<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 June 30, 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 August 4, 1998 registrant had outstanding 793,817 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 - June 30, 1998
and December 31, 1997 2
Consolidated Statements of Income and Comprehensive
Income - Three and Six Months Ended
June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 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 - 12
PART II - OTHER INFORMATION 13 - 14
Item 6 - Exhibits
SIGNATURES 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
- ------------------------------------------------------------------
June 30, December 31,
1998 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
Cash and due from banks $ 801,597 $ 650,923
Interest-bearing deposits with banks 4,990,009 5,169,830
Investment securities available for sale - at
fair value 49,989,717 52,878,583
Investment securities held to maturity - at
amortized cost 1,727,565 1,149,137
Stock in Federal Home Loan Bank and Federal
Reserve Bank - at cost 1,730,350 1,724,000
Loans held for sale 1,300,976 1,698,872
Loans receivable - net of allowance for loan
losses of $1,425,536 and
$1,370,466, respectively 126,883,692 121,866,762
Premises and equipment, net 4,311,615 4,189,222
Accrued interest receivable 1,413,553 1,276,376
Other assets 863,958 584,655
------------ ------------
TOTAL ASSETS $194,013,032 $191,188,360
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
LIABILITIES:
<S> <C> <C>
Noninterest-bearing deposits $ 7,592,449 $ 7,196,053
Interest-bearing deposits 136,828,167 135,080,024
------------ ------------
Total deposits 144,420,616 142,276,077
Other borrowed funds 11,899,079 12,523,210
Long-term debt 16,576,979 16,678,610
Accrued expenses and other liabilities 821,970 624,384
------------ ------------
Total liabilities 173,718,644 172,102,281
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized -
15,000,000 shares;
issued 810,006 and 782,866 shares, respectively 8,100 7,827
Surplus 7,269,292 6,574,162
Retained earnings 12,694,628 12,256,443
Accumulated other comprehensive income 529,353 442,032
Unearned ESOP shares (206,985) (194,385)
------------ ------------
Total stockholders' equity 20,294,388 19,086,079
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $194,013,032 $191,188,360
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- ----------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $2,905,591 $2,742,295 $5,753,207 $5,355,012
Taxable interest and dividends
on investment securities 947,644 950,732 1,842,052 1,890,834
Interest on deposits with banks 28,845 54,165 63,081 77,775
---------- ---------- ---------- ----------
Total interest income 3,882,080 3,747,192 7,658,340 7,323,621
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,410,750 1,388,152 2,833,682 2,797,799
Interest on other borrowed
funds 159,869 251,046 348,297 470,582
Interest on long-term debt 227,066 173,083 457,748 277,531
---------- ---------- ---------- ----------
Total interest expense 1,797,685 1,812,281 3,639,727 3,545,912
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,084,395 1,934,911 4,018,613 3,777,709
PROVISION FOR LOAN LOSSES 60,000 60,000 120,000 120,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,024,395 1,874,911 3,898,613 3,657,709
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Loan appraisal, credit and
miscellaneous charges 109,778 91,694 222,290 177,242
Net gains on sale of loans
held for sale 124,176 39,505 221,021 83,247
Service charges 107,466 119,407 256,086 234,417
Other 85,861 23,962 113,677 50,635
---------- ---------- ---------- ----------
Total noninterest income 427,281 274,568 813,074 545,541
---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries and employee benefits 860,284 765,377 1,481,380 1,327,104
Occupancy expense 104,210 91,426 214,064 185,625
Deposit insurance and surety
bond premium 35,564 17,882 73,858 53,000
Data processing expense 102,297 58,941 164,548 115,592
Advertising 32,028 44,654 63,876 83,509
Depreciation of furniture,
fixtures, and equipment 37,251 37,750 75,781 74,125
Other 302,548 323,418 596,643 630,255
---------- ---------- ---------- ----------
Total noninterest expenses 1,474,182 1,339,448 2,670,150 2,469,210
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 977,494 810,031 2,041,537 1,734,040
INCOME TAXES 347,000 336,700 724,000 684,400
---------- ---------- ---------- ----------
NET INCOME 630,494 473,331 1,317,537 1,049,640
OTHER COMPREHENSIVE INCOME, NET
OF TAX - Net unrealized holding
gains arising during the period 16,682 195,265 87,321 88,925
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME $ 647,176 $ 668,596 $1,404,858 $1,138,565
========== ========== ========== ==========
EARNINGS PER SHARE/(1)/
(Note 2):
Basic .79 .54 1.64 1.21
Diluted .73 .54 1.54 1.21
</TABLE>
/(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
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,317,537 $ 1,049,640
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 120,000 120,000
Depreciation and amortization 123,568 144,325
Net amortization of premium/discount on
investment securities (12,953) (40,352)
Deferred income tax benefit (109,000) (3,600)
Increase in interest receivable (137,177) (117,928)
Increase in deferred loan fees 13,184 46,574
Increase (decrease) in accounts payable,
accrued expenses, and other liabilities 160,657 (301,778)
Increase in other assets (188,315) (64,617)
Gain on sale of premises and equipment (7,051) -
Origination of loans held for sale (12,388,104) (3,671,991)
Gain on sales of loans held for sale (221,021) (83,247)
Proceeds from sale of loans held for sale 13,007,021 3,729,232
Gain on sale of foreclosed real estate (63,436) -
------------ ------------
Net cash provided by operating activities 1,614,910 806,258
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits with
banks 179,821 1,032,748
Purchase of investment securities available for
sale (23,898,455) (16,769,183)
Proceeds from sale, redemption or principal
payments of investment securities available
for sale 26,940,182 13,305,162
Purchase of investment securities held to maturity (2,018,147) -
Proceeds from maturities or principal payments
of investment securities held to maturity 1,442,073 326,854
Purchase of FHLB and Federal Reserve Bank stock (6,350) (224,000)
Loans originated or acquired (28,407,285) (25,182,040)
Principal collected on loans 22,493,765 15,370,130
Purchase of premises and equipment (238,062) (235,722)
Proceeds from sales of premises and equipment 7,051 -
Proceeds from disposition of foreclosed real
estate 826,842 155,135
------------ ------------
Net cash used in investing activities (2,678,565) (12,220,916)
------------ ------------
</TABLE>
4
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------
1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $2,144,539 $ 4,644,476
Proceeds from long-term borrowings - 11,400,000
Payments of long-term borrowings (109,530) (97,097)
Net decrease in other borrowed funds (624,131) (4,962,698)
Exercise of stock options 1,058 45,685
Net change in unearned ESOP shares (12,600) -
Redemption of common stock (82,600) -
Dividends paid (102,407) (81,008)
---------- -----------
Net cash provided by financing activities 1,214,329 10,949,358
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 150,674 (465,300)
CASH AND CASH EQUIVALENTS - JANUARY 1 650,923 1,111,894
---------- -----------
CASH AND CASH EQUIVALENTS - JUNE 30 $ 801,597 $ 646,594
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the six months for:
Interest $3,679,547 $ 3,498,845
========== ===========
Income taxes $872,500 $820,000
======== ========
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 $694,384 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 six months ended June 30, 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:
Six Months Ended
June 30,
----------------
1998 1997
------- -------
Basic 800,942 864,532
Diluted 853,311 867,409
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 operates under the Federal Reserve's Bank
Holding Company regulations. The consolidated financial statements include the
accounts of Tri-County Financial Corporation and its wholly owned subsidiary,
Community Bank of Tri-County ("the Bank") and the bank's wholly owned
subsidiary, Tri-County Federal Finance One, collectively referred to as "the
Company". Community Bank of Tri-County is operating as a commercial bank for
its second year following its thrift charter conversion on March 29, 1997.
The Bank has been successful in 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 transactional accounts of local business as well as consumers. The Bank
received a favorable reaction from its customers and potential customers in its
market area as well as national recognition by Veribanc, an independent bank
rating service, as a "Blue Ribbon" 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. 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 as well as certain
wholesale borrowings from its correspondents and capital markets, and investing
such funds in loans collateralized by residential and commercial real estate,
mortgage-backed securities and related investments, and, to a lesser, but
growing, extent, various types of consumer and other loans, 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 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
Six Months Ended
June 30,
---------------------------
1998 1997
Condensed Income Statement:
Interest income $7,658,340 $7,323,621
Interest expense 3,639,727 3,545,912
Net interest income 4,018,613 3,777,709
Provision for loan losses 120,000 120,000
Noninterest income 813,074 545,541
Noninterest expense 2,670,150 2,469,210
Income before income taxes 2,041,537 1,734,040
Income tax expense 724,000 684,400
Net income 1,317,537 1,049,640
Per Common Share:
Basic earnings $ 1.64 $ 1.21
Diluted earnings 1.54 1.21
Book value 25.05 24.38
8
<PAGE>
RESULTS OF OPERATIONS
The Company reported net income of $1,317,537 and $1,049,640 during the six
months ended June 30, 1998 and 1997, respectively, representing a $267,897 or
25.5% increase for the six months ended June 30, 1998 compared to the same
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 for the six months ended June 30, 1998 resulted from
the $240,904 increase in net interest income, a $267,533 increase in noninterest
income, an increase of $200,940 in noninterest expenses and a $39,600 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 are replaced with similar types of assets. However, as new
investment securities are acquired, the overall interest rate level of the
portfolio is reduced because the market dictates lower rates on these securities
at that time. The Bank has utilized a strategy of leveraging since the fourth
quarter of 1996. When opportunities become available, an investment is
purchased with maturity and rate terms that can be reasonably matched with
available borrowings to generate a specified net yield.
The Bank continued to benefit 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 6.4% overall growth in net interest income for the six months
ended June 30, 1998 over the comparable period results in 1997.
Noninterest Income
Contributing to the increase in earnings were increases in noninterest income of
$267,533 resulting from a heavy volume of mortgage originations as consumers
reacted to lower market rates and increased gains on sales of loans originated
for the purpose of resale. Loan originations for the six months of 1998
increased $11.9 million, or 41%, over the level in the same 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 line of credit loans. In addition, the Bank has
increased its activity in originating and selling fixed rate mortgage loans,
accounting for $8.7 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.
During the second quarter of 1998, a participation with another lender that was
in default was sold and the Bank's portion of the proceeds were received. The
sale resulted in the recovery of all outstanding fees and interest as well as
generating a profit of approximately $64,000.
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 current
period 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. The Bank has been actively seeking lucrative outlets for installation
of its ATM machines throughout its market with the recent installation of three
stand alone ATMs at convenience food markets. In addition, Bank customers have
been utilizing certain negotiable order of withdrawal account features which
have a related service fee while the conversion to a commercial bank has
generated a small but increasing commercial deposit account base.
9
<PAGE>
Noninterest Expense
The Bank experienced an increase in noninterest expenses of $200,940 or 8% for
the six months ended June 30, 1998 compared to the six months ended June 30,
1997. Compensation related expenses increased $154,276, or 11.6%, as the Bank
increased its salary level commensurate with market pressures for professional
staff and reached a full staffing level for its new, larger branch which
replaced a satellite branch. Data processing expense increased by $48,956 or
42% over the comparable period in 1997. This reflects the ongoing cost
associated with the Bank's efforts to implement its Year 2000 century date
compliance.
In connection with the 1997 conversion to a commercial bank, substantial
advertising costs were incurred to publicize and promote the conversion and its
ensuing benefits to the customers and community. Advertising costs have
returned to a more normal level for a bank of our size, reflecting a $19,633, or
24%, decrease in costs incurred in 1998 compared to those incurred in 1997.
Income Tax Expense
Income tax expenses increased 6% as a result of the increase in pretax income.
Earnings Per Share
Basic earnings per share for the six months were $1.64 per share or $.43 higher
than for the corresponding period in 1997.
FINANCIAL CONDITION
Assets
Total assets as of June 30, 1998 grew $2.8 million to $194 million from the
December 31, 1997 level of $191.2 million. This reflects a growth rate of 1.5%
as compared to 6.6% 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 $4.6 million or 3.7% for
the six-month period as compared to an increase of $9.5 million or 8.5% for the
six months ended June 30, 1997. In connection with the charter conversion, the
Bank adopted a business plan that focused on more consumer and commercial loans,
and increased its fixed rate loan origination and sale activity in connection
with the low fixed rate loan environment. Loan demand has slowed in the latter
portion of the second quarter of 1998.
The allowance for loan losses was maintained at a level believed by management
to be adequate to absorb potential losses consistent with the risk profile of
the loan portfolio. Management's determination of the adequacy of the allowance
is based on a periodic evaluation of the portfolio with consideration given to
the overall loss experience; current economic conditions; volume, growth and
composition of the loan portfolio; financial condition of the borrowers; and
other relevant factors that, in management's judgment, warrant recognition in
providing an adequate allowance. The Bank's allowance for loan losses was
increased $120,000 during the first six months of 1998 in accordance with
management's policy described above.
The Company's holdings of investment securities declined $2.9 million, or 5.5%,
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.
When possible, the funds received from payoff of these securities were used to
acquire similar investments, though generally at a lower yield in response to
the current market conditions at the time of purchase. Excess funds were used
to curtail debt.
The level of property and equipment balances increased $122,393 as the new
location was brought into operation and the Bank continued to upgrade its
computer equipment.
10
<PAGE>
Liabilities
Liability growth was managed to reflect the change in asset levels. Deposit
growth was 1.5% for the six months ended June 30, 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.
Stockholders' Equity
Stockholders' equity increased $1.2 million or 6.3% to $20.3 million at June 30,
1998 compared to $19.1 million at December 31, 1997. This reflects the net
income of $1,317,537 for the six-month period and a $87,321 increase in
accumulated other comprehensive income. Reductions in equity occurred as a
result of a $.125 per share cash dividend paid to shareholders and the use of
$82,600 to purchase treasury shares in the open market. 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 $694,384 from
retained earnings to common stock and surplus. The cash and stock dividends
were distributed to shareholders on April 13, 1998.
Book value on a per share basis, $25.05 at June 30, 1998, as compared to $24.38
at December 31, 1997, reflects a 2.7% 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 twelve months, the
purchase of 20,850 shares. During the first six months of 1998, the Bank's
Employee Stock Ownership Plan (ESOP) acquired additional shares, utilizing the
line of credit available from the Corporation when necessary. 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.
In its capital management strategy, the Board has approved certain purchases,
for retirement, of shares offered for sale by its stockholders. For the six
months ended June 30, 1998, the Corporation purchased 3,850 shares for $82,600;
during July 1998, an additional 16,189 shares were purchased for $391,036. The
cash for these purchases was provided to the Company through a $750,000 cash
dividend from the Bank.
INTEREST RATE RISK MATTERS
The market risk of the Bank is managed through the Board's Asset and Liability
Committee (ALCO). Together with the Bank's management, the committee reviews
the sensitivity of the market value of the portfolio equity and interest rate
sensitivity of net income. The changes in the market value of portfolio equity,
as well as the interest income sensitivity, are caused by shifts in the market
rates of interest and can cause a negative or a positive impact in given
scenarios. The portfolio is subjected to periodic modeling to test the effects
of sudden and sustained interest rate shocks on the market value and the net
interest income sensitivity. The Basle Committee on Banking Supervision has set
standard measures of portfolio market value equity and interest income
sensitivity in a shock environment of an up or down 200 basis point shift in
assumed interest rates. The impact of such a shock on the Bank's portfolio is
as follows:
June 30, 1998 June 30, 1997
------------- -------------
Market value of portfolio equity:
Interest rate changes:
Up 200 basis points -7% -6%
Down 200 basis points +3% -5%
Interest rate sensitivity:
Interest rate changes:
Up 200 basis points +7% +6%
Down 200 basis points -8% -8%
11
<PAGE>
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 interest rates. In the
current flat yield curve environment, the risk of downward movement appears to
be the most probable because, historically, flat yield curves have preceded five
of the last six recessions. The ALCO committee has taken several measures to
mitigate the effects of this situation by lengthening the duration of the newly
acquired investments and shortening the duration of the underlying liabilities
to reflect the dynamics of the market. The changes in the market value as well
as the net interest income are well within the boundaries established by the
Board.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as to
statutory capital requirements imposed under Maryland law. At June 30, 1998,
the Bank's tangible, leverage and risk-based capital was 9.98%, 9.98% and
17.70%, 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 6 - Exhibits
A. Exhibits
(27) Financial Data Schedule
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: By:
-------------------- -------------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: By:
-------------------- -------------------------------------
Eileen M. Ramos
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 801,597
<INT-BEARING-DEPOSITS> 4,990,009
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,989,717
<INVESTMENTS-CARRYING> 1,727,565
<INVESTMENTS-MARKET> 1,756,458
<LOANS> 128,184,668
<ALLOWANCE> 1,425,536
<TOTAL-ASSETS> 194,013,032
<DEPOSITS> 144,420,616
<SHORT-TERM> 11,899,079
<LIABILITIES-OTHER> 821,970
<LONG-TERM> 16,576,979
0
0
<COMMON> 8,100
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<TOTAL-LIABILITIES-AND-EQUITY> 194,013,032
<INTEREST-LOAN> 5,753,207
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<INTEREST-OTHER> 63,081
<INTEREST-TOTAL> 7,658,340
<INTEREST-DEPOSIT> 2,833,682
<INTEREST-EXPENSE> 806,045
<INTEREST-INCOME-NET> 4,018,613
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,670,150
<INCOME-PRETAX> 2,041,537
<INCOME-PRE-EXTRAORDINARY> 2,041,537
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<CHANGES> 0
<NET-INCOME> 1,317,537
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.54
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