-----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, AsU+jbyYqfdiG1llHJ17Ao5zv/iNmWMyTenHPd4TkZYKVhxAgDQjLxPH4FlgWwys LMWJJCP04lLFPNgQ6WhMsw== 0000950109-99-001844.txt : 19990517 0000950109-99-001844.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950109-99-001844 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99623198 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 FORM 10-Q 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 March 31, 1999 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 May 6, 1999 registrant had outstanding 784,879 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 - March 31, 1999 and December 31, 1998 2 Consolidated Statements of Income and Comprehensive Income - Three Months Ended March 31, 1999 and 1998 3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 4 - 5 Notes to Consolidated Financial Statements 6 - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 11 PART II - OTHER INFORMATION 12 - 13 Item 6 - Exhibits SIGNATURES 14 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND DECEMBER 31, 1998 - --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, 1999 1998 ASSETS Cash and due from banks $ 548,843 $ 906,658 Interest-bearing deposits with banks 4,374,159 4,152,816 Investment securities available for sale - at fair value 57,596,990 55,976,606 Investment securities held to maturity - at amortized cost 2,763,980 2,139,069 Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 2,012,700 2,005,350 Loans held for sale 1,247,648 2,266,697 Loans receivable - net of allowance for loan losses of $1,602,649 and $1,540,551, respectively 134,237,638 132,645,936 Premises and equipment, net 4,414,836 4,316,207 Accrued interest receivable 1,423,932 1,486,776 Other assets 1,146,560 1,123,675 ------------ ------------ TOTAL ASSETS $209,767,286 $207,019,790 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Noninterest-bearing deposits $ 10,049,183 $ 9,750,153 Interest-bearing deposits 142,183,290 142,065,211 ------------ ------------ Total deposits 152,232,473 151,815,364 Other borrowed funds 4,152,486 16,937,882 Long-term debt 31,437,480 16,496,450 Accrued expenses and other liabilities 712,757 638,128 ------------ ------------ Total liabilities 188,535,196 185,887,824 STOCKHOLDERS' EQUITY: Common stock - par value $.01; authorized - 15,000,000 shares; issued 784,879 and 789,334 shares, respectively 7,849 7,893 Surplus 7,341,948 7,309,901 Retained earnings 13,630,947 13,372,441 Accumulated other comprehensive income 427,911 648,614 Unearned ESOP shares (176,565) (206,883) ------------ ------------ Total stockholders' equity 21,232,090 21,131,966 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $209,767,286 $207,019,790 ============ ============
See notes to consolidated financial statements. 2 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME THREE MONTHS ENDED MARCH 31, 1999 AND 1998 - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ----------------------- 1999 1998 INTEREST INCOME: Interest and fees on loans $2,967,932 $2,847,616 Taxable interest and dividends on investment securities 928,354 894,408 Interest on deposits with banks 21,276 34,236 ---------- ---------- Total interest income 3,917,562 3,776,260 ---------- ---------- INTEREST EXPENSE: Interest on deposits 1,366,640 1,422,932 Interest on other borrowed funds 132,111 188,428 Interest on long-term debt 270,576 230,682 ---------- ---------- Total interest expense 1,769,327 1,842,042 ---------- ---------- NET INTEREST INCOME 2,148,235 1,934,218 PROVISION FOR LOAN LOSSES 60,000 60,000 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,088,235 1,874,218 ---------- ---------- NONINTEREST INCOME: Loss on sale of investments (605) - Loan appraisal, credit and miscellaneous charges 60,627 72,735 Net gains on sale of loans held for sale 102,279 96,845 Service charges 166,785 148,620 Other 16,056 27,816 ---------- ---------- Total noninterest income 345,142 346,016 ---------- ---------- NONINTEREST EXPENSES: Salaries and employee benefits 740,080 621,096 Occupancy expense 124,148 109,854 Deposit insurance and surety bond premium 35,883 38,294 Data processing expense 72,418 62,251 Advertising 41,323 31,848 Depreciation of furniture, fixtures, and equipment 70,849 38,530 Other 245,267 254,318 ---------- ---------- Total noninterest expenses 1,329,968 1,156,191 ---------- ---------- INCOME BEFORE INCOME TAXES 1,103,409 1,064,043 INCOME TAXES 420,000 377,000 ---------- ---------- NET INCOME 683,409 687,043 OTHER COMPREHENSIVE INCOME, NET OF TAX - Net unrealized holding (losses) gains arising during the period (220,703) 70,639 ---------- ---------- COMPREHENSIVE INCOME $ 462,706 $ 757,682 ========== ========== EARNINGS PER SHARE (Note 2): Basic .87 .86 Diluted .81 .81
See notes to consolidated financial statements. 3 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 - -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ------------------------------- 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 683,409 $ 687,043 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 60,000 60,000 Depreciation and amortization 103,450 66,319 Net amortization of premium/discount on investment securities (30,782) (8,819) Deferred income tax benefit (20,000) (95,000) Decrease (increase) in accrued interest receivable 62,844 (46,568) (Decrease) increase in deferred loan fees (54,212) 10,744 Increase in accounts payable, accrued expenses, and other liabilities 74,781 402,924 Increase in other assets (22,885) (117,698) Gain on sale of premises and equipment - (7,051) Loss on sale of investment securities 605 - Origination of loans held for sale (3,824,376) (7,279,429) Gain on sales of loans held for sale (102,279) (96,845) Proceeds from sale of loans held for sale 4,945,704 5,322,845 ------------ ------------ Net cash provided (used) by operating activities 1,876,259 (1,101,535) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in interest-bearing deposits with banks (221,343) 225,866 Purchase of investment securities available for sale (21,832,495) (12,242,206) Proceeds from sale, redemption or principal payments of investment securities available for sale 19,881,710 14,160,374 Purchase of investment securities held to maturity (970,436) (2,000,260) Proceeds from maturities or principal payments of investment securities held to maturity 346,535 168,805 Loans originated or acquired (14,059,141) (12,341,919) Principal collected on loans 12,461,651 10,144,101 Purchase of premises and equipment (202,079) (148,037) Proceeds from sales of premises and equipment - 7,051 Purchase of FHLB and Federal Reserve stock (7,350) - ------------ ------------ Net cash used in investing activities (4,602,948) (2,026,225) ------------ ------------
4 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ----------------------------- 1999 1998 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits $ 417,109 $ 2,893,582 Proceeds from long-term borrowings 15,000,000 - Payments of long-term borrowings (58,970) (79,514) Net increase in other borrowed funds (12,785,381) 706,955 Exercise of stock options 32,088 1,785 Net change in unearned ESOP shares 30,318 (12,600) Dividends paid (90) - Redemption of common stock (266,200) - ------------ ------------ Net cash provided by financing activities 2,368,874 3,510,208 ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (357,815) 382,448 CASH AND CASH EQUIVALENTS - JANUARY 1 906,658 650,923 ------------ ------------ CASH AND CASH EQUIVALENTS - MARCH 31 $ 548,843 $ 1,033,371 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the three months for: Interest $ 1,760,279 $ 1,828,076 ============ ============ Income taxes $ 373,750 $ - ============ ============
Tri-County Financial Corporation declared a 5% stock dividend payable April 13, 1998 to shareholders of record on March 13, 1998. Retained earnings in the amount of $711,259 in 1998 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 three months ended March 31, 1999 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 1999 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, 1998. 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:
THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 --------- --------- Basic 786,159 803,342 Diluted 838,952 853,472
6 MANAGEMENT'S DISCUSSION AND ANALYSIS This document contains forward-looking statements, including discussions of Tri- county Financial Corporation's (the "Company's") goals, strategies and expected outcomes; estimates of risks and future costs; and reports of the Company's ability to achieve its financial and other goals. These forward-looking statements are subject to significant known and unknown risks and uncertainties because they are based upon future economic conditions, particularly interest rates, statements by providers of data processing services and equipment and government agencies in connection with year 2000 compliance, competition within and without the banking industry, changes in laws and regulations applicable to the Company and various other matters. Because of these uncertainties, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. 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 has completed its second year of operations as a commercial bank, following its thrift charter conversion on March 29, 1997. In its business plan for the commercial bank, specific product lines, particularly commercial and consumer loan products, were targeted for concentrated efforts to bring the balances to levels normally found in established commercial banks. Growth in these asset categories has exceeded internal goals set in the plan. Strategies to broaden the scope of services to attract transactional accounts of local business as well as consumers have successfully gained the attention of the community and resulted in continuous growth in these low cost funding sources. In its efforts to expand its product and service offerings, the Bank now offers investment and retirement planning services through its affiliation with UVEST Investment Services and an investment representative based in the home office branch. While this investment division is anticipated to contribute a relatively small amount of net earnings to the Bank, the benefit to our customers is expected to be great, enabling them to have a "one stop" source for all their investment and borrowing needs. The Bank conducts operations through eight full-service offices in its market area consisting of Charles, St. Mary's and Calvert counties in Maryland. Construction has begun on its newest "microbranch" location as part of a mini- mart on a key homeward bound commuter route in Charles County. The Bank continues to capitalize on its niche in community based banking activities. 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. 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, non- deposit products and additional services are under continuous consideration to augment the non-interest 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. 7 SELECTED FINANCIAL DATA
Three Months Ended March 31, ------------------------ 1999 1998 Condensed Income Statement Interest Income $3,917,562 $3,776,260 Interest Expense 1,769,327 1,842,042 Net Interest Income 2,148,235 1,934,218 Provision for Loan Losses 60,000 60,000 Noninterest Income 345,142 346,016 Noninterest Expenses 1,329,968 1,156,191 Income Before Income Taxes 1,103,409 1,064,043 Income Tax Expense 420,000 377,000 Net Income 683,409 687,043 Per Common Share Basic Earnings $ .87 $ .86 Diluted Earnings .81 .81 Book Value 27.05 25.20
FINANCIAL CONDITION Assets Total assets as of March 31, 1999 grew $2.7 million to $209.8 million from the December 31, 1998 level of $207.0 million. This reflects a growth rate of 1.3% as compared to 2.0% asset growth during the same period in 1998. Increased development of the Southern Maryland area as a bedroom community for Washington, DC workers and military base expansion in the Bank's market area continued to keep the real estate market strong. Loan levels were stable despite high refinancing activity; the Bank was able to retain its share by offering competitive products. With its increased focus on consumer and commercial loans, the Bank has continued to attract these customers in increasing numbers, resulting in change in the portfolio mix. At March 31, 1999, consumer and commercial loans comprised 28.4% of the loan portfolio, compared to 25.0% at December 31, 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 $60,000 during the first quarter of 1999 in accordance with management's policy described above. The Company's holdings of investment securities increased $2.5 million, or 3.8%, since December 31, 1998. The Bank continued to experience early payoffs in its security portfolio as issuers were able to obtain better rates by calling the investments and reissuing them at more attractive long-term rates currently available in the market. For securities with mortgage loans as the underlying collateral, the borrowers refinanced earlier than was projected at the purchase of the security because they were able to obtain lower rates. 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. With returns in a declining trend, the Bank moved to lock in current rates before further declines. These purchases were funded with short-term floating rate borrowings. Rate movements are closely monitored so long-term fixed rate arrangements can be made before the declining trend reverses. The level of property and equipment balances increased $98,629 as branch and administrative office renovations were made and the Bank continued to upgrade its computer equipment. 8 Liabilities Liability growth was managed to reflect the change in asset levels. Deposit balances declined by .4% for the three months ended March 31, 1999. The Bank's strategy has been to focus on attracting customers disenfranchised by the shrinking pool of locally run banks in Southern Maryland. Rate competition has been fierce, however, and recent stock market returns have caused some customers to change their deposit philosophy and move their money to uninsured investment vehicles. Loan demands were met with the funds obtained through borrowed funds. Stockholders' Equity Stockholders' equity increased $100,000 or .47% to $21.2 million at March 31, 1999 compared to $21.1 million at December 31, 1998. This reflects the net income of $683,000 for the three month period and a $220,000 decrease in accumulated other comprehensive income. Reductions in equity occurred as a result of a $.20 per share cash dividend paid to shareholders and the use of $266,000 to purchase shares in the open market and retire them. The cash dividends were distributed to shareholders on April 15, 1999. Book value on a per share basis, $27.05 at March 31, 1999, as compared to $26.77 at December 31, 1998, reflects a 1.0% increase, low because of the cash dividend, the acquisition of treasury shares as well as additional purchases by the Bank's Employee Stock Ownership Plan (ESOP). The ESOP acquired shares utilizing the line of credit available from the Corporation. 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. As part of its capital management strategy, the Board has approved certain purchases, for retirement, of shares offered for sale by its stockholders. For the three months ended March 31, 1999, the Corporation purchased 10,00 shares for $266,200 The cash for these purchases was provided to the Company through a $750,000 cash dividend from the Bank in 1998. Additional stock acquisitions and retirements will be considered in the future; a $1,000,000 cash dividend from the Bank in 1999 will provide the cash necessary for such purchases. RESULTS OF OPERATIONS The Company's net income for the three months ended March 31, 1999 decreased $3,634 or .5% from 1998's levels. As described in more detail in following sections of this analysis, significant changes in specific income and expense line items generated this small decrease, rather than an overall trend applicable to all areas. The decrease in net income for the three months ended March 31, 1999 resulted from a $214,017 increase in net interest income, an $874 decrease in noninterest income, an increase of $173,777 in noninterest expenses and a $43,000 increase in income tax expense. Interest and Dividend Income Interest and dividend income on investment securities increased $33,946 or 3.8% in the first quarter of 1999 compared to the first quarter of 1998. Given that the balances invested increased $6.3 million or 11.6%, a much larger increase in related income might be expected. However, the interest rates available in the market have been steadily declining, and as investments mature or pay off, they are replaced with lower yielding securities, resulting in lower overall yield on the portfolio. 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. Alternatively, there have been opportunities to purchase relatively short-lived securities, those with projected lives of a year or less. These have often been funded with borrowings that reprice daily because short-term borrowing rates have been very low. In such cases, the daily rate borrowing level is monitored closely so that a reversal of the low rate borrowing will be identified early and longer term financing can be secured. The portfolio net spread, the difference between interest earned on all interest-earning assets and interest paid on all interest-bearing liabilities, has been maintained at a very level rate over the last five years. The variance between the high of 3.72% in 1995 and the low of 3.35% in March 1994 is only 37 basis points or .37%; the variance over the last three years is only 20 basis points or .20%. The 11.1% overall growth in net interest income for the three months ended March 31, 1999 over the comparable period results in 1998 is, therefore, attributable to the balance sheet growth. 9 Noninterest Income In 1998, the Bank experienced 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. This high volume was maintained through the first quarter of 1999, so there was little fluctuation in loan origination- related noninterest earnings. 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 non-customers. The Bank continues to benefit from the imposition of these usage fees and has been actively seeking lucrative outlets for installation of its ATM machines throughout its market. 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 continues to generate a small but increasing commercial deposit account base. Noninterest Expense The Bank experienced an increase in noninterest expenses of $173,777 or 15.03% for the three months ended March 31, 1999 compared to the three months ended March 31, 1998. Compensation related expenses increased $118,984, or 19.16%, as the Bank has created new positions to meet the needs of a commercial bank and its customers. Occupancy costs increased $14,294 or 13.01% as a result of adding the branch location near the St. Charles mall and expanding its Dunkirk branch facility. Data processing expense increased by $10,167 or 16.33% over the comparable period in 1998. This reflects the ongoing cost associated with the Bank's efforts to implement its Year 2000 century date compliance as well as increased processing costs connected with increased commercial account volume. Depreciation expense increased $32,319 or 84% due to high levels of fixed asset acquisitions in connection with branch expansion, administrative office expansion and renovation and data processing equipment. Earnings Per Share Primary earnings per share for the three months were $.87 per share or $.01 higher than for the corresponding period in 1998. 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:
MARCH 31,1999 MARCH 31, 1998 -------------- --------------- MARKET VALUE OF PORTFOLIO EQUITY: Interest rate changes: Up 200 basis points -11% -10% Down 200 basis points +3% -2% INTEREST RATE SENSITIVITY: Interest rate changes: Up 200 basis points +3% +8% Down 200 basis points -1% -10%
10 The change in percentage for the Market Value of Portfolio Equity declined slightly at the adverse scenario of up 200 basis points in interest rate movement, while the equity value improved in the down 200 basis shock. This reflects the impact of multi-year flat yield curves at lower rate levels. As prepayments have occurred, reinvestment of the proceeds was at lower yields. An immediate market rate increase would make those new investments less valuable. Because the net income of the Bank and Company is derived through the interest spread of the portfolio, the Asset/Liability Committee is less concerned with the shock of interest rates on the market value than it is on the interest rate sensitivity because the assets are employed for their income production rather than value appreciation upon sale. The levels of change for both the market value of the portfolio and the net interest income sensitivity fall within the policy benchmarks established by the Board. 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 an upward movement of interest rates. Neither scenario, however, generates a severe impact to the Bank's earnings. Management feels that a more difficult situation for the Bank to control would exist with rising interest rates. This is due to the composition of the cost of funds and the percentage of wholesale borrowings needed to finance the activities of the Bank. Typically, wholesale borrowings are in large denominations and reprice quickly to reflect sudden changes in the global market. Retail deposits typically are in smaller amounts and are less likely to respond to shifts in rates in a short time period. Therefore, the Bank's portfolio has been structured with an attempt to reasonably minimize the impace from sudden and prolonged upward shifts in interest rates. 2000 READINESS The Bank's management and Board of Directors has been monitoring the problems created by the year 2000 (Y2K) and its effect on data processing systems. The Bank's capitalized cost of new technology and software over the last three years has exceeded $520,000 and additional costs in the current and next year could reach $100,000. All software systems have been upgraded. These software costs were expensed during the years as a part of ongoing data operations expense. The current technology utilized by the Bank and its eight locations has been subjected to periodic reviews by its regulators. Testing of the systems with third party providers has been ongoing through 1998 and early 1999. The Board is closely involved with this project and is aware that third party providers of data processing services are conducting their own Y2K projects to ensure that their users have adequate coverage of the problem. However, the Board also realizes that third party providers' compliance is largely out of the Bank's control and is monitoring their progress. Because of the Company's reliance on third party data processing services, it does not anticipate any material expenditures associated with the Y2K issue. There can be no assurance that the Bank and its third party providers will be successful in making all necessary changes to avoid computer system failure related to the year 2000. REGULATORY MATTERS The Bank is subject to Federal Reserve Board capital requirements as well as statutory capital requirements imposed under Maryland law. At March 31, 1999, the Bank's tangible, leverage and risk-based capital was 9.5%, 10.4% and 17.6%, respectively. These levels are well in excess of the required 4.0%, 4.0% and 8.0% ratios required by the Federal Reserve Board. 11 TRI-COUNTY FINANCIAL CORPORATION -------------------------------- PART II - OTHER INFORMATION --------------------------- Item 6 - Exhibits A. Exhibits (27) Financial Data Schedule 12 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: May 14, 1999 By: /s/ Michael L. Middleton ------------------- ------------------------------------- Michael L. Middleton, President and Chairman of the Board Date: May 14, 1999 By: /s/ Eileen M. Ramos ------------------- ------------------------------------- Eileen M. Ramos Chief Financial Officer 13 EX-27 2 FINANCIAL DATA SCHEDULE
9 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 548,843 4,374,159 0 0 57,596,990 2,763,980 2,766,002 135,485,286 1,602,649 209,767,286 152,232,473 4,152,486 712,757 31,437,480 0 0 7,849 21,224,241 209,767,286 2,967,932 928,354 21,276 3,917,562 1,366,640 402,687 2,148,235 60,000 (605) 1,329,968 1,103,409 1,103,409 0 0 683,409 .87 .81 4.19 500,425 0 0 0 1,540,551 0 2,098 1,602,649 1,602,649 0 0
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