<PAGE>
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
---------
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended: Commission File Number 0-18279
-------
June 30, 1997
Tri-County Financial Corporation
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Maryland 52-0692188
- ------------------------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identificaiton Number)
3035 Leonardtown Road
Waldorf, Maryland 20601
- ----------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number: (301) 645-5601
Securities Registered Pursuant to Section 12(g) of Act:
Capital Stock, Par Value $.01 per Share
---------------------------------------
(Title of Class)
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
----- -----
Number of Shares of Capital Stock
Outstanding as of July 31, 1997 799,043
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
INDEX
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1997 (Unaudited) and December 31, 1996 2
Consolidated Statements of Operations for the Six-Month
and the Three-Month Periods Ended June 30, 1997
and 1996 (Unaudited) 3
Consolidated Statements of Cash Flows for the Six-Month
Periods Ended June 30, 1997 and 1996 (Unaudited) 4-5
Notes to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Operations 8-12
PART II - OTHER INFORMATION 13
SIGNATURES 14
</TABLE>
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997 (UNAUDITED) AND
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Noninterest-bearing $ 646,594 $ 1,111,894
Interest-bearing 1,758,970 2,791,718
------------ ------------
Total cash and cash equivalents 2,405,564 3,903,612
INVESTMENT SECURITIES AVAILABLE
FOR SALE - At fair value, amortized cost of $8,438,215
and $11,117,063, respectively 8,645,548 11,265,358
INVESTMENT SECURITIES HELD TO
MATURITY - At amortized cost, fair value of $631,723
and $863,757, respectively 631,723 863,757
MORTGAGE-BACKED SECURITIES AVAILABLE
FOR SALE - At fair value, amortized cost of $48,652,654
and $42,473,979, respectively 48,734,834 42,470,319
MORTGAGE-BACKED SECURITIES HELD TO
MATURITY - At amortized cost, fair value of $826,103
and $919,349, respectively 793,611 883,887
LOANS RECEIVABLE - Net of allowance for loan losses of
$1,208,565 and $1,120,102, respectively 120,432,688 111,024,921
STOCK IN FEDERAL HOME LOAN BANK AND FEDERAL
RESERVE BANK - At cost 1,524,000 1,300,000
LOANS HELD FOR SALE 1,146,164 1,011,930
NET PREMISES AND EQUIPMENT 3,941,150 3,824,568
ACCRUED INTEREST RECEIVABLE 1,283,119 1,165,191
OTHER ASSETS 520,339 607,014
------------ ------------
TOTAL ASSETS $190,058,740 $178,320,557
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $139,463,468 $134,818,992
Advances from Federal Home Loan Bank 29,400,000 24,000,000
Notes payable and other borrowings 940,578 733,466
Advance payments by borrowers for taxes and insurance 1,473,449 715,171
Accounts payable, accrued expenses, and other liabilities 555,661 724,055
Current and deferred income taxes - 77,190
------------ ------------
Total liabilities 171,833,156 161,068,874
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 7,929 7,510
Additional paid-in capital 6,599,120 5,724,729
Net unrealized gain on investment securities and mortgage-backed
securities available for sale, net of taxes 177,703 88,778
Retained earnings 11,570,173 11,430,666
Loan to ESOP (129,341) -
------------ ------------
Total stockholders' equity 18,225,584 17,251,683
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $190,058,740 $178,320,557
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX-MONTH AND THREE-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST REVENUES:
Interest on loans $ 5,355,012 $ 4,974,819 $2,742,295 $2,444,209
Interest on mortgage-backed securities 1,510,620 1,154,274 771,873 593,900
Interest and dividends on investment securities 457,989 460,957 233,024 204,960
------------ ------------ ----------- -----------
Total interest revenues 7,323,621 6,590,050 3,747,192 3,243,069
------------ ------------ ----------- -----------
INTEREST EXPENSES:
Deposits 2,797,799 2,707,374 1,388,152 1,354,635
Federal Home Loan Bank advances 698,042 365,407 376,594 183,694
Notes payable and other borrowings 50,071 110,463 47,535 27,858
------------ ------------ ----------- -----------
Total interest expenses 3,545,912 3,183,244 1,812,281 1,566,187
------------ ------------ ----------- -----------
NET INTEREST INCOME 3,777,709 3,406,806 1,934,911 1,676,882
LOAN LOSS PROVISION 120,000 120,000 60,000 60,000
------------ ------------ ----------- -----------
Net interest income after loan loss provision 3,657,709 3,286,806 1,874,911 1,616,882
------------ ------------ ----------- -----------
OTHER INCOME:
Loan appraisal, credit, and miscellaneous charges 177,242 134,046 91,694 66,290
Gain on sale of loans held for sale 83,247 71,312 39,505 30,092
Service charges 234,417 174,492 119,407 100,618
Other 50,635 42,058 23,962 24,054
------------ ------------ ----------- -----------
Total other income 545,541 421,908 274,568 221,054
------------ ------------ ----------- -----------
OPERATING EXPENSES:
Employee compensation and benefits 1,327,104 1,179,368 765,377 642,792
Occupancy expense 185,625 173,450 91,426 80,758
Federal insurance premium and surety bond premiums 53,000 173,914 17,882 86,860
Data processing expense 115,592 116,903 58,941 57,601
Advertising 83,509 67,737 44,654 35,442
Depreciation for furniture, fixtures, and equipment 74,125 96,828 33,325 44,471
Other 630,255 397,511 327,843 190,630
------------ ------------ ----------- -----------
Total operating expenses 2,469,210 2,205,711 1,339,448 1,138,554
------------ ------------ ----------- -----------
INCOME BEFORE INCOME TAXES 1,734,040 1,503,003 810,031 699,382
INCOME TAXES 684,400 567,700 336,700 281,766
------------ ------------ ----------- -----------
NET INCOME $ 1,049,640 $ 935,303 $ 473,331 $ 417,616
============ ============ =========== ===========
EARNINGS PER SHARE (Note 2):
Primary $1.26 1.15(1) $0.57 $0.51
On a fully diluted basis $1.26 1.15(1) 0.57 $0.51
</TABLE>
- ---------------------
(1) Restated to reflect 1997 stock dividends
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND
1996 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,049,640 $ 935,303
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 120,000 120,000
Provision for depreciation and amortization 144,325 120,979
Amortization of premium/discount on mortgage-backed
securities and investments (40,352) (48,308)
Provision for deferred income tax benefit (3,600) (300)
Increase in interest receivable (117,928) (54,819)
Increase (decrease) in deferred loan fees 46,574 (31,966)
(Decrease) increase in accounts payable, accrued
expenses, and other liabilities (301,778) 149,086
Increase in other assets (64,617) (70,592)
Gain on sale of premises and equipment - (9,610)
Origination of loans held for sale (3,671,991) (3,930,155)
Gain on sales of loans held for sale (83,247) (71,312)
Proceeds from sale of loans held for sale 3,729,232 5,006,312
------------ ------------
Net cash provided by operating activities 806,258 2,114,618
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (8,302,912) (9,851,574)
Principal collected on loans 15,370,130 23,497,258
Principal collected on mortgage-backed securities
held to maturity 90,276 130,389
Loans originated or acquired (25,182,040) (25,505,670)
Purchase of mortgage-backed securities available for sale (8,466,271) (5,030,000)
Proceeds from sale or redemption of mortgage-backed
securities available for sale 2,311,988 1,995,826
Principal collected on investment securities held to maturity 236,578 -
Proceeds from sale or redemption of investment securities
available for sale 10,993,174 12,427,478
Purchase of premises and equipment (235,722) (266,754)
Proceeds from sales of premises and equipment - 9,610
Investment in real estate - (207,936)
Purchase of FHLB stock and Federal Reserve Bank stock (224,000) -
Proceeds from disposition of foreclosed real estate 155,135 -
------------ ------------
Net cash used in investing activities (13,253,664) (2,801,373)
------------ ------------
(Continued)
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OFCASH FLOWS SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND
1996 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 4,644,476 4,060,591
Proceeds from Federal Home Loan Bank advances 34,400,000 41,500,000
Payments of maturing Federal Home Loan Bank advances (29,000,000) (41,750,000)
Net increase (decrease) in other short-term borrowings 279,024 (3,038,351)
Net increase in advance payments by borrowers for
taxes and insurance 758,278 765,360
Dividends paid (81,008) (74,046)
Exercise of stock options 45,685 103,562
Payments on notes payable (97,097) (189,571)
------------ ------------
Net cash provided by financing activitiesb 10,949,358 1,377,545
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,498,048) 690,790
CASH AND CASH EQUIVALENTS - JANUARY 1, 3,903,612 4,050,219
------------ ------------
CASH AND CASH EQUIVALENTS - JUNE 30, $ 2,405,564 $ 4,741,009
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the six months for:
Interest $ 3,498,845 $ 3,224,332
Income taxes 820,000 470,000
</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. (Concluded)
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 six months ended June 30,
1997, are not necessarily indicative of the results of operations to be
expected for the remainder of the year.
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>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Primary 831,281 810,136 832,587 812,722
Fully diluted 834,048 813,288 834,692 813,570
</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
June 30, 1997, it would have reported basic and diluted EPS of $1.35 and
$1.26, respectively, for the six months then ended.
6
<PAGE>
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 Benefit 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 rolled into the
Bank's ESOP/401K on behalf of all Defined Benefit Plan participants. The
final cost or benefit to the Bank resulting from this Plan curtailment has
not been determined by the plan administrator. However, management does not
expect the termination to materially affect the financial position or results
of operation of the Bank.
* * * * * *
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
On June 30, 1997, Community Bank of Tri-County completed its first quarter of
operations as a commercial bank, following its thrift charter conversion on
March 29. 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 is well positioned to operate as a community-oriented commercial bank.
While functioning as a thrift, the Bank's operations had expanded into the
community bank market with the product lines available to the thrift. Seasoned
bank officers were recruited for the branches and the corporate team, and
business was conducted to attract more commercial customers. The hurdle faced
by the Bank was the customers' perception that thrifts are more limited in the
type of transactions they could undertake than are banks. This charter change
allows the Bank to adequately address the total financial needs of its
communities rather than just concentrate on residential lending. For the
business community, having a local decision center provides the Bank with a
considerable advantage over those institutions with headquarters in distant
cities and states.
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 loans, 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, including fees and
service charges, gains or losses on sales of loans, mortgage-backed securities,
investment securities, and other noninterest income, and noninterest expense,
including employee compensation and benefits, occupancy expense, other
noninterest expenses, and income taxes,
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.
8
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
<S> <C> <C>
Condensed Income Statement:
Interest income $7,324,000 $6,590,000
Interest expense 3,546,000 3,183,000
Net interest income 3,778,000 3,407,000
Provision for loan losses 120,000 120,000
Other income 545,000 422,000
Operating expenses 2,469,000 2,206,000
Income before income taxes 1,734,000 1,503,000
Income tax expense 684,000 568,000
Net income 1,050,000 935,000
Per Common Share:
Primary earnings $ 1.26 $ 1.15
Cash dividends declared 0.10 0.10
Book value 22.99 22.29
</TABLE>
RESULTS OF OPERATIONS
The Company reported net income of $1,050,000 and $935,000 during the six months
ended June 30, 1997 and 1996, respectively, representing a $115,000, or 12.3%,
increase for the six months ended June 30, 1997, compared to the comparable
period in 1996. The increase in net income resulted from the $371,000 increase
in net interest income and a $123,000 increase in noninterest income, which were
offset by increases of $263,000 in noninterest expenses, primarily employee
compensation and benefits and advertising and supplies costs incurred relating
to the charter conversion and name change, plus a $116,000 increase in income
tax expense relating to the increased earnings.
Interest and Dividend Income
Interest and dividend income on investment securities declined during the first
quarter as a result of the exercise of calls imbedded in several of the Bank's
securities; this decline was offset in the second quarter by increased market
yields on the securities remaining in the portfolio. The Federal Reserve
Board's action to raise interest rates in mid March may affect the prepayment
speeds on mortgage-related investments to a limited degree and may ultimately
result in slowing down the pace of the current economic expansion. The Bank is
currently benefiting from the rate increase as the adjustable portfolio items
reprice to higher yields. The asset side is repricing at a faster rate than our
liabilities, both deposits and borrowings, further increasing the net yield.
The combination of the increased net yield and the balance sheet growth
contributed to the 11.3% overall growth in net interest income for the six
months ended June 30, 1997, over the comparable period results for 1996.
Other Income
Contributing to the increase in earnings were increases in loan service charges
resulting from higher commercial loan volume, which in turn generates higher
per-loan appraisal fees and other fees, as well as 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
9
<PAGE>
estate and lines of credit loans. Bank mergers and 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, so mortgage
activity remains strong. An additional commission-based mortgage loan
originator was hired 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 fees for the use of the Bank's ATMs by noncustomers. In addition, Bank
customers have been utilizing certain demand deposit account features that have
a related service fee. These items resulted in a $60,000, or 34%, increase in
service charge income in the six months ended June 30, 1997, as compared to the
comparable period in 1996.
Operating Expense
The first six months of 1997 saw a significant $263,000 or 11.9%, increase in
operating expenses as compared to the first six months of 1996. Compensation-
related expenses increased $148,000, or 12.5%, as the Bank expanded its branch
network to include a traditionally designed full service office 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.
In connection with the conversion to commercial bank operations, the cost of
stationery, printing, and certain other supplies costs increased $72,000, or
148%, as the entire inventory had to be replaced with items reflecting the new
corporate name. In addition, advertising costs incurred to publicize and
promote the conversion and its ensuing benefits to the customers and community
went from $35,000 to $84,000, an increase of 136%.
The benefit to the Bank of the BIF/SAIF recapitalization in the fall of 1996 is
clearly seen in the $121,000 reduction in federal insurance and surety bond
premiums for the first six months of 1997 as compared to the comparable period
in 1996.
Income Tax Expense
Income tax expenses increased 20.6% as a result of the increase in pretax
income.
Earnings Per Share
Primary earnings per share for the six months were $1.26 per share or $0.11
higher than for the corresponding period in 1996. Book value on a per-share
basis reflects only a 3.1% increase, primarily because the number of shares
outstanding was increased by the 5% stock dividend. Additional factors were the
$0.10 per share cash dividend distribution and the exercise of stock options by
members of the senior management team and the board of directors.
10
<PAGE>
FINANCIAL CONDITION
Assets
Total assets as of June 30, 1997, grew $11.7 million to $190 million from the
December 31, 1996 level of $178.3 million. This reflects a growth rate of 6.6%
as compared to 1.2% asset growth during the previous year. 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 continues to
keep the real estate market strong despite higher long-term real estate loan
rates. Loan growth was $9.5 million or 8.5% for the six-month period as
compared to an increase of $0.9 million, or .85%, for the six months ended June
30, 1996. Loan origination volume in 1997 was 2% lower than in the comparable
period in 1996; however, in 1997 fewer loans were originated for sale and
subsequently sold than during the first six months of 1996. With rates at a
slightly higher level in 1997 than in 1996, the Bank experienced a much lower
rate of repayment through refinancings. Overall loan repayments from payoffs
and scheduled principal curtailments were $15.3 million during the first six
months of 1997 compared to $23.5 million in 1997, a decline of $8.1 million, or
34.6%.
In connection with the charter conversion, the Bank adopted a business plan that
focuses on originating more consumer and commercial loans, while creating 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 is maintained at a level believed by management to
be adequate to absorb potential losses inherent in 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 provision for loan losses was $120,000 during
the first six months of 1997 in accordance with management's policy described
above.
The Company's holdings of investment securities declined $2.9 million 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.
As part of the Bank's strategic plan to prudently leverage capital, holdings of
mortgage-backed securities were increased $6.3 million, or 15%, since December
31, 1997. This was accomplished using funds obtained through Federal Home Loan
Bank Advances under terms which matched the rate index and maturity of the
securities acquired. This strategy will continue to be utilized as long as the
interest rate spread obtained meets management's criteria and adequate net worth
levels are maintained.
The level of property and equipment balances increased $117,000 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 controlled to stay in line with the change in asset levels.
Deposit growth was 3.4% for the first six months of 1997. The deposit base
provides a source of funds at a lower average rate than could be realized by
borrowing. The Bank will be focusing on attracting customers disenfranchised by
the shrinking pool of locally run banks in Southern Maryland. Loan demand was
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;
11
<PAGE>
borrowings were generally obtained with maturity and rate index characteristics
similar to those of the security purchased so that an acceptable interest rate
spread was obtained in the transaction. Advance payments by borrowers for taxes
and insurance increased $758,000, and the balance will continue to increase
until the real estate tax payments are made in September 1997.
Stockholders' Equity
Stockholders' equity increased $974,000, or 5.6% to $18.2 million at June 30,
1997, compared to $17.3 million at December 31, 1996. This reflects the net
income of $1,050,000 for the six-month period, an $89,000 increase in unrealized
holding gains on investment and mortgage-backed securities available for sale,
$46,000 realized from the exercise of outstanding stock options by members of
senior management and the Board of Directors, and a cash distribution to
shareholders in the form of a $0.10 per share cash dividend. 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 $829,000 from
retained earnings to common stock and capital surplus.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as to
statutory capital requirements imposed by Maryland law. At June 30, 1997, the
Bank's tangible, leverage, and risk-based capital were 9.3%, 9.3%, and 17.0%,
respectively. These levels are well in excess of the required 1.5%, 3.0% and
8.0% ratios required by the Federal Reserve Board.
12
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
--------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings
-----------------
Not Applicable.
Item 2 - Changes in Securities
---------------------
Not Applicable.
Item 3 - Defaults Upon Senior Securities
-------------------------------
Not Applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable.
Item 5 - Other Information
-----------------
None.
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
None.
13
<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: August 8, 1997 By: /S/ Michael L. Middleton
-------------- -------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: August 8, 1997 By: /S/ Henry A. Shorter, Jr.
-------------- -------------------------------
Henry A. Shorter, Jr.
Secretary
14
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