<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________________
Commission File Number 0-18279
----------------------------------
Tri-County Financial Corporation
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1652138
- ---------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
- ------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(301) 645-5601
-------------------------------------------
(Registrant's telephone number, including area code)
-----------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
As of May 5, 1998 registrant had outstanding 813,967 shares of Common
Stock.
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q
INDEX
-------------------------------------------------------------
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997 2
Consolidated Statements of Income and Comprehensive
Income - Three Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 4-5
Notes to Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
PART II - OTHER INFORMATION 12-13
Item 6 - Exhibits
SIGNATURES 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
March 31, December 31,
1998 1997
ASSETS
Cash and due from banks $ 1,033,371 $ 650,923
Interest-bearing deposits with banks 4,943,964 5,169,830
Investment securities available for sale -
at fair value 51,081,965 52,878,583
Investment securities held to maturity - at
amortized cost 2,982,945 1,149,137
Stock in Federal Home Loan Bank and Federal
Reserve Bank - at cost 1,724,000 1,724,000
Loans held for sale 3,752,301 1,698,872
Loans receivable - net of allowance for loan losses
of $1,370,466 and $1,310,365, respectively 123,993,836 121,866,762
Premises and equipment, net 4,278,838 4,189,222
Accrued interest receivable 1,322,944 1,276,376
Other assets 615,527 584,655
------------ ------------
TOTAL ASSETS $195,729,691 $191,188,360
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 7,853,226 $ 7,196,053
Interest-bearing deposits 137,316,433 135,080,024
------------ ------------
Total deposits 145,169,659 142,276,077
Other borrowed funds 13,230,165 12,523,210
Long-term debt 16,606,995 16,678,610
Accrued expenses and other liabilities 994,692 624,384
------------ ------------
Total liabilities 176,001,511 172,102,281
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized -
15,000,000 shares; issued
782,866 and 782,699 shares,
respectively 7,829 7,827
Surplus 6,575,945 6,574,162
Stock dividend distributable 711,259 -
Retained earnings 12,127,461 12,256,443
Accumulated other comprehensive income 512,671 442,032
Unearned ESOP shares (206,985) (194,385)
------------ ------------
Total stockholders' equity 19,728,180 19,086,079
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $195,729,691 $191,188,360
============ ============
See notes to consolidated financial statements.
2
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- ---------------------------------------------------------------------
Three Months Ended
March 31,
----------------------
1998 1997
INTEREST INCOME:
Interest and fees on loans $2,847,616 $2,612,717
Taxable interest and dividends on investment
securities 894,408 940,102
Interest on deposits with banks 34,236 23,610
---------- ----------
Total interest income 3,776,260 3,576,429
---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,422,932 1,409,647
Interest on other borrowed funds 188,428 219,536
Interest on long-term debt 230,682 104,448
---------- ----------
Total interest expense 1,842,042 1,733,631
---------- ----------
NET INTEREST INCOME 1,934,218 1,842,798
PROVISION FOR LOAN LOSSES 60,000 60,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,874,218 1,782,798
---------- ----------
NONINTEREST INCOME:
Loan appraisal, credit and miscellaneous charges 112,512 85,548
Net gains on sale of loans held for sale 96,845 43,742
Service charges 148,620 115,010
Other 27,816 26,673
---------- ----------
Total noninterest income 385,793 270,973
---------- ----------
NONINTEREST EXPENSES:
Salaries and employee benefits 621,096 561,727
Occupancy expense 109,854 94,199
Deposit insurance and surety bond premium 38,294 35,118
Data processing expense 62,251 56,651
Advertising 31,848 38,855
Depreciation of furniture, fixtures, and equipment 38,530 36,375
Other 294,095 306,837
---------- ----------
Total noninterest expenses 1,195,968 1,129,762
---------- ----------
INCOME BEFORE INCOME TAXES 1,064,043 924,009
INCOME TAXES 377,000 347,700
---------- ----------
NET INCOME 687,043 576,309
OTHER COMPREHENSIVE INCOME, NET OF TAX -
Net unrealized holding gains arising during the
period 70,639 106,340
---------- ----------
COMPREHENSIVE INCOME $ 757,682 $ 682,649
========== ==========
EARNINGS PER SHARE/(1)/ (Note 2):
Basic .86 .67
Diluted .81 .67
/(1)/ Restated to reflect 1998 4% stock dividend
See notes to consolidated financial statements.
3
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- ---------------------------------------------------------------------
Three Months Ended
March 31,
---------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 687,043 $ 576,309
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 60,000 60,000
Depreciation and amortization 66,319 74,143
Net amortization of premium/discount on
investment securities (8,819) (24,987)
Deferred income tax benefit (95,000) (6,300)
Increase in interest receivable (46,568) (102,467)
Increase (decrease) in deferred loan fees 10,744 (213)
Increase (decrease) in accounts payable,
accrued expenses, and other liabilities 402,924 (123,947)
Increase in other assets (117,698) (117,899)
Gain on sale of premises and equipment (7,051) -
Origination of loans held for sale (7,279,429) (1,449,280)
Gain on sales of loans held for sale (96,845) (43,742)
Proceeds from sale of loans held for sale 5,322,845 2,091,702
Gain on sale of foreclosed real estate - (7,000)
------------ ------------
Net cash (used) provided by operating
activities (1,101,535) 926,319
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing
deposits with banks 225,866 (1,447,050)
Purchase of investment securities available
for sale (12,242,206) (5,437,676)
Proceeds from sale, redemption or principal
payments of investment securities available
for sale 14,160,374 5,117,045
Purchase of investment securities held to maturity (2,000,260) -
Proceeds from maturities or principal payments
of investment securities held to maturity 168,805 157,543
Loans originated or acquired (12,341,919) (10,896,339)
Principal collected on loans 10,144,101 7,633,593
Purchase of premises and equipment (148,037) (147,281)
Proceeds from sales of premises and equipment 7,051 -
Proceeds from disposition of foreclosed
real estate - 162,135
------------ ------------
Net cash used in investing activities (2,026,225) (4,858,030)
------------ ------------
4
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- ---------------------------------------------------------------------
Three Months Ended
March 31,
---------------------
1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $2,893,582 $ 2,814,366
Proceeds from long-term borrowings - 8,000,000
Payments of long-term (79,514) (8,044,352)
Net increase in other borrowed funds 706,955 599,619
Exercise of stock options 1,785 44,354
Net change in unearned ESOP shares (12,600) 49,876
---------- -----------
Net cash provided by financing activities 3,510,208 3,463,863
---------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 382,448 (467,848)
CASH AND CASH EQUIVALENTS - JANUARY 1 650,923 1,111,894
---------- -----------
CASH AND CASH EQUIVALENTS - MARCH 31 $1,033,371 $ 644,046
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the three months for:
Interest $1,828,076 $ 1,726,042
========== ===========
Income taxes $ - $ 200,000
========== ===========
Tri-County Financial Corporation declared a 4% and 5% stock dividend payable
April 13, 1998 and April 15, 1997, to shareholders of record on March 13, 1998
and March 7, 1997, respectively. Retained earnings in the amount of $711,259 in
1998 and $834,635 in 1997 was transferred to capital in excess of par and common
stock to reflect these dividends.
See notes to consolidated financial statements.
5
<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 three months ended March 31, 1998 are not necessarily indicative
of the results of operations to be expected for the remainder of the year.
Certain previously reported amounts have been restated to conform to the
1998 presentation.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31,
1997.
2. EARNINGS PER SHARE
Basic and diluted earnings per share, as adjusted for the stock dividend,
have been computed based on weighted-average common and common equivalent
shares outstanding as follows:
Three Months Ended
March 31,
------------------
1998 1997
-------- --------
Basic 803,432 854,235
Diluted 853,472 859,523
3. NEW ACCOUNTING PRONOUNCEMENTS
Effective for periods ending after December 15, 1997, Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, is
applicable for computing and presenting earnings per share (EPS) for
entities, such as the Company, with publicly held common stock or
potential common stock. This statement simplifies the standards for
computing EPS, making them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation.
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was issued in June 1997. This statement establishes
standards for disclosing comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is
defined as the change in equity from transactions and other events and
circumstances from nonowner sources. Comprehensive income includes net
income which is adjusted for items such as unrealized gains and losses on
certain investment securities and minimum pension liability adjustments.
This statement is effective for fiscal years beginning after December 31,
1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
6
<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.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
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 holding company's banking
subsidiary, Community Bank of Tri-County has completed its first year as a
commercial bank, following its thrift charter conversion on March 29, 1997.
The Bank has been successful in the first phase of its evolution from a thrift
to a community based commercial bank. All product lines were subjected to
analysis for relevance and profitability. Strategies were implemented to
broaden the scope of services to attract local business and consumers. The Bank
received a favorable reaction from its customers and potential customers in its
market area as it redefined its niche as a locally owned and managed financial
institution.
The Bank conducts operations through eight full-service offices in its market
area consisting of Charles, St. Mary's and Calvert counties in Maryland. In
January 1998, a new, highly visible location was acquired adjacent to Southern
Maryland's only regional shopping mall and a small satellite branch was closed.
The Bank is primarily engaged in the business of obtaining funds in the form of
deposits from the general public in the Bank's market area, and investing such
funds in loans collateralized by residential and commercial real estate,
mortgage-backed securities and, to a lesser, but growing, 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 derived from activities
that are not dependent on spread based lending. Transaction charges, nondeposit
products and additional services are under review to augment the noninterest
income contribution to the net earnings of the Bank.
The Company's deposit flows and cost of funds are determined by interest rates
on competing investments and general market rates of interest. Lending
activities are affected by consumer demand, the interest rates in the market and
the level of funds available. The Company grants loans throughout the Southern
Maryland area. Its borrowers' ability to repay is, therefore, dependent upon
the economy of Southern Maryland.
SELECTED FINANCIAL DATA
Three Months Ended
March 31,
-------------------
1998 1997
Condensed Income Statement:
Interest income $3,776,260 $3,576,429
Interest expense 1,842,042 1,733,631
Net interest income 1,934,218 1,842,798
Provision for loan losses 60,000 60,000
Other income 385,793 270,973
Operating expenses 1,195,968 1,129,762
Income before income taxes 1,064,043 924,009
Income tax expense 377,000 347,700
Net income 687,043 576,309
Per Common Share:
Basic earnings $ .86 $ .67
Diluted earnings .81 .67
Book value 25.20 23.27
8
<PAGE>
RESULTS OF OPERATIONS
The Company reported net income of $687,043 and $576,309 during the three months
ended March 31, 1998 and 1997, respectively, representing a $110,734 or 19.2%
increase for the three months ended March 31, 1998 compared to the comparable
period in 1997. As described in more detail in following sections of this
analysis, significant changes in specific income and expense line items
generated this increase, rather than an overall trend applicable to all areas.
The increase in net income resulted from the $91,420 increase in net interest
income, a $114,820 increase in noninterest income, an increase of $66,206 in
noninterest expenses and a $29,300 increase in income tax expense relating to
the increased earnings.
Interest and Dividend Income
Interest and dividend income on investment securities continued a generally
declining trend during 1998 as a result of the exercise of calls imbedded in
several of the Bank's securities and the maturity of some others. The majority
of these securities were replaced with similar types of assets. However, as new
investment securities were acquired, the overall interest rate level of the
portfolio was reduced because the market dictated lower rates on these
securities at that time. The Bank has utilized a strategy of net worth
leveraging since the fourth quarter of 1996. When opportunities became
available, an investment was purchased with maturity and rate terms that could
be reasonably matched with available borrowings to generate a specified net
yield.
The Bank benefitted from the Federal Reserve Board's rate increase in March of
1997 as the adjustable rate investment and loan portfolio items repriced to
higher yields. The asset side repriced at a slightly faster rate than
liabilities, both deposits and borrowings, further increasing the net yield.
The combination of the increased net yield and the balance sheet growth
contributed to the 5.0% overall growth in net interest income for the three
months ended March 31, 1998 over the comparable period results in 1997.
Noninterest Income
Contributing to the increase in earnings were increases in loan service charges
of $26,964, or 31.5%, resulting from higher mortgage loan volume as consumers
reacted to lower market rates and increased gains on sales of loans originated
for the purpose of reselling. Overall loan originations increased $7.3 million,
or 58.9%, for the first three months of 1998 as compared to the comparable
period in 1997. The conversion to a commercial bank charter resulted in a
change in the composition of originations, with an increased proportion of
originations occurring in the commercial real estate and lines of credit loans.
In addition, the Bank has increased its activity in originating and selling
fixed rate mortgage loans, accounting for $5.8 million of the increased loan
volume. Bank mergers and residential mortgage company restructurings have left
the Bank as one of a few long-standing, stable and reputable sources of funds
for the Southern Maryland market. Commission-based mortgage loan originators
are utilized to further strengthen the Bank's presence in its market.
An effort has been made to identify the customer services provided by the Bank
which can be used to generate additional revenues. This led to the imposition
of user fees for the use of the Bank's ATMs by noncustomers. In the two months
of operations at the Bank's new facility near the mall, that location has had
its ATM volume surpass every other existing branch in individual transaction
levels. In addition, Bank customers 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 $33,610, or
29.2%, increase in service charge income in the three months ended March 31,
1998 as compared to the corresponding period in 1997.
Noninterest Expense
The Bank experienced an increase in noninterest expenses of $66,206 or 5.9% for
the three months ended March 31, 1998 as compared to the three months ended
March 31, 1997. Compensation related expenses increased $59,369, or 10.6%, as
the Bank increased its salary level commensurate with inflation and reached a
full staffing level for its new, larger branch which replaced a satellite
branch. Occupancy expense increased $15,655, or 16.6%, as the new branch
location costs are higher than the satellite branch it replaced and contractual
inflation adjustments took effect.
In connection with the conversion to a commercial bank, the level of advertising
costs incurred to publicize and promote the conversion and its ensuing benefits
to the customers and community began to be incurred.
9
<PAGE>
Income Tax Expense
Income tax expenses increased 8.4% as a result of the increase in pretax income.
Earnings Per Share
Basic earnings per share for the three months were $.86 per share or $.19 higher
than for the corresponding period in 1997.
FINANCIAL CONDITION
Assets
Total assets as of March 31, 1998 grew $4.5 million to $195.7 million from the
December 31, 1997 level of $191.2 million. This reflects a growth rate of 2.4%
as compared to 2.0% asset growth during the previous year. Increased
development of the Southern Maryland area as a bedroom community for Washington,
D.C. workers and military base expansion in the Bank's market area continued to
keep the real estate market strong. Loan growth was $4.2 million or 3.4% for
the three-month period as compared to an increase of $2.4 million or 2.2% for
the three months ended March 31, 1998. In connection with the charter
conversion, the Bank adopted a business plan that focused on more consumer and
commercial loans, and has increased its fixed rate loan origination and sale
activity in connection with the current low fixed rate loan environment.
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 in part by a $60,000 provision for loan losses during the first three
months of 1998 in accordance with management's policy described above.
The Company's holdings of investment securities remained stable since December
31, 1997. Several securities experienced early payoff since the issuer was able
to obtain better rates by calling the investment and reissuing it at the more
attractive long-term rates currently available in the market. These securities
were replaced by similar investments, though generally at a lower yield in
response to the current market conditions at the time of purchase.
The level of property and equipment balances increased $89,616 as the new
location was brought into operation and the Bank continued to upgrade its
computer equipment.
Liabilities
Liability growth was managed to reflect the change in asset levels. Deposit
growth was 2.0% for the three months ended March 31, 1998. The deposit base
provided a source of funds at a lower average rate than could be realized by
borrowing. The Bank's strategy has been to focus on attracting customers
disenfranchised by the shrinking pool of locally run banks in Southern Maryland.
Loan demands were met with the funds obtained through increased deposit account
balances and a $635,340 increase in borrowed funds and long-term debt.
Stockholders' Equity
Stockholders' equity increased $642,101 or 3.4% to $19.7 million at March 31,
1998 compared to $19.1 million at December 31, 1997. This reflects the net
income of $687,043 for the three-month period and a $70,639 increase in
accumulated other comprehensive income. Additionally, a cash distribution to
shareholders in the form of a $.125 per share cash dividend was accrued. A
shift in the components of stockholders' equity occurred as a result of the
declaration of a 4% stock dividend to shareholders; this resulted in a transfer
of $711,259 from retained earnings to stock dividend distributable. The cash
and stock dividends were distributed to shareholders on April 13, 1998.
10
<PAGE>
Book value on a per share basis, $25.20 at March 31, 1998, as compared to $24.38
at December 31, 1997, reflects a 3.4% increase. Beginning in the third quarter
of 1997, opportunities arose for the Corporation to acquire some of its own
stock. After evaluation of the offering price and consideration of alternative
uses of corporate assets, the Board approved, over the last six months, the
purchase of 17,000 shares. During the first three months of 1998, 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 balance is reflected as a reduction of stockholders'
equity.
MARKET RISK ANALYSIS
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 as well as a positive impact in given
scenarios. The portfolio is subjected to periodic modeling to test the effects
of sudden and sustained interest rate shocks on the market value and the net
interest income sensitivity. The Basle Committee on Banking Supervision has set
standard measures of portfolio market value equity and interest income
sensitivity in a shock environment of an up or down 200 basis point shift in
assumed interest rates. The impact of such a shock on the Bank's portfolio is
as follows:
March 31, 1998 March 31, 1997
--------------- ---------------
Market value of portfolio equity:
Interest rate changes - adverse scenario:
Up 200 basis points -10% -13%
Down 200 basis points -2% +8%
Interest rate sensitivity:
Interest rate changes - adverse scenario:
Up 200 basis points +8% +4%
Down 200 basis points -10% -5%
The change in percentage for the Market Value of Portfolio Equity improved at
the adverse scenario of up 200 basis points in interest rate movement, while the
equity declined at a greater rate in the down 200 basis shock. Because the net
income of the Bank and Company is derived through the interest spread of the
portfolio, the ALCO 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 that value appreciation
upon sale. The levels of change for both the market value of the portfolio
equity and the net interest income sensitivity fall within the policy benchmarks
established by the Board.
Interest rate sensitivity reflects the change in the Bank's net interest income
given assumed interest rate shifts. In the scenarios presented, the most
detrimental for the Bank is a downward movement of rates. Management feels that
a more difficult situation for the Bank to control would exist with rising
interest rates. This is due to the composition of the cost of funds and the
percentage of wholesale borrowings needed to finance the activities of the Bank.
Typically, wholesale borrowings are in large denominations and reprice quickly
to reflect sudden changes in the global market. Retail deposits typically are
in smaller amounts and are less likely to respond to shifts in rates in a short
time period. Therefore, the Bank's portfolio has been structured with an
attempt to reasonably minimize the impact from sudden and prolonged upward
shifts in interest rates.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as to
statutory capital requirements imposed under Maryland law. At March 31, 1998,
the Bank's tangible, leverage and risk-based capital was 9.87%, 9.87% and
18.22%, 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
A. Exhibits
(27) Financial Data Schedule
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 M. Ramos
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,033,371
<INT-BEARING-DEPOSITS> 4,943,964
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0
0
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</TABLE>
