<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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission File Number 0-18279
----------------------------------------------
TRI-COUNTY FINANCIAL CORPORATION
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1652138
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
- -------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(301) 645-5601
---------------------------------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
As of May 6, 1999 registrant had outstanding 784,879 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, 1999
and December 31, 1998 2
Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 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, 1999 AND DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
ASSETS
<S> <C> <C>
Cash and due from banks $ 548,843 $ 906,658
Interest-bearing deposits with banks 4,374,159 4,152,816
Investment securities available for sale - at fair value 57,596,990 55,976,606
Investment securities held to maturity - at amortized cost 2,763,980 2,139,069
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 2,012,700 2,005,350
Loans held for sale 1,247,648 2,266,697
Loans receivable - net of allowance for loan losses
of $1,602,649 and $1,540,551, respectively 134,237,638 132,645,936
Premises and equipment, net 4,414,836 4,316,207
Accrued interest receivable 1,423,932 1,486,776
Other assets 1,146,560 1,123,675
------------ ------------
TOTAL ASSETS $209,767,286 $207,019,790
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 10,049,183 $ 9,750,153
Interest-bearing deposits 142,183,290 142,065,211
------------ ------------
Total deposits 152,232,473 151,815,364
Other borrowed funds 4,152,486 16,937,882
Long-term debt 31,437,480 16,496,450
Accrued expenses and other liabilities 712,757 638,128
------------ ------------
Total liabilities 188,535,196 185,887,824
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 784,879 and 789,334 shares, respectively 7,849 7,893
Surplus 7,341,948 7,309,901
Retained earnings 13,630,947 13,372,441
Accumulated other comprehensive income 427,911 648,614
Unearned ESOP shares (176,565) (206,883)
------------ ------------
Total stockholders' equity 21,232,090 21,131,966
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $209,767,286 $207,019,790
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $2,967,932 $2,847,616
Taxable interest and dividends on investment securities 928,354 894,408
Interest on deposits with banks 21,276 34,236
---------- ----------
Total interest income 3,917,562 3,776,260
---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,366,640 1,422,932
Interest on other borrowed funds 132,111 188,428
Interest on long-term debt 270,576 230,682
---------- ----------
Total interest expense 1,769,327 1,842,042
---------- ----------
NET INTEREST INCOME 2,148,235 1,934,218
PROVISION FOR LOAN LOSSES 60,000 60,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,088,235 1,874,218
---------- ----------
NONINTEREST INCOME:
Loss on sale of investments (605) -
Loan appraisal, credit and miscellaneous charges 60,627 72,735
Net gains on sale of loans held for sale 102,279 96,845
Service charges 166,785 148,620
Other 16,056 27,816
---------- ----------
Total noninterest income 345,142 346,016
---------- ----------
NONINTEREST EXPENSES:
Salaries and employee benefits 740,080 621,096
Occupancy expense 124,148 109,854
Deposit insurance and surety bond premium 35,883 38,294
Data processing expense 72,418 62,251
Advertising 41,323 31,848
Depreciation of furniture, fixtures, and equipment 70,849 38,530
Other 245,267 254,318
---------- ----------
Total noninterest expenses 1,329,968 1,156,191
---------- ----------
INCOME BEFORE INCOME TAXES 1,103,409 1,064,043
INCOME TAXES 420,000 377,000
---------- ----------
NET INCOME 683,409 687,043
OTHER COMPREHENSIVE INCOME, NET OF TAX -
Net unrealized holding (losses) gains arising during the period (220,703) 70,639
---------- ----------
COMPREHENSIVE INCOME $ 462,706 $ 757,682
========== ==========
EARNINGS PER SHARE (Note 2):
Basic .87 .86
Diluted .81 .81
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 683,409 $ 687,043
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 60,000 60,000
Depreciation and amortization 103,450 66,319
Net amortization of premium/discount on
investment securities (30,782) (8,819)
Deferred income tax benefit (20,000) (95,000)
Decrease (increase) in accrued interest receivable 62,844 (46,568)
(Decrease) increase in deferred loan fees (54,212) 10,744
Increase in accounts payable, accrued expenses,
and other liabilities 74,781 402,924
Increase in other assets (22,885) (117,698)
Gain on sale of premises and equipment - (7,051)
Loss on sale of investment securities 605 -
Origination of loans held for sale (3,824,376) (7,279,429)
Gain on sales of loans held for sale (102,279) (96,845)
Proceeds from sale of loans held for sale 4,945,704 5,322,845
------------ ------------
Net cash provided (used) by operating activities 1,876,259 (1,101,535)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits with banks (221,343) 225,866
Purchase of investment securities available for sale (21,832,495) (12,242,206)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 19,881,710 14,160,374
Purchase of investment securities held to maturity (970,436) (2,000,260)
Proceeds from maturities or principal payments
of investment securities held to maturity 346,535 168,805
Loans originated or acquired (14,059,141) (12,341,919)
Principal collected on loans 12,461,651 10,144,101
Purchase of premises and equipment (202,079) (148,037)
Proceeds from sales of premises and equipment - 7,051
Purchase of FHLB and Federal Reserve stock (7,350) -
------------ ------------
Net cash used in investing activities (4,602,948) (2,026,225)
------------ ------------
</TABLE>
4
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 417,109 $ 2,893,582
Proceeds from long-term borrowings 15,000,000 -
Payments of long-term borrowings (58,970) (79,514)
Net increase in other borrowed funds (12,785,381) 706,955
Exercise of stock options 32,088 1,785
Net change in unearned ESOP shares 30,318 (12,600)
Dividends paid (90) -
Redemption of common stock (266,200) -
------------ ------------
Net cash provided by financing activities 2,368,874 3,510,208
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (357,815) 382,448
CASH AND CASH EQUIVALENTS - JANUARY 1 906,658 650,923
------------ ------------
CASH AND CASH EQUIVALENTS - MARCH 31 $ 548,843 $ 1,033,371
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the three months for:
Interest $ 1,760,279 $ 1,828,076
============ ============
Income taxes $ 373,750 $ -
============ ============
</TABLE>
Tri-County Financial Corporation declared a 5% stock dividend payable April 13,
1998 to shareholders of record on March 13, 1998. Retained earnings in the
amount of $711,259 in 1998 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, 1999 are not necessarily indicative of
the results of operations to be expected for the remainder of the year.
Certain previously reported amounts have been restated to conform to the
1999 presentation.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31,
1998.
2. EARNINGS PER SHARE
Basic and diluted earnings per share, as adjusted for the stock dividend,
have been computed based on weighted-average common and common equivalent
shares outstanding as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Basic 786,159 803,342
Diluted 838,952 853,472
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
This document contains forward-looking statements, including discussions of Tri-
county Financial Corporation's (the "Company's") goals, strategies and expected
outcomes; estimates of risks and future costs; and reports of the Company's
ability to achieve its financial and other goals. These forward-looking
statements are subject to significant known and unknown risks and uncertainties
because they are based upon future economic conditions, particularly interest
rates, statements by providers of data processing services and equipment and
government agencies in connection with year 2000 compliance, competition within
and without the banking industry, changes in laws and regulations applicable to
the Company and various other matters. Because of these uncertainties, there can
be no assurance that actual results, performance or achievements of the Company
will not differ materially from any future results, performance or achievements
expressed or implied by these forward-looking statements.
GENERAL
Tri-County Financial Corporation operates under the Federal Reserve's Bank
Holding Company regulations. The consolidated financial statements include the
accounts of Tri-County Financial Corporation and its wholly owned subsidiary,
Community Bank of Tri-County ("the Bank") and the Bank's wholly owned
subsidiary, Tri-County Federal Finance One, collectively referred to as "the
Company". Community Bank of Tri-County has completed its second year of
operations as a commercial bank, following its thrift charter conversion on
March 29, 1997.
In its business plan for the commercial bank, specific product lines,
particularly commercial and consumer loan products, were targeted for
concentrated efforts to bring the balances to levels normally found in
established commercial banks. Growth in these asset categories has exceeded
internal goals set in the plan. Strategies to broaden the scope of services to
attract transactional accounts of local business as well as consumers have
successfully gained the attention of the community and resulted in continuous
growth in these low cost funding sources.
In its efforts to expand its product and service offerings, the Bank now offers
investment and retirement planning services through its affiliation with UVEST
Investment Services and an investment representative based in the home office
branch. While this investment division is anticipated to contribute a relatively
small amount of net earnings to the Bank, the benefit to our customers is
expected to be great, enabling them to have a "one stop" source for all their
investment and borrowing needs.
The Bank conducts operations through eight full-service offices in its market
area consisting of Charles, St. Mary's and Calvert counties in Maryland.
Construction has begun on its newest "microbranch" location as part of a mini-
mart on a key homeward bound commuter route in Charles County. The Bank
continues to capitalize on its niche in community based banking activities.
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. 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, non-
deposit products and additional services are under continuous consideration to
augment the non-interest income contribution to the net earnings of the Bank.
The Company's deposit flows and cost of funds are determined by interest rates
on competing investments and general market rates of interest. Lending
activities are affected by consumer demand, the interest rates in the market and
the level of funds available. The Company grants loans throughout the Southern
Maryland area. Its borrowers' ability to repay is, therefore, dependent upon the
economy of Southern Maryland.
7
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
<S> <C> <C>
Condensed Income Statement
Interest Income $3,917,562 $3,776,260
Interest Expense 1,769,327 1,842,042
Net Interest Income 2,148,235 1,934,218
Provision for Loan Losses 60,000 60,000
Noninterest Income 345,142 346,016
Noninterest Expenses 1,329,968 1,156,191
Income Before Income Taxes 1,103,409 1,064,043
Income Tax Expense 420,000 377,000
Net Income 683,409 687,043
Per Common Share
Basic Earnings $ .87 $ .86
Diluted Earnings .81 .81
Book Value 27.05 25.20
</TABLE>
FINANCIAL CONDITION
Assets
Total assets as of March 31, 1999 grew $2.7 million to $209.8 million from the
December 31, 1998 level of $207.0 million. This reflects a growth rate of 1.3%
as compared to 2.0% asset growth during the same period in 1998. 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 continued to
keep the real estate market strong. Loan levels were stable despite high
refinancing activity; the Bank was able to retain its share by offering
competitive products. With its increased focus on consumer and commercial loans,
the Bank has continued to attract these customers in increasing numbers,
resulting in change in the portfolio mix. At March 31, 1999, consumer and
commercial loans comprised 28.4% of the loan portfolio, compared to 25.0% at
December 31, 1998.
The allowance for loan losses was maintained at a level believed by management
to be adequate to absorb potential losses consistent with the risk profile of
the loan portfolio. Management's determination of the adequacy of the allowance
is based on 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 $60,000 during the first quarter of 1999 in accordance with
management's policy described above.
The Company's holdings of investment securities increased $2.5 million, or 3.8%,
since December 31, 1998. The Bank continued to experience early payoffs in its
security portfolio as issuers were able to obtain better rates by calling the
investments and reissuing them at more attractive long-term rates currently
available in the market. For securities with mortgage loans as the underlying
collateral, the borrowers refinanced earlier than was projected at the purchase
of the security because they were able to obtain lower rates. 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. With returns in a declining trend, the Bank
moved to lock in current rates before further declines. These purchases were
funded with short-term floating rate borrowings. Rate movements are closely
monitored so long-term fixed rate arrangements can be made before the declining
trend reverses.
The level of property and equipment balances increased $98,629 as branch and
administrative office renovations were made and the Bank continued to upgrade
its computer equipment.
8
<PAGE>
Liabilities
Liability growth was managed to reflect the change in asset levels. Deposit
balances declined by .4% for the three months ended March 31, 1999. The Bank's
strategy has been to focus on attracting customers disenfranchised by the
shrinking pool of locally run banks in Southern Maryland. Rate competition has
been fierce, however, and recent stock market returns have caused some customers
to change their deposit philosophy and move their money to uninsured investment
vehicles. Loan demands were met with the funds obtained through borrowed funds.
Stockholders' Equity
Stockholders' equity increased $100,000 or .47% to $21.2 million at March 31,
1999 compared to $21.1 million at December 31, 1998. This reflects the net
income of $683,000 for the three month period and a $220,000 decrease in
accumulated other comprehensive income. Reductions in equity occurred as a
result of a $.20 per share cash dividend paid to shareholders and the use of
$266,000 to purchase shares in the open market and retire them. The cash
dividends were distributed to shareholders on April 15, 1999.
Book value on a per share basis, $27.05 at March 31, 1999, as compared to $26.77
at December 31, 1998, reflects a 1.0% increase, low because of the cash
dividend, the acquisition of treasury shares as well as additional purchases by
the Bank's Employee Stock Ownership Plan (ESOP). The ESOP acquired 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.
As part of its capital management strategy, the Board has approved certain
purchases, for retirement, of shares offered for sale by its stockholders. For
the three months ended March 31, 1999, the Corporation purchased 10,00 shares
for $266,200 The cash for these purchases was provided to the Company through a
$750,000 cash dividend from the Bank in 1998. Additional stock acquisitions and
retirements will be considered in the future; a $1,000,000 cash dividend from
the Bank in 1999 will provide the cash necessary for such purchases.
RESULTS OF OPERATIONS
The Company's net income for the three months ended March 31, 1999 decreased
$3,634 or .5% from 1998's levels. As described in more detail in following
sections of this analysis, significant changes in specific income and expense
line items generated this small decrease, rather than an overall trend
applicable to all areas. The decrease in net income for the three months ended
March 31, 1999 resulted from a $214,017 increase in net interest income, an $874
decrease in noninterest income, an increase of $173,777 in noninterest expenses
and a $43,000 increase in income tax expense.
Interest and Dividend Income
Interest and dividend income on investment securities increased $33,946 or 3.8%
in the first quarter of 1999 compared to the first quarter of 1998. Given that
the balances invested increased $6.3 million or 11.6%, a much larger increase in
related income might be expected. However, the interest rates available in the
market have been steadily declining, and as investments mature or pay off, they
are replaced with lower yielding securities, resulting in lower overall yield on
the portfolio. The Bank has utilized a strategy of leveraging since the fourth
quarter of 1996. When opportunities become available, an investment is purchased
with maturity and rate terms that can be reasonably matched with available
borrowings to generate a specified net yield. Alternatively, there have been
opportunities to purchase relatively short-lived securities, those with
projected lives of a year or less. These have often been funded with borrowings
that reprice daily because short-term borrowing rates have been very low. In
such cases, the daily rate borrowing level is monitored closely so that a
reversal of the low rate borrowing will be identified early and longer term
financing can be secured.
The portfolio net spread, the difference between interest earned on all
interest-earning assets and interest paid on all interest-bearing liabilities,
has been maintained at a very level rate over the last five years. The variance
between the high of 3.72% in 1995 and the low of 3.35% in March 1994 is only 37
basis points or .37%; the variance over the last three years is only 20 basis
points or .20%. The 11.1% overall growth in net interest income for the three
months ended March 31, 1999 over the comparable period results in 1998 is,
therefore, attributable to the balance sheet growth.
9
<PAGE>
Noninterest Income
In 1998, the Bank experienced 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. This high volume was maintained through
the first quarter of 1999, so there was little fluctuation in loan origination-
related noninterest earnings.
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 non-customers. The Bank continues to
benefit from the imposition of these usage fees and has been actively seeking
lucrative outlets for installation of its ATM machines throughout its market. 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 continues to generate a small but increasing
commercial deposit account base.
Noninterest Expense
The Bank experienced an increase in noninterest expenses of $173,777 or 15.03%
for the three months ended March 31, 1999 compared to the three months ended
March 31, 1998. Compensation related expenses increased $118,984, or 19.16%, as
the Bank has created new positions to meet the needs of a commercial bank and
its customers. Occupancy costs increased $14,294 or 13.01% as a result of adding
the branch location near the St. Charles mall and expanding its Dunkirk branch
facility. Data processing expense increased by $10,167 or 16.33% over the
comparable period in 1998. This reflects the ongoing cost associated with the
Bank's efforts to implement its Year 2000 century date compliance as well as
increased processing costs connected with increased commercial account volume.
Depreciation expense increased $32,319 or 84% due to high levels of fixed asset
acquisitions in connection with branch expansion, administrative office
expansion and renovation and data processing equipment.
Earnings Per Share
Primary earnings per share for the three months were $.87 per share or $.01
higher than for the corresponding period in 1998.
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:
<TABLE>
<CAPTION>
MARCH 31,1999 MARCH 31, 1998
-------------- ---------------
<S> <C> <C>
MARKET VALUE OF PORTFOLIO EQUITY:
Interest rate changes:
Up 200 basis points -11% -10%
Down 200 basis points +3% -2%
INTEREST RATE SENSITIVITY:
Interest rate changes:
Up 200 basis points +3% +8%
Down 200 basis points -1% -10%
</TABLE>
10
<PAGE>
The change in percentage for the Market Value of Portfolio Equity declined
slightly at the adverse scenario of up 200 basis points in interest rate
movement, while the equity value improved in the down 200 basis shock. This
reflects the impact of multi-year flat yield curves at lower rate levels. As
prepayments have occurred, reinvestment of the proceeds was at lower yields. An
immediate market rate increase would make those new investments less valuable.
Because the net income of the Bank and Company is derived through the interest
spread of the portfolio, the Asset/Liability Committee is less concerned with
the shock of interest rates on the market value than it is on the interest rate
sensitivity because the assets are employed for their income production rather
than value appreciation upon sale. The levels of change for both the market
value of the portfolio and the net interest income sensitivity fall within the
policy benchmarks established by the Board.
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 an upward movement of interest rates. Neither
scenario, however, generates a severe impact to the Bank's earnings.
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 impace
from sudden and prolonged upward shifts in interest rates.
2000 READINESS
The Bank's management and Board of Directors has been monitoring the
problems created by the year 2000 (Y2K) and its effect on data processing
systems. The Bank's capitalized cost of new technology and software over the
last three years has exceeded $520,000 and additional costs in the current and
next year could reach $100,000. All software systems have been upgraded. These
software costs were expensed during the years as a part of ongoing data
operations expense. The current technology utilized by the Bank and its eight
locations has been subjected to periodic reviews by its regulators. Testing of
the systems with third party providers has been ongoing through 1998 and early
1999. The Board is closely involved with this project and is aware that third
party providers of data processing services are conducting their own Y2K
projects to ensure that their users have adequate coverage of the problem.
However, the Board also realizes that third party providers' compliance is
largely out of the Bank's control and is monitoring their progress. Because of
the Company's reliance on third party data processing services, it does not
anticipate any material expenditures associated with the Y2K issue. There can be
no assurance that the Bank and its third party providers will be successful in
making all necessary changes to avoid computer system failure related to the
year 2000.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as
statutory capital requirements imposed under Maryland law. At March 31, 1999,
the Bank's tangible, leverage and risk-based capital was 9.5%, 10.4% and 17.6%,
respectively. These levels are well in excess of the required 4.0%, 4.0% 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: May 14, 1999 By: /s/ Michael L. Middleton
------------------- -------------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: May 14, 1999 By: /s/ Eileen M. Ramos
------------------- -------------------------------------
Eileen M. Ramos
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 548,843
<INT-BEARING-DEPOSITS> 4,374,159
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,596,990
<INVESTMENTS-CARRYING> 2,763,980
<INVESTMENTS-MARKET> 2,766,002
<LOANS> 135,485,286
<ALLOWANCE> 1,602,649
<TOTAL-ASSETS> 209,767,286
<DEPOSITS> 152,232,473
<SHORT-TERM> 4,152,486
<LIABILITIES-OTHER> 712,757
<LONG-TERM> 31,437,480
0
0
<COMMON> 7,849
<OTHER-SE> 21,224,241
<TOTAL-LIABILITIES-AND-EQUITY> 209,767,286
<INTEREST-LOAN> 2,967,932
<INTEREST-INVEST> 928,354
<INTEREST-OTHER> 21,276
<INTEREST-TOTAL> 3,917,562
<INTEREST-DEPOSIT> 1,366,640
<INTEREST-EXPENSE> 402,687
<INTEREST-INCOME-NET> 2,148,235
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> (605)
<EXPENSE-OTHER> 1,329,968
<INCOME-PRETAX> 1,103,409
<INCOME-PRE-EXTRAORDINARY> 1,103,409
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 683,409
<EPS-PRIMARY> .87
<EPS-DILUTED> .81
<YIELD-ACTUAL> 4.19
<LOANS-NON> 500,425
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,540,551
<CHARGE-OFFS> 0
<RECOVERIES> 2,098
<ALLOWANCE-CLOSE> 1,602,649
<ALLOWANCE-DOMESTIC> 1,602,649
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
