-----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, KeCx722r7yuSikQ1GA0isrp4mc3yqveyLyO+9CUmVVMR5AsHWPxP0KM5tXS2UUzf DKKpcX+ofQoQIBKJmBaViQ== 0000950109-99-004053.txt : 19991115 0000950109-99-004053.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950109-99-004053 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99749869 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 September 30, 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 November 3, 1999 registrant had outstanding 787,367 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 - September 30, 1999 and December 31, 1998 2 Consolidated Statements of Income and Comprehensive Income - Three and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998 4 - 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 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 SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 - ----------------------------------------------------------------------------------------------------------------- September 30, December 31, 1999 1998 ------------------- -------------------- ASSETS Cash and cash equivalents $ 8,602,876 $ 906,658 Interest-bearing deposits with banks 2,663,712 4,152,816 Investment securities available for sale - at fair value 57,864,317 55,976,606 Investment securities held to maturity - at amortized cost 2,108,090 2,139,069 Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 2,237,700 2,005,350 Loans held for sale 575,400 2,266,697 Loans receivable - net of allowance for loan losses of $1,604,397 and $1,555,489, respectively 137,266,471 132,645,936 Premises and equipment, net 4,520,523 4,316,207 Accrued interest receivable 1,425,935 1,486,776 Other assets 1,150,591 1,123,675 Foreclosed real estate 166,626 - ------------ ------------ TOTAL ASSETS $218,582,241 $207,019,790 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Noninterest-bearing deposits $ 8,868,234 $ 9,750,153 Interest-bearing deposits 144,291,167 142,065,211 ------------- ------------- Total deposits 153,159,401 151,815,364 Other borrowed funds 12,452,618 16,937,882 Long-term debt 31,400,000 16,496,450 Accrued expenses and other liabilities 357,342 638,128 ------------- ------------- Total liabilities 197,369,361 185,887,824 ------------- ------------- STOCKHOLDERS' EQUITY: Common stock - par value $.01; authorized - 15,000,000 shares; issued 778,683 and 788,892 shares, respectively 7,787 7,893 Surplus 7,417,168 7,309,901 Retained earnings 14,278,407 13,372,441 Accumulated other comprehensive income (313,917) 648,614 Unearned ESOP shares (176,565) (206,883) ------------- ------------- Total stockholders' equity 21,212,880 21,131,966 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 218,582,241 $ 207,019,790 ============= =============
See notes to consolidated financial statements. 2 TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 - -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30 ---------------------------------- ---------------------------------- 1999 1998 1999 1998 INTEREST INCOME: Interest and fees on loans $ 2,849,085 $ 2,844,841 $ 8,674,029 $ 8,598,048 Taxable interest and dividends on investment securities 1,075,146 1,076,065 3,088,650 2,918,117 Interest on deposits with banks 30,644 48,584 63,362 111,665 ----------- ----------- ----------- ----------- Total interest income 3,954,875 3,969,490 11,826,041 11,627,830 ----------- ----------- ----------- ----------- INTEREST EXPENSE: Interest on deposits 1,386,524 1,426,206 4,123,337 4,259,888 Interest on other borrowed funds 109,123 251,144 329,494 599,441 Interest on long-term debt 378,017 270,332 995,785 728,080 ----------- ----------- ----------- ----------- Total interest expense 1,873,664 1,947,682 5,448,616 5,587,409 ----------- ----------- ----------- ----------- NET INTEREST INCOME 2,081,211 2,021,808 6,377,425 6,040,421 PROVISION FOR LOAN LOSSES 60,000 60,000 180,000 180,000 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,021,211 1,961,808 6,197,425 5,860,421 ----------- ----------- ----------- ----------- NONINTEREST INCOME: Loss on sale of investment securities -- (391) (605) (391) Loan appraisal, credit and miscellaneous charges 38,045 101,018 151,827 323,308 Net gains on sale of loans held for sale 31,913 60,981 207,492 282,002 Service charges 194,614 165,305 564,294 421,391 Other 17,868 17,633 45,857 131,310 ----------- ----------- ----------- ----------- Total noninterest income 282,440 344,546 968,865 1,157,620 ----------- ----------- ----------- ----------- NONINTEREST EXPENSES: Salaries and employee benefits 890,112 711,105 2,542,333 2,192,485 Occupancy expense 126,660 131,404 381,942 345,468 Deposit insurance and surety bond premium 36,047 34,099 107,602 107,957 Data processing expense 61,968 63,368 197,624 227,916 Advertising 66,471 30,583 170,986 94,459 Depreciation of furniture, fixtures, and equipment 55,149 40,575 184,346 116,356 Other 296,765 318,127 852,605 914,770 ----------- ----------- ----------- ----------- Total noninterest expenses 1,533,172 1,329,261 4,437,438 3,999,411 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 770,479 977,093 2,728,852 3,018,630 INCOME TAXES 271,752 408,764 1,007,271 1,132,764 ----------- ----------- ----------- ----------- NET INCOME 498,727 568,329 1,721,581 1,885,866 OTHER COMPREHENSIVE INCOME, NET OF TAX - Net unrealized holding (losses) gains arising during the period (399,656) 389,302 (962,531) 476,623 ----------- ----------- ----------- ----------- COMPREHENSIVE INCOME $ 99,071 $ 957,631 $ 759,050 $ 2,362,489 =========== =========== =========== =========== EARNINGS PER SHARE (Note 2): Basic $.72 $.73 $2.19 $2.37 Diluted $.67 $.68 $2.05 $2.22
See notes to consolidated financial statements. 3 TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 - ---------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, ------------------------------- 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,721,581 $ 1,885,866 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 180,000 180,000 Depreciation and amortization 272,550 185,243 Net amortization of premium/discount on investment securities (174,425) 60,102 Deferred income tax benefit (44,000) (128,000) Decrease (increase) in accrued interest receivable 60,841 (254,216) Decrease in deferred loan fees (82,560) (56,989) Increase in accounts payable, accrued expenses, and other liabilities 321,051 80,524 Increase in other assets (26,916) (305,379) Gain on sale of premises and equipment (12,150) (7,051) Loss on sale of investment securities 605 391 Origination of loans held for sale (7,780,628) (14,394,128) Gain on sales of loans held for sale (207,492) (282,002) Proceeds from sale of loans held for sale 9,679,417 15,671,002 Gain on sale of foreclosed real estate -- (61,654) ------------- ------------- Net cash provided by operating activities 3,907,874 2,573,709 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in interest-bearing deposits with banks 1,489,104 3,158,548 Purchase of investment securities available for sale (52,086,274) (52,141,617) Proceeds from sale, redemption or principal payments of investment securities available for sale 49,401,043 42,007,808 Purchase of investment securities held to maturity (1,170,436) (2,915,007) Proceeds from maturities or principal payments of investment securities held to maturity 1,199,887 1,647,623 Purchase of FHLB and Federal Reserve Bank stock (779,850) (206,350) Loans originated or acquired (41,498,077) (43,051,669) Principal collected on loans 36,780,102 33,297,910 Purchase of premises and equipment (476,866) (347,014) Proceeds from sales of premises and equipment 12,150 7,051 Proceeds from disposition of foreclosed real estate -- 825,060 Acquisition from foreclosed real estate (166,626) -- ------------- ------------- Net cash used in investing activities (7,295,843) (17,717,657) ------------- -------------
4 TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 - ---------------------------------------------------------------------------------------------------------------- Nine Months Ended -------------------------------- 1999 1998 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits $ 1,344,037 $ 3,184,492 Proceeds from long-term borrowings 35,000,000 - Payments of long-term borrowings (20,096,450) (1,660,431) Net decrease in other borrowed funds (4,485,264) 14,621,703 Exercise of stock options 107,394 1,058 Net change in unearned ESOP shares 30,333 (12,600) Redemption of common stock (657,150) (473,637) Dividends paid (158,713) (102,407) ------------- ------------- Net cash provided by financing activities 11,084,187 15,558,178 ------------- ------------- INCREASE IN CASH AND CASH EQUIVALENTS 7,696,218 412,230 CASH AND CASH EQUIVALENTS - JANUARY 1 906,658 650,923 ------------- ------------- CASH AND CASH EQUIVALENTS - SEPTEMBER 30 $ 8,602,876 $ 1,065,153 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the nine months for: Interest $ 5,772,672 $ 5,575,044 ============= ============= Income taxes $ 1,100,949 $ 1,150,634 ============= =============
Tri-County Financial Corporation declared a 4% stock dividend payable April 13, 1998 to shareholders of record on March 13, 1998. Retained earnings in the amount of $694,384 in 1998 was transferred to capital in excess of par and common stock to reflect this dividend. 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 nine months ended September 30, 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: Nine Months Ended September 30, 1999 1998 ------- ------- Basic 784,014 788,892 Diluted 838,439 885,195 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 subsidiaries, Tri-County Investment Corporation and Tri-County Federal Finance One, collectively referred to as "the Company". Community Bank of Tri-County has completed over two years 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. In the third quarter of 1999, the Bank received state banking approval to create a "passive investment company" subsidiary, Tri-county Investment Corporation. This subsidiary holds investment securities that are not used in the general operations of the Bank. The investment company is operated from facilities in Delaware as income from "passive investments" does not incur taxes in that state. Similar income in Maryland is subject to state tax of 7%. This action is expected to save approximately $70,000 in state taxes in 1999, with the income generated in Delaware for the last four months of 1999. Higher tax savings are expected in 2000, when the investment company will be in operation for the full year. The Bank also acquired a 7% interest in a Maryland Title Company for the purpose of sharing in title insurance commissions generated by its mortgage lending activities. The Bank's capital investment was $9,800. Its participation in the title insurance business commenced on August 1, 1999. 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 been completed on its newest "express" branch location as part of a mini-mart on a key homeward bound commuter route in Charles County. This branch opened for business on August 31, 1999. The Bank's strategy is to utilize "express" branches to fill in the market between its established anchor branches. 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. These funds are then invested 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. 7 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. SELECTED FINANCIAL DATA Nine Months Ended September 30, 1999 1998 ---------- ---------- Condensed Income Statement: Interest Income $11,826,041 $11,627,830 Interest Expense 5,448,616 5,587,409 Net Interest Income 6,377,425 6,040,421 Provision for Loan Losses 180,000 180,000 Noninterest Income 968,865 1,157,620 Noninterest Expenses 4,437,438 3,999,411 Income Before Income Taxes 2,728,852 3,018,630 Income Tax Expense 1,007,271 1,132,764 Net Income 1,721,581 1,885,866 Per Common Share: Basic Earnings $ 2.19 $ 2.37 Diluted Earnings 2.05 2.22 Book Value 27.24 26.63 FINANCIAL CONDITION Assets Total assets as of September 30, 1999 grew $11.6 million to $218.6 million from the December 31, 1998 level of $207.0 million. This reflects a growth rate of 5.6% as compared to 9.5% asset growth during the same period in 1998. Continuing development of the Southern Maryland area as a bedroom community for Washington, DC workers and military base expansion in the Bank's market maintained a strong real estate market. Loan originations during the first nine months of 1999 were $49,279,000, compared to $57,446,000 during the first nine months of 1998, a 14.2% decline. Loan sales and repayments during the first nine months of 1999 were $46,460,000, compared to $48,969,000 during the first nine months of 1998, a 5.1% decline. The higher rate environment in 1999 reduced or eliminated the incentive for homeowners to refinance their loans. The Bank was able to retain its overall market share by offering competitive residential loan products as well as emphasizing products outside the single family residential loan group. With its increased focus on consumer and commercial loans, the Bank continued to attract these customers in greater numbers, resulting in a change in the portfolio mix. At September 30, 1999, consumer and commercial loans comprised 33.2% of the loan portfolio, compared to 23.8% 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 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. A $180,000 provision for loan losses was made during the first nine months of 1999 in accordance with management's policy described above. 8 As further discussed in the following section titled "Year 2000 Readiness", the Company has spent significant time, effort and monies to prepare for the year 2000 date change and its potential effect on the systems used in operations. Additional planning required the accumulation of cash to meet customer needs in the event Bank customers decide to exchange their deposit balances for currency. In the third quarter of 1999, $8 million of cash and cash equivalents was set aside for potential use by such customers. Since the allocation of large balances to a non-interest bearing asset is detrimental to the earnings of the Company, the need for this cash will be evaluated on a continuous basis as the end of year approaches. The Company's holdings of investment securities increased $1.9 million, or 3.2%, since December 31, 1998. The Bank experienced a slow down of the early payoff of its securities which had accelerated in 1998. For securities with mortgage loans as the underlying collateral, prepayments closely tracked the refinance volume prevalent in the industry during the low rate environment. When possible, the funds received from payoff of these securities were used to acquire similar investments, though generally at a lower yield reflecting current market conditions at the time of purchase. Since June 1999, yields have stabilized or increased slightly, improving the portfolio yield. Other security purchases were funded with wholesale borrowings. The level of property and equipment balances increased $204,000 as branch and administrative office renovations were completed, construction of the new "express" branch was completed and the Bank continued to upgrade its computer equipment as a result of its Y2K readiness preparation. Liabilities Liability growth was managed to reflect the change in asset levels. Deposit balances increased by .9% for the nine months ended September 30, 1999. Competition for bank deposits continues to be intense with nondeposit investments capturing an increasing share of its customers' financial assets. Stockholders' Equity Stockholders' equity increased $81,000 or .4% to $21.2 million at September 30, 1999 compared to $21.1 million at December 31, 1998. This reflects the net income of $1,722,000 for the nine month period and a $963,000 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 $657,000 to purchase shares of the Company's common stock in the open market. The cash dividends were distributed to shareholders on April 15, 1999. Book value on a per share basis, $27.24 at September 30, 1999, as compared to $26.79 at December 31, 1998, reflects a 1.8% increase. The ESOP acquired shares utilizing the line of credit available from the Corporation. Whenever 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 nine months ended September 30, 1999, the Corporation purchased 24,803 shares for $657,000. The cash for these stock purchases was provided to the Company through cash dividends of $1,000,000 and $750,000 from the Bank in 1999 and 1998. RESULTS OF OPERATIONS The Company's net income for the nine months ended September 30, 1999 decreased $164,000 or 8.7% 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 decrease, rather than an overall trend applicable to all areas. The decrease in net income for the nine months ended September 30, 1999 resulted from a $337,000 increase in net interest income, an $189,000 decrease in noninterest income, an increase of $438,000 in noninterest expenses and a $125,000 decrease in income tax expense. Interest and Dividend Income Interest and dividend income on investment securities increased $171,000 or 5.9% in the first nine months of 1999 compared to the first nine months of 1998. Given that the balances invested increased $1.9 million or 3.2%, a smaller increase in related income might be expected. However, the interest rates available in the market, which had been steadily declining through June of 1999, began to level off or increase slightly. 9 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. Hovering at just under 4.0%, changes from year to year have generally been less than 20 basis points; from September 30, 1998 to September 30, 1999, the spread increased 5 basis points or 1.3%. The 5.5% overall growth in net interest income for the nine months ended September 30, 1999 over the comparable period results in 1998 is, therefore, attributable to a combination of balance sheet growth and a change in spread. Noninterest Income In 1998, the Bank experienced a heavy volume of mortgage originations as consumers reacted to lower market rates; this increased gains on sales of loans originated for the purpose of resale. This high volume was maintained through the first quarter of 1999, but fell off significantly in the second quarter of 1999 and, consequently, loan origination-related noninterest earnings declined. Noninterest Expense The Bank experienced an increase in noninterest expenses of $438,000 or 11.0% for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. Compensation related expenses increased $350,000, or 16.00%, as the Bank has created new positions to meet the needs of a commercial bank and its customers. Occupancy costs increased $36,000 or 10.42% as a result of operating the branch near the St. Charles mall and opening the new "express" branch, as well as expanding its Dunkirk branch facility. Data processing expense decreased by $30,000 or 13.2% over the comparable period in 1998. This reflects the significant costs incurred in 1998 associated with the Bank's efforts to implement its Year 2000 century date compliance; while these efforts are ongoing, the majority of changes and acquisitions were made in 1998. Depreciation expense increased $68,000 or 58.4% 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 nine months were $2.19 per share or $.18 lower than for the corresponding period in 1998. 10 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: September 30,1999 September 30, 1998 ----------------- ------------------- Market value of portfolio equity: Interest rate changes: Up 200 basis points -10% -11% Down 200 basis points +1% +4% Interest rate sensitivity: Interest rate changes: Up 200 basis points +6% +1% Down 200 basis points -4% -3% The Bank's exposure to a 200 basis point increase in interest rates would result in a decline in the market value of portfolio equity of 10% at September 30, 1999, compared to a projected decline of 11% at September 30, 1998 in the same adverse scenario. A 200 basis point downward shift in rates would have a slightly lower positive effect on the portfolio at September 30, 1999 compared to 1998. 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. Interest rate sensitivity reflects the change in the Bank's net interest income given assumed interest rate shifts. In the scenarios presented, the Bank's interest income would increase 6% in the event of a 200 basis point increase in market rates. A 200 basis point decline would decrease net interest income by 4%. Management feels that a more difficult situation for the Bank to control would exist with rising interest rates. With a higher likelihood of such increases coming in the near future, management began structuring the Bank assets to provide more protection against upward movements, generally shortening the maturities of assets where possible and lengthening liability maturities. This structure is expected to reasonably minimize the impact from sudden and prolonged upward shifts in interest rates. 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. YEAR 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. 11 In anticipation of potential customer demands, the Bank studied its cash levels and projected its needs as the end of 1999 approaches. While the Bank has taken reasonable steps to avoid disruption of service due to the date change, customer reaction cannot be determined. In the event that a significant portion of the Bank's customer base decides that large cash holdings are necessary for their ease of mind, the Bank must be prepared. In the third quarter of 1999, the Bank drew upon its borrowing capabilities at the Federal Home Loan Bank to acquire additional cash balances to meet customer demand, should it materialize. REGULATORY MATTERS The Bank is subject to Federal Reserve Board capital requirements as well as statutory capital requirements imposed under Maryland law. At September 30, 1999, the Bank's tangible, leverage and risk-based capital was 9.6%, 10.6% and 17.8%, respectively. These levels are well in excess of the required 4.0%, 4.0% 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: 11/12/99 By: /s/ Michael L. Middleton -------------------- ---------------------------------- Michael L. Middleton, President and Chairman of the Board Date: 11/12/99 By: /s/ Eileen M. Ramos -------------------- ---------------------------------- Eileen M. Ramos Chief Financial Officer 14 EX-27 2 FINANCIAL DATA SCHEDULE
9 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 8,602,876 2,663,712 0 0 57,864,317 2,108,090 2,112,651 137,841,871 1,604,397 218,582,241 153,159,401 12,452,618 357,342 31,400,000 0 0 7,787 21,205,169 218,582,241 8,674,029 3,088,650 63,362 11,826,041 4,123,337 1,325,279 6,377,425 180,000 (605) 4,437,438 2,728,852 2,728,852 0 0 1,721,581 2.19 2.05 3.95 0 612,904 0 0 0 1,540,551 118,960 2,806 1,604,397 1,604,397 0
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