<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-18279
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TRI-COUNTY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-0692188
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
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(Address of principal executive offices) (Zip Code)
(301) 645-5601
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(Registrant's telephone number, including area code)
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(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 October 31, 1997, registrant had outstanding 785,514 shares of
--------------
Common Stock.
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q
INDEX
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PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 2
Consolidated Statements of Income - Nine Months and Three
Months Ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1997 and 1996 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
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES 13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Noninterest-bearing $ 520,980 $ 1,111,894
Interest-bearing 5,889,504 2,791,718
------------ ------------
Total cash and cash equivalents 6,410,484 3,903,612
Investment securities available for sale - at fair value 53,281,218 53,735,677
Investment securities held to maturity - at amortized cost 1,323,280 1,747,644
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 1,724,000 1,300,000
Loans held for sale 1,033,680 1,011,930
Loans receivable - net of allowance for loan losses
of $1,264,668 and $1,120,102, respectively 124,157,802 111,024,921
Premises and equipment, net 3,926,347 3,824,568
Accrued interest receivable 1,266,795 1,165,191
Other assets 516,242 607,014
------------ ------------
TOTAL ASSETS $193,639,848 $178,320,557
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 5,946,314 $ 5,251,827
Interest-bearing deposits 134,443,345 130,282,336
------------ ------------
Total deposits 140,389,659 135,534,163
Short-term borrowings 16,746,177 11,463,507
Long-term debt 17,526,836 13,269,959
Accrued expenses and other liabilities 405,416 801,245
------------ ------------
Total liabilities 175,068,088 161,068,874
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 785,514 and 750,960 shares, respectively 7,855 7,510
Surplus 6,301,165 5,724,729
Retained earnings 12,147,316 11,430,666
Net unrealized gain on investment securities
available for sale, net of deferred taxes 372,019 88,778
Loan to ESOP (256,595) -
------------ ------------
Total stockholders' equity 18,571,760 17,251,683
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $193,639,848 $178,320,557
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 8,183,391 $ 7,525,510 $2,828,379 $2,550,691
Interest on mortgage-backed securities 2,377,982 1,786,972 867,362 632,698
Interest and dividends on investment securities 633,534 676,351 175,545 215,394
----------- ----------- ---------- ----------
Total interest income 11,194,907 9,988,833 3,871,286 3,398,783
----------- ----------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 4,235,624 4,058,764 1,437,825 1,351,390
Interest on short-term borrowings 730,423 126,362 259,841 174,621
Interest on long-term debt 498,158 571,665 220,627 47,536
----------- ----------- ---------- ----------
Total interest expense 5,464,205 4,756,791 1,918,293 1,573,547
----------- ----------- ---------- ----------
NET INTEREST INCOME 5,730,702 5,232,042 1,952,993 1,825,236
LOAN LOSS PROVISION 180,000 180,000 60,000 60,000
----------- ----------- ---------- ----------
NET INTEREST INCOME AFTER LOAN
LOSS PROVISION 5,550,702 5,052,042 1,892,993 1,765,236
----------- ----------- ---------- ----------
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges 262,034 200,975 84,792 66,929
Gain on sale of loans held for sale 151,809 129,635 68,562 58,323
Loss on sale of investment securities (17,502) - (17,502) -
Service charges 361,047 270,620 126,630 96,128
Other 69,761 59,663 19,126 17,605
----------- ----------- ---------- ----------
Total noninterest income 827,149 660,893 281,608 238,985
----------- ----------- ---------- ----------
NONINTEREST EXPENSES:
Employee compensation and benefits 1,913,959 1,668,998 586,855 489,630
Occupancy expense 303,169 265,820 117,544 92,370
Federal insurance premium and surety bond premiums 88,016 1,084,120 35,016 910,206
Data processing expense 175,643 174,371 60,051 57,468
Advertising 115,751 53,870 32,242 18,530
Depreciation for furniture, fixtures, and equipment 109,875 93,019 35,750 29,755
Other 1,038,155 681,648 407,900 218,176
----------- ----------- ---------- ----------
Total noninterest expenses 3,744,568 4,021,846 1,275,358 1,816,135
----------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,633,283 1,691,089 899,243 188,086
INCOME TAXES 1,006,500 629,700 322,100 62,000
----------- ----------- ---------- ----------
NET INCOME $ 1,626,783 $ 1,061,389 $ 577,143 $ 126,086
=========== =========== ========== ==========
EARNINGS PER SHARE (Note 2):
Primary $1.98 $1.29 /(1)/ $.70 $.15 /(1)/
On a fully diluted basis $1.96 $1.29 /(1)/ $.70 $.15 /(1)/
</TABLE>
/(1)/ Restated to reflect 1997 5% stock dividend
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- ------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,626,783 $ 1,061,389
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 180,000 180,000
Depreciation and amortization 209,828 180,926
Amortization of premium/discount on mortgage-backed
securities and investments (42,537) (71,021)
Deferred income tax benefit (52,500) (57,300)
Increase in interest receivable (101,604) (177,660)
Increase (decrease) in deferred loan fees 3,671 (23,229)
(Decrease) increase in accounts payable,
accrued expenses, and other liabilities (477,658) 553,322
Increase in other assets (108,248) (268,238)
Gain on sale of premises and equipment - (9,610)
Loss on sale of investment securities 17,502 -
Origination of loans held for sale (7,274,575) (5,839,805)
Gain on sales of loans held for sale (134,307) (129,635)
Proceeds from sale of loans held for sale 7,387,132 6,036,635
------------ ------------
Net cash provided by operating activities 1,233,487 1,435,774
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (24,622,942) (22,056,393)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 25,557,076 15,738,724
Purchase of investment securities held to maturity - (450,415)
Proceeds from maturities or principal payments
of investment securities held to maturity 431,179 2,923,996
Purchase of FHLB stock and Federal Reserve Bank stock (424,000) -
Loans originated or acquired (41,076,412) (41,422,480)
Principal collected on loans 27,630,519 37,352,867
Purchase of premises and equipment (273,829) (677,507)
Proceeds from sales of premises and equipment - 9,610
Proceeds from disposition of foreclosed real estate 155,135 -
------------ ------------
Net cash used in investing activities (12,623,274) (8,581,598)
------------ ------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- ------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 4,855,496 $ 3,299,925
Proceeds from long-term Federal Home Loan Bank advances 17,400,000 -
Payments of long-term Federal Home Loan Bank advances - (1,000,000)
Net increase (decrease) in other short-term borrowings (7,743,123) 2,779,552
Payments on notes payable (155,108) (318,738)
Dividends paid (81,008) (74,046)
Exercise of stock options 18,236 127,880
Increase in loan to ESOP (127,254) -
Redemption of common stock (270,580) -
----------- -----------
Net cash provided by financing activities 13,896,659 4,814,573
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,506,872 (2,331,251)
CASH AND CASH EQUIVALENTS - JANUARY 1 3,903,612 4,050,219
----------- -----------
CASH AND CASH EQUIVALENTS - SEPTEMBER 30 $ 6,410,484 $ 1,718,968
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest $ 5,375,129 $ 4,799,692
Income taxes 1,200,000 743,000
</TABLE>
Tri-County Financial Corporation declared a 5% stock dividend payable April 15,
1997, and April 15, 1996, to shareholders of record on March 7, 1997, and March
4, 1996, respectively. Retained earnings in the amount of $834,635 in 1997 and
$525,840 in 1996 was transferred to capital in excess of par and common stock to
reflect these dividends.
See notes to consolidated financial statements.
5
<PAGE>
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, 1997, 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 1997 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,
1996.
2. EARNINGS PER SHARE
Primary and fully 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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Primary 823,263 822,781 822,945 828,352
Fully diluted 828,175 825,101 827,849 828,352
</TABLE>
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. If the Company had adopted SFAS No. 128 as of September 30,
1997, it would have reported basic and diluted EPS of $2.09 and $1.96,
respectively, for the nine months then ended.
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 15,
1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
6
<PAGE>
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.
4. CURTAILMENT OF THE DEFINED BENEFIT PLAN
On May 28, 1997, the Board of Directors, after due consideration of the
projected cost of the Bank's Defined Pension Plan, voted to terminate the
Plan effective August 31, 1997. The present value of current benefits,
plus any remaining pension assets, net of costs, will be transferred into
the Bank's ESOP/401K on behalf of all Defined Benefit Plan participants.
For the nine months ended September 30, 1997, net pension cost of $45,000
has been charged against earnings to reflect operating costs of the plan.
Upon distribution of plan assets, credits of approximately $91,000 on an
after tax basis will be recorded in settlement of the termination. It
is anticipated that distribution of participant assets will occur in
December 1997.
* * * * * *
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The holding company's banking subsidiary, Community Bank of Tri-County, has
operated as a commercial bank for six months, following its thrift charter
conversion on March 29, 1997. Tri-County Financial Corporation owns 100% of the
issued and outstanding common stock of Community Bank of Tri-County ("the
Bank"), which is the principal asset of the Company. Tri-County Financial
Corporation does not presently own or operate any subsidiaries other than the
Bank and its subsidiary and the entities are collectively referred to as "the
Company".
The Bank progressed in its evolution from a thrift to a community based
commercial bank. All product lines were subjected to analysis for relevance and
profitability. Strategies for broadening the scope of services to attract local
business and consumers have been initiated in an effort to address the niche
that appears to be available for an institution such as the Community 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. 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, and investing such
funds in loans collateralized by residential and commercial real estate,
mortgage-backed securities and, to a lesser extent, various types of consumer
and other loans and 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, mortgage-backed securities 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.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
<S> <C> <C>
Condensed Income Statement:
Interest income $11,194,907 $ 9,988,833
Interest expense 5,464,205 4,756,791
Net interest income 5,730,702 5,232,042
Provision for loan losses 180,000 180,000
Noninterest income 827,149 660,893
Noninterest expenses 3,744,568 4,021,846
Income before income taxes 2,633,283 1,691,089
Income tax expense 1,006,500 629,700
Net income 1,626,783 1,061,389
Per Common Share:
Primary earnings $ 1.98 $ 1.29
Cash dividends declared .10 .10
Book value 23.64 21.48 /(1)/
</TABLE>
/(1)/ Restated to reflect the 1997 5% stock dividend.
8
<PAGE>
RESULTS OF OPERATIONS
The Company reported net income of $1,626,783 and $1,061,389 during the nine
months ended September 30, 1997 and 1996, respectively, representing a $565,394
or 53.3% increase for the nine months ended September 30, 1997 compared to the
comparable period in 1996. 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 resulted from the $498,660 increase in net interest
income, a $166,256 increase in noninterest income, a decrease of $277,278 in
noninterest expenses and a $376,800 increase in income tax expense relating to
the increased earnings.
Interest and Dividend Income
Interest and dividend income on investment securities declined during 1997 as a
result of the exercise of calls imbedded in several of the Bank's securities and
the maturity of some others. The Bank benefitted from the Federal Reserve
Board's rate increase in March as the adjustable rate portfolio items repriced
to higher yields. The asset side repriced at a slightly faster rate than
liabilities, further increasing the net yield. The Bank has utilized a strategy
of leveraging since the fourth quarter of 1996. When opportunities became
available, investments were purchased with maturity and rate terms that could be
reasonably matched with available borrowings to generate a specified net yield.
The combination of the increased net yield and the balance sheet growth
contributed to the 9.5% overall growth in net interest income for the nine
months ended September 30, 1997 over the comparable period results in 1996.
Noninterest Income
Contributing to the increase in earnings were increases in loan service charges
of $61,059, or 30.4%, resulting from higher commercial loan volume, which
generated higher per loan appraisal and other fees, and increased gains on sales
of loans originated for the purpose of reselling. Overall loan originations
remained stable in 1997 as compared to 1996. The conversion to a commercial
bank charter resulted in a change in the composition of originations, however,
with an increased proportion of originations occurring in the commercial real
estate and lines of credit loans. 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.
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 convenience fees for the use of the Bank's ATMs by noncustomers. In
addition, Bank have been utilizing certain negotiable order of withdrawal
account features which have a related service fee and the conversion to a
commercial bank has generated a small but increasing commercial deposit account
base. The combined effect of these factors was a $90,427, or 33.4%, increase in
service charge income in the nine months ended September 30, 1997 as compared to
the corresponding period in 1996.
Operating Expense
Despite as increase in the number of branches operated by the Bank in the first
nine months of 1997 compared to 1996 and the significant costs of converting the
Bank's charter to that of a commercial bank, the Bank experienced a decline in
noninterest expenses of $277,278 or 6.9%. Included in 1996 costs is the FDIC
insurance cost incurred by the Bank as a thrift. The Bank was assessed a 65.7
basis point special insurance fee, payable September 30, 1996, in connection the
recapitalization of the FDIC's Savings Association Insurance Fund (SAIF). This
fee, coupled with the regular assessment, translated into $1.04 million dollars
in FDIC insurance expense charged to operations for the nine months ended
September 30, 1996. In contrast, for the nine months ended September 30, 1997,
the Bank incurred $53,000 in deposit account insurance. This reduced insurance
cost can be expected to continue for the foreseeable future.
9
<PAGE>
Compensation related expenses did increase $244,961, or 14.7%, as the Bank
expanded its branch network to include a traditionally designed, full service
branch in Bryans Road, Maryland in October 1996 and a "micro" branch, utilizing
limited square footage to provide full customer service, at Charles County
Community College in February 1997. Included in compensation expense was
retirement expense related to the defined benefit pension plan in accordance
with Financial Accounting Standards Board (FASB) Statement No. 87. This
statement requires that service and interest costs associated with
administration of the plan be offset by the return on plan assets and reflected
in operations over the period the employee provides services. For the nine
months ended September 30, 1997, this expense was $45,000 more than the
corresponding period in 1996. In May 1997, the Board of Directors voted to
terminate the defined benefit plan effective August 31, 1997. Upon distribution
of plan assets, the Bank will, in accordance with Statement No. 88 of the FASB,
eliminate its liability for future plan benefits. Approximately $91,000 on an
after-tax basis will be added to earnings to record settlement of the plan
termination, which is anticipated to occur in December 1997.
In connection with the conversion to a commercial bank, the level of stationery,
printing and certain supplies costs increased $74,973, or 127.8%, as the entire
inventory had to be replaced with items reflecting the new corporate name.
Advertising costs incurred to publicize and promote the conversion and its
ensuing benefits to the customers and community increased from $53,870 to
$115,751, or 114.9%. Legal fees related to the conversion and to certain other
one-time management considerations substantially increased the Bank's costs by
$59,006 or 167.8% of costs associated with normal operations.
Income Tax Expense
Income tax expenses increased 59.8% as a result of the 55.7% increase in pretax
income.
Earnings Per Share
Primary earnings per share for the nine months were $1.98 per share or $.69
higher than for the corresponding period in 1996.
FINANCIAL CONDITION
Assets
Total assets as of September 30, 1997 grew $15.3 million to $193.6 million from
the December 31, 1996 level of $178.3 million. This reflects a growth rate of
8.6% as compared to 3.7% 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 $13.2 million or 11.7% for
the nine-month period as compared to an increase of $3.8 million or 3.6% for the
nine months ended September 30, 1996. In connection with the charter
conversion, the Bank adopted a business plan that focused on more consumer and
commercial loans, and to create a mortgage subsidiary to handle the production
and sale of residential loans. This plan is still in the development and
analysis stage.
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 $180,000 during the first six months of 1997 in accordance with
management's policy described above.
The Company's holdings of investment securities declined $878,823 since December
31, 1996. 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. By September 30,
the Bank had been able to replace the majority of called securities.
10
<PAGE>
The Bank was required to increase its holdings of Federal Home Loan Bank (FHLB)
stock as a result of its increased use of Advances from the FHLB as a source of
funds to purchase investments. In connection with its conversion to a
commercial bank member of the Federal Reserve, the Bank was required to acquire
stock in the Federal Reserve. Overall, the Bank acquired $424,000 of FHLB and
Federal Reserve stock during the nine months ended September 30, 1997.
The level of property and equipment balances increased $116,000 as branch
network expansion continued through construction of the "micro" branch described
above. In addition, continued upgrade of the branch teller system equipment has
required expenditures for computer equipment.
Liabilities
Liability growth was managed to reflect the change in asset levels. Deposit
growth was 3.6% for the nine months ended September 30, 1997. 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.
With loan demand stable, the funds obtained through increased deposit account
balances and the call of certain investment securities were sufficient to meet
this demand. Advances from the FHLB were used to acquire mortgage-backed
securities; borrowings were generally obtained with similar maturity and rate
index characteristics to the security purchased so that an acceptable interest
rate spread was realized in the transaction.
Stockholders' Equity
Stockholders' equity increased $1,320,077 or 7.7% to $18.2 million at September
30, 1997 compared to $17.3 million at December 31, 1996. This reflects the net
income of $1,626,783 for the nine-month period, a $283,241 increase in net
unrealized holding gains on investment and mortgage-backed securities available
for sale and $18,236 realized from the exercise of outstanding stock options by
members of senior management and the Board of Directors. Additionally, a cash
distribution to shareholders in the form of a $.10 per share cash dividend was
paid. A shift in the components of stockholders' equity occurred as a result of
the declaration of a 5% stock dividend to shareholders. This resulted in a
transfer of $835,000 from retained earnings to common stock and capital surplus.
Book value on a per share basis, $23.64 at September 30, 1997, as compared to
$22.97 at December 31, 1996, reflects a 2.9% increase. During the third quarter
of 1997 an opportunity 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 the purchase of 13,529 shares. At
the same time, the Bank's Employee Stock Ownership Plan (ESOP) acquired
additional 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 balances is reflected as a
reduction of stockholders' equity. The number of shares outstanding was
increased by the 5% stock dividend declared by the Board of Directors on January
24, 1997. Additional factors were the $.10 per share cash dividend distribution
and the exercise of stock options by members of the senior management team and
the Board of Directors.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as to
statutory capital requirements imposed under Maryland law. At September 30,
1997, the Bank's tangible, leverage, and risk-based capital 9.48%, 9.48% and
16.0%, respectively. These levels are well in excess of the required 1.5%, 3.0%
and 8.0% ratios required by the Federal Reserve Board.
11
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
--------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits
(27) Financial Data Schedule
B. Reports on Form 8-K
One report on Forms 8-K and 8-K/A was filed during the quarter:
Date of Report: September 19, 1997
--------------
Item(s) Reported: Board of Directors decision to dismiss Deloitte &
----------------
Touche, LLP as certifying accountant and retention
of Stegman & Company as its new certifying
accountant.
Date of Report: September 19, 1997
--------------
Item(s) Reported: Deloitte & Touche, LLP letter regarding information
----------------
stated in Form 8-K dated September 19, 1997.
12
<PAGE>
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 Ramos
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,410,484
<INT-BEARING-DEPOSITS> 5,889,504
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,281,218
<INVESTMENTS-CARRYING> 1,323,280
<INVESTMENTS-MARKET> 1,365,178
<LOANS> 125,191,482
<ALLOWANCE> 1,264,668
<TOTAL-ASSETS> 193,639,848
<DEPOSITS> 140,389,659
<SHORT-TERM> 16,746,177
<LIABILITIES-OTHER> 405,416
<LONG-TERM> 17,526,836
0
0
<COMMON> 7,990
<OTHER-SE> 18,563,770
<TOTAL-LIABILITIES-AND-EQUITY> 193,639,848
<INTEREST-LOAN> 8,183,391
<INTEREST-INVEST> 3,011,516
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,194,907
<INTEREST-DEPOSIT> 4,235,624
<INTEREST-EXPENSE> 5,464,205
<INTEREST-INCOME-NET> 5,730,702
<LOAN-LOSSES> 180,000
<SECURITIES-GAINS> 7,000
<EXPENSE-OTHER> 3,744,568
<INCOME-PRETAX> 2,633,283
<INCOME-PRE-EXTRAORDINARY> 2,633,283
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,626,783
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 4.19
<LOANS-NON> 142,993
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 1,120,102
<CHARGE-OFFS> 35,539
<RECOVERIES> 105
<ALLOWANCE-CLOSE> 1,264,668
<ALLOWANCE-DOMESTIC> 1,264,668
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
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