<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Mark One FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[_] TRANSITIONAL 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
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TRI-COUNTY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-1652138
- -------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
- ---------------------------------------- --------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (301) 645-5601
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (l) 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of March 22, 1999, there were issued and outstanding 793,563 shares of
the registrant's common stock.
The registrant's voting stock is not regularly and actively traded in any
established market and there are no regularly quoted bid and asked prices for
the registrant's common stock. The registrant believes the approximate trading
price for the stock to be $24.31 per share for an approximate aggregate market
value of voting stock held by non-affiliates of the registrant of $14.3 million.
For purposes of this calculation, the shares held by directors and executive
officers of the registrant and by any stockholder beneficially owning more than
5% of the registrant's outstanding common stock are deemed to be shares held by
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998. (Parts I and II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders.
(Part III)
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PART I
Item 1. Business
The Corporation. Tri-County Financial Corporation (the "Corporation") is a
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Maryland corporation that serves as the holding company of Community Bank of
Tri-County ("Community Bank" or the "Bank"). The Corporation engages in no
significant activity other than holding the stock of the Bank and operating the
business of a Maryland chartered commercial bank through the Bank. Accordingly,
the information set forth in this report, including financial statements and
related data, relates primarily to the Bank and its subsidiary.
The Corporation's executive offices are located at 3035 Leonardtown Road,
Waldorf, Maryland. Its telephone number is (301) 645-5601.
The Bank. The Bank is a Maryland chartered commercial bank which conducts
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full service commercial banking operations throughout the southern Maryland
area. The primary financial services provided include mortgage loans on
residential, construction and commercial real estate and various types of
consumer lending, as well as offering demand deposits, savings products and safe
deposit boxes. Since its conversion from a federally chartered savings and loan
association to a state commercial bank in March of 1997, the Bank's business
plan has focused on expanding its business and consumer loan portfolios and
increasing the level of its transactional accounts and business deposits.
In 1998, the Bank entered into an agreement with UVEST Financial Services
Group, Inc. under which the Bank offers investment in various financial products
to Bank customers. Under this arrangement, a dual employee of the brokerage
service and the Bank sells various investments, including mutual funds,
annuities and stocks. The Bank receives a share of the commissions paid by the
fund or insurance agency when the customer makes a purchase. The Bank began the
UVEST arrangement in late 1998 and, consequently, the arrangement did not
generate any income for the Bank in fiscal 1998.
In 1997, the Bank entered into an agreement with a local insurance company
under which the Bank sells insurance as agent to its customers and others from
its branch office located in Bryans Road, Maryland. Under this arrangement, a
dual employee of the insurance company and the Bank sells various insurance
products including automobile insurance, life and casualty, health and property
and credit coverage. The Bank and the insurance company share commission income
attributable to these activities. The program did not generate any significant
income for the Bank in fiscal 1998.
Lending and Investment Activities
General. The principal lending activity of the Bank is the origination of
single family conventional mortgage loans (i.e., loans that are neither insured
nor partially guaranteed by government agencies). To a lesser extent, the Bank
also makes second mortgage loans, home equity loans, construction loans, and
loans secured by multi-family dwellings. Since its conversion to a commercial
bank, the Bank has put more emphasis on attracting and servicing consumer and
commercial customers.
The Bank offers real estate loans with both fixed and adjustable rates. The
Bank's fixed-rate real estate loans may be packaged for resale in the secondary
market or securitized for outside borrowings. The Bank has also purchased
mortgage-backed securities.
Geographic Lending Area. The Bank is authorized to make real estate loans
throughout the United States, provided the Bank continues to meet the provisions
of the Community Reinvestment Act to serve the communities in which it operates
offices. The Bank's lending area consists of Charles, Calvert and St. Mary's
counties in Maryland.
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Residential Real Estate Loans. The primary lending activity of the Bank is
the granting of conventional loans to enable borrowers to purchase existing
homes. At December 31, 1998, approximately 75% of the Bank's total loan
portfolio consisted of loans secured by residential real estate, including
residential apartment buildings.
Mortgage loans made by the Bank are generally long-term loans, amortized on
a monthly basis, with principal and interest due each month. The initial
contractual loan payment period for residential loans typically ranges from 10
to 30 years. The Bank's experience indicates that real estate loans remain
outstanding for significantly shorter periods than their contractual terms.
Borrowers may refinance or prepay loans at their option.
The Bank aggressively markets adjustable-rate loans with rate adjustments
based upon a United States Treasury bill index. As of December 31, 1998, the
Bank had $29.9 million in loans using a U.S. Treasury bill index. The Bank
offers mortgages which are adjustable on a one, a three and a five year basis
with limitations on upward adjustments of 2% per year and 6% over the life of
the loan. The Bank also offers long term fixed rate loans. The fixed rate loans
may be packaged and sold in the secondary market, primarily to the Federal Home
Loan Mortgage Corporation ("FHLMC"), private mortgage correspondents and the
Federal National Mortgage Association ("FNMA") or are exchanged for FHLMC
participation certificates or FNMA mortgage-backed securities.
The retention of adjustable-rate mortgage loans in the Bank's loan
portfolio helps reduce the Bank's exposure to increases in interest rates.
However, there are unquantifiable credit risks resulting from potential
increased costs to the borrower as a result of repricing of adjustable-rate
mortgage loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest cost to the borrower.
The Bank makes loans up to 95% of appraised value or sales price of the
property, whichever is less, to qualified owner occupants upon the security of
single family homes. Non-owner occupied one to four family loans and loans
secured by other than residential real estate are generally permitted to a
maximum 70% loan-to-value of the appraised value depending on the overall
strength of the application. The Bank currently requires that substantially all
residential loans with loan to value ratios in excess of 80% carry private
mortgage insurance to bring the Bank's exposure down to approximately 70% of the
value of the property.
All improved real estate which serves as security for a loan made by the
Bank must be insured, in the amount and by such companies as may be approved by
the Bank, against fire, vandalism, malicious mischief and other hazards. Such
insurance must be maintained through the entire term of the loan and in an
amount not less than that amount necessary to pay the Bank's indebtedness in
full.
The Bank has maintained a growing level of home equity loans in recent
years. These loans, which totaled $16.3 million at December 31, 1998, are
generally made in minimum amounts of $5,000, have terms of up to 20 years,
variable rates priced at prime or some margin above prime and require an 80% or
90% loan-to-value ratio, depending on the specific loan program.
Commercial Real Estate and Other Non-Residential Real Estate Loans. The
Bank has been giving increased emphasis to loans for the construction and
permanent financing of commercial and other improved real estate projects,
including, to a limited extent, office buildings, as well as churches and other
special purpose projects. As a result, commercial real estate loans increased
$4.6 million or 30% during 1998. The primary security on a commercial real
estate loan is the real property and the leases which produce income for the
real property. Commercial real estate loans amounted to approximately $19.7
million or 15% of the Bank's loan portfolio at December 31, 1998. The Bank
generally limits its exposure to a single borrower to 15% of the Bank's net
worth and frequently participates with other lenders on larger projects. Loans
secured by commercial real estate are generally limited to 75% of appraised
value and generally have an initial contractual loan payment period ranging from
three to 20 years. Virtually all of the Bank's commercial real estate loans, as
well as its construction loans discussed below, are secured by real estate
located in the Bank's primary market area.
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Loans secured by commercial real estate are larger and involve greater
risks than one- to four-family residential mortgage loans. Because payments on
loans secured by such properties are often dependent on the successful operation
or management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Bank restricts its commercial real estate lending primarily to owner
occupied buildings which will, to some extent, be occupied by the borrower as
opposed to speculative rental projects.
Construction Loans. The Bank offers construction loans to individuals and
building contractors primarily for the construction of one- to four-family
dwellings. These loans have constituted a significant portion of the Bank's loan
originations in recent years. Most of these loans are construction/permanent
loans which have fixed rates, payable monthly for the construction period and
are followed by a 30 year fixed or adjustable rate permanent loan. Most
construction loans provide for disbursement of loan funds based on draw requests
submitted by the builder during construction and site inspections by independent
inspectors. The Bank will also make a construction loan if the borrower has a
commitment from another lender for a permanent loan at the completion of the
construction. These loans typically have terms of six months. The application
process includes the same items which are required for other mortgage loans and
also requires the borrower to submit to the Bank accurate plans, specifications,
and costs of the property to be constructed. These items are used as a basis to
determine the appraised value of the subject property. Construction loans
totaled $16.1 million, or 12% of the Bank's loan portfolio, at December 31,
1998.
Construction financing involves a higher degree of risk than long-term
financing on improved, occupied real estate. The Bank's risk of loss on a
construction loan is dependent primarily upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost, including interest, of completion. If the estimate of
construction costs proves to be inaccurate, the Bank may be required to advance
funds beyond the amount originally committed to permit completion of the
project. If the estimate of value proves to be inaccurate, the project may have
a value which is insufficient to assure full repayment of the loan.
The Bank also offers builders lines of credit, which are revolving notes
generally secured by real property. Outstanding builders lines of credit
amounted to approximately $4.6 million at December 31, 1998. The Bank offers a
builder's master note program in which the builder receives a revolving line of
credit at a rate over prime and the Bank obtains security in the form of a first
lien on home sites under construction. At December 31, 1998, $3.1 million in
such loans were outstanding.
In addition, the Bank offers loans for the purpose of acquisition and
development of land, as well as loans on undeveloped, subdivided lots for home
building by individuals. Land acquisition and development loans, included in
construction loans discussed above, totaled $6.8 million at December 31, 1998.
The Bank originated approximately $4.1 million of lot loans during 1998, which
consisted of 25 loans secured by land in the Bank's market area, the largest of
which had a balance of $228,000 at December 31, 1998.
Land acquisition and development lending generally involves a higher degree
of credit risk than lending on existing residential properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on development projects.
The Bank's ability to originate all types of construction loans is heavily
dependent on the continued demand for single family housing construction in the
Bank's market areas. In the event the demand for new houses in the Bank's market
areas were to decline, the Bank may be forced to shift a portion of its lending
emphasis. There can be no assurance of the Bank's ability to continue growth and
profitability in its construction lending activities in the event of such a
decline.
Consumer and Commercial Loans. The Bank has developed a number of programs
to serve the needs of its customers with primary emphasis upon loans secured by
automobiles, boats, recreational vehicles and trucks and heavy equipment. The
Bank also makes home improvement loans and offers both secured and unsecured
lines of credit.
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The Bank also offers a variety of commercial loan services including term
loans, lines of credit and equipment financing. The Bank's commercial loans are
primarily underwritten on the basis of the borrower's ability to service the
debt from income. Such loans are generally made for terms of five years or less
at interest rates which adjust periodically.
The Bank believes that the shorter terms and the normally higher interest
rates available on various types of consumer and commercial business loans have
been helpful in maintaining a profitable spread between the Bank's average loan
yield and its cost of funds. Consumer and commercial business loans do, however,
entail greater risk than do residential mortgage loans, particularly in the case
of consumer loans which are unsecured or secured by rapidly depreciable assets
such as automobiles. In such cases, any repossessed collateral may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various Federal and state laws including Federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Such loans may also give rise to claims and defenses by a consumer
loan borrower against an assignee such as the Bank, and a borrower may be able
to assert against such assignee claims and defenses which it has against the
seller of the underlying collateral.
Loan Portfolio Analysis. Set forth below is selected data relating to the
composition of the Bank's loan portfolio by type of loan and type of security on
the dates indicated.
At December 31,
------------------------------------
1998 1997 1996
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(In thousands)
Type of Loan:
Real Estate Loans --
Residential construction .......... $ 16,147 $ 13,222 $ 7,946
Mortgage .......................... 83,976 77,261 77,845
Builders Line of Credit ........... 4,629 5,054 3,810
Home Equity ....................... 16,314 17,428 14,147
Commercial Lines of Credit ........... 6,161 4,852 3,887
Consumer Loans ....................... 7,889 6,420 5,422
Less: Deferred Loan Fees ......... 930 1,060 1,086
Loan Loss Reserve ....... 1,540 1,310 1,120
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Total ........................ $132,646 $121,867 $110,851
======== ======== ========
Loan Solicitation and Processing. The Bank actively solicits mortgage loan
applications from existing customers, local real estate agents, contractors and
real estate developers. In addition, the Bank has several commissioned loan
officers who originate loans with laptop computers to produce additional loan
volume. Loan processing is centralized at the Bank's main office. Upon receipt
of a loan application from a prospective borrower, a credit report and
verifications are ordered to verify specific information relating to the loan
applicant's employment, income and credit standing. An appraisal of the real
estate intended to secure the proposed loan is undertaken by a staff or an
independent fee appraiser. The Bank uses FHLMC's Prospector Software and
Purchase program. This provides the Bank with faster loan approval turnaround
and competitive pricing of loans.
The Bank's President has the authority to approve loans in amounts up to
$750,000. The Bank's Senior Vice Presidents individually have the authority to
approve loans in amounts up to $300,000. The residential loan underwriter has
authority to approve FHLMC and FNMA conforming loans up to the limits
established from time to time by those organizations, currently $240,000. The
Business Development Officer has loan authority of $100,000. Any two of
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the aforementioned individuals may jointly approve a loan up to $1,000,000.
Selected branch personnel have lending limits ranging from $10,000 to $50,000
depending on loan type and the employee's position. A loan committee, consisting
of the President and two members of the Board of Directors on a rotating basis,
ratify all real estate mortgage loans and all other large (in excess of
$100,000) loans.
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved,
these terms and conditions include the amount of the loan, interest rate,
amortization term, a brief description of real estate to be mortgaged to the
Bank, and the notice of requirement of insurance coverage to be maintained to
protect the Bank's interest. Title insurance is required on all loans except
second mortgages and home equity loans. Hazard insurance policies are required
on all loans in an amount equal to the lesser of the loan balance or the
replacement value of the structure.
Loan Originations, Purchases and Sales. The Bank actively originates
mortgage loans primarily for its own portfolio, and, periodically, for sale in
the secondary mortgage market. At December 31, 1998, the Bank was servicing
approximately $54 million of loans for others. Fee income from loan servicing
totaled approximately $190,000 during 1998. The Bank has periodically purchased
whole loans, participation interests in loans and participation certificates. In
recent years, the Bank has participated in several residential home construction
loans with other well capitalized lenders. Approximately $1.7 million of such
loans was outstanding at December 31, 1998. These participation loans are for
the acquisition and development of residential properties located in Maryland
and the construction of housing stock on a pre sold basis. These loans have
competitively priced terms and various maturity structures.
Year Ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
Loans originated:
Real estate loans:
Construction loans ................... $14,775 $17,549 $ 9,157
Loans on existing property ........... 10,502 11,542 18,092
Loans refinanced ..................... 12,780 4,081 2,182
Land loans ........................... 4,061 1,337 1,167
Builder lines of credit .............. 20,195 19,691 15,360
Non-residential mortgage loans ....... 1,585 2,898 6,691
Commercial lines of credit .............. 8,171 4,357 3,594
Consumer loans .......................... 5,756 4,234 3,175
------- ------- -------
Total loans originated ............. $77,825 $65,689 $59,418
======= ======= =======
Loans sold:
Participation loans .................. $ -- $ -- --
Whole loans .......................... 23,173 11,876 8,965
------- ------- -------
Total loans sold ................... $23,173 $11,876 $ 8,965
======= ======= =======
The Bank occasionally packages some fixed rate loans it originates into
mortgage participation certificates or direct sales utilizing the FHLMC, FNMA
and private mortgage correspondents as its secondary market buyer. During 1998,
the Bank sold $23 million of loans under direct sales agreements. For further
information, see "Management's Discussion and Analysis" in the Annual Report.
Loan Commitments. The Bank does not normally negotiate standby commitments
for the construction and purchase of real estate. Conventional loan commitments
are granted for a one month period. The total amount of the Bank's outstanding
commitments to originate real estate loans at December 31, 1998, was
approximately $1.7 million,
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excluding undisbursed portions of loans in process. It has been the Bank's
experience that few commitments expire unfunded.
Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1998 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans (loans having no stated schedule of repayments and no stated maturity) and
home equity loans which reprice within one year are reported as due in one year
or less.
Due after Due more
Due within 1 through 5 than 5
1 year after years from years from
December December December
31, 1998 31, 1998 31, 1998 Total
------------ ----------- ---------- -------
(In thousands)
Mortgage ....................... $ 1,087 $ 45,442 $ 35,206 $ 81,736
Residential construction ....... 16,147 -- -- 16,147
Builder line of credit ......... 4,629 -- -- 4,629
Commercial line of credit ...... 6,044 -- -- 6,044
Home equity .................... 13,279 526 2,509 16,314
Consumer ....................... 265 5,970 1,541 7,776
-------- -------- -------- --------
$ 41,451 $ 51,938 $ 39,256 $132,646
======== ======== ======== ========
The next table sets forth the dollar amount of all loans due after one year
from December 31, 1998 which have predetermined interest rates and have floating
or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
---------------- -------
(In thousands)
Mortgage ....................... $39,563 $41,085 $80,648
Home equity .................... 3,035 -- 3,035
Consumer ....................... 7,511 -- 7,511
------- ------- -------
$50,109 $41,085 $91,194
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Loan Origination Fees. In addition to interest earned on loans, the Bank
receives loan origination fees and discounts for originating loans which are
computed as a percentage of the principal amount of the mortgage loan and are
charged to the borrower for creation of the loan.
The Bank's loan origination fees and discounts are generally 2% to 3% on
conventional residential mortgages and 1% to 2% for commercial real estate
loans. Loan origination and loan commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in mortgage markets which, in turn,
tend to vary in response to the demand and availability of money. The Bank has
experienced a decrease in loan fee income during periods of unusually high
interest rates due to the resulting lack of demand for mortgage loans.
The Bank receives other fees and charges relating to existing loans, late
charges, and fees collected in connection with a change in borrower or other
loan modifications. These fees and charges have not constituted a material
source of income for the Bank.
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Delinquencies. The Bank's collection procedures provide that when a loan is
15 days delinquent, the borrower is contacted by mail and payment is requested.
If the delinquency continues, subsequent efforts will be made to contact the
delinquent borrower. In certain instances, the Bank will modify the loan or
grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial affairs. If the loan continues in a delinquent status
for 90 days or more, the Bank will generally initiate foreclosure proceedings.
Non-Performing Assets and Asset Classification. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential
mortgage loans are placed on non-accrual status when either principal or
interest is 90 days or more past due unless they are adequately secured and
there is reasonable assurance of full collection of principal and interest.
Consumer loans generally are charged off when the loan becomes over 120 days
delinquent. Commercial business and real estate loans are placed on non-accrual
status when the loan is 90 days or more past due. Interest accrued and unpaid at
the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as foreclosed real estate until such time as
it is sold. When such property is acquired, it is recorded at its fair market
value. Subsequent to foreclosure, the property is carried at the lower of cost
or fair value less selling costs. Any write-down of the property at foreclosure
is charged to the allowance for loan losses. The Bank had no foreclosed real
estate at December 31, 1998.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods shown, the
Bank had no impaired loans within the meaning of Statement of Financial
Accounting Standards No. 114 and 118.
At December 31,
----------------------
1998 1997 1996
---- ---- ----
(In thousands)
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential ...................................... $196 $165 $262
Commercial ....................................... -- -- --
Commercial Business ............................... -- -- --
Consumer .......................................... -- -- 79
---- ---- ----
Total ........................................... $196 $165 $341
==== ==== ====
Percentage of Total Loans ........................... .15% .14% .32%
==== ==== ====
Loans accounted for on a nonaccrual basis:(1)
Real Estate:
Residential ...................................... $126 $ 34 $358
Commercial Business .............................. 85 30 --
Consumer ......................................... 58 95 --
---- ---- ----
Total ........................................... 269 159 358
---- ---- ----
Total nonperforming loans ........................... $465 $324 $699
==== ==== ====
- -----------------
(1) Nonaccrual status denotes loans on which, in the opinion of management, the
collection of additional interest is unlikely, or loans that meet
nonaccrual criteria as established by regulatory authorities.
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During the fiscal year ended December 31, 1998, gross interest income of
$21,000 would have been recorded on loans accounted for on a non-accrual basis
if the loans had been current throughout the period. No interest on such loans
was included in income during 1998.
The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
Year Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Balance at Beginning of Period ................ $1,310 $1,120 $ 734
------ ------ ------
Loans Charged-Off:
Real Estate:
Residential ................................. -- 11 17
Commercial .................................. -- -- --
Commercial Business .......................... -- 21 --
Consumer ..................................... 10 18 5
------ ------ ------
Total Charge-Offs ............................. 10 50 22
------ ------ ------
Provision for Possible Loan Losses ........... 240 240 408
------ ------ ------
Balance at End of Period ...................... $1,540 $1,310 $1,120
====== ====== ======
Ratio of Net Charge-Offs to Average Loans
Outstanding During the Period ............... .01% .04% .02%
====== ====== ======
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The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
Residential ................................. $1,029 74.9% $ 881 75.7% 786 79.3%
Commercial and other ........................ 281 14.6 255 15.2 240 12.5
Commercial and unsecured ....................... 117 4.6 87 5.2 41 3.4
Consumer ....................................... 113 5.9 87 3.9 53 4.8
------ ------ ------ ------ ------ ------
Total allowance for loan losses ........ $1,540 100.0% $1,310 100.0% $1,120 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
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The Bank closely monitors the loan payment activity of all its loans. Any
consumer loan which is determined to be uncollectible is charged off against the
allowance for loan losses. A loan loss provision is provided by a monthly
accrual based on analysis of the loan portfolio characteristics and industry
norms. The allowance for loan losses was approximately 1% of outstanding loan
balances. This measure was deemed prudent to achieve a sufficient reserve level
commensurate with the Bank's portfolio risk.
While the Bank believes it has established its existing allowances for loan
losses in accordance with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to significantly increase its allowance for loan losses,
thereby negatively affecting the Bank's financial condition and earnings.
Investment Activities
Interest income from cash deposits and investment securities generally
provides the second largest source of income for the Bank after interest
payments on loans. At December 31, 1998, the Bank's interest-bearing cash and
investment securities portfolio of $61 million consisted of deposits in other
financial institutions, corporate equity securities, money market funds,
obligations of U.S. Government Corporations and agencies and asset-backed
securities. The Bank is in compliance with applicable liquidity requirements.
The Bank is required under Maryland regulations to maintain a minimum
amount of liquid assets sufficient to meet the operating needs of the Bank and
its customers. These assets may be invested in interest and noninterest-bearing
cash and certain other investments. See "Regulation -- Liquidity Requirements"
below and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity" in the Corporation's 1998 Annual Report to
Stockholders (the "Annual Report"), which is attached as Exhibit 13 hereto and
is incorporated herein by reference. It has been the Bank's policy in the past
to maintain a liquidity portfolio above regulatory requirements, and at December
31, 1998, the Bank's liquidity was in compliance with Maryland requirements.
Investment decisions are made by authorized officers of the Bank under the
supervision of the Bank's Board of Directors. Brokers periodically approved by
the Board of Directors are used to effect securities transactions. See Notes 2
and 3 of Notes to Consolidated Financial Statements in the Annual Report.
The following table sets forth the carrying value of the Corporation's
investment securities portfolio and FHLB and Federal Reserve Bank stock at the
dates indicated. At December 31, 1998, their market value was $60.1 million.
At December 31,
---------------------------
1998 1997 1996
------- ------- -------
(In thousands)
Investment securities:
Asset-backed securities ...................... $45,964 $44,035 $43,354
Money market funds ........................... 293 4,011 4,531
FHLMC, FNMA, SLMA and FHLB notes ............. 9,045 5,003 5,320
Federal Home Loan Bank of Atlanta, Federal
Reserve, Federal Home Loan Mortgage
Corporation and Federal National Mortgage
Corporation Stock .......................... 3,226 2,229 2,267
Treasury bills ............................... 196 192 640
Other investments ............................ 1,397 281 671
------- ------- -------
Total investment securities and FHLB and
Federal Reserve Bank stock .............. $60,121 $55,752 $56,783
======= ======= =======
10
<PAGE>
The maturities and weighted average yields for investment securities
available for sale and held to maturity at December 31, 1998 are shown below.
<TABLE>
After One After Five
One Year or Less Through Five Years Through Ten Years After Ten Years
----------------- ------------------- --------------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities available for sale:
Corporate equity securities ............ $ 1,221 3.39% $ 1,009 6.34% $ -- --% $ -- --%
Asset-backed securities ................ -- -- -- -- 5,936 6.51 41,475 6.67
Money market funds ..................... 293 5.30 -- -- -- -- -- --
Obligations of U.S. government
sponsored enterprises (GSE) .......... -- -- -- -- 6,043 6.66 -- --
------- ------- ------- -------
Total investment securities
available for sale ................ $ 1,514 3.76 $ 1,009 6.34 $11,979 6.59 $41,475 6.67
======= ======= ======= =======
Investment securities held-to-maturity:
Asset-backed securities ................ $ -- -- $ -- -- $ -- -- $ 545 8.48
Treasury bills ......................... 197 4.00 -- -- -- -- -- --
Other investments ...................... 1,397 7.30 -- -- -- -- -- --
------- ------- ------- -------
Total investment securities
held-to-maturity .................. $ 1,594 6.89 $ -- -- $ -- -- $ 545 8.48
======= ======= ======= =======
</TABLE>
11
<PAGE>
The Bank's investment policy provides that securities that will be held
for indefinite periods of time, including securities that will be used as part
of the Bank's asset/liability management strategy and that may be sold in
response to changes in interest rates, prepayments and similar factors, are
classified as available for sale and accounted for at the fair value.
Management's intent is to hold securities reported at amortized cost to
maturity.
For further information regarding the Corporation's investment
securities, see Notes 2 and 3 of Notes to Consolidated Financial Statements in
the Annual Report.
Savings Activities and Other Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, advances from the FHLB of Atlanta and other
borrowings. Loan repayments are a relatively stable source of funds, while
deposit inflows are significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short term basis to compensate
for reductions in the availability of other sources of funds. They may also be
used on a longer term basis for general business purposes.
Deposits. Deposits are solicited throughout the Bank's market area
through the Bank's branch system. The Bank offers a wide variety of deposit
accounts with terms that vary, with the principal differences being the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate. To date, the Bank has not obtained any funds through brokers. In
recent years, the Bank has relied increasingly on newly authorized types of
short-term accounts and other savings alternatives that are responsive to
changes in market rates of interest.
Advances. With its membership in the FHLB, the Bank utilizes wholesale
borrowings to fund specific loans, such as acquisition and development loans. In
addition, to prudently leverage its net worth, the Bank matches certain
authorized investments with corresponding borrowings from the FHLB for a managed
spread.
The following table indicates the amount of the Bank's certificates of
deposit and other time deposits of more than $100,000 by time remaining until
maturity as of December 31, 1998.
Certificates
Maturity Period of Deposit
--------------- ----------
(In thousands)
One through three months.................. $ 1,641
Three through six months.................. 1,721
Six through twelve months................. 2,521
Over twelve months........................ 7,106
----------
Total................................ $ 12,989
==========
12
<PAGE>
Borrowings. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The Bank does, however, rely upon advances from the FHLB of Atlanta to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta has served as the Bank's primary borrowing
source. Advances from the FHLB are typically secured by the Bank's stock in the
FHLB and a portion of the Bank's first mortgage loans. At December 31, 1998,
advances from the FHLB of Atlanta were as follows:
Weighted Average
Year Due Interest Rate Balance
-------- ------------- -------
1999 5.18% $ 21,500,000
2002 5.81% 11,400,000
--------------
$ 32,900,000
The FHLB of Atlanta functions as a central reserve bank providing
credit for member institutions. As a member, the Bank is required to own capital
stock in the FHLB and is authorized to apply for advances on the security of
such stock and certain of its home mortgages and other assets (principally,
securities which are obligations of, or guaranteed by, the United States
government) provided certain standards related to creditworthiness have been
met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of an association's net worth or on the FHLB's assessment of the
association's creditworthiness. Under its current credit policies, the FHLB
limits advances to 30% of a member's assets, but there are no other limitations
on the amount of advances which may be made to an association.
The Bank, through a finance subsidiary, has also borrowed funds through
a collateralized mortgage obligation program. For further information, see Note
7 of Notes to Consolidated Financial Statements.
For more information regarding the Bank's borrowings, see Note 7 of
Notes to Consolidated Financial Statements.
Yields Earned and Rates Paid
The pre-tax earnings of the Bank depend significantly upon the spread
between the income it receives from its loan and investment portfolios and its
cost of money, consisting of the interest paid on deposit accounts and
borrowings.
13
<PAGE>
The following table sets forth for the periods and at the dates
indicated, the weighted average yields earned on the Bank's assets, the weighted
average interest rates paid on the Bank's liabilities, together with the
interest rate spread and net yield on interest-earning assets.
<TABLE>
<CAPTION>
At Years Ended December 31,
December 31, --------------------------
1998 1998 1997 1996
------------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average yield on loan portfolio ................ 8.63% 9.00% 9.20% 9.13%
Weighted average yield on interest-bearing cash and
investment securities portfolio ....................... 6.13 6.42 6.48 6.42
Weighted average yield on all interest-
earning assets ................................... 7.82 8.15 8.29 8.25
Weighted average rate paid on savings deposits
and escrow ............................................ 3.75 3.91 4.06 4.05
Weighted average rate paid on Federal Home Loan Bank
advances and other borrowings ......................... 5.69 5.72 5.91 5.46
Weighted average rate paid on all interest-bearing
liabilities ..................................... 4.10 4.24 4.37 4.22
Interest rate spread (spread between weighted average
rate on all interest-earning assets and all interest
bearing liabilities) .................................. 3.72 3.91 3.92 4.03
Net yield (net interest income as a percentage of average
interest-earning assets) .............................. 4.01 4.21 4.23 4.32
</TABLE>
14
<PAGE>
Average Balance Sheet
The following table presents for the periods indicated the Bank's
average balance sheet and reflects the amount of interest income from average
interest-earning assets and the resultant yields, as well as the amount of
interest expense on average interest-bearing liabilities and the resultant
costs, expressed both in dollars and rates. Interest income includes fees which
are considered adjustments to yields. Average balances are based on average
month-end balances.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------------
At December 31, 1998 1998
--------------------- ----------------------------
Average Average
Yield/ Average Yield/
Balance Cost Balance Interest Cost
------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan portfolio ................... $134,912 8.63% $129,375 $ 11,642 9.00%
Cash and investment securities ... 64,273 6.13 63,609 4,084 6.42
-------- ---- -------- -------- ----
Total interest-earning assets . 199,185 7.82 192,984 15,726 8.15
-------- ---- -------- -------- ----
Interest-bearing liabilities:
Savings deposits and escrow ...... $151,815 3.75% $145,752 $ 5,694 3.91%
FHLB advances and other borrowings 33,434 5.69 33,294 1,903 5.72
-------- ---- -------- -------- ----
Total ......................... $185,249 4.10% $179,046
-------- ---- --------
Net interest income................. $ 8,129
========
Interest rate spread................ 3.72% 3.91%
====== ======
Net yield on interest-earning
assets............................ 4.01% 4.21%
====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities............... 107.5% 107.8%
===== =====
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------
1997 1996
--------------------------- -----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan portfolio ................... $120,178 $ 11,056 9.20% $110,024 $ 10,045 9.13%
Cash and investment securities ... 60,716 3,937 6.48 53,335 3,426 6.42
-------- -------- ---- -------- -------- ----
Total interest-earning assets . 180,894 14,993 8.29 163,359 13,471 8.25
-------- -------- ---- -------- -------- ----
Interest-bearing liabilities:
Savings deposits and escrow ...... $139,941 $ 5,683 4.06% $133,331 $ 5,397 4.05%
FHLB advances and other borrowings 28,184 1,667 5.91 18,493 1,010 5.46
-------- -------- ---- -------- -------- ----
Total ......................... $168,125 7,350 4.37% $151,824 6,407 4.22%
-------- -------- ---- -------- -------- ----
Net interest income................. $ 7,643 $ 7,064
======== ========
Interest rate spread................ 3.92% 4.03%
====== ======
Net yield on interest-earning
assets............................ 4.23% 4.32%
====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities............... 107.6% 107.6%
===== =====
</TABLE>
15
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in volume multiplied by old rate); (2) changes in rate (changes in rate
multiplied by old volume); (3) changes in rate-volume (changes in rate
multiplied by the change in volume).
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 vs. 1998 1996 vs. 1997
------------------------------------- --------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------- --------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio................... $ 844 $ (240) $ (18) $ 586 $ 927 $ 77 $ 7 $ 1,011
Interest-earning cash and
investment portfolio........... 185 (36) (2) 147 475 32 4 511
-------- ------- ------- ------- ------- -------- -------- --------
Total interest-earning assets....... $ 1,029 $ (276) $ (20) $ 733 $ 1,402 $ 109 $ 11 $ 1,522
------- ------- ------- ------- ------- -------- -------- --------
Interest expense:
Savings deposits and escrow...... $ 229 $ (210) $ (9) $ 10 $ 272 $ 13 $ 1 $ 286
FHLB advances and other
borrowings..................... 300 (54) (10) 236 530 83 44 657
-------- ------- ------- ------- ------- ------- -------- --------
Total interest-bearing liabilities.. $ 529 $ (264) $ (19) $ 246 $ 802 $ 96 $ 45 $ 943
======= ======== ======= ======= ======= ======== ======== ========
</TABLE>
Key Operating Ratios
The table below sets forth certain performance ratios of the
Corporation for the periods indicated.
Year Ended December 31,
--------------------------
1998 1997 1996
------ ------ ------
Return on Assets
(Net Income Divided by Average Total Assets) ... 1.20% 1.13% .77%
Return on Equity
(Net Income Divided by Average Equity) ......... 11.87% 11.53% 7.94%
Equity-to-Assets Ratio
(Average Equity Divided by Average
Total Assets) ................................. 10.10% 9.79% 9.70%
Subsidiary Activity
In 1985, the Bank formed Tri-County Federal Bank Finance One as a
finance subsidiary for the purpose of issuing a $6.5 million collateralized
mortgage obligation. In April 1997, the Bank formed a wholly owned subsidiary,
Community Mortgage Corporation of Tri-County, to offer mortgage banking and
brokerage services to the public. To date, this corporation has been inactive.
16
<PAGE>
Depository Institution Regulation
General. The Bank is a Maryland commercial bank and its deposit
accounts are insured by the Savings Association Insurance Fund ("SAIF"). The
Bank is a member of the Federal Reserve System. The Bank is subject to
supervision, examination and regulation by the State of Maryland Commissioner of
Financial Regulation ("Commissioner") and the Board of Governors of the Federal
Reserve (the "FRB") and to Maryland and federal statutory and regulatory
provisions governing such matters as capital standards, mergers and
establishment of branch offices. The Bank is subject to the FDIC's authority to
conduct special examinations. The Bank is required to file reports with the
Commissioner and the FRB concerning its activities and financial condition and
will be required to obtain regulatory approvals prior to entering into certain
transactions, including mergers with, or acquisitions of, other depository
institutions.
As a federally insured depository institution, the Bank is subject to
various regulations promulgated by the FRB, including Regulation B (Equal Credit
Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund
Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of
Funds and Collection of Checks) and Regulation DD (Truth in Savings).
The system of regulation and supervision applicable to the Bank
establishes a comprehensive framework for the operations of the Bank and is
intended primarily for the protection of the FDIC and the depositors of the
Bank. Changes in the regulatory framework could have a material effect on the
Bank and its respective operations that in turn, could have a material effect on
the Corporation.
Liquidity Requirements. The Bank is subject to the reserve requirements
imposed by the State of Maryland. A Maryland commercial bank is required to have
at all times a reserve equal to at least 15% of its demand deposits. The board
of directors of a Maryland commercial bank must by resolution direct the
commercial bank to maintain this reserve ratio in: (i) cash on hand; (ii) demand
deposits in a bank of good standing in any state; or (iii) as to 5% of its
demand deposits, on approval of the Commissioner, (a) registered or coupon
bonds, or (b) general obligations guaranteed by the United States government, an
agency of the United States government, the State of Maryland, or any political
subdivision. Additionally, a Maryland commercial bank must have at all times a
reserve equal to at least 3% of all time deposits. Time deposit reserves must be
kept in: (i) cash on hand; (ii) deposits in a bank of good standing in any
state; or (iii) direct obligations of the United States government or of the
State of Maryland. Under the Maryland statute, "demand deposits" are defined as
deposits payable within 30 days and "time deposits" are defined to be deposits
that are payable after 30 days, including a savings account or certificate of
deposit that requires at least a 30-day notice before payment. As of December
31, 1998 the Bank was in compliance with Maryland's reserve requirements.
Regulatory Capital Requirements. The Bank is subject to FRB capital
requirements as well as statutory capital requirements imposed under Maryland
law. FRB regulations establish two capital standards for state-chartered banks
that are members of the Federal Reserve System ("state member banks"): a
leverage requirement and a risk-based capital requirement. In addition, the
Federal Reserve may on a case-by-case basis, establish individual minimum
capital requirements for a bank that vary from the requirements which would
otherwise apply under FRB regulations. A bank that fails to satisfy the capital
requirements established under the FRB's regulations will be subject to such
administrative action or sanctions as the FRB deems appropriate.
The leverage ratio adopted by the FRB requires a minimum ratio of "Tier
1 capital" to adjusted total assets of 5% for banks rated composite 1 under the
CAMELS rating system for banks. Banks not rated composite 1 under the CAMELS
rating system for banks are required to maintain a minimum ratio of Tier 1
capital to adjusted total assets of 4% to 5%, depending upon the level and
nature of risks of their operations. For purposes of the FRB's leverage
requirement, Tier 1 capital generally consists of common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits.
17
<PAGE>
The risk-based capital requirements established by the FRB's
regulations require state member banks to maintain "total capital" equal to at
least 8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital" defined to include certain preferred stock issues,
nonwithdrawable accounts and pledged deposits that do not qualify as Tier 1
capital, certain approved subordinated debt, certain other capital instruments
and a portion of the bank's general loss allowance.
Total risk-weighted assets equal the sum of the amount of each asset
and credit-equivalent amount of each off-balance sheet item after such asset or
item is multiplied by an assigned risk weight. The FRB's regulations establish
four risk weights, 0%, 20%, 50% and 100%.
In addition, the Bank is subject to the statutory capital requirements
imposed by the State of Maryland. Under Maryland statutory law, if the surplus
of a Maryland commercial bank at any time is less than 100% of its capital
stock, then, until the surplus is 100% of the capital stock, the commercial
bank: (i) must transfer to its surplus annually at least 10% of its net
earnings; and (ii) may not declare or pay any cash dividends that exceed 90% of
its net earnings.
Prompt Corrective Regulatory Action. Under requirements implementing
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
the federal banking regulators generally measure a depository institution's
capital adequacy on the basis of the institution's total risk-based capital
ratio (the ratio of its total capital to risk-weighted assets), Tier 1
risk-based capital ratio (the ratio of its core capital to risk-weighted assets)
and leverage ratio (the ratio of its core capital to adjusted total assets).
Under the regulations, an institution that is not subject to an order or written
directive to meet or maintain a specific capital level will be deemed "well
capitalized" if it also has: (i) a total risk-based capital ratio of 10% or
greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a
leverage ratio of 5.0% or greater. An "adequately capitalized" institution is an
institution that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital
risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or
greater (or 3.0% or greater if the institution has a composite 1 CAMEL rating).
An "undercapitalized institution" is an institution that has (i) a total
risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if
the association has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as an institution that has: (i) a total
risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" institution is defined as an institution that has
a ratio of "tangible equity" to total assets of less than 2.0%. Tangible equity
is defined as core capital plus cumulative perpetual preferred stock (and
related surplus) less all intangibles other than qualifying supervisory goodwill
and certain purchased mortgage servicing rights. The FRB may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized or undercapitalized institution to comply with the supervisory
actions applicable to institutions in the next lower capital category (but may
not reclassify a significantly undercapitalized institution as critically
under-capitalized) if the FRB determines, after notice and an opportunity for a
hearing, that the institution is in an unsafe or unsound condition or that the
institution has received and not corrected a less-than-satisfactory rating for
any CAMEL rating category. At December 31, 1998, the Bank was classified as
"well capitalized" under these regulations.
Deposit Insurance. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See " -- Prompt Corrective Action." Within each
capital group, institutions are assigned to one of three subgroups on the basis
of supervisory evaluations by the institution's primary supervisory authority
and such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Subgroup A consists of financially sound institutions with only a few
minor weaknesses. Subgroup B consists of
18
<PAGE>
institutions that demonstrate weaknesses which, if not corrected, could result
in significant deterioration of the institution and increased risk of loss to
the deposit insurance fund. Subgroup C consists of institutions that pose a
substantial probability of loss to the deposit insurance fund unless effective
corrective action is taken. The Bank is currently classified in Subgroup A under
these regulations.
Federal Reserve System. Pursuant to regulations of the FRB, all
FDIC-insured depository institutions must maintain average daily reserves
against their transaction accounts. Because required reserves must be maintained
in the form of vault cash or in a noninterest bearing account at a Federal
Reserve Bank, the effect of the reserve require ment is to reduce the amount of
the institution's interest-earning assets. At December 31, 1998, the Bank met
its reserve requirements.
The Bank is a member of the Federal Reserve System and has subscribed
for stock in the Federal Reserve Bank of Richmond in an amount equal to 6% of
the Bank's common stock and surplus.
The monetary policies and regulations of the FRB have a significant
effect on the operating results of commercial banks. The FRB's policies affect
the levels of bank loans, investments and deposits through its open market
operation in United States government securities, its regulation of the interest
rate on borrowings of member banks from Federal Reserve Banks and its imposition
of non-earning reserve requirements on all depository institutions, such as the
Bank, that maintain transaction accounts or non-personal time deposits.
Transactions with Affiliates. Transactions between state member banks
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a state member bank is any company or entity which
controls, is controlled by or is under common control with the state member
bank. In a holding company context, the parent holding company of a state member
bank (such as the Corporation) and any companies which are controlled by such
parent holding company are affiliates of the savings association or state member
bank. Generally, Sections 23A and 23B (i) limit the extent to which the
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no state member bank may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the state member bank.
State member banks are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an executive
officer and to a greater than 10% stockholder of a state member bank (18% in the
case of institutions located in an area with less than 30,000 in population),
and certain affiliated entities of either, may not exceed, together with all
other outstanding loans to such person and affiliated entities the institution's
loan to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus and an additional 10% of such capital and surplus
for loans fully secured by certain readily marketable collateral). Section 22(h)
also prohibits loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater than 10%
stockholders of a state member bank, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
institution with any "interested" director not participating in the voting. The
FRB has prescribed the loan amount (which includes all other outstanding loans
to such person), as to which such prior board of director approval if required,
as being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the FRB pursuant to Section 22(h) requires that loans to directors,
executive officers and principal stockholders be made on terms substantially the
same as offered in comparable transactions to other persons.
19
<PAGE>
State member banks are also subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to executive
officers and the restrictions of 12 U.S.C. ss. 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires that loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, requires approval for such extensions of credit by the board of
directors of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers. Section 1972 prohibits (i) a depository institution from extending
credit to or offering any other services, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or certain of its affiliates
or not obtain services of a competitor of the institution, subject to certain
exceptions, and (ii) extensions of credit to executive officers, directors, and
greater than 10% stockholders of a depository institution by any other
institution which has a correspondent banking relationship with the institution,
unless such extension of credit is on substantially the same terms as those
prevailing at the time for comparable transactions with other persons and does
not involve more than the normal risk of repayment or present other unfavorable
features.
Dividend Limitations. The Bank's ability to pay dividends is governed
by the Maryland Financial Institutions Code and the regulations of the FRB.
Under the Maryland Financial Institutions Code, a Maryland bank (1) may only pay
dividends from undivided profits or, with prior regulatory approval, its surplus
in excess of 100% of required capital stock and (2) may not declare dividends on
its common stock until its surplus fund equals the amount of required capital
stock or, if the surplus fund does not equal the amount of capital stock, in an
amount in excess of 90% of net earnings.
The Bank's payment of dividends are subject to the FRB's Regulation H,
which limits the dividends payable by a state member bank to the net profits of
the Bank then on hand, less the Bank's losses and bad debts. Additionally, the
FRB has the authority to prohibit the payment of dividends by a state member
bank when it determines such payment to be an unsafe and unsound banking
practice. Finally, the Bank would not be able to pay dividends on its capital
stock if its capital would thereby reduced below the remaining balance of the
liquidation account established in connection with its mutual to stock
conversion.
Regulation of the Corporation
General. The Corporation, as the sole shareholder of the Bank, is a
bank holding company and registered as such with the FRB. Bank holding companies
are subject to comprehensive regulation by the FRB under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and the regulations of the FRB. As
a bank holding company, the Corporation is required to file with the FRB annual
reports and such additional information as the FRB may require, and is subject
to regular examinations by the FRB. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the FRB includes,
among other things, operating a savings institution, mortgage company, finance
company, credit card company or factoring company;
20
<PAGE>
performing certain data processing operations; providing certain investment and
financial advice; underwriting and acting as an insurance agent for certain
types of credit-related insurance; leasing property on a full-payout,
non-operating basis; selling money orders, travelers' checks and United States
Savings Bonds; real estate and personal property appraising; providing tax
planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers.
Under Maryland statutory law, acquisitions of 25% or more of the voting
stock of a commercial bank or a bank holding company and other acquisitions of
voting stock of such entities which affect the power to direct or to cause the
direction of the management or policy of a commercial bank or a bank holding
company must be approved in advance by the Commissioner. Any person proposing to
make such an acquisition must file an application with the Commissioner at least
60 days before the acquisition becomes effective. The Commissioner may deny
approval of any such acquisition if the Commissioner determines that the
acquisition is anticompetitive or threatens the safety or soundness of a banking
institution. Any voting stock acquired without the approval required under the
statute may not be voted for a period of 5 years. This restriction is not
applicable to certain acquisitions by bank holding companies of the stock of
Maryland banks or Maryland bank holding companies which are governed by
Maryland's holding company statute.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and
its Application in Maryland. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Act") was enacted to ease restrictions on
interstate banking. Effective September 29, 1995, the Act allows the FRB to
approve an application of an adequately capitalized and adequately managed bank
holding company to acquire control of, or acquire all or substantially all of
the assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The FRB may not approve the acquisition of a bank that has not been
in existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Act also prohibits the FRB from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Pursuant to the Act, the FRB may approve an application of an
adequately capitalized and adequately managed non-Maryland bank holding company
to acquire control of, or acquire all or substantially all of the assets of, a
Maryland bank, as long as certain requirements of the Act are met.
Additionally, the Act authorizes the federal banking agencies to
approve interstate merger transactions without regard to whether such
transaction is prohibited by the law of any state, unless the home state of one
of the banks opts out of the Act by adopting a law after the date of enactment
of the Act and prior to June 1, 1997 that applies equally to all out-of-state
banks and expressly prohibits merger transactions involving out-of-state banks.
The State of Maryland has enacted legislation that authorizes interstate mergers
involving Maryland banks. The Maryland statute also authorizes out-of-state
banks to establish branch offices in Maryland by means of merger, branch
acquisition or de novo branching.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earning retention that is consistent with the company's capital needs,
asset quality and overall financial condition. The FRB also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB pursuant to FDICIA, the FRB may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized". See "Depository Institution
Regulation -- Prompt Corrective Regulatory Action."
21
<PAGE>
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the their consolidated retained earnings. The
FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe or unsound practice or would violate any
law, regulation, FRB order, or any condition imposed by, or written agreement
with, the FRB.
Capital Requirements. The FRB has established capital requirements,
similar to the capital requirements for state member banks described above, for
bank holding companies with consolidated assets of $150 million or more. As of
December 31, 1998, the Corporation's levels of consolidated regulatory capital
exceeded the FRB's minimum requirements.
Federal and State Taxation
The Corporation and its subsidiaries currently file a consolidated
federal income tax return based on a fiscal year ending December 31.
The Bank is subject to the provisions of the Internal Revenue Code of
1986, as amended (the "Code") in the same general manner as other corporations.
In its form as a savings bank until March 1997, through tax years beginning
before December 31, 1995, savings associations such as the Bank which met
certain definitional tests and other conditions prescribed by the Code
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in real
property, and nonqualifying real property loans, which are all other loans. The
bad debt reserve deduction with respect to nonqualifying loans must be based on
actual loss experience. The amount of the bad debt reserve deduction with
respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method"). The Bank generally elected to use the method which resulted in the
greatest deduction for federal income tax purposes in any given year.
Neither the Corporation nor the Bank's federal income tax returns have
been audited during the past five years.
For 1997, the Bank was required to file a franchise tax return with the
State of Maryland which computes the tax at a rate of 7% on the Bank's net
earnings, as defined. Under current tax laws, the Bank is no longer subject
to the franchise tax, but files a corporate return with the State of Maryland.
For additional information regarding federal and state taxes payable by
the Corporation, see Note 8 of the Notes to Consolidated Financial Statements.
Competition
The Bank faces strong competition in the attraction of deposits (its
primary source of lendable funds) and in the origination of real estate loans.
Its most direct competition for deposits and loans comes from other banks, from
savings and loan associations, federal and state credit unions located in its
primary market area. The Bank faces additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities.
The Bank competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers, and home builders. It competes for deposits by
offering depositors a wide variety of savings accounts, checking accounts,
convenient office locations, tax-deferred retirement programs, and other
miscellaneous services. The Bank has also utilized direct mail, telemarketing
and
22
<PAGE>
newspaper advertising to help increase deposits. It provides ongoing training
for its staff in an attempt to ensure high quality service.
Personnel
As of December 31, 1998, the Bank had 75 full-time employees and 10
part-time employees. The employees are not represented by a collective
bargaining agreement. The Bank believes its employee relations are good.
23
<PAGE>
Item 2. Properties
- -------------------
The following table sets forth the location of the Bank's offices, as
well as certain additional information relating to these offices as of December
31, 1998.
Year
Facility Leased Approximate
Office Commenced or Square
Location Operation Owned Footage
- -------- --------- ----- -------
Main Office 1974 Owned 16,500
3035 Leonardtown Road
Waldorf, Maryland
Branch Office (1) 1974 Owned 1,000
502 Great Mills Road
Lexington Park, Maryland
Branch Office (1) 1992 Owned 2,500
Rt. 235 and Maple Road
Lexington Park, Maryland
Branch Office 1961 Owned 2,500
Route 5 and Lawrence Avenue
Leonardtown, Maryland
Branch Office (2) 1990 Leased 24,200
Potomac Square
729 North 301 Highway
La Plata, Maryland
Branch Office 1991 Leased 1,400
10321 Southern Md. Blvd.
Dunkirk, Maryland
Branch Office 1996 Owned 2,500
8010 Matthews Road
Bryans Road, Maryland
Branch Office (3) 1998 Leased (Land) 2,840
20 St. Patrick's Drive Owned (Building)
Waldorf, Maryland
Branch Office 1997 Leased 126
Charles County Community College
8730 Mitchell Road
La Plata, Maryland
- -------------
(1) The Bank purchased land early in 1992, and built a new Lexington Park
branch office which opened in August 1992. The Bank is currently leasing
out the former office space and is actively seeking to sell the site.
(2) Includes land purchased in February 1993 as potential branch location.
(3) The Bank purchased the location in 1998. The building is owned by the Bank
with the land on a lease basis.
24
<PAGE>
NCR currently maintains all accounting records for the Bank's deposits
and loans. The Bank's general ledger and other accounting needs are met through
the use of internal computer systems. The net book value of the Bank's
investment in premises and equipment less accumulated depreciation totaled $4.3
million at December 31, 1998. See Note 5 of the Notes to Consolidated Financial
Statements.
Item 3. Legal Proceedings
- --------------------------
Neither the Corporation, the Bank, nor any subsidiary is engaged in any
legal proceedings of a material nature at the present time. From time to time
the Bank is a party to legal proceedings in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- --------------------------------------------------------------------------------
Matters
-------
The information contained under the section caption "Stock Information"
in the Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The information contained in the section captioned "Results of
Operations" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The financial statements contained in the Annual Report which are
listed under Item 14 herein, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
25
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's definitive proxy statement for the
Corporation's 1998 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
The executive officers of the Corporation are as follows:
Michael L. Middleton (51 years old) is Chief Executive Officer of the
Corporation and the Bank. He joined the Bank in 1973 and served in various
management positions until 1979 when he became president of the Bank. Mr.
Middleton is a Certified Public Accountant and holds a Masters of Business
Administration. As President and Chief Executive Officer of the Bank, Mr.
Middleton is responsible for the overall operation of the Bank pursuant to the
policies and procedures established by the Board of Directors. Mr. Middleton is
a member of the Board of Directors of the FHLB of Atlanta, a member of the
Rotary Club of Waldorf and is a Paul Harris Fellow.
Henry A. Shorter, Jr. (68 years old) was the Secretary of the
Corporation and the Bank until December 31, 1998. He has served in this capacity
with the Bank since 1968. Mr. Shorter is a past member of the Board of Directors
of the Physicians Memorial Hospital located in La Plata, Maryland.
C. Marie Brown (56 years old) has been employed with the Bank for over
20 years and was appointed Chief Operating Officer (COO) in 1998. Prior
to her appointment as COO, Ms. Brown served as Senior Vice President
of the Bank.
Beaman Smith (53 years old) was the Treasurer of the Corporation in
1998 and became Secretary-Treasurer in January 1999 and has been the president
of Accosystems, Inc., a computer software company, since 1989. Prior to that
time, Mr. Smith was a majority owner of the Smith's Family Honey Company in
Bryans Road, Maryland. Mr. Smith is a Vice President of Fry Plumbing Company of
Washington, D.C., a Trustee of the Ferguson Foundation, a member of the Bryans
Road Sports Council and the Treasurer of the Mayaone Association.
Eileen M. Ramos (42 years old) joined the Bank as Chief Financial
Officer in September 1994. Prior to that time, Ms. Ramos was a partner with the
accounting firm of Councilor, Buchanan & Mitchell, P.C. She is a member of the
American Institute of CPAs, the District of Columbia Institute of CPAs and the
Financial Managers Society.
Gregory C. Cockerham (44 years old) joined the Bank in November 1988
and has served as Chief Lending Officer (CLO) since 1998. Prior to his
appointment as CLO, Mr. Cockerham served as Senior Vice President of Lending at
the Bank. Mr. Cockerham has been in banking for 22 years. He is a Paul Harris
Fellow with the Rotary Club of Charles County and serves on various civic boards
in the County.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors - Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Owners
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy Statement.
26
<PAGE>
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the section captioned "Proposal I -Election of Directors" of the Proxy
Statement.
(c) Changes in Control
Management of the Corporation knows of no arrangements, including any
pledge by any person of securities of the Corporation, the operation of which
may at a subsequent date result in a change in control of the registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Transactions with the Corporation and the Bank" of the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Report of Independent Certified Public Accountants*
Tri-County Financial Corporation*
(a) Consolidated Statements of Financial Condition at
December 31, 1998 and 1997
(b) Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996
(c) Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996
(d) Consolidated Statements of Cash Flow for the Years
Ended December 31, 1998, 1997 and 1996
(e) Notes to Consolidated Financial Statements
---------------
* Incorporated by reference to the Annual Report.
2. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
3. Exhibits
(3)(a) Articles of Incorporation of Tri-County Financial
Corporation**
(3)(b) Bylaws of Tri-County Financial Corporation **
(10)(a) Tri-County Financial Corporation 1995 Stock Option
and Incentive Plan, as amended
(10)(b) Tri-County Financial Corporation 1995 Stock Option
Plan for Non-Employee Directors, as amended
(10)(c) Employment Agreement with Michael L. Middleton, as
amended, C. Marie Brown, as amended and Gregory C.
Cockerham, as amended
(13) Annual Report to Stockholders for the Fiscal Year
Ended December 31, 1998
(21) Subsidiaries of the Registrant
(23) Consent of Stegman & Company
(27) Financial Data Schedule
27
<PAGE>
(b) No reports on Form 8-K have been filed during the
last quarter of the fiscal year covered by this
report.
(c) The exhibits required by Item 601 of Regulation S-K
are either filed as part of this Annual Report on
Form 10-K or incorporated by reference herein.
(d) There are no other financial statements and financial
statement schedules which were excluded from the
Annual Report pursuant to Rule 14a-3(b)(1) which are
required to be included herein.
----------------
** Incorporated by reference to the registrant's Form
S-4 Registration Statement No. 33-31287.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 1999 By: /s/ Michael L. Middleton
-------------------------------------
Michael L. Middleton
President and Chief Executive Officer
(Duly Authorized Representative)
Date: March 26, 1999 By: /s/ Eileen M. Ramos
----------------------------------------
Eileen M. Ramos
Chief Financial Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By: /s/ Michael L. Middleton By: /s/ Herbert N. Redmond, Jr.
-------------------------------------- ----------------------------
Michael L. Middleton Herbert N. Redmond, Jr.
(Director, President and Chief (Director)
Executive Officer)
Date: March 26, 1999 Date: March 26, 1999
By: /s/ Henry A. Shorter, Jr. By: /s/ W. Edelen Gough, Jr.
-------------------------------------- ----------------------------
Henry A. Shorter, Jr. W. Edelen Gough, Jr.
(Director) (Director)
Date:March 26, 1999 Date: March 26, 1999
By: /s/ C. Marie Brown By: /s/ Gordon A. O'Neill
-------------------------------------- ----------------------------
C. Marie Brown Gordon A. O'Neill
(Director and Chief Operating Officer) (Director)
Date: March 26, 1999 Date: March 26, 1999
By: /s/ Beaman Smith
--------------------------------------
Beaman Smith
(Director and Secretary/Treasurer)
Date: March 26, 1999
</TABLE>
29
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
(3)(a) Articles of Incorporation of Tri-County Financial Corporation*
(3)(b) Bylaws of Tri-County Financial Corporation*
(10)(a) Tri-County Financial Corporation 1995 Stock Option and
Incentive Plan, as amended
(10)(b) Tri-County Financial Corporation 1995 Stock Option Plan
for Non-Employee Directors, as amended
(10)(c) Employment Agreement with Michael L. Middleton,
as amended, C. Marie Brown, as amended and Gregory C. Cockerham,
as amended
(13) Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998
(21) Subsidiaries of the Registrant
(23) Consent of Stegman & Company
(27) Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to the registrant's Form S-4 Registration
Statement No. 33-31287.
30
<PAGE>
EXHIBIT 10(a)
TRI-COUNTY FINANCIAL CORPORATION
1995 STOCK OPTION AND INCENTIVE PLAN
1. Purpose of the Plan.
The purpose of this Tri-County Financial Corporation Stock Option and
Incentive Plan (the "Plan") is to advance the interests of the Company through
providing select key Employees of the Bank, the Company, and their Affiliates
with the opportunity to acquire Shares. By encouraging such stock ownership,
the Company seeks to attract, retain and motivate the best available personnel
for positions of substantial responsibility and to provide addi tional incentive
to key Employees of the Company or any Affiliate to promote the success of the
business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).
(c) "Awards" shall mean, collectively, Options and SARs, unless the context
clearly indicates a different meaning.
(d) "Bank" shall mean Tri-County Federal Savings Bank of Waldorf.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Change in Control" shall mean: (i) the execution of an agreement for
the sale of all, or a material portion, of the assets of the Company; (ii) the
execution of an agreement for a merger or recapitalization of the Company or any
merger or recapitalization whereby the Company is not the surviving entity;
(iii) a change of control of the Company, as otherwise defined or determined by
the Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules promulgated thereunder) of twenty-five percent (25%)
or more of the outstanding voting securities of the Company by any person,
trust, entity or group. "Imminent Change in Control" shall refer to any offer
or announcement, oral or written, by any person or persons acting as a group, to
acquire control of the Company.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(h) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with Paragraph 5(a) hereof.
(i) "Common Stock" shall mean the common stock, par value $$.01 per share,
of the Company.
(j) "Company" shall mean Tri-County Financial Corporation
(k) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee of the Company or an Affiliate.
Continuous Service shall not be considered interrupted in the case of
sick
1
<PAGE>
leave, military leave or any other leave of absence approved by the Company or
in the case of transfers between payroll locations of the Company or between the
Company, an Affiliate or a successor.
(l) "Disability" shall mean a physical or mental condition, which in the
sole and absolute discretion of the Committee, is reasonably expected to be of
indefinite duration and to substantially prevent a Participant from fulfilling
his or her duties or responsibilities to the Company or an Affiliate.
(m) "Disinterested Person" shall mean any member of the Board who, at the
time discretion under the Plan is exercised, is a "disinterested person" within
the meaning of Rule 16b-3.
(n) "Effective Date" shall mean the date specified in Paragraph 14 hereof.
(o) "Employee" shall mean any person employed by the Company, the Bank, or
an Affiliate.
(p) "Exercise Price" shall mean the price per Optioned Share at which an
Option or SAR may be exercised.
(q) "ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan, and which is intended to be and is
identified as an "incentive stock option" within the meaning of Section 422 of
the Code.
(r) "Market Value" shall mean the fair market value of the Common Stock, as
determined under Paragraph 7(b) hereof.
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be and is not
identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.
(v) "Participant" shall mean any person who receives an Award pursuant to
the Plan.
(w) "Plan" shall mean this Tri-County Financial Corporation 1995 Stock
Option and Incentive Plan.
(x) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
(y) "Share" shall mean one share of Common Stock.
(z) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, of a specified
number of shares of Common Stock.
(aa) "Year of Service" shall mean a full twelve-month period, measured from
the date of an Award and each annual anniversary of that date, during which a
Participant has continuously been an Employee of the Company or an Affiliate.
3. Term of the Plan and Awards.
2
<PAGE>
(a) Term of the Plan. The Plan shall continue in effect for a term of ten
years from the Effective Date, unless sooner terminated pursuant to Paragraph 17
hereof. No Award shall be granted under the Plan after ten years from the
Effective Date.
(b) Term of Awards. The term of each Award granted under the Plan shall be
established by the Committee, but shall not exceed 10 years; provided, however,
that in the case of an Employee who owns Shares representing more than 10% of
the outstanding Common Stock at the time an ISO is granted, the term of such ISO
shall not exceed five years.
4. Shares Subject to the Plan.
(a) General Rule. Except as otherwise required by the provisions of
Paragraph 11 hereof, the aggregate number of Shares deliverable pursuant to
Awards shall not exceed 32,375 Shares. Such Shares may either be authorized but
unissued Shares or Shares held in treasury. If any Awards should expire, become
unexercisable, or be forfeited for any reason without having been exercised or
without having become vested in full, the Optioned Shares shall, unless the Plan
shall have been terminated, be available for the grant of additional Awards
under the Plan.
(b) Special Rule for SARs. The number of Shares with respect to which an
SAR is granted, but not the number of Shares which the Company delivers or could
deliver to an Employee or individual upon exercise of an SAR, shall be charged
against the aggregate number of Shares remaining available under the Plan;
provided, however, that in the case of an SAR granted in conjunction with an
Option, under circumstances in which the exercise of the SAR results in
termination of the Option and vice versa, only the number of Shares subject to
the Option shall be charged against the aggregate number of Shares remaining
available under the Plan. The Shares involved in an Option as to which option
rights have terminated by reason of the exercise of a related SAR, as provided
in Paragraph 9 hereof, shall not be available for the grant of further Options
under the Plan.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the
Committee, which shall consist of not less than three (3) members of the Board
who are Disinterested Persons. Members of the Committee shall serve at the
pleasure of the Board. In the absence at any time of a duly appointed
Committee, the Plan shall be administered by those members of the Board who are
Disinterested Persons.
(b) Powers of the Committee. Except as limited by the express provisions
of the Plan or by resolutions adopted by the Board, the Committee shall have
sole and complete authority and discretion (i) to select Participants and grant
Awards, (ii) to determine the form and content of Awards to be issued in the
form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to
prescribe, amend and rescind rules and regulations relating to the Plan, and (v)
to make other determinations necessary or advisable for the administration of
the Plan. The Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to time. A majority
of the entire Committee shall constitute a quorum and the action of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by a majority of the Committee without a meeting, shall be
deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement. The
terms of each such Agreement shall be in accordance with the Plan, but each
Agreement may include such additional provisions and restrictions determined by
the Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular,
the Committee shall set forth in each Agreement (i) the Exercise Price of an
Option or SAR, (ii) the
3
<PAGE>
number of Shares subject to, and the expiration date of, the Award, (iii) the
manner, time and rate (cumulative or otherwise) of exercise or vesting of such
Award, and (iv) the restrictions, if any, to be placed upon such Award, or upon
Shares which may be issued upon exercise of such Award.
The Chairman of the Committee and such other directors and officers as
shall be designated by the Committee are hereby authorized to execute Agreements
on behalf of the Company and to cause them to be delivered to the recipients of
Awards.
(d) Effect of the Committee's Decisions. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
(e) Indemnification. In addition to such other rights of indemnification
as they may have, the members of the Committee shall be indemnified by the
Company in connection with any claim, action, suit or proceeding relating to any
action taken or failure to act under or in connection with the Plan or any
Award, granted hereunder to the full extent provided for under the Company's
governing instruments with respect to the indemnification of directors.
6. Grant of Options.
(a) General Rule. Only Employees shall be eligible to receive Awards. In
selecting those Employees to whom Awards will be granted and the number of
shares covered by such Awards, the Committee shall consider the position, duties
and responsibilities of the eligible Employees, the value of their services to
the Company and its Affiliates, and any other factors the Committee may deem
relevant.
(b) Special Rules for ISOs. The aggregate Market Value, as of the date the
Option is granted, of the Shares with respect to which ISOs are exercisable for
the first time by an Employee during any calendar year (under all incentive
stock option plans, as defined in Section 422 of the Code, of the Company or any
present or future Affiliate of the Company) shall not exceed $100,000.
Notwithstanding the foregoing, the Committee may grant Options in excess of the
foregoing limitations, in which case such Options granted in excess of such
limitation shall be Options which are Non-ISOs.
7. Exercise Price for Options.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Option granted under the Plan shall not be less than 100% of the
Market Value of the Optioned Shares on the date of grant. In the case of an
Employee who owns Shares representing more than 10% of the Company's outstanding
Shares of Common Stock at the time an ISO is granted, the Exercise Price shall
not be less than 110% of the Market Value of the Optioned Shares at the time the
ISO is granted.
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National Market
System) on the date in question, then the Market Value per Share shall be not
less than the average of the highest and lowest selling price on such exchange
on such date, or if there were no sales on such date, then the Exercise Price
shall be not less than the mean between the bid and asked price on such date.
If the Common Stock is traded otherwise than on a national securities exchange
on the date in question, then the Market Value per Share shall be not less than
the mean between the bid and asked price on such date, or, if there is no bid
and asked price on such date, then on the next prior business day on which there
was a bid and asked price. If no such bid and asked price is available, then
the Market Value per Share shall be its fair market value as determined by the
Committee, in its sole and absolute discretion. Notwithstanding the foregoing,
in the event that either (i) the Committee exercises its discretion to impose
transfer (or other) restrictions on the Shares subject to an Option, or (ii) the
Plan requires specified transfer restrictions, the Committee shall make an
appropriate adjustment
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<PAGE>
in determining the Market Value of the Shares subject to such an Option (in
order to take into account that their fair market value may be less than the
fair market value of unrestricted Shares).
(c) Reissuance of Options and SARs. Notwithstanding anything herein to
the contrary, the Committee shall have the authority to cancel outstanding
Options and/or SARs with the consent of the Participant and to reissue new
Options and/or SARs at a lower Exercise Price equal to the then Market Value per
share of Common Stock in the event that the Market Value per share of Common
Stock at any time prior to the date of exercise of outstanding Options and/or
SARs falls below the Exercise Price.
8. Exercise of Options.
(a) Generally. Any Option granted hereunder shall be exercisable at such
times and under such conditions as shall be permissible under the terms of the
Plan and of the Agreement granted to a Participant. An Option may not be
exercised for a fractional Share.
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise, only
by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the number of Shares
with respect to which the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at the Company's
executive offices. Common Stock utilized in full or partial payment of the
Exercise Price for Options shall be valued at its Market Value at the date of
exercise, and may consist of Shares subject to the Option being exercised.
(c) Period of Exercisability. Except to the extent otherwise provided in
the terms of an Agreement, an Option may be exercised by a Participant only
while he is an Employee and has maintained Continuous Service from the date of
the grant of the Option, or within three months after termination of such
Continuous Service (but not later than the date on which the Option would
otherwise expire), except if the Employee's Continuous Service terminates by
reason of
(1) "Just Cause" which for purposes hereof shall have the meaning set
forth in any unexpired employment or severance agreement between the
Participant and the Bank and/or the Company (and, in the absence of any
such agreement, shall mean termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order), then the
Participant's rights to exercise such Option shall expire on the date of
such termination;
(2) death, then to the extent that the Participant would have been
entitled to exercise the Option immediately prior to his death, such Option
of the deceased Participant may be exercised within two years from the date
of his death (but not later than the date on which the Option would
otherwise expire) by the personal representatives of his estate or person
or persons to whom his rights under such Option shall have passed by will
or by laws of descent and distribution;
(3) Disability, then to the extent that the Participant would have
been entitled to exercise the Option immediately prior to his or her
Disability, such Option may be exercised within one year from the date of
termination of employment due to Disability, but not later than the date on
which the Option would otherwise expire.
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Notwithstanding the provisions of any Option which provides for its
exercise in installments or based on the Participant's future Continuous
Service, such Option shall become immediately and fully exercisable upon the
Participant's death or Disability.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
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<PAGE>
9. SARs (Stock Appreciation Rights)
(a) Granting of SARs. In its sole discretion, the Committee may from time
to time grant SARs to Employees either in conjunction with, or independently of,
any Options granted under the Plan. An SAR granted in conjunction with an
Option may be an alternative right wherein the exercise of the Option terminates
the SAR to the extent of the number of shares purchased upon exercise of the
Option and, correspondingly, the exercise of the SAR terminates the Option to
the extent of the number of Shares with respect to which the SAR is exercised.
Alternatively, an SAR granted in conjunction with an Option may be an additional
right wherein both the SAR and the Option may be exercised. An SAR may not be
granted in conjunction with an ISO under circumstances in which the exercise of
the SAR affects the right to exercise the ISO or vice versa, unless the SAR, by
its terms, meets all of the following requirements:
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference between the Exercise
Price of the ISO and the Market Value of the Shares subject to the ISO at
the time the SAR is exercised;
(3) The SAR is transferable only when the ISO is transferable, and under
the same conditions;
(4) The SAR may be exercised only when the ISO may be exercised; and
(5) The SAR may be exercised only when the Market Value of the Shares
subject to the ISO exceeds the Exercise Price of the ISO.
(b) Exercise Price. The Exercise Price as to any particular SAR shall not
be less than the Market Value of the Optioned Shares on the date of grant.
(c) Timing of Exercise. Any election by a Participant to exercise SARs
shall be made during the period beginning on the 3rd business day following the
release for publication of quarterly or annual financial information and ending
on the 12th business day following such date. This condition shall be deemed to
be satisfied when the specified financial data is first made publicly available.
In no event, however, may an SAR be exercised within the six-month period
following the date of its grant.
The provisions of Paragraph 8(c) regarding the period of exercisability of
Options are incorporated by reference herein, and shall determine the period of
exercisability of SARs.
(d) Exercise of SARs. An SAR granted hereunder shall be exercisable at
such times and under such con ditions as shall be permissible under the terms of
the Plan and of the Agreement granted to a Participant, provided that an SAR may
not be exercised for a fractional Share. Upon exercise of an SAR, the
Participant shall be entitled to receive, without payment to the Company except
for applicable withholding taxes, an amount equal to the excess of (or, in the
discretion of the Committee if provided in the Agreement, a portion of) the
excess of the then aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the aggregate Exercise
Price of such number of Optioned Shares. This amount shall be payable by the
Company, in the discretion of the Committee, in cash or in Shares valued at the
then Market Value thereof, or any combination thereof.
(e) Procedure for Exercising SARs. To the extent not inconsistent
herewith, the provisions of Paragraph 8(b) as to the procedure for exercising
Options are incorporated by reference, and shall determine the procedure for
exercising SARs.
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<PAGE>
10. Change in Control; Other Acceleration of Vesting
(a) General Rule. Notwithstanding the provisions of any Award which
provides for its exercise or vesting in installments, for a period of 60 days
beginning on the date of a Change in Control or an Imminent Change in Control,
all Options and SARs shall be immediately exercisable and fully vested. With
respect to Options, at the time of a Change in Control or an Imminent Change in
Control, the Participant shall, at the discretion of the Committee, be entitled
to receive cash in an amount equal to the excess of the Market Value of the
Common Stock subject to such Option over the Exercise Price of such Shares, in
exchange for the cancellation of such Options by the Participant.
(b) Acceleration of Vesting. The Committee shall at all times have the
power to accelerate the exercise date of Options and SARs.
11. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares subject
to outstanding Awards, and the Exercise Price thereof, shall be proportionately
adjusted for any increase, decrease, change or exchange of Shares for a
different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In the
event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding
Awards, together with the Exercise Prices thereof, shall be equitably adjusted
for any change or exchange of Shares for a different number or kind of shares or
other securities which results from the Transaction.
(c) Special Rule for ISOs. Any adjustment made pursuant to subparagraphs
(a) or (b)(1) hereof shall be made in such a manner as not to constitute a
modification, within the meaning of Section 424(h) of the Code, of outstanding
ISOs.
(d) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Paragraph, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the Shares pursuant to the Award before the adjustment was made.
(e) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect, and no adjustment
shall be made with respect to, the number, class, or Exercise Price of Shares
then subject to Awards or reserved for issuance under the Plan.
12. Non-Transferability of Awards.
Awards may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution, or pursuant to the terms of a "qualified domestic relations order"
(within the meaning of Section 414(p) of the Code and the regulations and
rulings thereunder).
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<PAGE>
13. Time of Granting Awards.
The date of grant of an Award shall, for all purposes, be the later of the
date on which the Committee makes the determination of granting such Award, or
the Effective Date. Notice of the determination shall be given to each
Participant to whom an Award is so granted within a reasonable time after the
date of such grant.
14. Effective Date.
The Plan shall become effective on January 31, 1995. Awards may be made
prior to approval of the Plan by the stockholders of the Company if the exercise
of Awards in the form of Options and/or SARs, are conditioned upon stockholder
approval of the Plan.
15. Approval by Stockholders.
The Plan shall be approved by stockholders of the Corporation within twelve
(12) months before or after the Effective Date.
16. Modification of Awards.
At any time, and from time to time, the Board may authorize the Committee
to direct execution of an instrument providing for the modification of any
outstanding Award, provided no such modification shall confer on the holder of
said Award any right or benefit which could not be conferred on him by the grant
of a new Award at such time, or impair the Award without the consent of the
holder of the Award.
17. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Awards, suspend or terminate
the Plan; provided that amendment of the Plan shall be approved by stockholders
to the extent that such stockholder approval is necessary to comply with
applicable provisions of the Code, rules promulgated pursuant to Section 16 of
the Securities Exchange Act of 1934, applicable state law, or NASD or exchange
listing requirements.
No amendment, suspension or termination of the Plan shall, without the
consent of any affected holder of an Award, alter or impair any rights or
obligations under any Award theretofore granted.
18. Conditions Upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not be
issued with respect to any Award unless the issuance and delivery of such Shares
shall comply with all relevant provisions of law, including, without limitation,
the Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities law, and the requirements of any
stock exchange upon which the Shares may then be listed. The Plan is intended
to comply with Rule 16b-3, and any provision of the Plan which the Committee
determines in its sole and absolute discretion to be inconsistent with said Rule
shall, to the extent of such inconsistency, be inoperative and null and void,
and shall not affect the validity of the remaining provisions of the Plan.
(b) Special Circumstances. The inability of the Company to obtain approval
from any regulatory body or authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder shall relieve
the Company of any liability in respect of the non-issuance or sale of such
Shares. As a condition to the exercise of an Option or SAR, the Company may
require the person exercising the Option or SAR to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
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<PAGE>
(c) Committee Discretion. The Committee shall have the discretionary
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to impose a
right of first refusal or to establish repurchase rights or both of these
restrictions.
19. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
20. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options and/or
SARs (or such earlier time that the Participant makes an election under Section
83(b) of the Code) shall be subject to the Participant's satisfaction of all
applicable federal, state and local income and employment tax withholding
obligations. The Committee, in its discretion, may permit the Participant to
satisfy the obligation, in whole or in part, by irrevocably electing to have the
Corporation withhold Shares, or to deliver to the Corporation Shares that he
already owns, having a value equal to the amount required to be withheld. The
value of Shares to be withheld, or delivered to the Corporation, shall be based
on the Market Value of the Shares on the date the amount of tax to be withheld
is to be determined. As an alternative, the Corporation may retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
21. No Employment or Other Rights.
In no event shall an Employee's eligibility to participate or participation
in the Plan create or be deemed to create any legal or equitable right of the
Employee, or any other party to continue service with the Company, the Bank, or
any Affiliate of such corporations. No Employee shall have a right to be
granted an Award or, having received an Award, the right to again be granted an
Award. However, an Employee who has been granted an Award may, if otherwise
eligible, be granted an additional Award or Awards.
22. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of
the State of Maryland, except to the extent that federal law shall be deemed to
apply.
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TRI-COUNTY FINANCIAL CORPORATION
1995 STOCK OPTION AND INCENTIVE PLAN
_____________________
1998 Amendment
_____________________
WHEREAS, Tri-County Financial Corporation (the "Company") maintains the
Tri-County Financial Corporation 1995 Stock Option and Incentive Plan (the
"Plan"); and
WHEREAS, the Company has determined that said Plan should be amended to
increase the number of shares reserved for future awards.
NOW, THEREFORE, pursuant to Paragraph 17 of the Plan, the Plan is hereby
amended as follows, effective immediately:
1. Paragraph 4(a) of the Plan shall be amended by inserting the following
sentence immediately after its first sentence:
The number of shares reserved under the Plan shall be increased by
79,400 Shares.
2. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Plan or any Option entered into
thereunder, other than as stated above.
WHEREFORE, on this 30th day of October, 1998, the Company hereby executes
this 1998 Amendment to the Plan.
TRI-COUNTY FINANCIAL CORPORATION
By
--------------------------------------
Its
----------------------------------
- -------------------------------
Date Attest:
---------------------------(Seal)
<PAGE>
EXHIBIT 10(b)
TRI-COUNTY FINANCIAL CORPORATION
1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. Purpose of the Plan.
The purpose of this Tri-County Financial Corporation 1995 Stock Option Plan
for Non-Employee Directors (the "Plan") is to advance the interests of the
Company through providing Directors of the Company and its Affiliates with the
opportunity to acquire Shares. By encouraging such stock ownership, the Company
seeks to attract, retain, and motivate the best available personnel for
positions of substantial responsibility and to provide additional incentive to
Directors to promote the success of the business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Change in Control" shall mean the acquisition of the beneficial
ownership (as that term is defined in Rule 13d-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended) of 25% or
more of the voting securities of the Company by any person or by persons acting
as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act
of 1934). For purposes of this subparagraph only, the term "person" refers to
an individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the Board as to
whether a change in control has occurred shall be conclusive and binding.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Common Stock" shall mean the common stock, par value $.01 per share,
of the Company.
(g) "Company" shall mean Tri-County Financial Corporation.
(h) "Continuous Service" shall mean the absence of any interruption or
termination of service as a Director of the Company or an Affiliate. Continuous
Service shall not be considered
<PAGE>
interrupted in the case of sick leave, military leave or any other leave of
absence approved by the Company or in the case of transfers between payroll
locations of the Company or between the Company, an Affiliate or a successor.
(i) "Director" shall mean any member of the Board or of the Board of
Directors of an Affiliate, including advisory director Gough.
(j) "Effective Date" shall mean the date specified in Paragraph 13 hereof.
(k) "Employee" shall mean any person employed on a full-time basis by the
Company or an Affiliate.
(l) "Exercise Price" shall mean the price per Optioned Share at which an
Option may be exercised.
(m) "Market Value" shall mean the fair market value of the Common Stock, as
determined under Paragraph 7(b) hereof.
(n) "Option" means an option to purchase Common Stock which meets the
requirements set forth in the Plan. Such Options shall not constitute
"incentive stock options" within the meaning of Section 422 of the Code.
(o) "Optioned Shares" shall mean Shares subject to an Option granted
pursuant to this Plan.
(p) "Participant" shall mean any person who receives an Option pursuant to
the Plan.
(q) "Plan" shall mean this Tri-County Financial Corporation 1995 Stock
Option Plan for Non-Employee Directors.
(r) "Share" shall mean one share of Common Stock.
3. Term of the Plan and Options.
(a) Term of the Plan. The Plan shall continue in effect for a term of five
years from the Effective Date, unless sooner terminated pursuant to Paragraph 14
hereof. No Option shall be granted under the Plan after five years from the
Effective Date.
(b) Term of Options. The term of each Option granted under the Plan shall
be 10 years.
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<PAGE>
4. Shares Subject to the Plan.
Except as otherwise required by the provisions of Paragraph 10 hereof, the
aggregate number of Shares deliverable pursuant to Options shall not exceed
7,000 Shares. Such Shares may either be authorized but unissued Shares or
Shares held in treasury. If Options should expire, become unexercisable or be
forfeited for any reason without having been exercised or become vested in full,
the Optioned Shares shall, unless the Plan shall have been terminated, be
available for the grant of additional Options under the Plan.
5. Administration of the Plan.
(a) General Rule. The Plan shall be administered by the Board, provided
that the Board may appoint a committee of Directors to make any determinations
required pursuant to the Plan.
(b) Powers. Except as limited by the express provisions of the Plan, the
Board shall have sole and complete authority and discretion (i) to determine the
form and content of Options to be issued in the form of Agreements under the
Plan, (ii) to interpret the Plan, (iii) to prescribe, amend and rescind rules
and regulations relating to the Plan, and (iv) to make other determinations
necessary or advisable for the administration of the Plan.
(c) Agreement. Each Option shall be evidenced by a written agreement
containing such provisions as may be approved by the Board. Each such Agreement
shall constitute a binding contract between the Company and the Participant, and
every Participant, upon acceptance of such Agreement, shall be bound by the
terms and restrictions of the Plan and of such Agreement. The terms of each
such Agreement shall be in accordance with the Plan. In particular, the Board
shall set forth in each Agreement (i) the Exercise Price of an Option, (ii) the
number of Shares subject to, and the expiration date of, the Option, (iii) the
manner, time, and rate (cumulative or otherwise) of exercise or vesting of such
Option, and (iv) the restrictions, if any, to be placed upon such Option, or
upon Shares which may be issued upon exercise of such Option.
The President of the Company and such Directors as shall be designated by
the Board are hereby authorized to execute Agreements on behalf of the Company,
and to cause them to be delivered to the recipients of Options.
(d) Effect of the Board's Decisions. All decisions, determinations and
interpretations of the Board shall be final and conclusive on all persons
affected thereby.
(e) Indemnification. In addition to such other rights of indemnification
as they may have, the members of the Board shall be indemnified by the Company
in connection with any claim, action, suit or proceeding relating to any action
taken or failure to act under or in connection with the Plan or any Option,
granted hereunder to the full extent provided for under the Company's governing
instruments with respect to the indemnification of Directors.
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<PAGE>
(f) Certain Mandatory Abstentions. Notwithstanding anything herein to the
contrary, no Director shall have any vote with regard to any Option previously
granted to himself or herself.
6. Grant of Options.
Each Director who is not an Employee but is a Director on the Effective
Date shall receive, on said date, an Option to purchase 1,400 Shares at an
Exercise Price per Share equal to its Market Value on the Effective Date.
7. Exercise Price for Options.
(a) General Rule. The Exercise Price as to any particular Option shall be
the Market Value of the Optioned Shares on the date of grant, as determined by
the Board.
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National Market
System) on the date in question, then the Market Value per Share shall be the
average of the highest and lowest selling price on such exchange on such date,
or if there were no sales on such date, then the Exercise Price shall be the
mean between the bid and asked price on such date. If the Common Stock is
traded otherwise than on a national securities exchange on the date in question,
then the Market Value per Share shall be the mean between the bid and asked
price on such date, or, if there is no bid and asked price on such date, then on
the next prior business day on which there was a bid and asked price. If no
such bid and asked price is available, then the Market Value per Share shall be
its fair market value as determined by the Board, in its sole and absolute
discretion.
8. Exercise of Options.
(a) Generally. Each Option shall be fully (100%) exercisable immediately
upon the date of its grant.
(b) Procedure for Exercise. Options may be exercised from time to time by
(i) written notice of intent to exercise the Option with respect to all or a
specified number of the Optioned Shares, and (ii) payment to the Company
(contemporaneously with the delivery of such notice), in cash, in Common Stock,
or a combination of cash and Common Stock, of the amount of the Exercise Price
for the number of the Optioned Shares with respect to which the Option is then
being exercised. Each such notice and payment shall be delivered, or mailed by
prepaid registered or certified mail, addressed to the Treasurer of the Company
at the Company's executive offices. A Director who exercises Options may
satisfy all applicable federal, state and local income and employment tax
withholding obligations, in whole or in part, by irrevocably electing to have
the Company withhold shares of Common Stock, or to deliver to the Company shares
of Common Stock that he already owns, having a value equal to the amount
required to be withheld.
4
<PAGE>
(c) Exercisability. Options granted under this Paragraph may be exercised
only while the Participant is a Director of the Company, or within one year
after termination of the Participant's Continuous Service as a Director, but in
no event later than the date on which such Options would otherwise expire. In
the event of such Director's death during the term of his directorship, Options
granted under this Paragraph may be exercised within one year from the date of
his death by the personal representatives of his estate or person or persons to
whom his rights under such Option shall have passed by will or by laws of
descent and distribution, but in no event later than the date on which such
Options would otherwise expire.
9. Change in Control
At the time of a Change in Control, each holder of an Option shall be
entitled to receive cash from the Company in an amount equal to the excess of
the Market Value of the Common Stock subject to the Option over the Exercise
Price of the Optioned Shares, in exchange for the cancellation of such Option.
10. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares subject
to outstanding Options (and the Exercise Price thereof) shall be proportionately
adjusted for any increase, decrease, change or exchange of Shares for a
different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. Subject
to Paragraph 9 hereof, in the event of (i) the liquidation or dissolution of the
Company, (ii) a merger or consolidation in which the Company is not the
surviving entity, or (iii) the sale or disposition of all or substantially all
of the Company's assets (any of the foregoing to be referred to herein as a
"Transaction"), all outstanding Options shall be surrendered. With respect to
each Option so surrendered, the holder of the surrendered Option may elect to
receive --
(1) for each Share then subject to an outstanding Option the number
and kind of shares into which each outstanding Share (other than Shares
held by dissenting stockholders) is changed or exchanged, together with an
appropriate adjustment to the Exercise Price; or
(2) a cash payment (from the Company or the successor corporation),
in an amount equal to the Market Value of the Shares subject to the Option
on the date of the Transaction, less the Exercise Price of the Option.
5
<PAGE>
(c) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Paragraph, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the Shares pursuant to the Option before the adjustment was made.
(d) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect, and no adjustment
shall be made with respect to, the number, class, or Exercise Price of Shares
then subject to Options or reserved for issuance under the Plan.
11. Non-Transferability of Options.
Options may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution.
12. Time of Granting Options.
The date of grant of an Option shall, for all purposes, be the date on
which the Board makes the determination granting such Option. Notice of the
determination shall be given to each Participant to whom an Option is so granted
within a reasonable time after the date of such grant.
13. Effective Date.
The Plan shall become effective immediately upon its approval by the Board.
14. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Options, suspend or terminate
the Plan; provided that no provision hereof may be amended more than once every
six months (other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder).
No amendment, suspension or termination of the Plan shall, without the consent
of any affected holders of an Option, alter or impair any rights or obligations
under any Option theretofore granted.
15. Conditions Upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not be
issued with respect to any Option unless the issuance and delivery of such
Shares shall comply with all
6
<PAGE>
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the rules and regulations promulgated thereunder, any
applicable state securities law, and the requirements of any stock exchange upon
which the Shares may then be listed.
(b) Special Circumstances. The inability of the Company to obtain approval
from any regulatory body or authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder shall relieve
the Company of any liability in respect of the non-issuance or sale of such
Shares. As a condition to the exercise of an Option, the Company may require
the person exercising the Option to make such representations and warranties as
may be necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
16. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
17. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options shall
be subject to the Participant's satisfaction of all applicable federal, state
and local income and employment tax withholding obligations. Each Participant
may satisfy the obligation, in whole or in part, by irrevocably electing to have
the Company withhold Shares, or to deliver to the Company Shares that he already
owns, having a value equal to the amount required to be withheld. The value of
Shares to be withheld, or delivered to the Company, shall be based on the Market
Value of the Shares on the date the amount of tax to be withheld is to be
determined. As an alternative, the Company may retain, or sell without notice,
a number of such Shares sufficient to cover the amount required to be withheld.
18. No Employment or Other Rights.
In no event shall a Director's eligibility to participate or participation
in the Plan create or be deemed to create any legal or equitable right of the
Director, or any other party to continue service with the Company or any
Affiliate. No Director shall have a right to be granted an Option or, having
received an Option, the right to again be granted an Option. However, a
Director who has been granted an Option may, if otherwise eligible, be granted
an additional Option or Options.
19. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of
the State of Maryland, except to the extent that federal law shall be deemed to
apply.
7
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
_____________________
1998 Amendment
_____________________
WHEREAS, Tri-County Financial Corporation (the "Company") maintains the
Tri-County Financial Corporation 1995 Stock Option Plan for Non-Employee
Directors (the "Plan"); and
WHEREAS, the Company has determined that said Plan should be amended to
increase the number of shares reserved for future awards.
NOW, THEREFORE, pursuant to Paragraph 14 of the Plan, the Plan is hereby
amended as follows, effective immediately:
1. Paragraph 4 of the Plan shall be amended by inserting the following
sentence immediately after its first sentence:
The number of shares reserved under the Plan shall be increased by
10,000 Shares.
2. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Plan or any Option entered into
thereunder, other than as stated above.
WHEREFORE, on this 30th day of October, 1998, the Company hereby executes
this 1998 Amendment to the Plan.
TRI-COUNTY FINANCIAL CORPORATION
By
-------------------------------------
Its
----------------------------------
- -------------------------------
Date Attest:
---------------------------(Seal)
<PAGE>
EXHIBIT 10(c)
COMMUNITY BANK OF TRI-COUNTY
____________________________________
Restated Employment Agreement with
Michael L. Middleton
____________________________________
AGREEMENT, originally entered into as of June 1, 1986 and amended as of
March 1, 1991 and August ___, 1996, and restated effective this ________ day of
February, 1998, by and between Community Bank of Tri-County (the "Bank") and
Michael L. Middleton (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as its
President and Chief Executive Officer and is experienced in all phases of the
business of the Bank; and
WHEREAS, the Bank and Employee are parties to an employment agreement dated
June 1, 19986 and amended as of March 1, 1991 and August ___, 1996; and
WHEREAS, the parties desire by this writing to restate the terms of such
employment agreement.
NOW, THEREFORE, it is AGREED as follows:
1. Defined Terms
-------------
When used anywhere in this Agreement, the following terms shall have the
meaning set forth herein.
(a) "Change in Control" shall mean any one of the following events:
(i) the acquisition of ownership, holding or power to vote more than 25% of the
voting stock of the Bank or the Company, (ii) the acquisition of the ability to
control the election of a majority of the Bank's or the Company's directors,
(iii) the acquisition of a controlling influence over the management or policies
of the Bank or of the Company by any person or by persons acting as a "group"
(within the meaning of Section 13(d) of the Securities Exchange Act of 1934), or
(iv) during any period of two consecutive years, individuals (the "Continuing
Directors") who at the beginning of such period constitute the Board of
Directors of the Bank or of the Company (the "Existing Board") cease for any
reason to constitute at least two-thirds thereof, provided that any individual
whose election or nomination for election as a member of the Existing Board was
approved by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. Notwithstanding the
foregoing, the Company's ownership of the Bank shall not of itself constitute a
Change in Control for purposes of the Agreement. For purposes of this paragraph
only, the term "person" refers to an individual or a corporation, partnership,
trust, association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization or any other form of entity not specifically listed
herein.
(b) "Company" shall mean Tri-County Financial Corporation.
<PAGE>
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and as interpreted through applicable rulings and regulations
in effect from time to time.
(d) "Code '280G Maximum" shall mean the product of 2.99 and the
Employee's "base amount" as defined in Code '280G(b)(3).
(e) "Disability" shall mean a physical or mental infirmity which
impairs the Employee's ability to substantially perform his duties under this
Agreement and which results in the Employee becoming eligible for long-term
disability benefits under the Bank's long-term disability plan (or, if the Bank
has no such plan in effect, which impairs the Employee's ability to
substantially perform his duties under this Agreement for a period of 180
consecutive days).
(f) "Effective Date" shall mean the date of restatement of this
Agreement, February __, 1998.
(g) "Good Reason" shall mean any of the following events, which has
not been consented to in advance by the Employee in writing: (i) the requirement
that the Employee move his personal residence, or perform his principal
executive functions, more than 30 miles from his primary office as of the later
of the Effective Date and the most recent voluntary relocation by the Employee;
(ii) a material reduction in the Employee's base compensation under this
Agreement as the same may be increased from time to time; (iii) the failure by
the Bank or the Company to continue to provide the Employee with compensation
and benefits provided under this Agreement as the same may be increased from
time to time, or with benefits substantially similar to those provided to him
under any of the employee benefit plans in which the Employee now or hereafter
becomes a participant, or the taking of any action by the Bank or the Company
which would directly or indirectly reduce any of such benefits or deprive the
Employee of any material fringe benefit enjoyed by him under this Agreement;
(iv) the assignment to the Employee of duties and responsibilities materially
different from those normally associated with his position; (v) a failure to
reelect the Employee to the Board of Directors of the Bank (the "Board") or the
Company; or (vi) a material diminution or reduction in the Employee's
responsibilities or authority (including reporting responsibilities) in
connection with his employment with the Bank.
(h) "Just Cause" shall mean, in the good faith determination of the
Bank's Board of Directors, the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
The Employee shall have no right to receive compensation or other benefits for
any period after termination for Just Cause. No act, or failure to act, on the
Employee's part shall be considered "willful" unless he has acted, or failed to
act, with an absence of good faith and without a reasonable belief that his
action or failure to act was in the best interest of the Bank and the Company.
(i) "Protected Period" shall mean the period that begins on the date
six months before a Change in Control and ends on the later of the second annual
anniversary of the Change in Control or the expiration date of this Agreement.
-2-
<PAGE>
(j) "Trust" shall mean a grantor trust that is designed in
accordance with Revenue Procedure 92-64 and has a trustee independent of the
Bank and the Company.
2. Employment. The Employee is employed as the President and Chief
----------
Executive Officer of the Bank. The Employee shall render such administrative
and management services for the Bank as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee shall also promote, by entertainment or otherwise, as and to the extent
permitted by law, the business of the Bank. The Employee's other duties shall
be such as the Board may from time to time reasonably direct, including normal
duties as an officer of the Bank.
3. Base Compensation. The Bank agrees to pay the Employee during the
-----------------
term of this Agreement a salary at the rate of $142,100 per annum, payable in
cash not less frequently than monthly. The Board shall review, not less often
than annually, the rate of the Employee's salary, and in its sole discretion may
decide to increase his salary.
4. Discretionary Bonuses. The Employee shall participate in an
---------------------
equitable manner with all other senior management employees of the Bank in
discretionary bonuses that the Board may award from time to time to the Bank's
senior management employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such discretionary bonuses.
5. Participation in Retirement, Medical and Other Plans.
----------------------------------------------------
(a) The Employee shall be eligible to participate in any of the
following plans or programs that the Bank may now or in the future maintain:
group hospitalization, disability, health, dental, sick leave, life insurance,
travel and/or accident insurance, auto allowance/auto lease, retirement,
pension, and/or other present or future qualified or nonqualified plans provided
by the Bank, generally which benefits, taken as a whole, must be at least as
favorable as those in effect on the Effective Date.
(b) The Employee shall also be eligible to participate in any fringe
benefits which are or may become available to the Bank's senior management
employees, including for example: any stock option or incentive compensation
plans, and any other benefits which are commensurate with the responsibilities
and functions to be performed by the Employee under this Agreement. The
Employee shall be reimbursed for all reasonable out-of-pocket business expenses
which he shall incur in connection with his services under this Agreement upon
substantiation of such expenses in accordance with the policies of the Bank.
6. Term. The Bank hereby employs the Employee, and the Employee hereby
----
accepts such employment under this Agreement, for the period commencing on the
Effective Date and ending 60 months thereafter (or such earlier date as is
determined in accordance with Section 10 or 12 hereof). Additionally, on each
annual anniversary date from the Effective Date, the Employee's term of
employment shall be extended for an additional one-year period beyond the then
effective expiration date, provided the Board determines in a duly adopted
resolution that the performance of the Employee has met the Board's requirements
and standards, and that this Agreement shall be extended. Only those members of
the Board of Directors who have no personal interest in this Employment
Agreement shall discuss and vote on the approval and subsequent review of this
Agreement.
-3-
<PAGE>
7. Loyalty; Noncompetition.
-----------------------
(a) During the period of his employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties hereunder; provided, however, from
time to time, the Employee may serve on the boards of directors of, and hold any
other offices or positions in, companies or organizations, which will not
present any conflict of interest with the Bank or any of its subsidiaries or
affiliates, or unfavorably affect the performance of the Employee's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of his employment under this Agreement, the Employee shall not
engage in any business or activity contrary to the business affairs or interests
of the Bank.
(b) Nothing contained in this Section shall be deemed to prevent or
limit the Employee's right to invest in the capital stock or other securities of
any business dissimilar from that of the Bank, or, solely as a passive or
minority investor, in any business.
8. Standards. The Employee shall perform his duties under this
---------
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Bank will provide the Employee with the
working facilities and staff customary for similar executives and necessary for
him to perform his duties.
9. Vacation and Sick Leave. At such reasonable times as the Board
-----------------------
shall in its discretion permit, the Employee shall be entitled, without loss of
pay, to absent himself voluntarily from the performance of his employment under
this Agreement, all such voluntary absences to count as vacation time, provided
that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies that the Board periodically establishes for senior
management employees of the Bank, which shall in no event be less than four (4)
weeks per annum.
(b) The Employee shall not receive any additional compensation from
the Bank on account of his failure to take a vacation or sick leave, and the
Employee shall not accumulate unused vacation or sick leave from one fiscal year
to the next, except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Bank for such additional periods of time
and for such valid and legitimate reasons as the Board may in its discretion
determine. Further, the Board may grant to the Employee a leave or leaves of
absence, with or without pay, at such time or times and upon such terms and
conditions as such Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board. In the event any sick leave time
shall not have been used during any year, such leave shall accrue to subsequent
years only to the extent authorized by the Board.
-4-
<PAGE>
10. Termination and Termination Pay. Subject to Section 12 hereof, the
-------------------------------
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which his death occurred.
(b) Disability. (1) The Bank may terminate the Employee's
employment after having established the Employee's Disability, in which event
the Employee shall be entitled to the compensation and benefits provided for
under this Agreement for (i) any period during the term of this Agreement and
prior to the establishment of the Employee's Disability during which the
Employee is unable to work due to the physical or mental infirmity, and (ii) any
period of Disability which is prior to the Employee's termination of employment
pursuant to this Section 10(b); provided that any benefits paid pursuant to the
Bank's long term disability plan will continue as provided in such plan without
-------
reduction for payments made pursuant to this Agreement.
(2) During any period that the Employee shall receive disability
benefits and to the extent that the Employee shall be physically and mentally
able to do so, he shall furnish such information, assistance and documents so as
to assist in the continued ongoing business of the Bank and, if able, shall make
himself available to the Bank to undertake reasonable assignments consistent
with his prior position and his physical and mental health. The Bank shall pay
all reasonable expenses incident to the performance of any assignment given to
the Employee during the disability period.
(c) Just Cause. The Board may, by written notice to the Employee,
immediately terminate his employment at any time, for Just Cause. The Employee
shall have no right to receive compensation or other benefits for any period
after termination for Just Cause.
(d) Without Just Cause; Constructive Discharge. The Board may, by
written notice to the Employee, immediately terminate his employment at any time
for a reason other than his Disability or Just Cause, in which event the
Employee shall be entitled to receive the following compensation and benefits
(unless such termination occurs during the Protected Period, in which event the
benefits and compensation provided for in Section 12 shall apply):
(i) the salary provided pursuant to Section 3 hereof,
together with accrued incentive pay (based on the level of such
pay for the year in which the termination occurs) for a period of
three years following termination of employment, and
(ii) at the Employee's election either (A) cash in an amount
equal to the cost to the Employee of obtaining all health, life,
disability and other benefits which the Employee would have been
eligible to participate for a period of three years following
termination of employment, based upon the benefit levels
substantially equal to those that the Bank provided for the
Employee at the date of termination of employment or (B) continued
participation under such Bank benefit plans for a period of three
years following termination of employment, to the extent the
Employee continues to qualify for participation therein.
-5-
<PAGE>
All amounts payable to the Employee shall be paid, at the option of the
Employee, either (I) in periodic payments, through the Expiration Date, or (II)
in one lump sum within ten days of such termination.
(e) Good Reason. The Employee shall be entitled to receive the
compensation and benefits payable under subsection 10(d) hereof in the event
that the Employee voluntarily terminates employment within 90 days of an event
that constitutes Good Reason, (unless such voluntary termination occurs during
the Protected Period, in which event the benefits and compensation provided for
in Section 12 shall apply).
(f) Termination or Suspension Under Federal Law. (1) If the Employee
is removed and/or permanently prohibited from participating in the conduct of
the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the
Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all
obligations of the Bank under this Agreement shall terminate, as of the
effective date of the order, but vested rights of the parties shall not be
affected.
(2) If the Bank is in default (as defined in Section 3(x)(1) of
FDIA), all obligations under this Agreement shall terminate as of the date of
default; however, this Paragraph shall not affect the vested rights of the
parties.
(3) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA
(12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the
Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(4) Any payments made to the Employee pursuant to this Agreement,
or otherwise, are subject to and conditioned upon their compliance with
applicable law and regulations.
(g) Voluntary Termination by Employee. Subject to Section 12 hereof,
the Employee may voluntarily terminate employment with the Bank during the term
of this Agreement, upon at least 90 days' prior written notice to the Board of
Directors, in which case the Employee shall receive only his compensation,
vested rights and employee benefits up to the date of his termination (unless
such termination occurs pursuant to Section 10(d) hereof or within the Protected
Period, in Section 12(a) hereof, in which event the benefits and compensation
provided for in Sections 10(d) or 12, as applicable, shall apply).
(h) Post-termination Health Insurance. If the Employee's employment
terminates with the Bank or the Company for any reason other than Just Cause,
the Employee shall be entitled to purchase from the Bank, at the Employee's own
expense which shall not exceed applicable COBRA rates, family medical insurance
under any group health plan that the Bank or the Company maintains for its
employees. This right shall be (i) in addition to, and not in lieu of, any
other rights that the Employee has under this Agreement, and (ii) shall continue
until the Employee first becomes eligible for participation in Medicare.
-6-
<PAGE>
11. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
12. Change in Control.
-----------------
(a) Trigger Events. The Employee shall be entitled to collect the
severance benefits set forth in Subsection (b) hereof in the event that either
(i) the Employee voluntarily terminates employment for any reason within the 30-
day period beginning on the date of a Change in Control, (ii) the Employee
voluntarily terminates employment within 90 days of an event that both occurs
during the Protected Period and constitutes Good Reason, or (iii) the Bank or
the Company or their successor(s) in interest terminate the Employee's
employment without his written consent and for any reason other than Just Cause
during the Protected Period.
(b) Amount of Severance Benefit. If the Employee becomes entitled
to collect severance benefits pursuant to Section 12(a) hereof, the Bank shall:
(i) pay the Employee a severance benefit equal to the
difference between the Code '280G Maximum and the sum of any other
"parachute payments" as defined under Code '280G(b)(2) that the
Employee receives on account of the Change in Control, and
(ii) pay for long-term disability and provide such medical
benefits as are available to the Employee under the provisions of
COBRA, for eighteen (18) months (or such longer period, up to 24
months, if COBRA is amended).
The amount payable under this Section 12(b) shall be paid either (i) in
one lump sum within ten days of the later of the date of the Change in Control
and the Employee's last day of employment with the Bank or the Company, or (ii)
if prior to the date which is 90 days before the date on which a Change in
Control occurs, the Employee filed a duly executed irrevocable written election
in the form attached hereto as Exhibit AA@, payment of such amount shall be made
according to the elected schedule. Deferred amounts shall bear interest from
the date on which they would otherwise be payable until the date paid at a rate
equal to 120% of the applicable federal rate, compounded semiannually, as
determined under Code Section 1274(d) and the regulations thereunder.
In the event that the Employee, the Bank, and the Company jointly agree
that the Employee has collected an amount exceeding the Code '280G Maximum, the
parties may agree in writing that such excess shall be treated as a loan ab
--
initio, which the Employee shall repay to the Bank, on terms and conditions
- ------
mutually agreeable to the parties, together with interest at the applicable
federal rate provided for in Section 7872(f)(2)(B) of the Code.
(c) Funding of Grantor Trust upon Change in Control. Not later than
ten business days after a Change in Control, the Bank shall (i) deposit in a
Trust an amount equal to the Code '280G Maximum, unless the Employee has
previously provided a written release of any claims under this
-7-
<PAGE>
Agreement, and (ii) provide the trustee of the Trust with a written direction to
hold said amount and any investment return thereon in a segregated account for
the benefit of the Employee, and to follow the procedures set forth in the next
paragraph as to the payment of such amounts from the Trust. Upon the later of
the Trust's final payment of all amounts due under the following paragraph or
the date 27 months after the Change in Control, the trustee of the Trust shall
pay to the Bank the entire balance remaining in the segregated account
maintained for the benefit of the Employee. The Employee shall thereafter have
no further interest in the Trust.
During the 27-consecutive month period after a Change in Control, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as being
payable pursuant to this Agreement. Within three business days after receiving
said notice, the trustee of the Trust shall send a copy of the notice to the
Bank via overnight and registered mail return receipt requested. On the tenth
(10th) business day after mailing said notice to the Bank, the trustee of the
Trust shall pay the Employee the amount designated therein in immediately
available funds, unless prior thereto the Bank provides the trustee with a
written notice directing the trustee to withhold such payment. In the latter
event, the trustee shall submit the dispute to non-appealable binding
arbitration for a determination of the amount payable to the Employee pursuant
to this Agreement, and the costs of such arbitration shall be paid by the Bank.
The trustee shall choose the arbitrator to settle the dispute, and such
arbitrator shall be bound by the rules of the American Arbitration Association
in making his determination. The parties and the trustee shall be bound by the
results of the arbitration and, within 3 days of the determination by the
arbitrator, the trustee shall pay from the Trust the amounts required to be paid
to the Employee and/or the Bank, and in no event shall the trustee be liable to
either party for making the payments as determined by the arbitrator.
13. Indemnification. The Bank and the Company agree that their
---------------
respective Bylaws shall continue to provide for indemnification of directors,
officers, employees and agents of the Bank and the Company, including the
Employee during the full term of this Agreement, and to at all times provide
adequate insurance for such purposes.
14. Reimbursement of Employee for Enforcement Proceedings. In the
-----------------------------------------------------
event that any dispute arises between the Employee and the Bank as to the terms
or interpretation of this Agreement, whether instituted by formal legal
proceedings or otherwise, including any action that the Employee takes to defend
against any action taken by the Bank or the Company, the Employee shall be
reimbursed for all costs and expenses, including reasonable attorneys' fees,
arising from such dispute, proceedings or actions, provided that the Employee
obtains either a written settlement or a final judgement by a court of competent
jurisdiction substantially in his favor. Such reimbursement shall be paid
within ten days of the Employee's furnishing to the Bank written evidence, which
may be in the form, among other things, of a canceled check or receipt, of any
costs or expenses incurred by the Employee.
15. Federal Income Tax Withholding. The Bank may withhold all federal
------------------------------
and state income or other taxes from any benefit payable under this Agreement as
shall be required pursuant to any law or government regulation or ruling.
-8-
<PAGE>
16. Successors and Assigns.
----------------------
(a) Bank. This Agreement shall not be assignable by the Bank,
provided that this Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank.
(b) Employee. Since the Bank is contracting for the unique and
personal skills of the Employee, the Employee shall be precluded from assigning
or delegating his rights or duties hereunder without first obtaining the written
consent of the Bank; provided, however, that nothing in this paragraph shall
preclude (i) the Employee from designating a beneficiary to receive any benefit
payable hereunder upon his death, or (ii) the executors, administrators, or
other legal representatives of the Employee or his estate from assigning any
rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
17. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
18. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the State of Maryland shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
19. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
20. Entire Agreement. This Agreement, together with any understanding
----------------
or modifications thereof as agreed to in writing by the parties, shall
constitute the entire agreement between the parties hereto and shall supersede
any prior agreement between the parties, including their agreement entered into
on June 1, 1986.
-9-
<PAGE>
Employment Agreement
Deferred Payment Election Form
Page 2
IN WITNESS WHEREOF, the parties have executed this restated Agreement on
the day and year first hereinabove written.
ATTEST: COMMUNITY BANK OF TRI-COUNTY
By:
- ---------------------------- ------------------------------
Secretary Its Chairman of the Board
WITNESS:
/s/ Michael L. Middleton
- ---------------------------- ------------------------------
Michael L. Middleton
-10-
<PAGE>
RESTATED EMPLOYMENT AGREEMENT with C. Marie Brown
THIS AGREEMENT originally entered into as of December 17, 1993, and
restated effective this 23 day of February 1998, by and between Community Bank
of Tri-County (the "BANK") and C. Marie Brown (the "Employee"), effective as of
the date hereof (the "Effective Date").
WHEREAS, the Employee has heretofore been employed by the bank as and is
experienced in all phases of the business of the Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the Senior Vice President of
----------
the Bank. The Employee shall render such administrative and management services
for the Bank as are currently rendered and as are customarily performed by
persons situated in a similar executive capacity. The Employee shall also
promote, by entertainment or otherwise, as and to the extent permitted by law,
the business of the Bank. The Employee's other duties shall be such as the
Board of Directors of the Bank ("Board") may from time to time reasonably
direct, including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
-----------------
term of this agreement a salary at the rate of $88,200 per annum, payable in
cash not less frequently than monthly. The Board shall review, not less than
annually, the rate of the Employee's salary, and in its sole discretion may
decide to increase his/her salary.
3. Discretionary Bonus. The Employee shall participate in an equitable
-------------------
manner with all other senior management employees of the Bank in discretionary
bonuses that the Board may award from time to time to the Bank's senior
management employees. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to participate in such
discretionary bonuses.
4. (a) Participation in Retirement, Medical and Other Plans. The
----------------------------------------------------
Employee shall participate in any plan that the Bank maintains for the benefit
of its employees if the plan relates to (i) pension, profit-sharing, or other
retirement benefits, (ii) medical insurance or the reimbursement of medical or
dependent care expenses, or (iii) other group benefits, including disability and
life insurance plans.
(b) Employee Benefits; Expenses. The Employee shall participate in
---------------------------
any fringe benefits which are or may become available to the Bank's senior
management employees,
1
<PAGE>
any other benefits which are commensurate with the responsibilities and
functions to be performed by the Employee under this Agreement. The Employees
shall be reimbursed for all reasonable out-of-pocket business expenses which
he/she shall incur in connection with his/her services under this Agreement upon
substantiation of such expenses in accordance with the policies of the Bank.
5. Term. The Bank hereby employs the Employee, and the Employee hereby
----
accepts such employment under this Agreement, for the period commencing on the
Effective Date and ending 36 months thereafter (or such earlier date as is
determined in accordance with Section 9). Additionally, on each annual
anniversary date from the Effective date, the Employee's term of employment
shall be extended for an additional one-year period beyond the then effective
expiration date provided the Board determined in a duly adopted resolution that
the performance of the Employee has met the Board's requirements and standards,
and that this Agreement shall be extended.
6. Loyalty; Non-competition.
------------------------
(a) During the period of his/her employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his/her full business time, attention, skill, and
efforts to the faithful performance of his/her duties hereunder; provided,
however, from time to time, the Employee may serve on the boards of directors
of, and hold any other offices or positions in, companies or organizations,
which will not present any conflict of interest with the Bank or any of its
subsidiaries or affiliates, or unfavorably affect the performance of Employee's
duties pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of his/her employment under this Agreement, the Employee shall
not engage in any business or activity contrary to the business affairs or
interest of the Bank, or be gainfully employed in any other position or job
other than as provided above.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent
or limit the Employee's right to invest in the capital stock or other securities
of any business dissimilar from that of the Bank, or, solely as a passive or
minority investor, in any business.
7. Standards. The Employee shall perform his/her duties under this
---------
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Bank will provide Employee with the working
facilities and staff customary for similar executives and necessary for him/her
to perform his/her duties.
8. Vacation and Sick Leave. At such reasonable times as the Board shall
-----------------------
in its discretion permit, the Employee shall be entitled, without loss of pay,
to absent himself/herself voluntarily from the performance of his/her employment
under this Agreement, all such voluntary absences to count as vacation time,
provided that:
2
<PAGE>
(a) The Employee shall be entitled to an annual vacation in accordance
with the policies that the Board periodically established for senior management
employees of the Bank.
(b) The Employee shall not receive any additional compensation from
the Bank on account of his/her failure to take a vacation, and the Employee
shall not accumulate unused vacation, and the Employee shall not accumulate
unused vacation from one fiscal year to the next, except in either case to the
extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled, without loss of pay, to absent himself/herself voluntarily from the
performance of his/her employment with the Bank for such additional periods of
time and for such valid and legitimate reasons as the Board may in its
discretion determine. Further, the Board may grant to the Employee a leave or
leaves of absence, with or without pay, at such time or times and upon such
terms and conditions as the Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
9. Termination and Termination Pay. Subject to Section11 hereof, the
-------------------------------
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
-----
terminate upon his/her death during the term of this Agreement, in which event
the Employee's estate shall be entitled to receive the compensation due the
Employee through the last day of the calendar month in which his/her death
occurred.
(b) Disability. The Bank may terminate the Employee's employment after
----------
having established the Employee's Disability. For purposes of this Agreement,
"Disability" means a physical or mental infirmity which impairs the Employee's
ability to substantially perform his/her duties under this Agreement and which
results in the Employee becoming eligible for long-term disability benefits
under the Bank's long-term disability plan (or, if the Bank has no such plan in
effect, which impairs the Employee's ability to substantially perform his/her
duties under this Agreement for a period of one hundred eighty (180) consecutive
days). The Employee shall be entitled to the compensation and benefits provided
for under this Agreement for (I) any period during the term of this Agreement
and prior to the establishment of the Employee's Disability during which the
Employee is unable to work due to the physical or mental infirmity, or (ii) any
period of Disability which is prior to the Executive's termination of employment
pursuant to this Section 9(b).
(c) Just Cause. The Board may, by written notice to the Employee,
----------
immediately terminate his/her employment at any time for Just Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Just Cause. Termination for "Just Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final
3
<PAGE>
cease-and desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, (i) the Employee shall not be deemed to have been
terminated for Just Cause unless there shall have been delivered to the Employee
a copy of a resolution duly adopted by the affirmative vote of not less that a
majority of the entire membership of the Board at a meeting of the Board called
and held for the purpose (after reasonable notice to the Employee and an
opportunity for the Employee to be heard before the board), finding that in the
good faith opinion of the board the Employee was guilty of conduct set forth
above in the second sentence of this Subsection (c) and specifying the
particulars thereof in detail.
(d) Without Just Cause. Subject to Section II hereof, the board may,
------------------
by written notice to the Employee, immediately terminate his/her employment at
any time for a reason other than Just Cause, in which event the Employee shall
be entitled to receive the following compensation and benefits: (i) the salary
provided pursuant to Section 2 hereof for a period of one year following
termination of employment, and (ii) the cost to the Employee of obtaining all
health, life, disability and other benefits which the Employee would have been
eligible to participate in for a period of one year following termination of
employment based upon benefit levels substantially equal to those that the Bank
provided for the Employee at the date of termination of employment. Said sum
shall be paid, at the option of the Employee, either (I) in period payment over
the remaining term of this Agreement, as if the Employee's employment had not
been terminated, or (II) in one lump sum within ten (10) days of such
termination.
Notwithstanding the foregoing, but only to the extent required under
federal banking law, the amount payable under clause (i) hereof shall be reduced
to the extent that on the date of the Employee's termination of employment, the
present value of the benefits payable under clauses (i) and (ii) hereof exceeds
three times his/her average annual compensation based on his/her most recent
five taxable years.
(e) Termination or Suspension under Federal Law. (1) If the Employee
-------------------------------------------
is removed and/or permanently prohibited from participating in the conduct of
the Bank's affairs by an order issued under Sections 8(e) (4) or 8(g) (1) of the
Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818 (e) (4) or (g) (1)), all
obligations of the Bank under this Agreement shall terminate, as of the
effective date of the order, but vested rights of the parties shall not be
affected.
(2) If the Bank is in default (as defined in section 3(x) (1) of FDIA),
all obligations under this agreement shall terminate as of the date of
default; however, this Paragraph shall not affect the vested rights of
the parties.
(3) If a notice served under Section 8 (e) (3) or (g) (1) of the FDIA (12
U.S.C. 1818 (e) (3) or (g) (1)) suspends and/or temporarily prohibits
the Employee from participating in the conduct of the Bank's affairs,
the Bank's obligations under this Agreement shall be suspended as of
the date of such service, unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation
withheld while its contract obligations were suspended, and (ii)
reinstate (in whole or in part) any of its obligations which were
suspended.
4
<PAGE>
(4) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with
applicable laws and regulations.
(f) Voluntary Termination by Employee. Subject to Section 11 hereof,
---------------------------------
the Employee may voluntarily terminate employment with the Bank
during the term of this Agreement, upon at least 60 days' prior
written notice to the Board of Directors, in which case the
employee shall receive only his/her compensation, vested rights
and employee benefits up to the date of his/her termination.
10. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for this Agreement by seeking other
employment or otherwise and no such payment shall be offset or reduced by the
amount of any compensation or benefits provided to the Employee in any
subsequent employment.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, if the
Employee's employment under this Agreement is terminated by the Bank, without
the Employee's prior written consent and for a reason other than Just Cause, in
connection with or within twelve (12) months after any change in control of the
Bank or Tri-County Financial Corporation (the "Corporation"), the Employee shall
be paid an amount equal to the difference between (i) the product of 2.00 times
his/her "base amount" as defined in Section 280G (b) (3) of the Internal Revenue
Code of 1986, as amended (the "Code") and regulations promulgated thereunder,
and (ii) the sum of any other parachute payments (as defined under Section 280G
(b) (2) of the Code) that the Employee receives an account of the change in
control. Said sum shall be paid in one lump sum within ten (10) days of such
termination. The term "change in control" shall mean (1) the ownership, holding
or power to vote more than 25% of the Bank's or Corporation's voting stock, (2)
the control of the election of a majority of the Bank's or Corporation's
directors, (3) the exercise of a controlling influence over the management or
policies of the Bank or the Corporation by any person or by persons acting as a
"group" (within the meaning of Section 13 (d) of the Securities Exchange Act of
1934), or (4) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Corporation of
the Bank (the "Company Board") (the "Continuing Directors") cease for any reason
to constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the Company Board was
approved by a vote of at least two thirds of the Continuing directors then in
office shall be considered a Continuing Director. The term "person" means an
individual other than the Employee, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization, or any other for of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, the Employee may voluntarily terminate his/her employment under this
Agreement within twelve (12) months following a change in control of the Bank or
Corporation, and the Employee shall thereupon be entitled to receive the payment
described in Section 11(a) of this Agreement, upon
5
<PAGE>
the occurrence of any of the following events, or within ninety (90) days
thereafter, which have not been consented to in advance by the Employee in
writing: (i) the requirement that the Employee move his/her personal residence,
or perform his/her principal executive functions, more than thirty-five (35)
miles from his/her primary office as of the date of the change in control; (ii)
a material reduction in the Employee's base compensation as in effect on the
date of the change in control or as the same may be increased from time to time;
(iii) the failure by the Bank to continue to provide the Employee with
compensation and benefits provided for under this Agreement, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him/her under any of the employee benefit plans in which the
Employee now or hereafter becomes a participant, or the taking of any action by
the Bank which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him/her at the
time of the change of control; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with
his/her position as referenced at Section 1; (v) a failure to elect or reelect
the Employee to the Board of Directors of the Bank, if the Employee is serving
on the Board on the date of the change in control; or (vi) a material diminution
or reduction in the Employee's responsibilities or authority (including
reporting responsibilities) in connection with his/her employment with the Bank.
(c) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
(d) In the event that any dispute arises between the Employee and the
Bank as to the terms or interpretation of this agreement, including this Section
11, whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Section 11 or to
defend against any action taken by the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorney's fees, arising form
such dispute, proceedings or actions, provided that the Employee shall obtain a
final judgment by a court of competent jurisdiction in favor of the Employee.
Such reimbursement shall be paid within ten (10) days of Employee's furnishing
to the Bank written evidence, which may be in the form, among other things, of a
canceled check or receipt, of any costs or expenses incurred by the Employee.
6
<PAGE>
12. Successors and Assigns.
----------------------
(a) This Agreement shall incur to the benefit of and be binding upon
any corporate of other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank.
(b) Since The Bank is contracting for the unique and personal skills
of the Employee, the Employee shall be precluded from assigning or delegating
his/her rights or duties hereunder without first obtaining the written consent
of the Bank.
13. Amendments. No amendments or additions to the Agreement shall be
----------
binding unless made in writing and signed by all of the parities, except as
herein otherwise specifically provided.
14. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the State of Maryland shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
15. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement. This Agreement, together with any understanding or
-----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove the written.
ATTEST: COMMUNITY BANK OF TRI-COUNTY
- ---------------------------------- ------------------------------------
Henry A. Shorter, Jr. Michael L. Middleton
Secretary President
WITNESS: EMPLOYEE:
- ---------------------------------- ------------------------------------
C. Marie Brown
<PAGE>
EMPLOYMENT AGREEMENT AS AMENDED
THIS AGREEMENT entered into this 23 day of February 1998, by and
between Community Bank of Tri-County (the "BANK") and Gregory C. Cockerham (the
"Employee"), effective as of the date hereof (the "Effective Date").
WHEREAS, the Employee has heretofore been employed by the bank as and
is experienced in all phases of the business of the Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the Senior Vice President
----------
of the Bank. The Employee shall render such administrative and management
services for the Bank as are currently rendered and as are customarily performed
by persons situated in a similar executive capacity. The Employee shall also
promote, by entertainment or otherwise, as and to the extent permitted by law,
the business of the Bank. The Employee's other duties shall be such as the Board
of Directors of the Bank ("Board") may from time to time reasonably direct,
including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
-----------------
term of this agreement a salary at the rate of $78,800 per annum, payable in
cash not less frequently than monthly. The Board shall review, not less than
annually, the rate of the Employee's salary, and in its sole discretion may
decide to increase his/her salary.
3. Discretionary Bonus. The Employee shall participate in an
-------------------
equitable manner with all other senior management employees of the Bank in
discretionary bonuses that the Board may award from time to time to the Bank's
senior management employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such discretionary bonuses.
4. (a) Participation in Retirement, Medical and Other Plans. The
----------------------------------------------------
Employee shall participate in any plan that the Bank maintains for the benefit
of its employees if the plan relates to (i) pension, profit-sharing, or other
retirement benefits, (ii) medical insurance or the reimbursement of medical or
dependent care expenses, or (iii) other group benefits, including disability and
life insurance plans.
(b) Employee Benefits; Expenses. The Employee shall participate
---------------------------
in any fringe benefits which are or may become available to the Bank's senior
management employees,
1
<PAGE>
any other benefits which are commensurate with the responsibilities and
functions to be performed by the Employee under this Agreement. The Employees
shall be reimbursed for all reasonable out-of-pocket business expenses which
he/she shall incur in connection with his/her services under this Agreement upon
substantiation of such expenses in accordance with the policies of the Bank.
5. Term. The Bank hereby employs the Employee, and the Employee
----
hereby accepts such employment under this Agreement, for the period commencing
on the Effective Date and ending 36 months thereafter (or such earlier date as
is determined in accordance with Section 9). Additionally, on each annual
anniversary date from the Effective date, the Employee's term of employment
shall be extended for an additional one-year period beyond the then effective
expiration date provided the Board determined in a duly adopted resolution that
the performance of the Employee has met the Board's requirements and standards,
and that this Agreement shall be extended.
6. Loyalty; Non-competition.
------------------------
(a) During the period of his/her employment hereunder and except
for illnesses, reasonable vacation periods, and reasonable leaves of absence,
the Employee shall devote all his/her full business time, attention, skill, and
efforts to the faithful performance of his/her duties hereunder; provided,
however, from time to time, the Employee may serve on the boards of directors of
, and hold any other offices or positions in, companies or organizations, which
will not present any conflict of interest with the Bank or any of its
subsidiaries or affiliates, or unfavorably affect the performance of Employee's
duties pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of hi/her employment under this Agreement, the Employee shall
not engage in any business or activity contrary to the business affairs or
interest of the Bank, or be gainfully employed in any other position or job
other than as provided above.
(b) Nothing contained in this Paragraph 6 shall be deemed to
prevent or limit the Employee's right to invest in the capital stock or other
securities of any business dissimilar from that of the Bank, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his/her duties under this
---------
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Bank will provide Employee with the working
facilities and staff customary for similar executives and necessary for him/her
to perform his/her duties.
8. Vacation and Sick Leave. At such reasonable times as the Board
-----------------------
shall in its discretion permit, the Employee shall be entitled, without loss of
pay, to absent himself/herself voluntarily from the performance of his/her
employment under this Agreement, all such voluntary absences to count as
vacation time, provided that:
2
<PAGE>
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies that the Board periodically established for senior
management employees of the Bank.
(b) The Employee shall not receive any additional compensation
from the Bank on account of his/her failure to take a vacation, and the Employee
shall not accumulate unused vacation, and the Employee shall not accumulate
unused vacation from one fiscal year to the next, except in either case to the
extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee
shall be entitled, without loss of pay, to absent himself/herself voluntarily
from the performance of his/her employment with the Bank for such additional
periods of time and for such valid and legitimate reasons as the Board may in
its discretion determine. Further, the Board may grant to the Employee a leave
or leaves of absence, with or without pay, at such time or times and upon such
terms and conditions as the Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
9. Termination and Termination Pay. Subject to Section11 hereof, the
-------------------------------
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
-----
terminate upon his/her death during the term of this Agreement, in which event
the Employee's estate shall be entitled to receive the compensation due the
Employee through the last day of the calendar month in which his/her death
occurred.
(b) Disability. The Bank may terminate the Employee's employment
----------
after having established the Employee's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs the
Employee's ability to substantially perform his/her duties under this Agreement
and which results in the Employee becoming eligible for long-term disability
benefits under the Bank's long-term disability plan (or, if the Bank has no such
plan in effect, which impairs the Employee's ability to substantially perform
his/her duties under this Agreement for a period of one hundred eighty (180)
consecutive days). The Employee shall be entitled to the compensation and
benefits provided for under this Agreement for (I) any period during the term of
this Agreement and prior to the establishment of the Employee's Disability
during which the Employee is unable to work due to the physical or mental
infirmity, or (ii) any period of Disability which is prior to the Executive's
termination of employment pursuant to this Section 9(b).
(c) Just Cause. The Board may, by written notice to the Employee,
----------
immediately terminate his/her employment at any time for Just Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Just Cause. Termination for "Just Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final
3
<PAGE>
cease-and desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, (i) the Employee shall not be deemed to have been
terminated for Just Cause unless there shall have been delivered to the Employee
a copy of a resolution duly adopted by the affirmative vote of not less that a
majority of the entire membership of the Board at a meeting of the Board called
and held for the purpose (after reasonable notice to the Employee and an
opportunity for the Employee to be heard before the board), finding that in the
good faith opinion of the board the Employee was guilty of conduct set forth
above in the second sentence of this Subsection (c) and specifying the
particulars thereof in detail.
(d) Without Just Cause. Subject to Section II hereof, the board
------------------
may, by written notice to the Employee, immediately terminate his/her employment
at any time for a reason other than Just Cause, in which event the Employee
shall be entitled to receive the following compensation and benefits: (i) the
salary provided pursuant to Section 2 hereof for a period of one year following
termination of employment, and (ii) the cost to the Employee of obtaining all
health, life, disability and other benefits which the Employee would have been
eligible to participate in for a period of one year following termination of
employment based upon benefit levels substantially equal to those that the bank
provided for the employee at the date of termination of employment. Said sum
shall be paid, at the option of the Employee, either (I) in period payment over
the remaining term of this Agreement, as if the Employee's employment had not
been terminated, or (II) in one lump sum within ten (10) days of such
termination.
Notwithstanding the foregoing, but only to the extent required
under federal banking law, the amount payable under clause (i) hereof shall be
reduced to the extent that on the date of the Employee's termination of
employment, the present value of the benefits payable under clauses (i) and (ii)
hereof exceeds three times his/her average annual compensation based on his/her
most recent five taxable years.
(e) Termination or Suspension under Federal Law. (1) If the
-------------------------------------------
Employee is removed and/or permanently prohibited from participating in the
conduct of the Bank's affairs by an order issued under Sections 8(e) (4) or 8(g)
(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818 (e) (4) or (g)
(1)), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(2) If the Bank is in default (as defined in section 3(x) (1) of FDIA),
all obligations under this agreement shall terminate as of the date
of default; however, this Paragraph shall not affect the vested
rights of the parties.
(3) If a notice served under Section 8 (e) (3) or (g) (1) of the FDIA
(12 U.S.C. 1818 (e) (3) or (g) (1)) suspends and/or temporarily
prohibits the Employee from participating in the conduct of the
Bank's affairs, the Bank's obligations under this Agreement shall
be suspended as of the date of such service, unless stayed by
appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Employee all
or part of the compensation withheld while its contract obligations
were suspended, and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
4
<PAGE>
(4) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance
with applicable laws and regulations.
(f) Voluntary Termination by Employee. Subject to Section 11
hereof, the Employee may voluntarily terminate employment with
the Bank during the term of this Agreement, upon at least 60
days' prior written notice to the Board of Directors, in which
case the employee shall receive only his/her compensation,
vested rights and employee benefits up to the date of his/her
termination.
10. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, if the
Employee's employment under this Agreement is terminated by the Bank, without
the Employee's prior written consent and for a reason other than Just Cause, in
connection with or within twelve (12) months after any change in control of the
Bank or Tri-County Financial Corporation (the "Corporation"), the Employee shall
be paid an amount equal to the difference between (i) the product of 2.00 times
his/her "base amount" as defined in Section 280G (b) (3) of the Internal Revenue
Code of 1986, as amended (the "Code") and regulations promulgated thereunder,
and (ii) the sum of any other parachute payments (as defined under Section 280G
(b) (2) of the Code) that the Employee receives an account of the change in
control. Said sum shall be paid in one lump sum within ten (10) days of such
termination. The term "change in control" shall mean (1) the ownership, holding
or power to vote more than 25% of the Bank's or Corporation's voting stock, (2)
the control of the election of a majority of the Bank's or Corporation's
directors, (3) the exercise of a controlling influence over the management or
policies of the Bank or the Corporation by any person or by persons acting as a
"group" (within the meaning of Section 13 (d) of the Securities Exchange Act of
1934), or (4) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Corporation of
the Bank (the "Company Board") (the "Continuing Directors") cease for any reason
to constitute at least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the Company Board was
approved by a vote of at least two thirds of the Continuing directors then in
office shall be considered a Continuing Director. The term "person" means an
individual other than the Employee, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization, or any other for of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, the Employee may voluntarily terminate his/her employment under this
Agreement within twelve (12) months following a change in control of the Bank or
Corporation, and the Employee shall thereupon be entitled to receive the payment
described in Section 11(a) of this Agreement, upon
5
<PAGE>
the occurrence of any of the following events, or within ninety (90) days
thereafter, which have not been consented to in advance by the Employee in
writing: (i) the requirement that the Employee move his/her personal residence,
or perform his/her principal executive functions, more than thirty-five (35)
miles from his/her primary office as of the date of the change in control; (ii)
a material reduction in the Employee's base compensation as in effect on the
date of the change in control or as the same may be increased from time to time;
(iii) the failure by the Bank to continue to provide the Employee with
compensation and benefits provided for under this Agreement, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him/her under any of the employee benefit plans in which the
Employee now or hereafter becomes a participant, or the taking of any action by
the Bank which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him/her at the
time of the change of control; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with
his/her position as referenced at Section 1; (v) a failure to elect or reelect
the Employee to the Board of Directors of the Bank, if the Employee is serving
on the Board on the date of the change in control; or (vi) a material diminution
or reduction in the Employee's responsibilities or authority (including
reporting responsibilities) in connection with his/her employment with the Bank.
(c) Any payments made to the Employee pursuant to this Agreement,
or otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulations promulgated thereunder.
(d) In the event that any dispute arises between the Employee and
the Bank as to the terms or interpretation of this agreement, including this
Section 11, whether instituted by formal legal proceedings or otherwise,
including any action that the Employee takes to enforce the terms of this
Section 11 or to defend against any action taken by the Bank, the Employee shall
be reimbursed for all costs and expenses, including reasonable attorney's fees,
arising form such dispute, proceedings or actions, provided that the Employee
shall obtain a final judgment by a court of competent jurisdiction in favor of
the Employee. Such reimbursement shall be paid within ten (10) days of
Employee's furnishing to the Bank written evidence, which may be in the form,
among other things, of a canceled check or receipt, of any costs or expenses
incurred by the Employee.
6
<PAGE>
12. Successors and Assigns.
----------------------
(a) This Agreement shall incur to the benefit of and be binding
upon any corporate of other successor of the Bank which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank.
(b) Since The Bank is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his/her rights or duties hereunder without first obtaining the
written consent of the Bank.
13. Amendments. No amendments or additions to the Agreement shall be
----------
binding unless made in writing and signed by all of the parities, except as
herein otherwise specifically provided.
14. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the State of Maryland shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
15. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement. This Agreement, together with any understanding
----------------
or modifications thereof as agreed to in writing by the parties, shall
constitute the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove the written.
ATTEST: COMMUNITY BANK OF TRI-COUNTY
- ------------------------------ ------------------------------------
Henry A. Shorter, Jr. Michael L. Middleton
Secretary President
WITNESS: EMPLOYEE:
- ------------------------------- ------------------------------------
Gregory C. Cockerham
7
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
No extracts from this report may be published without our written consent.
Stegman & Company
<PAGE>
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS Page
----
Balance Sheets 1
Statements of Income 2
Statements of Stockholders' Equity 3
Statements of Cash Flows 4 - 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - 27
<PAGE>
Stockholders and Board of Directors
Tri-County Financial Corporation
Waldorf, Maryland
We have audited the accompanying consolidated balance sheets of Tri-County
Financial Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tri-County Financial Corporation as of December 31, 1998 and 1997, and the
results of its operations and cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Stegman & Company
Baltimore, Maryland
February 26, 1999
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash and due from banks $ 906,658 $ 650,923
Interest-bearing deposits with banks 4,152,816 5,169,830
Investment securities available-for-sale - at fair value 55,976,606 52,878,583
Investment securities held-to-maturity - at amortized cost 2,139,069 1,149,137
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 2,005,350 1,724,000
Loans held for sale 2,266,697 1,698,872
Loans receivable - net of allowance for loan losses
of $1,540,551 and $1,310,365, respectively 132,645,936 121,866,762
Premises and equipment, net 4,316,207 4,189,222
Accrued interest receivable 1,486,776 1,276,376
Other assets 1,123,675 584,655
------------ ------------
TOTAL ASSETS $207,019,790 $191,188,360
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 9,750,153 $ 7,196,053
Interest-bearing deposits 142,065,211 135,080,024
------------ ------------
Total deposits 151,815,364 142,276,077
Other borrowed funds 16,937,882 12,523,210
Long-term debt 16,496,450 16,678,610
Accrued expenses and other liabilities 638,128 624,384
------------ ------------
Total liabilities 185,887,824 172,102,281
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 789,334 and 782,699 shares, respectively 7,893 7,827
Surplus 7,309,901 6,574,162
Retained earnings 13,372,441 12,256,443
Accumulated other comprehensive income 648,614 442,032
Unearned ESOP shares (206,883) (194,385)
------------ ------------
Total stockholders' equity 21,131,966 19,086,079
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $207,019,790 $191,188,360
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $11,642,029 $11,056,220 $10,045,429
Taxable interest and dividends on investment securities 3,941,744 3,782,205 3,301,725
Interest on deposits with banks 142,259 154,836 124,441
----------- ----------- -----------
Total interest income 15,726,032 14,993,261 13,471,595
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 5,693,385 5,683,348 5,397,181
Interest on other borrowed funds 958,119 925,084 774,617
Interest on long-term debt 945,223 742,216 234,958
----------- ----------- -----------
Total interest expense 7,596,727 7,350,648 6,406,756
----------- ----------- -----------
NET INTEREST INCOME 8,129,305 7,642,613 7,064,839
PROVISION FOR LOAN LOSSES 240,000 240,000 408,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,889,305 7,402,613 6,656,839
----------- ----------- -----------
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges 223,326 158,945 147,561
Net gains on sale of loans held for sale 416,838 240,407 192,468
Net realized loss on sales of investment
securities available-for-sale (391) (17,502) -
Service charges 600,067 496,972 382,228
Other income 180,696 51,923 76,148
----------- ----------- -----------
Total noninterest income 1,420,536 930,745 798,405
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 3,114,748 2,624,131 2,432,293
Occupancy expense 494,113 396,378 353,246
Deposit insurance 85,598 70,000 1,120,669
Data processing expense 259,025 253,677 262,375
Depreciation of furniture, fixtures, and equipment 204,230 185,548 144,512
Other 1,308,923 1,347,613 1,037,222
----------- ----------- -----------
Total noninterest expenses 5,466,637 4,877,347 5,350,317
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,843,204 3,456,011 2,104,927
Income tax expense 1,457,000 1,372,000 785,200
----------- ----------- -----------
NET INCOME $ 2,386,204 $ 2,084,011 $ 1,319,727
=========== =========== ===========
INCOME PER COMMON SHARE (1):
Basic earnings per share $3.00 $2.57 $1.65
Diluted earnings per share 2.80 2.40 1.53
</TABLE>
(1) Restated to reflect 1998 stock dividends
See notes to consolidated financial statements.
2
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumu-
lated
Other
Compre- Unearned
Common Paid-in Retained hensive ESOP
Stock Capital Earnings Income Shares Total
----------- ------------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1996 $6,851 $5,021,350 $10,710,824 $ 232,123 $ (138,223) $15,832,925
Comprehensive income:
Net income - - 1,319,727 - - 1,319,727
Unrealized loss on
investment securities
net of tax of $(90,190) - - - (143,345) - (143,345)
-------------
Total comprehensive income - - - - - 1,176,382
Cash dividend - $0.10 per share - - (70,574) - - (70,574)
5% stock dividend 351 525,489 (525,840) - - -
Cash paid in lieu of stock dividend
for fractional shares - - (3,471) - - (3,471)
Exercise of stock options 308 177,890 - - - 178,198
Net change in unearned ESOP shares - - - - (36,008) (36,008)
----------- ------------- ------------ ---------- ---------- -------------
BALANCES, DECEMBER 31, 1996 7,510 5,724,729 11,430,666 88,778 (174,231) 17,077,452
Comprehensive income:
Net income - - 2,084,011 - - 2,084,011
Unrealized gain on
investment securities
net of tax of $222,265
and reclassification
adjustments of $16,950 - - - 353,254 - 353,254
-------------
Total comprehensive income - - - - - 2,437,265
Cash dividend - $0.10 per share - - (75,498) - - (75,498)
5% stock dividend 375 828,750 (829,125) - - -
Cash paid in lieu of stock dividend
for fractional shares - - (5,510) - - (5,510)
Exercise of stock options 112 20,683 - - - 20,795
Repurchase of common stock (170) - (348,101) - - (348,271)
Net change in unearned ESOP shares - - - - (20,154) (20,154)
----------- ------------- ------------ ---------- ----------- -------------
BALANCES, DECEMBER 31, 1997 7,827 6,574,162 12,256,443 442,032 (194,385) 19,086,079
Comprehensive income:
Net income - - 2,386,204 - - 2,386,204
Unrealized gains on investment
securities
net of tax of $129,980 - - - 206,582 - 206,582
-------------
Total comprehensive income - - - - - 2,592,786
Cash dividend - $0.125 per share - - (97,627) - - (97,627)
4% stock dividend 310 693,962 (694,272) - - -
Cash paid in lieu of stock dividend for
fractional shares - - (4,871) - - (4,871)
Exercise of stock options 58 41,777 - - - 41,835
Repurchase of common stock (200) - (473,436) - - (473,636)
Net change in unearned
ESOP shares (102) - - - (12,498) (12,600)
----------- ------------- ------------ ---------- ------------ -------------
BALANCES, DECEMBER 31, 1998 $7,893 $7,309,901 $13,372,441 $ 648,614 $ (206,883) $21,131,966
=========== ============= ============ ========== ============ =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,386,204 $ 2,084,011 $ 1,319,727
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 240,000 240,000 408,000
Depreciation and amortization 301,238 324,134 264,492
Amortization of premium/discount on mortgage-
backed securities and investments 33,346 (50,456) (96,060)
Deferred income tax benefit (131,000) 2,000 (143,800)
Increase in accrued interest receivable (210,400) (111,185) (72,078)
Decrease in deferred loan fees (130,320) (25,905) (85,781)
Increase (decrease) in accrued expenses and other liabilities 14,765 (314,242) 257,778
Decrease in other assets (539,020) (219,661) (200,921)
(Gain) loss on disposal of premises and equipment (66,813) 41,660 (9,610)
Loss on sale of investment securities 391 17,502 -
Origination of loans held for sale (23,740,825) (12,562,767) (8,812,925)
Gain on sales of loans held for sale (416,839) (240,407) (192,468)
Proceeds from sale of loans held for sale 23,589,839 12,116,232 8,887,468
Gain on sale of foreclosed real estate (61,654) (7,000) -
------------ ------------ ------------
Net cash provided by operating activities 1,268,912 1,293,916 1,523,822
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing
deposits with banks 1,017,014 (2,378,112) 472,388
Purchase of investment securities available-for-sale (90,192,914) (47,628,227) (27,637,617)
Proceeds from sale, redemption or principal payments
of investment securities available-for-sale 87,391,528 49,084,708 19,559,529
Purchase of investment securities held-to-maturity (3,110,963) (189,525) (990,273)
Proceeds from maturities or principal payments
of investment securities held-to-maturity 2,127,218 797,119 334,682
Purchase of FHLB stock and Federal Reserve Bank stock (281,350) (424,000) (418,400)
Loans originated or acquired (54,084,255) (53,126,555) (50,605,301)
Principal collected on loans 42,431,995 41,896,388 46,238,710
Purchase of premises and equipment (478,661) (680,078) (859,884)
Proceeds from sales of premises and equipment 117,251 - 9,610
Proceeds from disposition of foreclosed real estate 825,060 162,135 -
------------ ------------ ------------
Net cash used in investing activities (14,238,077) (12,486,147) (13,896,556)
------------ ------------ ------------
</TABLE>
4
<PAGE>
Tri-County Financial Corporation
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Net increase in deposits $ 9,539,287 $ 6,741,914 $ 5,500,120
Net increase (decrease) in other borrowed funds 4,414,672 (746,749) (2,497,413)
Dividends paid (102,498) (81,008) (74,045)
Exercise of stock options 41,835 20,795 178,198
Net change in unearned ESOP shares (12,600) (20,154) (36,008)
Redemption of common stock (473,636) (348,271) -
Proceeds from long-term borrowings - 22,400,000 11,000,000
Retirement of long-term borrowings (182,160) (17,235,267) (1,372,337)
----------- ------------ -----------
Net cash provided by financing activities 13,224,900 10,731,260 12,698,515
----------- ------------ -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 255,735 (460,971) 325,781
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 650,923 1,111,894 786,113
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 906,658 $ 650,923 $ 1,111,894
=========== ============ ===========
Supplementary cash flow information:
Cash paid during the year for:
Interest $ 7,942,034 $ 7,284,916 $ 6,414,832
Income taxes 1,502,868 1,625,000 803,000
Transfers from loans receivable to
foreclosed real estate 763,406 - 207,409
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
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, "the Company"). All significant intercompany
balances and transactions between the parent corporations and their subsidiaries
have been eliminated. The accounting and reporting policies of the Company
conform with generally accepted accounting principles and to general practices
within the banking industry. Certain reclassifications have been made to
amounts previously reported to conform with classifications made in 1998.
Nature of Operations
--------------------
The Company, through its bank subsidiary, conducts full service
commercial banking operations throughout the Southern Maryland area. The
primary financial services provided include mortgage loans on residential,
construction and commercial real estate and various types of consumer lending as
well as offering demand deposits, savings products, and safe deposit boxes.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities when
purchased of three months or less to be cash equivalents. These instruments are
presented as cash and due from banks.
6
<PAGE>
Investment Securities
---------------------
Investment securities are classified into the following three
categories: trading, held-to-maturity, and available-for-sale. Trading
securities are purchased and held principally for the purpose of reselling them
within a short period of time. Their unrealized gains and losses are included
in noninterest income. Securities classified as held-to-maturity are reported
at amortized cost, and require the Company to have both the positive intent and
ability to hold those securities to maturity. Securities not classified as
either trading or held-to-maturity are considered to be available-for-sale.
Unrealized holding gains and losses on available-for-sale securities are
excluded from earnings and reported, net of deferred taxes, as a separate
component of stockholders' equity until realized. Realized gains or losses on
the sale of investment securities are recognized at the time of sale using the
specific identification method and are classified as noninterest income in the
accompanying consolidated statements of income.
The Company invests in Federal Home Loan Bank and Federal Reserve Bank
stock which are considered restricted as to marketability.
Loans Receivable
----------------
Loans - Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are reported at
their outstanding principal reduced by any charge-offs or specific valuation
allowance accounts and any deferred fees or costs on originated loans.
Loans Held for Sale - Mortgage loans originated and intended for sale
in the secondary market are carried at the lower of cost or estimated fair
value, determined in the aggregate. Market value considers commitment
agreements with investors and prevailing market prices. A gain is recognized on
the sale of these loans through collection of a premium over the adjusted
carrying value, and through retention of an on-going rate differential as a
normal servicing fee between the rate paid by the borrower to the Company and
the rate paid by the Company to the purchaser.
Income Recognition on Loans - Interest on commercial loans, real estate
mortgages, and certain installment loans is accrued at the contractual rate on
the principal amounts outstanding. When scheduled principal or interest
payments are past due 90 days or more on any loan not fully secured by
collateral and not in the process of collection, the accrual of interest income
is discontinued and recognized only as collected. The loan is restored to an
accruing status when all amounts past due have been paid and the borrower has
demonstrated the ability to service the debt on a current basis. Loan fees and
related direct costs of loan origination are deferred and recognized over the
life of the loan as a component of interest income.
Allowance for Loan Losses - The allowance for loan losses is maintained
at a level believed by management to be adequate to absorb potential losses
inherent in the loan portfolio. Management's determination of the adequacy of
the allowance is based on a periodic evaluation of the portfolio with
consideration given to the overall loss experience; current economic conditions;
volume, growth, and composition of the loan portfolio; financial condition of
the borrowers; and other relevant factors that, in management's judgment,
warrant recognition in providing an adequate allowance. The allowance is
increased by provisions for loan losses charged against income and decreased by
charge-offs (net of recoveries). Changes in the allowance are recorded
periodically as conditions change or as more information becomes available.
Such changes could result in material adjustments to future results of
operations.
7
<PAGE>
Impairment of Loans - The Company evaluates its loan portfolios for
impairment. When deemed necessary, a valuation allowance is provided for these
loans based on management's estimates of the risks inherent in the portfolios
and analysis of prior loss experiences.
Payments received relating to impaired loans and nonaccrual loans are
recorded on a cash basis and are either applied to the outstanding principal
balance or recorded as interest income, depending upon management's assessment
of the ultimate collectibility of the loan.
Premises and Equipment
----------------------
Depreciation of premises and equipment, which are carried at cost, is
provided by the straight-line method over the estimated useful lives as follows:
Buildings and improvements 15 - 50 years
Furniture and equipment 5 - 15 years
Automobiles 5 years
Foreclosed Real Estate
----------------------
Real estate acquired through, or in lieu of, loan foreclosure is
initially recorded at the lower of the recorded investment or fair value at the
date of foreclosure. Costs relating to the development and improvement of
property are capitalized, whereas costs relating to the holding of property are
expensed. Valuations are periodically performed by management and an allowance
for losses is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value less estimated costs to sell. No
charge to operations was required as a result of this review in 1998, 1997 or
1996.
Mortgage Servicing Rights
-------------------------
The rights to service certain mortgages, including those purchased as
well as originated, are amortized in proportion to and over the estimated period
of the related net servicing revenues and are evaluated for impairment based on
their fair value. Total capitalized mortgage servicing rights approximated
$546,000 and $170,000 at December 31, 1998 and 1997, respectively.
Income Taxes
------------
The Company files a consolidated federal income tax return with its
subsidiary. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. Any deferred tax asset is reduced by
the amount of any tax benefit that more likely than not will not be realized.
8
<PAGE>
Income Per Common Share
-----------------------
Basic net income per common share is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted net income per common share is computed by
dividing net income available to common shareholders by the weighted average
number of common shares outstanding during the year including any potential
dilutive common shares outstanding, such as options and warrants.
Stock-Based Compensation
------------------------
Stock-based compensation is recognized using the intrinsic value
method. For disclosure purposes, pro forma net income and earnings per share
impacts are provided as if the fair value method had been applied.
New Accounting Standards
------------------------
In June 1997, Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS 130), was issued and establishes standards
for reporting and displaying comprehensive income and its components. SFAS 130
requires comprehensive income and its components, as recognized under the
accounting standard, to be displayed in a financial statement with the same
prominence as other financial statements. The Company adopted the standard, as
required, beginning in 1998; adoption of this disclosure requirement had no
impact on the financial position or results of operations of the Company.
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information (SFAS 131), which was issued
in June 1997 established new standards for reporting information about operating
segments in annual and interim financial statements. The standard requires
descriptive information about the way that operating segments are determined,
the products and services provided by the segments and the nature of differences
between reportable years beginning after December 15, 1997. Operating segments
are defined under the Standard based on the availability and utilization of
discrete financial information as well as the necessity for this discrete
financial information to meet certain quantitative thresholds. Management
believes that it has no reportable components that qualify as an operating
segment under SFAS 131 for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). The provisions of this statement require that
derivative instruments be carried at fair value on the balance sheet. The
statement allows derivative instruments to be used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be used. The statement also provides for offsetting changes in fair value or
cash flows of both the derivative and the hedged asset or liability to be
recognized in earnings in the same period; however, any changes in fair value or
cash flow that represent the ineffective portion of a hedge are required to be
recognized in earnings and cannot be deferred. For derivative instruments not
accounted for as hedges, changes in fair value are required to be recognized in
earnings. The provisions of this statement become effective for quarterly and
annual reporting beginning January 1, 2000, and allow for early adoption in any
quarterly period after June 1998. The Company will adopt SFAS 133 as required
in 2000. It is expected that adoption of this standard will have no material
impact.
9
<PAGE>
2. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair values of investment securities
available-for-sale at December 31 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Corporate equity securities $ 763,166 $458,123 $ - $1,221,289
Money Market and mutual funds 292,502 - - 292,502
Obligations of U.S. Government
Agencies and U.S. Government
Sponsored Enterprises (GSE's) 9,000,000 53,215 8,260 9,044,955
Asset-backed securities issued by:
GSE's 31,299,272 465,934 41,235 31,723,971
Other 13,523,847 171,792 1,750 13,693,889
----------- ---------- ------- -----------
$54,878,787 $1,149,064 $51,245 $55,976,606
=========== ========== ======= ===========
<CAPTION>
The amortized cost and estimated fair values of investment securities
available-for-sale at December 31 are as follows:
December 31, 1997
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Corporate equity securities $ 263,166 $241,930 $ - $ 505,096
Money Market and mutual funds 4,010,505 - - 4,010,505
Obligations of U.S. Government
Agencies and U.S. Government
Sponsored Enterprises (GSE's) 5,000,000 14,200 10,800 5,003,400
Asset-backed securities issued by:
GSE's 29,291,769 423,525 15,389 29,699,905
Other 13,586,982 86,830 14,135 13,659,677
----------- -------- ------- -----------
$52,152,422 $766,485 $40,324 $52,878,583
=========== ======== ======= ===========
</TABLE>
10
<PAGE>
The scheduled maturities of investment securities available-for-sale at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Available-for-Sale
------------------------
<S> <C> <C>
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 4,055,668 $ 4,545,580
Due after one year through five years 3,000,000 3,021,426
Due after five years through ten years 3,000,000 2,991,740
Asset-backed securities 44,823,119 45,417,860
----------- -----------
$54,878,787 $55,976,606
=========== ===========
<CAPTION>
Sales of investment securities available-for-sale during 1998, 1997 and
1996 resulted in the following:
1998 1997 1996
---------- ------------ ---------
<S> <C> <C> <C>
Proceeds $408,500 $3,369,000 $ -
Gross gains - 2,111 -
Gross losses (391) (19,613) -
</TABLE>
Asset-backed securities are comprised of mortgage-backed securities as
well as mortgage derivatives such as collateralized mortgage obligations and
real estate mortgage investment conduits. The outstanding balance of no single
issuer, except for U.S. Government-Sponsored Enterprise Securities, exceeded
five percent of the Company's stockholders' equity at December 31, 1998 and
1997.
3. INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost and estimated fair values of investments held-to-
maturity at December 31 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of U.S. Government
Agencies $ 196,967 $ - $ - $ 196,967
Asset-backed securities 544,696 19,966 - 564,662
Other investments 1,397,406 - - 1,397,406
----------- ----------- ------------ ----------
$2,139,069 $19,966 $ - $2,159,035
=========== =========== ============ ==========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of U.S. Government Agencies $ 192,025 $ - $ - $ 192,025
Asset-backed securities 675,720 29,813 - 705,533
Other investments 281,392 - - 281,392
----------- ---------- ----------- -----------
$1,149,137 $ 29,813 $ - $1,178,950
=========== ========== =========== ===========
</TABLE>
4. LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commercial real estate $ 19,732,432 $ 15,153,167
Residential real estate 64,243,146 62,107,569
Residential construction 20,776,294 18,275,907
Second mortgage loans 16,313,728 17,428,330
Lines of credit - commercial 6,161,033 4,852,193
Consumer loans 7,889,792 6,420,219
------------ ------------
135,116,425 124,237,385
------------ ------------
Less:
Deferred loan fees 929,938 1,060,258
Allowance for loan losses 1,540,551 1,310,365
------------ ------------
2,470,489 2,370,623
------------ ------------
Total $132,645,936 $121,866,762
============ ============
</TABLE>
The following table sets forth the activity in the allowance for loan
losses:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Balance, January 1 $1,310,365 $1,120,102 $ 733,573
Add:
Provision charged to operations 240,000 240,000 408,000
Recoveries 275 105 180
Less:
Charge-offs 10,089 49,842 21,651
---------- ---------- -----------
Balance, December 31 $1,540,551 $1,310,365 $1,120,102
========== ========== ===========
</TABLE>
12
<PAGE>
No loans included within the scope of SFAS 114 were identified as being
impaired at December 31, 1998 or 1997 and for the years then ended.
Loans on which the recognition of interest has been discontinued, which
were not included within the scope of SFAS 114, amounted to approximately
$269,000, $160,000, and $400,000 at December 31, 1998, 1997, and 1996,
respectively. If interest income had been recognized on nonaccrual loans at
their stated rates during 1998, 1997, and 1996, interest income would have been
increased by approximately $21,000, $29,000, and $14,000, respectively. No
income was recognized for these loans in 1998, 1997 and 1996.
Included in loans receivable at December 31, 1998 and 1997, is $1,347,263
and $1,206,615 due from officers and directors of the Bank. Activity in loans
outstanding to officers and directors is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Balance, beginning of year $1,206,615 $ 918,566
New loans made during year 226,547 337,462
Repayments made during year (85,899) (49,413)
------------- -------------
Balance, end of year $1,347,263 $1,206,615
============= =============
</TABLE>
Loans serviced for others and not reflected in the balance sheets are
$56,040,000 and $47,816,000 at December 31, 1998 and 1997, respectively.
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees.
The Bank grants loans throughout the Southern Maryland area. Its
borrowers' ability to repay is, therefore, dependent upon the economy of
Southern Maryland.
5. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cost:
Land $1,437,761 $1,486,879
Building and improvements 2,769,246 2,648,684
Furniture and equipment 1,810,221 1,496,586
Automobiles 105,394 81,000
---------- ----------
Total cost 6,122,622 5,713,149
Less accumulated depreciation 1,806,415 1,523,927
---------- ----------
Premises and equipment, net $4,316,207 $4,189,222
========== ==========
</TABLE>
13
<PAGE>
Certain bank facilities are leased under various operating leases. Rent
expense was $161,167, $118,556 and $106,708 in 1998, 1997 and 1996,
respectively.
Future minimum rentals commitments under noncancellable leases are as
follows:
1999 $ 164,155
2000 137,808
2001 118,336
2002 125,859
2003 125,124
Thereafter 498,547
----------
Total $1,169,829
==========
6. DEPOSITS
Deposits outstanding at December 31 consist of:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Noninterest-bearing demand $ 9,750,153 $ 7,196,053
------------ ------------
Interest-bearing:
Demand 16,963,000 15,550,241
Money market deposits 20,775,000 11,479,000
Savings 25,771,211 26,338,783
Certificates of deposit of $100,000 or more 12,989,000 14,235,000
Other certificates of deposit 65,567,000 67,477,000
------------ ------------
Total interest-bearing 142,065,211 135,080,024
------------ ------------
Total deposits $151,815,364 $142,276,077
============ ============
</TABLE>
7. ADVANCES FROM THE FEDERAL HOME LOAN BANK
OF ATLANTA AND OTHER BORROWINGS
The advances from the Federal Home Loan Bank are as follows:
Weighted
Average
Interest
Year Due Rate 1998
-------- ---------- -----------
1999 5.18 $21,500,000
2002 5.81 11,400,000
14
<PAGE>
Under the terms of an Agreement for Advances and Security Agreement with
Blanket Floating Lien, the Company maintains eligible collateral consisting of
1-4 unit residential first mortgage loans, discounted at 75% of the unpaid
principal balance, equal to 100% at December 31, 1998 and 1997, of its
outstanding Federal Home Loan Bank advances. These amounts were $43,900,000 and
$37,900,000 at December 31, 1998 and 1997, respectively. The advances due in
2002 have call provisions under which the Federal Home Loan Bank may require
payment prior to the stated maturity date.
Tri-County Federal Finance One (Finance One) is obligated on a note
payable issued in connection with its participation in the Salomon Capital
Access Collateralized Mortgage Obligation Bond Program. Under this program,
Finance One has pledged Federal Home Loan Mortgage Corporation participation
certificates having unpaid principal balances at December 31, 1998 and 1997,
totaling $544,696 and $675,720, respectively, as security for the notes. The
participation certificates are held in trust, and the principal and interest
payments required by the note payable are made out of the monthly cash proceeds
from the certificates.
The maturity date and interest rate, which are subject to adjustment based
on prepayments of the participation certificates, for the notes payable at
December 31, 1998 and 1997, are as follows:
Unpaid Principal
(Net of Discount)
December 31,
---------------------- Interest Maturity
1998 1997 Rate Date
--------- ----------- -------- ----------------
$96,450 $278,610 8.50% July 1, 2010
The Company enters into sales of securities under agreements to repurchase
with terms to maturity of less than one month and short-term borrowings from the
Federal Home Loan Bank. The repurchase agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the statements of financial condition. The dollar amounts of securities
underlying the agreements remain in the asset accounts. The securities
underlying the agreements are book-entry securities and were delivered by
appropriate entry into the counterparties' accounts maintained at the purchasing
securities dealer's safekeeping house.
The repurchase agreements subject the Company to the risk that its
interest in the sold securities is inadequately protected in the event the
purchasing securities dealer fails to perform its obligations. The Company
attempts to reduce the effects of such risks by entering into such agreements
only with well-capitalized securities dealers who are primary dealers in
government securities and by limiting the maximum amount of agreements
outstanding at any time with any single securities dealer.
Additional information regarding short-term borrowings and repurchase
agreements is as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Balance outstanding at December 31 $16,937,882 $12,523,210
Average balance during the year 16,743,325 15,388,329
Average interest rate during the year 5.72% 5.77%
Maximum outstanding balance at any
month end during the year 26,619,724 20,905,025
</TABLE>
15
<PAGE>
Other borrowed funds consist of treasury tax and loan deposits that
generally mature within one to 120 days from the transaction date. At December
31, 1998 and 1997, such borrowings were $437,882 and $523,210, respectively.
The aggregate scheduled principal maturities on all borrowings outstanding
at December 31, 1998 are as follows:
1999 $21,937,882
2000 -
2001 -
2002 11,400,000
2003 96,450
-----------
Total $33,434,332
===========
8. INCOME TAXES
Income tax expense was as follows:
1998 1997 1996
---------- ----------- ---------
Current:
Federal $1,317,000 $ 1,122,000 $ 761,000
State 271,000 248,000 168,000
---------- ----------- ---------
1,588,000 1,370,000 929,000
---------- ----------- ---------
Deferred:
Federal (107,000) 1,600 (117,800)
State (24,000) 400 (26,000)
---------- ----------- ---------
(131,000) 2,000 (143,800)
---------- ----------- ---------
Total income tax expense $1,457,000 $1,372,000 $785,200
========== =========== =========
Total income tax expense differed from the amounts computed by applying
the federal income tax rate of 34% to income before income taxes as a result of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- ------------------------ ------------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------- ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Expected income tax expense at
federal tax rate $1,307,000 34.0% $1,175,000 34.0% $715,700 34.0%
State taxes, net of federal benefit 178,000 4.6 154,000 4.5 96,000 4.6
Nondeductible expenses 5,400 .1 5,000 .1 10,000 .4
Other (33,400) (.8) 38,000 1.1 (36,500) (1.7)
---------- ----- ------------ ----- ------------ -----
Total income tax expense $1,457,000 37.9% $1,372,000 39.7% $785,200 37.3%
========== ===== ============ ===== ============ =====
</TABLE>
16
<PAGE>
The net deferred tax liabilities in the accompanying balance sheets
include the following components:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Deferred tax assets:
Deferred fees $ 119,091 $ 177,886
Allowance for loan losses 327,407 196,594
Deferred compensation 58,982 -
----------- ------------
Total deferred assets 505,480 374,480
----------- ------------
Deferred tax liabilities:
FHLB stock dividends 152,896 152,896
Depreciation 80,840 80,840
Unrealized gain on investment
securities available-for-sale 408,104 278,125
----------- ------------
Total deferred liabilities 641,840 511,861
----------- ------------
Net deferred liabilities $(136,360) $(137,381)
=========== ============
</TABLE>
Retained earnings at December 31, 1998, include approximately $1.2 million
of bad debt deductions allowed for federal income tax purposes (the "base year
tax reserve") for which no deferred income tax has been recognized. If, in the
future, this portion of retained earnings is used for any purpose other than to
absorb bad debt losses, it would create income for tax purposes only and income
taxes would be imposed at the then prevailing rates. The unrecorded income tax
liability on the above amount was approximately $458,000 at December 31, 1998.
Prior to January 1, 1996, the Bank computed its tax bad debt deduction
based upon the percentage of taxable income method as defined by the Internal
Revenue Code. The bad debt deduction allowable under this method equaled 8% of
taxable income determined without regard to the bad debt deduction and with
certain adjustments. The tax bad debt deduction differed from the bad debt
expense used for financial accounting purposes.
In August 1996, the Small Business Job Protection Act (the "Act") repealed
the percentage of taxable income method of accounting for bad debts effective
for years beginning after December 31, 1995. The Act requires the Bank to
change its method of computing reserves for bad debts to the experience method.
This method is available to banks with assets less than $500 million and will
allow the Bank to maintain a tax reserve for bad debts and to take bad debt
deductions for reasonable additions to the reserve. As a result of this change,
the Bank will have to recapture into income a portion of its existing tax bad
debt reserve. This recapture will occur ratably over a six-taxable year period,
beginning with the 1998 tax year. For financial reporting purposes, this
recapture will not result in additional tax expense as the Bank adequately
provided deferred taxes in prior years. Furthermore, this change does not
require the Bank to recapture its base year tax reserve.
17
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its borrowers.
These financial instruments are commitments to extend credit. These instruments
may, but do not necessarily, involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statements of
financial condition. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument is represented by
the contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet loans receivable.
As of December 31, 1998 and 1997, in addition to the undisbursed portion
of loans receivable, the Company had outstanding loan commitments approximating
$1,713,949 and $2,790,000, respectively. These commitments are normally met
from deposit account growth, loan payments, excess liquidity, or borrowed money.
Standby letters of credit written are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. These
guarantees are issued primarily to support construction borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Company holds cash
or a secured interest in real estate as collateral to support these commitments
for which collateral is deemed necessary. Outstanding standby letters of credit
amounted to $4,397,000 and $4,800,000 at December 31, 1998 and 1997,
respectively.
10. PENSION PLAN
On May 28, 1997, the Board of Directors, after due consideration of the
projected cost of the Company's defined benefit pension plan, voted to terminate
the Plan effective August 31, 1997. The present value of current benefits, plus
any remaining pension assets, net of costs, were transferred into the Company's
401(k) plan on behalf of all defined benefit plan participants. The final
benefit to the Company resulting from this plan curtailment was determined to be
$104,653 by the plan administrator. This credit is reflected in the 1997
salaries and employee benefits in the accompanying financial statements.
The Company's qualified, noncontributory defined benefit pension plan
covered substantially all of its employees. Benefits were based on each
employee's years of service up to a maximum of 35 years, and the average of the
highest five consecutive annual salaries out of the ten years prior to
retirement. The benefit formula used was the individual aggregate actuarial
cost method. An employee became fully vested upon completion of seven years of
qualifying service. It was the policy of the Company to fund the amount
required to meet minimum funding standards. No contributions were required to
be made in 1998 or 1997.
18
<PAGE>
Net pension cost for the Company's plan consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
Service cost $ - $ 49,239 $ 68,705
Interest cost - 71,313 61,651
Actual return on plan assets - (76,268) (98,075)
All other components - (6,618) 28,140
Charge resulting from plan curtailment - 73,314 -
Credit resulting from plan settlement - (215,633) -
--------- ----------- -----------
Net pension (credit) cost $ - $ (104,653) $ 60,421
========= =========== ===========
</TABLE>
Assumptions used to develop the net periodic pension cost were:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Discount rate N/A 7.5% 7.5%
Expected long-term rate of return on plan assets N/A 8.0% 8.0%
Rate of increase in compensation levels N/A 5.0% 5.0%
</TABLE>
11. STOCK OPTION AND INCENTIVE PLAN
The Company has a stock option and incentive plan to attract and retain
personnel and provide incentive to employees to promote the success of the
business. At December 31, 1998, 120,946 shares of stock have been authorized
for grants of options for this plan.
The following table provides the pro forma disclosures:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C> <C>
Net income As reported $2,386,204 $2,084,011 $1,319,727
Pro forma 2,284,225 2,084,011 1,319,727
Basic earnings per share As reported 3.00 2.57 1.65
Pro forma 2.88 2.57 1.65
Diluted earnings per share As reported 2.80 2.40 1.53
Pro forma 2.68 2.40 1.53
</TABLE>
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the Black-
Scholes pricing model with the following weighted-average assumptions used for
the 1998 grants: dividend yield of 0.5%, expected volatility of 15%, a risk-
free rate of 4.97%, and an expected option life of 10 years. No stock options
were granted in 1997 or 1996. The weighted-average fair value of each option
granted during 1998 was $10.20.
19
<PAGE>
Substantially all options are 100% vested when granted, and all options
expire after 10 years. The following tables summarize activity in the plan:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 85,566 $ 9.19 97,464 $8.56 131,233 $7.33
Granted 22,006 24.18 - .00 - .00
Exercised 7,627 7.08 11,898 5.69 33,625 5.30
Rescission of exercise 1,873 6.50 - .00 - -
Forfeitures - - 144 3.58
------- ------ -------
Outstanding at end of year 101,818 12.61 85,566 9.19 97,464 8.56
======= ====== =======
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------------
Weighted Weighted
Number Remaining Number Average
Outstanding Contractual Exercisable Exercise
12/31/98 Life 12/31/98 Price
------------- ----------- ------------ ----------
<S> <C> <C> <C>
$ 18,141 1 year $ 18,141 $ 6.50
61,671 7 years 60,298 10.28
1,006 9 years 1,006 21.51
21,000 10 years 21,000 24.31
------------- ------------
$101,818 $100,445 12.64
============= ============
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Bank has an Employee Stock Ownership Plan (ESOP) that acquires stock
of the Bank's parent corporation, Tri-County Financial Corporation. The Company
accounts for its ESOP in accordance with AICPA Statement of Position 93-6.
Accordingly, unencumbered shares held by the ESOP are treated as outstanding in
computing earnings per share. Shares issued to the ESOP but pledged as
collateral for loans obtained to provide funds to acquire the shares are not
treated as outstanding in computing earnings per share. Dividends on ESOP
shares are recorded as a reduction of retained earnings. The ESOP may acquire
in the open market up to 195,700 shares. At December 31, 1998, the Plan owns
59,744 shares. The Company also has a 401(k) plan. Employee contributions are
matched by the Bank at a ratio determined annually by the Board of Directors,
currently one-half of an employee's 6% elective deferral. All employees who
have completed one year of service and have reached the age of 21 are covered
under these defined contribution plans. Contributions are determined at the
discretion of management and the Board of Directors. For the years ended
December 31, 1998, 1997, and 1996, the Company charged $186,000, $102,000, and
$46,000 against earnings to fund the Plans.
20
<PAGE>
13. STOCK DIVIDENDS
On January 22, 1999, the Board of Directors declared a $.20 per share cash
dividend to be distributed to holders of record on March 17, 1999.
On February 15, 1998, the Board of Directors declared a 4% stock dividend
and a $.125 per share cash dividend that was distributed to holders of record on
March 13, 1998. The stock distribution increased the Corporation's issued stock
by approximately 31,000 shares.
On January 24, 1998, the Board of Directors declared a 5% stock dividend
that was distributed to holders of record on March 7, 1998. The stock
distribution increased the Corporation's issued stock by approximately 37,500
shares.
14. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of tangible and core capital (as defined in the
regulations) to total adjusted assets (as defined), and of risk-based capital
(as defined) to risk-weighted assets (as defined). Management believes, as of
December 31, 1998, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Office of
Thrift Supervision (the last regulatory body to issue a report on the Bank's
capital adequacy) categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Company's or
the Bank's category.
21
<PAGE>
The Company's and the Bank's actual capital amounts and ratios for 1998
and 1997 are presented in the tables below:
<TABLE>
<CAPTION>
To be Considered
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------ ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998:
Total capital (to risk-
weighted assets):
The Company $22,023 18.27% $9,640 8.0%
The Bank 21,791 18.08% 9,640 8.0% $12,050 10.0%
Tier 1 Capital (to risk-
weighted assets):
The Company 20,483 17.00% 4,820 4.0%
The Bank 20,251 16.80% 4,820 4.0% 7,230 6.0%
Tier 1 Capital (to
average assets):
The Company 20,483 10.28% 7,964 4.0%
The Bank 20,251 10.17% 7,964 4.0% 6,025 5.0%
At December 31, 1997:
Total capital (to risk-
weighted assets):
The Company 19,953 17.38% 9,184 8.0%
The Bank 19,855 17.29% 9,184 8.0% 11,480 10.0%
Tier 1 capital (to risk-
weighted assets):
The Company 18,643 16.24% 4,592 4.0%
The Bank 18,545 16.15% 4,592 4.0% 6,888 6.0%
Tier 1 capital (to
average assets):
The Company 18,643 9.68% 7,702 4.0%
The Bank 18,545 9.64% 7,692 4.0% 9,615 5.0%
</TABLE>
22
<PAGE>
Earnings Per Share
------------------
The calculations of basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share:
Net income $2,386,204 $2,084,011 $1,319,727
Average common shares outstanding 793,458 811,694 799,804
Net income per common share - basic $ 3.00 $ 2.57 $ 1.65
Diluted earnings per share:
Net income 2,386,204 2,084,011 1,319,727
Average common shares outstanding 793,458 811,694 799,804
Stock option adjustment 59,687 55,809 62,222
Average common shares outstanding - diluted 853,145 867,503 862,026
Net income per common share - diluted $ 2.80 $ 2.40 $ 1.53
</TABLE>
Charter Conversion
------------------
When the Small Business Job Protection Act was signed into law on
August 20, 1996, all savings banks and savings associations became able to
change to a commercial bank charter without having to recapture any of their
pre-1988 bad debt reserve accumulations. Prior to the passage of this law, when
management evaluated the benefits of changing to a commercial bank charter, the
recapture tax on these bad debt reserves represented a material cost to be
considered. With this significant obstacle removed, the opportunity to change
the Bank's mode of operations was revisited.
On October 30, 1996, the Board of Directors unanimously adopted a Plan
of Conversion whereby the Savings Bank converted to a Maryland-chartered
commercial bank to be known as "Community Bank of Tri-County." Following the
Charter Conversion, effected March 29, 1997, both the Bank and the Corporation
are regulated by the Federal Reserve Bank. The Charter Conversion allows the
Bank more flexibility in the types of loans it is permitted to make as it is no
longer required to meet the Qualified Thrift Lender Test. Specifically, the
Bank can increase its consumer and commercial lending and is better able to
offer products to its small business and retail customers.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. Therefore, any aggregate unrealized gains or losses should not be
interpreted as a forecast of future earnings or cash flows. Furthermore, the
fair values disclosed should not be interpreted as the aggregate current value
of the Company.
23
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 906,658 $ 906,658 $ 650,923 $ 650,923
Interest-bearing deposits
with banks 4,152,816 4,152,816 5,169,830 5,169,830
Investment securities and
stock in FHLB and FRB 60,121,025 60,140,991 55,751,720 55,781,533
Loans receivable, net 132,645,936 134,181,574 121,866,762 124,180,547
Loans held for sale 2,266,697 2,266,697 1,698,872 1,698,872
Liabilities:
Savings, NOW and money
market accounts 73,229,364 73,259,364 60,564,077 60,564,077
Time certificates 78,556,000 78,085,030 81,712,000 81,339,062
Long-term debt and other
borrowed funds 33,434,332 33,367,035 29,201,820 29,275,120
</TABLE>
At December 31, 1998 and 1997, the Company had outstanding loan commitments and
standby letters of credit of $6.1 million and $5.3 million, respectively. Based
on the short-term lives of these instruments, the Company does not believe that
the fair value of these instruments differs significantly from their carrying
values.
Valuation Methodology
---------------------
Cash and Cash Equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investment Securities - Fair values are based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Mortgage-Backed Securities - Fair values are based on quoted market
prices or dealer quotes. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
Loans Receivable and Loans Held for Sale - For conforming residential
first-mortgage loans, the market price for loans with similar coupons and
maturities was used. For nonconforming loans with maturities similar to
conforming loans, the coupon was adjusted for credit risk. Loans which did not
have quoted market prices were priced using the discounted cash flow method.
The discount rate used was the rate currently offered on similar products.
Loans priced using the discounted cash flow method included residential
construction loans, commercial real estate loans, and consumer loans. The
estimated fair value of loans held for sale is based on the terms of the related
sale commitments.
24
<PAGE>
Deposits - The fair value of checking accounts, saving accounts, and
money market accounts was the amount payable on demand at the reporting date.
Time Certificates - The fair value was determined using the discounted
cash flow method. The discount rate was equal to the rate currently offered on
similar products.
Long-Term Debt and Other Borrowed Funds - These were valued using the
discounted cash flow method. The discount rate was equal to the rate currently
offered on similar borrowings.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1998 and 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purpose of these financial statement since that date and,
therefore, current estimates of fair value may differ significantly from the
amount presented herein.
16. SAIF RECAPITALIZATION
The Federal Deposit Insurance Corporation administers two separate deposit
insurance funds, the Bank Insurance Fund (BIF) and Savings Association Insurance
Fund (SAIF). Congress passed legislation in August 1996, that recapitalized the
SAIF fund through a special assessment on FDIC-insured institutions with SAIF
deposits. This deposit assessment resulted in an after-tax expense to the
Company of approximately $504,000 for the year ended December 31, 1996.
25
<PAGE>
17. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY
Condensed Balance Sheets:
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash $ 44,935 $ 120,288
Accounts receivable 11,734 1,383
Investment securities available-for-sale 224,970 -
Investment in wholly owned subsidiary 20,899,960 19,004,345
----------- -----------
TOTAL ASSETS $21,181,599 $19,126,016
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 49,633 $ 39,937
Stockholders' equity:
Common stock 7,893 7,827
Surplus 7,309,901 6,574,162
Retained earnings 13,372,441 12,256,443
Unearned ESOP shares (206,883) (194,385)
Accumulated other comprehensive income 648,614 442,032
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $21,181,599 $19,126,016
=========== ===========
Condensed Statements of Income:
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Dividends from subsidiary $750,000 $ - $ -
Interest income 13,882 41,879 38,463
Loss on sale of investment securities (391) (250) -
Amortization and miscellaneous expenses (76,671) (72,323) (53,981)
------------ ------------- -------------
Income (loss) before income taxes and equity
in undistributed net income of subsidiary 686,820 (30,694) (15,518)
Federal and state income tax benefit 10,350 10,436 5,276
Equity in undistributed net income of subsidiary 1,689,034 2,104,269 1,329,969
------------ ------------- -------------
NET INCOME $2,386,204 $2,084,011 $1,319,727
============ ============= =============
</TABLE>
26
<PAGE>
Condensed Statements of Cash Flows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,386,204 $ 2,084,011 $ 1,319,727
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in investment in wholly owned subsidiary (1,689,034) (2,114,705) (1,335,245)
Loss on sale of investment securities 391 250 -
Amortization of discount on investments - (25,140) (24,187)
Increase in current assets (10,350) - -
Increase (decrease) in current liabilities 9,696 273 (30,936)
----------- ----------- -----------
Net cash provided (used) by
operating activities 696,907 (55,311) (70,641)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities
available-for-sale (633,861) (343,295) (431,598)
Maturity or redemption of investment
securities available-for-sale 408,500 815,750 430,000
----------- ----------- -----------
Net cash (used) provided by
investing activities (225,361) 472,455 (1,598)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (102,498) (81,008) (74,045)
Exercise of stock options 41,835 20,795 178,198
Net change in ESOP loan (12,600) (20,154) (36,008)
Redemption of common stock (473,636) (348,271) -
----------- ----------- -----------
Net cash (used) provided by
financing activities (546,899) (428,638) 68,145
----------- ----------- -----------
DECREASE IN CASH (75,353) (11,494) (4,094)
CASH AT BEGINNING OF YEAR 120,288 131,782 135,876
----------- ----------- -----------
CASH AT END OF YEAR $ 44,935 $ 120,288 $ 131,782
=========== =========== ===========
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The year ended December 31, 1998 was the first complete year of operations as
a commercial banking institution. The Community Bank of Tri-County ("the Bank")
provided the Tri-County Financial Corporation ("the Company") with record
earnings of $2.4 million, an increase of 14.5% over the year ended December 31,
1997.
In the five year business plan of the Bank, specific areas of portfolio growth
and marketing programs were targeted to create an earnings stream comparable to
established community banks. The key component of this strategy was to increase
the levels of commercial and consumer loan products. Utilizing the Bank's
existing delivery systems, the management began to capitalize on the lucrative
niche for community based lending. Market response was favorable and the
initial momentum generated even greater increases in commercial and consumer
loans than management had expected.
The outcome of management's efforts to restructure its portfolio and lines of
business was evident in the percentages of growth in targeted lines. Net loans
receivable increased by $10.8 million, or 8.8%. Commercial real estate loans
grew by $2.9 million or 17.4% and lines of credit grew by $1.3 million or 27.0%.
Management failed to meet business plan target growth in the area of second
mortgages. With low fixed rate loans available, many borrowers paid off their
second mortgages while refinancing their first mortgages to a lower rate.
Second mortgages declined $1.1 million, or 6.0%.
On the deposit side of the balance sheet, non-interest bearing demand accounts
grew by $2.6 million or 35.0% during the year. Transactional accounts comprise
$38.5 million, or 25.3% of the deposit base of the Bank at December 31, 1998
compared to $22.7 million or 16% at December 31, 1997. This increase resulted
from the Bank's development of accounts geared for the small business customer
as well as the creation of a money market indexed account with check withdrawal
privileges.
Residential mortgage lending continued to be a profit center for the Bank and
has produced a volume of $54.8 million in loans, up 4.5% over 1997's level. The
low rate environment continued the high refinancing activity. The majority of
fixed rate long term loans were sold in the secondary market, with the servicing
retained by the Bank, while adjustable rate mortgages and certain shorter
maturity fixed rate loans were originated for the Bank's portfolio. In 1998,
the continuation of a flat yield curve and the downward pressure on long term
treasury rates due to the international flight to quality in fixed rate
investments increased effect on the prepayment rate of the Bank's loan
portfolio. The high rate of prepayment and subsequent reinvestment of the
proceeds in new loans resulted in a marked decline in the overall yield of the
loan portfolio. This reduction will affect the future earning stream until the
funding costs are able to reprice under a falling rate scenario. The margin
between rates earned on the Bank's loan portfolio and the rates paid on its
customer deposits was narrowed by 5 basis points from 5.14% to 5.09%.
28
<PAGE>
The Bank is continuing to search for locations and platforms to deliver its
products to the region in a cost efficient manner. A prime location adjacent to
Southern Maryland's only regional mall was acquired in late 1997 and put into
operation in the first quarter of 1998. This provided a highly visible
commercial branch for further development of market share. The Bank is
expanding on its "micro-branching" concept by using lobbies connected with
convenience stores while providing full service drive-in hours and ATM access.
These micro-branches will be used as in-fill delivery sites and be supported by
our anchor branch staffs. Additional ATM sites have been acquired in several
retail establishments and management continues to seek such opportunities to
serve the local market. These steps are taken to generate fee income and
further advance the name recognition of the Bank.
In an effort to provide a wider range of services and products to Bank
customers and generate additional fee income, two new lines of business were
offered in 1998. First, an arrangement was made with a local insurance agency
so that property and casualty coverage will be offered, initially to loan
customers, but ultimately available to all. Second, with investment and
retirement planning of such importance to Bank customers, an investment
representative was hired to provide such services. Management anticipates that
fee income from these sources will develop slowly, but the customer
relationships established will solidify Community Bank's position in the area
market.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's net income for 1998 increased $302,000 or $.43 in basic earnings
per share over 1997's record levels. This was a slowing of the earnings growth
momentum experienced in 1997 when net income increased $764,284 or $.92 in basic
earnings per share over 1996 levels.
The Board of the Bank has elected to increase the allowance for loan losses to
achieve a sufficient reserve level commensurate with the Bank's portfolio risks
and business plan in anticipation of the impending conversion to a commercial
bank. The Bank continues to provide for increased loan losses that can be
associated with more risky commercial and consumer lending. In both 1998 and
1997, $240,000 was charged against earnings to increase the allowance for loan
losses.
The weighted average yield on all interest-earning assets was 8.07% in 1998,
8.29% in 1997 and 8.25% in 1996. The interest rate yield curve during the year
was flat with a general decline in the level of rates earned. The decrease in
the weighted average yield occurred as principal curtailments or payoffs were
received and somewhat lower yields were available on the investments acquired
with the cash received. Management's asset/liability strategy was to protect
against upside movements in interest rates, therefore, maturity extension of
investments would have been counterproductive to the strategy. The current
economic expansion is entering its seventh year without significant inflationary
pressure.
29
<PAGE>
As evidenced in the "Gap" chart in the "Market Risk Analysis" section of this
discussion, the Bank has exposure to rising rates, particularly in the short to
moderate term sectors. There were periods during 1997 when short term rates
exceeded long term rates, an "inverted yield curve"; 1998 saw some improvement
in the yield curve. However, there is still significant pressure on the Bank's
net interest spread because no appreciable relief is obtained in the cost of
money with short and intermediate term rates tracking so close to the long term
rates. The decline in the level of rates reduced the Bank's cost of funds at a
slower pace than the decline in asset returns. The weighted average rate paid
on all interest-bearing liabilities was 4.24% in 1998, 4.37% in 1997 and 4.22%
in 1996. The Board of Directors of the Bank continually monitors the situation
carefully to develop a balance in the portfolio that will conservatively
position the Bank for a continuation of the trend without undue risk to market
rate turns in either direction.
The net interest rate spread was 3.84% in 1998 compared to 3.92% in 1997 and
4.03% in 1996. The trend has been toward a narrowing of the yield over the past
several years; the interest rate spread will increase in the future only if a
normal interest rate cycle is regained in the economy. If the classic pattern
of inflationary pressures and interest rate volatility return to the economic
front, a restructuring of the Bank's assets will be necessary to realize
increased returns. An interest rate sensitivity analysis follows this section
and will provide a more detailed discussion.
The continued negative effect of the low long term rate environment on the
refinancing activity of the fixed rate portfolio and of the loans serviced for
others has decreased loan yields. Further, the Bank's adjustable rate mortgage
portfolio is repricing at levels consistent with or above the current fixed
rates found in the market. This exposes the ARM portfolio to a faster runoff of
loans as well as a flat yield from those which do not pay off.
The loan portfolio continues to hold its quality and has no loans identified
as impaired under the criteria established by the scope of Statement of
Financial Accounting Standards Nos. 114 and 118. The nonaccrual loans for 1998
totaled $269,00 compared to $160,000 for 1997 and $400,000 for 1996. Increasing
levels of commercial and consumer loans are expected to create some additional
collection problems for the Bank, but these loans are still relatively new and
the Bank has not yet experienced an increase in delinquencies in these loan
groups. The Bank owned no real estate acquired through foreclosure at the end
of 1998 and 1997.
OPERATIONAL ANALYSIS
Noninterest expense increased by 12.1% or $589,000 to $5,466,000 for 1998
compared to $4,877,000 in 1997 and $4,530,000 after adjustment for the $820,000
SAIF recapitalization charge in 1996. Salaries and employee benefits generated
the largest line item dollar increase in 1998, $491,000, as higher personnel
levels were required to handle the increase in transactional and business
activity and to staff the growing branch network. The Bank has implemented a
branch wide incentive plan for its managers that is based on specific
operational goals as well as corporate rates of return and quality of loan
criteria. The managers may receive cash incentives as well as stock options
based on their success in obtaining strategic goals. This greatly expands the
coverage of employees under an incentive based pay structure and more closely
aligns the manager or executive to the overall performance of the Bank. Further
incentive plans for the remaining employees are currently under development.
30
<PAGE>
During 1997, in an effort to control future personnel costs, the Board of
Directors of the Bank studied the projected long term costs associated with the
defined benefit pension plan. As the result of the study, the Board elected to
terminate the Defined Benefit Pension Trust of the Bank and to transfer the
assets into the participants' 401(k) plan. The net benefit to the Company
resulting from this plan curtailment was $105,000 in 1997. No future costs are
expected with this plan. This continued the strategy of the Bank to link
compensation with performance for its employees.
Occupancy expense is increasing as the branch network expands and as the
administrative office space is expanded within the home office facility.
Deposit insurance costs are incurred at a level just under $100,000 since the
conversion to a commercial bank. As a thrift prior to that, the normal
recurring costs approached $400,000 annually.
YEAR 2000 COMPLIANCE DISCLOSURE
The Bank's management and Board of Directors has been closely monitoring the
problems created by the year 2000 (Y2K) and its effect on data processing
systems. Banks are particularly aware of the potential problems due to the high
reliance on technology and computerized information systems. Whether an actual
threat exists or not, the Bank customer's perception of the problem will
directly affect Bank operations. If consumer confidence in general retail
operations is lacking, the bank may experience large cash withdrawal demands.
This cash would then be used, instead of checks or credit, to satisfy the
customer's needs for daily living supplies. Projections of customer withdrawal
demands are being made to adequately prepare for the maintenance of cash
balances in the branch system. Standby funding sources are being evaluated to
meet cash demands. At the same time, an ongoing information program has been
established to inform our customers of our state of readiness and of tips for
coping with the coming date change.
The Bank began its Y2K program in early 1997 and included complete analysis of
all Bank functions, documentation of the technology reliance and rating of the
systems in order of critical need. Contingency plans are being written and
timetables developed for the implementation of the contingency operations in the
event of failure in any given area. Testing of the plans will be performed for
critical areas.
The Bank's capitalized cost of new technology and software over the last three
years has exceeded $520,000. All mission critical software systems have been
evaluated and upgraded where necessary and possible. The majority of 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
branch locations has been subjected to periodic reviews by its regulators. It
has completed its Phase II examination by the Federal Reserve. No material
changes to the Bank's Y2K Readiness Plans were required. The Bank complies with
the Federal Financial Institutions Examination Council guidelines for Y2K
compliance. Continual testing of the systems with its third party provider is
ongoing and the testing of mission critical systems is scheduled for completion
by June 30, 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.
31
<PAGE>
Bank customers can put the Bank at risk by their failure to attain Y2K
compliance. In early 1998, borrowers were contacted about their readiness to
determine if the collection of loans may be adversely affected. New loan
approval procedures include an evaluation of the borrower's Y2K compliance and
loan documentation requires certification of the borrower's compliance.
The Bank is put at risk by outside parties due to its reliance on them for
electricity, telecommunications and other operating needs. The readiness of
these outside parties is beyond the Bank's control, though alternative sources
are evaluated where available.
NET PREMISES AND EQUIPMENT
Net premises and equipment increased by 3% or $127,000 in 1998 compared to a
9.5% or $365,000 increase in 1997 over 1996. Continued investment in technology
platforms, particularly to prepare for the Y2K situation, and various internal
office expansion and renovation required capital outlays in 1998. The purchase
of the St. Patrick's Drive branch building during the fourth quarter of 1997 and
investment in technology platforms required significant outlays in 1997.
BORROWINGS
The Bank's borrowing, consisting mainly of advances from the Federal Home Loan
Bank of Atlanta ("FHLB"), increased to $32.9 million from $28.4 million at
December 31, 1997. These borrowings were used to fund specific loan projects or
to create arbitrages with authorized investments matched to the borrowings for a
managed spread. This strategy allows for the prudent leveraging of equity to
maximize revenue production while managing asset and liability interest rate
risk.
STOCKHOLDERS' EQUITY
Stockholders' equity grew by 10.7%, or $2,046,000 during 1998 to $21,132,000
compared to 11.8% or $2,009,000 to $19,086,000 during 1997. This represents an
average net worth to total assets ratio of 10.1%, up from 9.8% in 1997.
The net unrealized gain on investment and mortgage-backed securities available
for sale included in accumulated other comprehensive income continued to grow,
increasing by $207,000 in 1998 in addition to the increase of $353,000 in 1997
due to the effects of the lower long term rate environment on the mortgage
portfolio. The valuation allowance is subject to the fluctuations in interest
rates and will be reflected in the quarterly statements to the regulatory
agencies and shareholders.
The Company's total risk based capital ratio for 1998 was 18.27% or
$22,023,000 compared to 17.38% or $19,953,000 in 1997. The Tier I risk based
capital level for 1998 was $20,483,000 or 17.00% compared to $18,643,000 or
16.24% in 1997. A discussion of the quantitative measures of capitalization and
regulatory capital requirements of the Company and its banking subsidiary may be
found in Footnote 14 "Regulatory Matters" of the Consolidated Financial
Statements. At December 31, 1998, the Bank exceeded all capital requirements
and was considered to be "well-capitalized" under regulatory definitions.
32
<PAGE>
During the year, the Board of Directors of the Company continued to provide
liquidity to its shareholder base through stock repurchases. The Company
purchased and retired 20,039 shares for $473,000 in 1998 and 17,000 shares for
$348,000 in 1997. With the downward shift in market values for financial
institution stock during 1998, the Company utilized its capital management
strategy to include repurchases and retirement of stock at levels that would be
antidilutive to the shareholder base.
LIQUIDITY
The Company's liquidity management policies for the Bank are designed to
provide for prudent levels of liquidity to be maintained at all times,
consistent with the nature of the business being conducted by the Bank. The
assets classified as Investment Securities Available-for-Sale are available for
leveraging as well as for immediate sale if the situation dictates that course
of action. Additionally, the Federal Home Loan Bank of Atlanta is extensively
utilized as the Bank's liquidity source in its asset/liability management
strategy. The Bank currently has approval to borrow up to thirty percent (30%)
of its assets. At December 31, 1998, it had $32.9 million outstanding or 15.9%
of its assets. Its year 2000 liquidity plan has been developed and is currently
being operated in conjunction with the guidelines of the Federal Reserve and
with the cooperation of the FHLB, its primary wholesale source.
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:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Sensitivity of market value of portfolio equity:
Interest rate changes - adverse scenario:
Up 200 basis points -12% -4%
Down 200 basis points +5% -5%
Sensitivity of net interest income:
Interest rate changes - adverse scenario:
Up 200 basis points -1% +7%
Down 200 basis points +1% -9%
</TABLE>
33
<PAGE>
The change in percentage for the Market Value of Portfolio Equity declined
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 a lower yields. An immediate market
rate increase would made those new investments less valuable. 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 an upward movement of 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 impact from sudden and prolonged upward
shifts in interest rates.
Interest rate sensitivity may also be analyzed by examining the extent to
which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. Gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income and a positive gap would
result in an increase in net interest income while, conversely, during a period
of falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
The following table illustrates the "gap" position of the Bank at December 31,
1998:
34
<PAGE>
<TABLE>
<CAPTION>
0 to 90 91 to 365 Over 1 to Over 3 to Over 5
days days 3 years 5 years years
------- --------- --------- --------- --------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Interest bearing deposits with banks $ 4,152 $ - $ - $ - $ -
Investment securities 8,915 - - 10,640 36,852
Loans 33,387 16,908 59,518 12,079 13,021
--------- --------- --------- -------- -------
Total rate sensitive assets 46,454 16,908 59,518 22,719 49,873
Rate Sensitive Liabilities:
Noninterest bearing deposits 9,753 - - - -
Interest bearing demand deposits 17,005 - - - -
Money market deposits 20,775 - - - -
Regular savings deposits 25,771 - - - -
Time deposits 11,061 26,858 36,586 4,051 -
Other borrowed funds and
long-term debt 16,500 15,096 - 11,400 -
--------- --------- --------- -------- -------
Total rate sensitive liabilities 100,865 31,954 36,586 15,451 -
Interest rate sensitivity gap (54,411) (15,046) 22,933 7,268 49,873
Cumulative interest rate
sensitivity gap (54,411) (69,457) (46,524) (39,256) 10,617
</TABLE>
While a perfectly matched portfolio of assets and borrowings would seem
optimal, in community banking enterprises, there exists too little margin for
normal profitability and coverage of the cost of operations to attempt a
complete match. Therefore, the Board of Directors, through its ALCO committee,
monitors certain levels of mismatch in the portfolio consistent with the equity
leveraging policies to maintain a profitable level of mismatched assets and
their funding costs.
IMPACT OF INFLATION
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services. In the current interest rate risk environment, liquidity and the
maturity structure of the Bank's assets and liabilities are critical to the
maintenance of acceptable performance levels.
35
<PAGE>
STOCK INFORMATION
Tri-County Financial Corporation's stock is not traded or listed on any
public exchange. However, stock does change hands over the course of the year.
In 1998, the Company was made aware of several trades which occurred.
During 1998, a total of 29,176 shares traded, with a high price of $27.50 and
a low price of $20. The weighted average price was $23.40. The number of
shareholders at March 17, 1999 was and the total outstanding shares was
. On January 22, 1999, the Board of Directors declared a $.20 per share cash
dividend payable on April 17, 1999 to shareholders of record on March 17, 1999.
On February 25, 1998, the Board of Directors declared a 4% stock dividend and a
$.125 per share cash dividend, both payable on April 13, 1998 to shareholders of
record on March 13, 1998.
Federal regulations impose certain limitations on the payment of dividends
and other capital distributions by the Bank.
the Bank's ability to pay dividends is governed by the Maryland Financial
Institutions Code and the regulations of the Federal Reserve Board. Under the
Maryland Financial Institutions Code, a Maryland bank (1) may only pay dividends
from undivided profits or, with prior regulatory approval, its surplus in excess
of 100% of required capital stock and (2) may not declare dividends on its
common stock until its surplus fund equals the amount of required capital stock
or, if the surplus fund does not equal the amount of capital stock, in an amount
in excess of 90% of net earnings.
The Bank's payment of dividends is also subject to the Federal Reserve
Board's Regulation H, which limits the dividends payable by a state member bank
to the net profits of the Bank then on hand, less the Bank's losses and bad
debts. Additionally, the Federal Reserve Board has the authority to prohibit
the payment of dividends by a Maryland commercial bank when it determines such
payment to be an unsafe and unsound banking practice. Finally, the Bank is not
able to pay dividends on its capital stock if its capital would thereby reduced
below the remaining balance of the liquidation account established in connection
with the Stock Conversion.
The Company's ability to pay dividends is governed by the policies and
regulations of the Federal Reserve Board which prohibit the payment of dividends
under certain circumstances involving the bank holding company's financial
condition and capital adequacy.
36
<PAGE>
Dear Shareholder:
I am pleased to report the operating results of Tri-County Financial
Corporation and its banking subsidiary, Community Bank of Tri-County, for the
year ended December 31, 1998. Net Income increased by 14.5% to $2.4 million
while basic earnings per share increased by $.53 or 21.4% to $3.00 per share.
At December 31,1999, the total assets of the company had increased 8.3% to
$207,000,000.
The success of the Company can be attributed to the excellent market
position of Community Bank and the growing awareness in the market that defines
it as "the" local bank. With eight locations strategically placed in three
counties, it enjoys the advantage of competing with the super regional banks by
using its closeness to the customer culture while being price sensitive to
competition. In utilizing a blend of wholesale investment strategies with
commercial banking operations, a consistent return on equity has been realized
by the Company over the last several years while the net worth of the Company
increased from strong earning streams. The Company's return on average assets
has improved to 1.20% in 1998, up from 1.13% in 1997 and .77% in 1996.
The bank is following its long-term business strategy by increasing lines
of business with higher profit potential than residential lending and
establishing fee generating divisions to broaden its relationship with each
customer. In 1999, it introduced an affiliation with UVEST, a brokerage service
that serves over 150 banks in providing full service brokerage sales. In
addition, an agreement with a local general insurance firm has resulted in the
increased marketing of property and casualty insurance to our customers.
Together, these divisions can begin to penetrate the insurance sector of
financial product lines for our customers. The current fee income stream, while
modest, is expected to become more substantial as these services gain customer
recognition.
As we approach the year 2000 date change issue, it is important for our
shareholders to know the state of readiness of the Company. For several years
your Board and management have closely attended to the issue of mission critical
data systems. The Bank's internal data processing systems have been tested and
upgraded where necessary. The third party providers of data services are in the
process of certifying that they will be ready to handle the date change. Our
correspondent banks have advised us of their state of readiness. Even our
commercial customers have been notified and are expressing an awareness that is
of reasonable comfort to the Bank. The Bank has recently completed the Federal
Reserve's Phase II examination without material changes in its readiness plan.
For the time available until the end of the year, what remains is the completion
and testing of contingency plans.
The economic environment in which we operate has created its own set of
opportunities as well as problems. While customer confidence in equities has
buoyed the stock market, the formation of deposits has virtually ceased in
America. This problem will be manifested in a greater dependence by banks on
wholesale funds. Further, banks will have to operate as a payment processing
entity instead of its more traditional role as a spread based lender. In order
to attract those payment streams, the Bank is redefining its traditional retail
center strategy and will focus on micro-delivery centers that will be supported
by its anchor centers. This should help increase its market share at an
efficient cost basis.
<PAGE>
In closing, our success results from the efforts of many stockholders, all
of whom feel an ownership in the Company. That philosophy helps balance long-
term growth objectives with short-term horizons, both in decision making and
operations. On behalf of the Board of Directors, management and staff, thank
you for your support. I am looking forward to serving you in the coming
century.
Yours truly
Michael L. Middleton
President and Chairman
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Tri-County Financial Corporation
Percentage State of
Subsidiaries Owned Incorporation
- ------------ ----- -------------
Community Bank of Tri-County 100% Maryland
Community Mortgage Corporation
of Tri-County (1) 100% Maryland
Tri-County Federal Finance One (1) 100% Maryland
- -----------------
(1) Wholly-owned subsidiary of Community Bank of Tri-County.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in this Annual Report on
Form 10-K of Tri-County Financial Corporation for the year ended December 31,
1998 of our report dated February 26, 1999 relating to the consolidated
financial statements of Tri-County Financial Corporation.
/s/ Stegman & Company
Baltimore, Maryland
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 906,658
<INT-BEARING-DEPOSITS> 4,152,816
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,976,606
<INVESTMENTS-CARRYING> 2,139,069
<INVESTMENTS-MARKET> 2,159,035
<LOANS> 132,645,936
<ALLOWANCE> 1,540,551
<TOTAL-ASSETS> 207,019,790
<DEPOSITS> 151,815,364
<SHORT-TERM> 16,937,882
<LIABILITIES-OTHER> 638,128
<LONG-TERM> 16,496,450
0
0
<COMMON> 7,893
<OTHER-SE> 21,537,839
<TOTAL-LIABILITIES-AND-EQUITY> 207,019,790
<INTEREST-LOAN> 11,642,029
<INTEREST-INVEST> 3,941,744
<INTEREST-OTHER> 142,259
<INTEREST-TOTAL> 15,726,032
<INTEREST-DEPOSIT> 5,693,385
<INTEREST-EXPENSE> 7,596,727
<INTEREST-INCOME-NET> 8,129,305
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> (391)
<EXPENSE-OTHER> 5,466,637
<INCOME-PRETAX> 3,843,204
<INCOME-PRE-EXTRAORDINARY> 3,843,204
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,386,204
<EPS-PRIMARY> 3.00
<EPS-DILUTED> 2.80
<YIELD-ACTUAL> 4.21
<LOANS-NON> 269,000
<LOANS-PAST> 196,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,310,365
<CHARGE-OFFS> 9,814
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,540,551
<ALLOWANCE-DOMESTIC> 1,540,551
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
