,176 39,505 221,021 83,247 Service charges 107,466 119,407 256,086 234,417 Other 85,861 23,962 113,677 50,635 ---------- ---------- ---------- ---------- Total noninterest income 427,281 274,568 813,074 545,541 ---------- ---------- ---------- ---------- NONINTEREST EXPENSES: Salaries and employee benefits 860,284 765,377 1,481,380 1,327,104 Occupancy expense 104,210 91,426 214,064 185,625 Deposit insurance and surety bond premium 35,564 17,882 73,858 53,000 Data processing expense 102,297 58,941 164,548 115,592 Advertising 32,028 44,654 63,876 83,509 Depreciation of furniture, fixtures, and equipment 37,251 37,750 75,781 74,125 Other 302,548 323,418 596,643 630,255 ---------- ---------- ---------- ---------- Total noninterest expenses 1,474,182 1,339,448 2,670,150 2,469,210 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 977,494 810,031 2,041,537 1,734,040 INCOME TAXES 347,000 336,700 724,000 684,400 ---------- ---------- ---------- ---------- NET INCOME 630,494 473,331 1,317,537 1,049,640 OTHER COMPREHENSIVE INCOME, NET OF TAX - Net unrealized holding gains arising during the period 16,682 195,265 87,321 88,925 ---------- ---------- ---------- ---------- COMPREHENSIVE INCOME $ 647,176 $ 668,596 $1,404,858 $1,138,565 ========== ========== ========== ========== EARNINGS PER SHARE/(1)/ (Note 2): Basic .79 .54 1.64 1.21 Diluted .73 .54 1.54 1.21
/(1)/ Restated to reflect 1998 4% stock dividend See notes to consolidated financial statements. 3 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 AND 1997 - -----------------------------------------------------------------
Six Months Ended June 30, ------------------ 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,317,537 $ 1,049,640 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 120,000 120,000 Depreciation and amortization 123,568 144,325 Net amortization of premium/discount on investment securities (12,953) (40,352) Deferred income tax benefit (109,000) (3,600) Increase in interest receivable (137,177) (117,928) Increase in deferred loan fees 13,184 46,574 Increase (decrease) in accounts payable, accrued expenses, and other liabilities 160,657 (301,778) Increase in other assets (188,315) (64,617) Gain on sale of premises and equipment (7,051) - Origination of loans held for sale (12,388,104) (3,671,991) Gain on sales of loans held for sale (221,021) (83,247) Proceeds from sale of loans held for sale 13,007,021 3,729,232 Gain on sale of foreclosed real estate (63,436) - ------------ ------------ Net cash provided by operating activities 1,614,910 806,258 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in interest-bearing deposits with banks 179,821 1,032,748 Purchase of investment securities available for sale (23,898,455) (16,769,183) Proceeds from sale, redemption or principal payments of investment securities available for sale 26,940,182 13,305,162 Purchase of investment securities held to maturity (2,018,147) - Proceeds from maturities or principal payments of investment securities held to maturity 1,442,073 326,854 Purchase of FHLB and Federal Reserve Bank stock (6,350) (224,000) Loans originated or acquired (28,407,285) (25,182,040) Principal collected on loans 22,493,765 15,370,130 Purchase of premises and equipment (238,062) (235,722) Proceeds from sales of premises and equipment 7,051 - Proceeds from disposition of foreclosed real estate 826,842 155,135 ------------ ------------ Net cash used in investing activities (2,678,565) (12,220,916) ------------ ------------
4 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 AND 1997 - ------------------------------------------------------------------------------- Six Months Ended June 30, --------------------- 1998 1997 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits $2,144,539 $ 4,644,476 Proceeds from long-term borrowings - 11,400,000 Payments of long-term borrowings (109,530) (97,097) Net decrease in other borrowed funds (624,131) (4,962,698) Exercise of stock options 1,058 45,685 Net change in unearned ESOP shares (12,600) - Redemption of common stock (82,600) - Dividends paid (102,407) (81,008) ---------- ----------- Net cash provided by financing activities 1,214,329 10,949,358 ---------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 150,674 (465,300) CASH AND CASH EQUIVALENTS - JANUARY 1 650,923 1,111,894 ---------- ----------- CASH AND CASH EQUIVALENTS - JUNE 30 $ 801,597 $ 646,594 ========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the six months for: Interest $3,679,547 $ 3,498,845 ========== =========== Income taxes $872,500 $820,000 ======== ======== Tri-County Financial Corporation declared a 4% and 5% stock dividend payable April 13, 1998 and April 15, 1997, to shareholders of record on March 13, 1998 and March 7, 1997, respectively. Retained earnings in the amount of $694,384 in 1998 and $834,635 in 1997 was transferred to capital in excess of par and common stock to reflect these dividends. See notes to consolidated financial statements. 5 TRI-COUNTY FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION General - The consolidated financial statements of Tri-County Financial Corporation (the Company) and its wholly owned subsidiary, Community Bank of Tri-County (the Bank) included herein are unaudited; however, they reflect all adjustments consisting only of normal recurring accruals that, in the opinion of Management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the six months ended June 30, 1998 are not necessarily indicative of the results of operations to be expected for the remainder of the year. Certain previously reported amounts have been restated to conform to the 1998 presentation. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report for the year ended December 31, 1997. 2. EARNINGS PER SHARE Basic and diluted earnings per share, as adjusted for the stock dividend, have been computed based on weighted-average common and common equivalent shares outstanding as follows: Six Months Ended June 30, ---------------- 1998 1997 ------- ------- Basic 800,942 864,532 Diluted 853,311 867,409 3. NEW ACCOUNTING PRONOUNCEMENTS Effective for periods ending after December 15, 1997, Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, is applicable for computing and presenting earnings per share (EPS) for entities, such as the Company, with publicly held common stock or potential common stock. This statement simplifies the standards for computing EPS, making them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, was issued in June 1997. This statement establishes standards for disclosing comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from nonowner sources. Comprehensive income includes net income which is adjusted for items such as unrealized gains and losses on certain investment securities and minimum pension liability adjustments. This statement is effective for fiscal years beginning after December 31, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. 6 Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information, was issued in June 1997. This statement establishes standards for disclosing information about operating segments in financial statements. Operating segments are components of a business about which separate financial information is available that is evaluated by management in deciding how to allocate resources and in assessing performance. Management has not determined yet whether additional disclosure will be necessary under the requirements of SFAS No. 131. For year-end disclosure, this statement is effective for fiscal years beginning after December 15, 1997. Interim reporting disclosures would not be required in the first year of adoption, but would begin the first quarter immediately after the first year of providing year-end disclosures. For interim reporting, the preceding year's interim information must be presented on a comparative basis. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL Tri-County Financial Corporation operates under the Federal Reserve's Bank Holding Company regulations. The consolidated financial statements include the accounts of Tri-County Financial Corporation and its wholly owned subsidiary, Community Bank of Tri-County ("the Bank") and the bank's wholly owned subsidiary, Tri-County Federal Finance One, collectively referred to as "the Company". Community Bank of Tri-County is operating as a commercial bank for its second year following its thrift charter conversion on March 29, 1997. The Bank has been successful in its evolution from a thrift to a community based commercial bank. All product lines were subjected to analysis for relevance and profitability. Strategies were implemented to broaden the scope of services to attract transactional accounts of local business as well as consumers. The Bank received a favorable reaction from its customers and potential customers in its market area as well as national recognition by Veribanc, an independent bank rating service, as a "Blue Ribbon" bank. The Bank conducts operations through eight full-service offices in its market area consisting of Charles, St. Mary's and Calvert counties in Maryland. In January 1998, a new, highly visible location was acquired adjacent to Southern Maryland's only regional shopping mall and a small satellite branch was closed. The Bank is primarily engaged in the business of obtaining funds in the form of deposits from the general public in the Bank's market area as well as certain wholesale borrowings from its correspondents and capital markets, and investing such funds in loans collateralized by residential and commercial real estate, mortgage-backed securities and related investments, and, to a lesser, but growing, extent, various types of consumer and other loans, investment and money market securities. The Company's earnings, therefore, are primarily dependent upon its net interest income. This is determined by the Company's interest rate spread (the difference between the yields earned on its loan and investment portfolios, and the rates paid on its deposits and borrowed funds) and the relative holdings of interest-earning assets and interest-bearing liabilities. Also of significance to the Company's net income is its provision for estimated loan losses, as well as the amount of noninterest income derived from activities that are not dependent on spread based lending. Transaction charges, nondeposit products and additional services are under review to augment the noninterest income contribution to the net earnings of the Bank. The Company's deposit flows and cost of funds are determined by interest rates on competing investments and general market rates of interest. Lending activities are affected by consumer demand, the interest rates in the market and the level of funds available. The Company grants loans throughout the Southern Maryland area. Its borrowers' ability to repay is, therefore, dependent upon the economy of Southern Maryland. SELECTED FINANCIAL DATA Six Months Ended June 30, --------------------------- 1998 1997 Condensed Income Statement: Interest income $7,658,340 $7,323,621 Interest expense 3,639,727 3,545,912 Net interest income 4,018,613 3,777,709 Provision for loan losses 120,000 120,000 Noninterest income 813,074 545,541 Noninterest expense 2,670,150 2,469,210 Income before income taxes 2,041,537 1,734,040 Income tax expense 724,000 684,400 Net income 1,317,537 1,049,640 Per Common Share: Basic earnings $ 1.64 $ 1.21 Diluted earnings 1.54 1.21 Book value 25.05 24.38 8 RESULTS OF OPERATIONS The Company reported net income of $1,317,537 and $1,049,640 during the six months ended June 30, 1998 and 1997, respectively, representing a $267,897 or 25.5% increase for the six months ended June 30, 1998 compared to the same period in 1997. As described in more detail in following sections of this analysis, significant changes in specific income and expense line items generated this increase, rather than an overall trend applicable to all areas. The increase in net income for the six months ended June 30, 1998 resulted from the $240,904 increase in net interest income, a $267,533 increase in noninterest income, an increase of $200,940 in noninterest expenses and a $39,600 increase in income tax expense relating to the increased earnings. Interest and Dividend Income Interest and dividend income on investment securities continued a generally declining trend during 1998 as a result of the exercise of calls imbedded in several of the Bank's securities and the maturity of some others. The majority of these securities are replaced with similar types of assets. However, as new investment securities are acquired, the overall interest rate level of the portfolio is reduced because the market dictates lower rates on these securities at that time. The Bank has utilized a strategy of leveraging since the fourth quarter of 1996. When opportunities become available, an investment is purchased with maturity and rate terms that can be reasonably matched with available borrowings to generate a specified net yield. The Bank continued to benefit from the Federal Reserve Board's rate increase in March of 1997 as the adjustable rate investment and loan portfolio items repriced to higher yields. The asset side repriced at a slightly faster rate than liabilities, both deposits and borrowings, further increasing the net yield. The combination of the increased net yield and the balance sheet growth contributed to the 6.4% overall growth in net interest income for the six months ended June 30, 1998 over the comparable period results in 1997. Noninterest Income Contributing to the increase in earnings were increases in noninterest income of $267,533 resulting from a heavy volume of mortgage originations as consumers reacted to lower market rates and increased gains on sales of loans originated for the purpose of resale. Loan originations for the six months of 1998 increased $11.9 million, or 41%, over the level in the same period in 1997. The conversion to a commercial bank charter resulted in a change in the composition of originations, with an increased proportion of originations occurring in the commercial real estate and line of credit loans. In addition, the Bank has increased its activity in originating and selling fixed rate mortgage loans, accounting for $8.7 million of the increased loan volume. Bank mergers and residential mortgage company restructurings have left the Bank as one of a few long-standing, stable and reputable sources of funds for the Southern Maryland market. Commission-based mortgage loan originators are utilized to further strengthen the Bank's presence in its market. During the second quarter of 1998, a participation with another lender that was in default was sold and the Bank's portion of the proceeds were received. The sale resulted in the recovery of all outstanding fees and interest as well as generating a profit of approximately $64,000. An effort has been made to identify the customer services provided by the Bank which can be used to generate additional revenues. This led to the imposition of user fees for the use of the Bank's ATMs by noncustomers. In the current period of operations at the Bank's new facility near the mall, that location has had its ATM volume surpass every other existing branch in individual transaction levels. The Bank has been actively seeking lucrative outlets for installation of its ATM machines throughout its market with the recent installation of three stand alone ATMs at convenience food markets. In addition, Bank customers have been utilizing certain negotiable order of withdrawal account features which have a related service fee while the conversion to a commercial bank has generated a small but increasing commercial deposit account base. 9 Noninterest Expense The Bank experienced an increase in noninterest expenses of $200,940 or 8% for the six months ended June 30, 1998 compared to the six months ended June 30, 1997. Compensation related expenses increased $154,276, or 11.6%, as the Bank increased its salary level commensurate with market pressures for professional staff and reached a full staffing level for its new, larger branch which replaced a satellite branch. Data processing expense increased by $48,956 or 42% over the comparable period in 1997. This reflects the ongoing cost associated with the Bank's efforts to implement its Year 2000 century date compliance. In connection with the 1997 conversion to a commercial bank, substantial advertising costs were incurred to publicize and promote the conversion and its ensuing benefits to the customers and community. Advertising costs have returned to a more normal level for a bank of our size, reflecting a $19,633, or 24%, decrease in costs incurred in 1998 compared to those incurred in 1997. Income Tax Expense Income tax expenses increased 6% as a result of the increase in pretax income. Earnings Per Share Basic earnings per share for the six months were $1.64 per share or $.43 higher than for the corresponding period in 1997. FINANCIAL CONDITION Assets Total assets as of June 30, 1998 grew $2.8 million to $194 million from the December 31, 1997 level of $191.2 million. This reflects a growth rate of 1.5% as compared to 6.6% asset growth during the previous year. Increased development of the Southern Maryland area as a bedroom community for Washington, D.C. workers and military base expansion in the Bank's market area continued to keep the real estate market strong. Loan growth was $4.6 million or 3.7% for the six-month period as compared to an increase of $9.5 million or 8.5% for the six months ended June 30, 1997. In connection with the charter conversion, the Bank adopted a business plan that focused on more consumer and commercial loans, and increased its fixed rate loan origination and sale activity in connection with the low fixed rate loan environment. Loan demand has slowed in the latter portion of the second quarter of 1998. The allowance for loan losses was maintained at a level believed by management to be adequate to absorb potential losses consistent with the risk profile of the loan portfolio. Management's determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to the overall loss experience; current economic conditions; volume, growth and composition of the loan portfolio; financial condition of the borrowers; and other relevant factors that, in management's judgment, warrant recognition in providing an adequate allowance. The Bank's allowance for loan losses was increased $120,000 during the first six months of 1998 in accordance with management's policy described above. The Company's holdings of investment securities declined $2.9 million, or 5.5%, since December 31, 1997. Several securities experienced early payoff since the issuer was able to obtain better rates by calling the investment and reissuing it at the more attractive long-term rates currently available in the market. When possible, the funds received from payoff of these securities were used to acquire similar investments, though generally at a lower yield in response to the current market conditions at the time of purchase. Excess funds were used to curtail debt. The level of property and equipment balances increased $122,393 as the new location was brought into operation and the Bank continued to upgrade its computer equipment. 10 Liabilities Liability growth was managed to reflect the change in asset levels. Deposit growth was 1.5% for the six months ended June 30, 1998. The deposit base provided a source of funds at a lower average rate than could be realized by borrowing. The Bank's strategy has been to focus on attracting customers disenfranchised by the shrinking pool of locally run banks in Southern Maryland. Loan demands were met with the funds obtained through increased deposit account balances. Stockholders' Equity Stockholders' equity increased $1.2 million or 6.3% to $20.3 million at June 30, 1998 compared to $19.1 million at December 31, 1997. This reflects the net income of $1,317,537 for the six-month period and a $87,321 increase in accumulated other comprehensive income. Reductions in equity occurred as a result of a $.125 per share cash dividend paid to shareholders and the use of $82,600 to purchase treasury shares in the open market. A shift in the components of stockholders' equity occurred as a result of the declaration of a 4% stock dividend to shareholders; this resulted in a transfer of $694,384 from retained earnings to common stock and surplus. The cash and stock dividends were distributed to shareholders on April 13, 1998. Book value on a per share basis, $25.05 at June 30, 1998, as compared to $24.38 at December 31, 1997, reflects a 2.7% increase. Beginning in the third quarter of 1997, opportunities arose for the Corporation to acquire some of its own stock. After evaluation of the offering price and consideration of alternative uses of corporate assets, the Board approved, over the last twelve months, the purchase of 20,850 shares. During the first six months of 1998, the Bank's Employee Stock Ownership Plan (ESOP) acquired additional shares, utilizing the line of credit available from the Corporation when necessary. When the ESOP purchases shares using such borrowed funds, the shares purchased are pledged as collateral for the loan and the loan balance is reflected as a reduction of stockholders' equity. In its capital management strategy, the Board has approved certain purchases, for retirement, of shares offered for sale by its stockholders. For the six months ended June 30, 1998, the Corporation purchased 3,850 shares for $82,600; during July 1998, an additional 16,189 shares were purchased for $391,036. The cash for these purchases was provided to the Company through a $750,000 cash dividend from the Bank. INTEREST RATE RISK MATTERS The market risk of the Bank is managed through the Board's Asset and Liability Committee (ALCO). Together with the Bank's management, the committee reviews the sensitivity of the market value of the portfolio equity and interest rate sensitivity of net income. The changes in the market value of portfolio equity, as well as the interest income sensitivity, are caused by shifts in the market rates of interest and can cause a negative or a positive impact in given scenarios. The portfolio is subjected to periodic modeling to test the effects of sudden and sustained interest rate shocks on the market value and the net interest income sensitivity. The Basle Committee on Banking Supervision has set standard measures of portfolio market value equity and interest income sensitivity in a shock environment of an up or down 200 basis point shift in assumed interest rates. The impact of such a shock on the Bank's portfolio is as follows: June 30, 1998 June 30, 1997 ------------- ------------- Market value of portfolio equity: Interest rate changes: Up 200 basis points -7% -6% Down 200 basis points +3% -5% Interest rate sensitivity: Interest rate changes: Up 200 basis points +7% +6% Down 200 basis points -8% -8% 11 Interest rate sensitivity reflects the change in the Bank's net interest income given assumed interest rate shifts. In the scenarios presented, the most detrimental for the Bank is a downward movement of interest rates. In the current flat yield curve environment, the risk of downward movement appears to be the most probable because, historically, flat yield curves have preceded five of the last six recessions. The ALCO committee has taken several measures to mitigate the effects of this situation by lengthening the duration of the newly acquired investments and shortening the duration of the underlying liabilities to reflect the dynamics of the market. The changes in the market value as well as the net interest income are well within the boundaries established by the Board. REGULATORY MATTERS The Bank is subject to Federal Reserve Board capital requirements as well as to statutory capital requirements imposed under Maryland law. At June 30, 1998, the Bank's tangible, leverage and risk-based capital was 9.98%, 9.98% and 17.70%, respectively. These levels are well in excess of the required 1.5%, 3.0% and 8.0% ratios required by the Federal Reserve Board. 12 TRI-COUNTY FINANCIAL CORPORATION -------------------------------- PART II - OTHER INFORMATION --------------------------- Item 6 - Exhibits A. Exhibits (27) Financial Data Schedule 13 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 Financial Corporation: Date: By: -------------------- ------------------------------------- Michael L. Middleton, President and Chairman of the Board Date: By: -------------------- ------------------------------------- Eileen M. Ramos Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
9 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 801,597 4,990,009 0 0 49,989,717 1,727,565 1,756,458 128,184,668 1,425,536 194,013,032 144,420,616 11,899,079 821,970 16,576,979 0 0 8,100 20,286,288 194,013,032 5,753,207 1,842,052 63,081 7,658,340 2,833,682 806,045 4,018,613 120,000 0 2,670,150 2,041,537 2,041,537 0 0 1,317,537 1.64 1.54 4.19 290,606 0 0 0 1,370,466 4,930 101 1,425,536 1,425,536 0 0
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