<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to_____
Commission File Number 0-18279
--------------------------------------
Tri-County Financial Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1652138
- ------------------------------- ------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(301) 645-5601
----------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
As of November 3, 1999 registrant had outstanding 787,367 shares of Common
Stock.
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q
INDEX
- -----------------------------------------------------------------------
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 2
Consolidated Statements of Income and Comprehensive Income -
Three and Nine Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1999 and 1998 4 - 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7 - 12
PART II - OTHER INFORMATION 13 - 14
Item 6 - Exhibits
SIGNATURES 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
------------------- --------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 8,602,876 $ 906,658
Interest-bearing deposits with banks 2,663,712 4,152,816
Investment securities available for sale - at fair value 57,864,317 55,976,606
Investment securities held to maturity - at amortized cost 2,108,090 2,139,069
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 2,237,700 2,005,350
Loans held for sale 575,400 2,266,697
Loans receivable - net of allowance for loan losses
of $1,604,397 and $1,555,489, respectively 137,266,471 132,645,936
Premises and equipment, net 4,520,523 4,316,207
Accrued interest receivable 1,425,935 1,486,776
Other assets 1,150,591 1,123,675
Foreclosed real estate 166,626 -
------------ ------------
TOTAL ASSETS $218,582,241 $207,019,790
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 8,868,234 $ 9,750,153
Interest-bearing deposits 144,291,167 142,065,211
------------- -------------
Total deposits 153,159,401 151,815,364
Other borrowed funds 12,452,618 16,937,882
Long-term debt 31,400,000 16,496,450
Accrued expenses and other liabilities 357,342 638,128
------------- -------------
Total liabilities 197,369,361 185,887,824
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 778,683 and 788,892 shares, respectively 7,787 7,893
Surplus 7,417,168 7,309,901
Retained earnings 14,278,407 13,372,441
Accumulated other comprehensive income (313,917) 648,614
Unearned ESOP shares (176,565) (206,883)
------------- -------------
Total stockholders' equity 21,212,880 21,131,966
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 218,582,241 $ 207,019,790
============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30
---------------------------------- ----------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,849,085 $ 2,844,841 $ 8,674,029 $ 8,598,048
Taxable interest and dividends on investment securities 1,075,146 1,076,065 3,088,650 2,918,117
Interest on deposits with banks 30,644 48,584 63,362 111,665
----------- ----------- ----------- -----------
Total interest income 3,954,875 3,969,490 11,826,041 11,627,830
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 1,386,524 1,426,206 4,123,337 4,259,888
Interest on other borrowed funds 109,123 251,144 329,494 599,441
Interest on long-term debt 378,017 270,332 995,785 728,080
----------- ----------- ----------- -----------
Total interest expense 1,873,664 1,947,682 5,448,616 5,587,409
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,081,211 2,021,808 6,377,425 6,040,421
PROVISION FOR LOAN LOSSES 60,000 60,000 180,000 180,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,021,211 1,961,808 6,197,425 5,860,421
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Loss on sale of investment securities -- (391) (605) (391)
Loan appraisal, credit and miscellaneous charges 38,045 101,018 151,827 323,308
Net gains on sale of loans held for sale 31,913 60,981 207,492 282,002
Service charges 194,614 165,305 564,294 421,391
Other 17,868 17,633 45,857 131,310
----------- ----------- ----------- -----------
Total noninterest income 282,440 344,546 968,865 1,157,620
----------- ----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 890,112 711,105 2,542,333 2,192,485
Occupancy expense 126,660 131,404 381,942 345,468
Deposit insurance and surety bond premium 36,047 34,099 107,602 107,957
Data processing expense 61,968 63,368 197,624 227,916
Advertising 66,471 30,583 170,986 94,459
Depreciation of furniture, fixtures, and equipment 55,149 40,575 184,346 116,356
Other 296,765 318,127 852,605 914,770
----------- ----------- ----------- -----------
Total noninterest expenses 1,533,172 1,329,261 4,437,438 3,999,411
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 770,479 977,093 2,728,852 3,018,630
INCOME TAXES 271,752 408,764 1,007,271 1,132,764
----------- ----------- ----------- -----------
NET INCOME 498,727 568,329 1,721,581 1,885,866
OTHER COMPREHENSIVE INCOME, NET OF TAX -
Net unrealized holding (losses) gains
arising during the period (399,656) 389,302 (962,531) 476,623
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 99,071 $ 957,631 $ 759,050 $ 2,362,489
=========== =========== =========== ===========
EARNINGS PER SHARE (Note 2):
Basic $.72 $.73 $2.19 $2.37
Diluted $.67 $.68 $2.05 $2.22
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- ----------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,721,581 $ 1,885,866
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 180,000 180,000
Depreciation and amortization 272,550 185,243
Net amortization of premium/discount on
investment securities (174,425) 60,102
Deferred income tax benefit (44,000) (128,000)
Decrease (increase) in accrued interest receivable 60,841 (254,216)
Decrease in deferred loan fees (82,560) (56,989)
Increase in accounts payable, accrued expenses, and other liabilities 321,051 80,524
Increase in other assets (26,916) (305,379)
Gain on sale of premises and equipment (12,150) (7,051)
Loss on sale of investment securities 605 391
Origination of loans held for sale (7,780,628) (14,394,128)
Gain on sales of loans held for sale (207,492) (282,002)
Proceeds from sale of loans held for sale 9,679,417 15,671,002
Gain on sale of foreclosed real estate -- (61,654)
------------- -------------
Net cash provided by operating activities 3,907,874 2,573,709
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits with banks 1,489,104 3,158,548
Purchase of investment securities available for sale (52,086,274) (52,141,617)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 49,401,043 42,007,808
Purchase of investment securities held to maturity (1,170,436) (2,915,007)
Proceeds from maturities or principal payments
of investment securities held to maturity 1,199,887 1,647,623
Purchase of FHLB and Federal Reserve Bank stock (779,850) (206,350)
Loans originated or acquired (41,498,077) (43,051,669)
Principal collected on loans 36,780,102 33,297,910
Purchase of premises and equipment (476,866) (347,014)
Proceeds from sales of premises and equipment 12,150 7,051
Proceeds from disposition of foreclosed real estate -- 825,060
Acquisition from foreclosed real estate (166,626) --
------------- -------------
Net cash used in investing activities (7,295,843) (17,717,657)
------------- -------------
</TABLE>
4
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- ----------------------------------------------------------------------------------------------------------------
Nine Months Ended
--------------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 1,344,037 $ 3,184,492
Proceeds from long-term borrowings 35,000,000 -
Payments of long-term borrowings (20,096,450) (1,660,431)
Net decrease in other borrowed funds (4,485,264) 14,621,703
Exercise of stock options 107,394 1,058
Net change in unearned ESOP shares 30,333 (12,600)
Redemption of common stock (657,150) (473,637)
Dividends paid (158,713) (102,407)
------------- -------------
Net cash provided by financing activities 11,084,187 15,558,178
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 7,696,218 412,230
CASH AND CASH EQUIVALENTS - JANUARY 1 906,658 650,923
------------- -------------
CASH AND CASH EQUIVALENTS - SEPTEMBER 30 $ 8,602,876 $ 1,065,153
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the nine months for:
Interest $ 5,772,672 $ 5,575,044
============= =============
Income taxes $ 1,100,949 $ 1,150,634
============= =============
</TABLE>
Tri-County Financial Corporation declared a 4% stock dividend payable April 13,
1998 to shareholders of record on March 13, 1998. Retained earnings in the
amount of $694,384 in 1998 was transferred to capital in excess of par and
common stock to reflect this dividend.
See notes to consolidated financial statements.
5
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
General - The consolidated financial statements of Tri-County
Financial Corporation (the Company) and its wholly owned subsidiary,
Community Bank of Tri-County (the Bank) included herein are
unaudited; however, they reflect all adjustments consisting only of
normal recurring accruals that, in the opinion of Management, are
necessary to present fairly the results for the periods presented.
Certain information and note disclosures normally included in
financial statements prepared in accordance with Generally Accepted
Accounting Principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
Company believes that the disclosures are adequate to make the
information presented not misleading. The results of operations for
the nine months ended September 30, 1999 are not necessarily
indicative of the results of operations to be expected for the
remainder of the year. Certain previously reported amounts have been
restated to conform to the 1999 presentation.
It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report for the year ended
December 31, 1998.
2. EARNINGS PER SHARE
Basic and diluted earnings per share, as adjusted for the stock
dividend, have been computed based on weighted-average common and
common equivalent shares outstanding as follows:
Nine Months Ended September 30,
1999 1998
------- -------
Basic 784,014 788,892
Diluted 838,439 885,195
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
This document contains forward-looking statements, including discussions of
Tri-County Financial Corporation's (the "Company's") goals, strategies and
expected outcomes; estimates of risks and future costs; and reports of the
Company's ability to achieve its financial and other goals. These
forward-looking statements are subject to significant known and unknown risks
and uncertainties because they are based upon future economic conditions,
particularly interest rates, statements by providers of data processing services
and equipment and government agencies in connection with year 2000 compliance,
competition within and without the banking industry, changes in laws and
regulations applicable to the Company and various other matters. Because of
these uncertainties, there can be no assurance that actual results, performance
or achievements of the Company will not differ materially from any future
results, performance or achievements expressed or implied by these
forward-looking statements.
GENERAL
Tri-County Financial Corporation operates under the Federal Reserve's Bank
Holding Company regulations. The consolidated financial statements include the
accounts of Tri-County Financial Corporation and its wholly owned subsidiary,
Community Bank of Tri-County ("the Bank") and the Bank's wholly owned
subsidiaries, Tri-County Investment Corporation and Tri-County Federal Finance
One, collectively referred to as "the Company". Community Bank of Tri-County has
completed over two years of operations as a commercial bank, following its
thrift charter conversion on March 29, 1997.
In its business plan for the commercial bank, specific product lines,
particularly commercial and consumer loan products, were targeted for
concentrated efforts to bring the balances to levels normally found in
established commercial banks. Growth in these asset categories has exceeded
internal goals set in the plan. Strategies to broaden the scope of services to
attract transactional accounts of local business as well as consumers have
successfully gained the attention of the community and resulted in continuous
growth in these low cost funding sources.
In its efforts to expand its product and service offerings, the Bank now offers
investment and retirement planning services through its affiliation with UVEST
Investment Services and an investment representative based in the home office
branch. While this investment division is anticipated to contribute a relatively
small amount of net earnings to the Bank, the benefit to our customers is
expected to be great, enabling them to have a "one stop" source for all their
investment and borrowing needs.
In the third quarter of 1999, the Bank received state banking approval to create
a "passive investment company" subsidiary, Tri-county Investment Corporation.
This subsidiary holds investment securities that are not used in the general
operations of the Bank. The investment company is operated from facilities in
Delaware as income from "passive investments" does not incur taxes in that
state. Similar income in Maryland is subject to state tax of 7%. This action is
expected to save approximately $70,000 in state taxes in 1999, with the income
generated in Delaware for the last four months of 1999. Higher tax savings are
expected in 2000, when the investment company will be in operation for the full
year.
The Bank also acquired a 7% interest in a Maryland Title Company for the purpose
of sharing in title insurance commissions generated by its mortgage lending
activities. The Bank's capital investment was $9,800. Its participation in the
title insurance business commenced on August 1, 1999.
The Bank conducts operations through eight full-service offices in its market
area consisting of Charles, St. Mary's and Calvert counties in Maryland.
Construction has been completed on its newest "express" branch location as part
of a mini-mart on a key homeward bound commuter route in Charles County. This
branch opened for business on August 31, 1999. The Bank's strategy is to utilize
"express" branches to fill in the market between its established anchor
branches.
The Bank is primarily engaged in the business of obtaining funds in the form of
deposits from the general public in the Bank's market area as well as certain
wholesale borrowings from its correspondents and capital markets. These funds
are then invested in loans collateralized by residential and commercial real
estate, mortgage-backed securities and related investments, and, to a lesser,
but growing, extent, various types of consumer and other loans. The Company's
earnings, therefore, are primarily dependent upon its net interest income. This
is determined by the Company's interest rate spread (the difference between the
yields earned on its loan and investment portfolios, and the rates paid on its
deposits and borrowed funds) and the relative holdings of interest-earning
assets and interest-bearing liabilities.
7
<PAGE>
Also of significance to the Company's net income is its provision for estimated
loan losses, as well as the amount of noninterest income derived from activities
that are not dependent on spread based lending. Transaction charges, non-deposit
products and additional services are under continuous consideration to augment
the non-interest income contribution to the net earnings of the Bank.
The Company's deposit flows and cost of funds are determined by interest rates
on competing investments and general market rates of interest. Lending
activities are affected by consumer demand, the interest rates in the market and
the level of funds available. The Company grants loans throughout the Southern
Maryland area. Its borrowers' ability to repay is, therefore, dependent upon the
economy of Southern Maryland.
SELECTED FINANCIAL DATA
Nine Months Ended September 30,
1999 1998
---------- ----------
Condensed Income Statement:
Interest Income $11,826,041 $11,627,830
Interest Expense 5,448,616 5,587,409
Net Interest Income 6,377,425 6,040,421
Provision for Loan Losses 180,000 180,000
Noninterest Income 968,865 1,157,620
Noninterest Expenses 4,437,438 3,999,411
Income Before Income Taxes 2,728,852 3,018,630
Income Tax Expense 1,007,271 1,132,764
Net Income 1,721,581 1,885,866
Per Common Share:
Basic Earnings $ 2.19 $ 2.37
Diluted Earnings 2.05 2.22
Book Value 27.24 26.63
FINANCIAL CONDITION
Assets
Total assets as of September 30, 1999 grew $11.6 million to $218.6 million from
the December 31, 1998 level of $207.0 million. This reflects a growth rate of
5.6% as compared to 9.5% asset growth during the same period in 1998. Continuing
development of the Southern Maryland area as a bedroom community for Washington,
DC workers and military base expansion in the Bank's market maintained a strong
real estate market. Loan originations during the first nine months of 1999 were
$49,279,000, compared to $57,446,000 during the first nine months of 1998, a
14.2% decline. Loan sales and repayments during the first nine months of 1999
were $46,460,000, compared to $48,969,000 during the first nine months of 1998,
a 5.1% decline. The higher rate environment in 1999 reduced or eliminated the
incentive for homeowners to refinance their loans. The Bank was able to retain
its overall market share by offering competitive residential loan products as
well as emphasizing products outside the single family residential loan group.
With its increased focus on consumer and commercial loans, the Bank continued to
attract these customers in greater numbers, resulting in a change in the
portfolio mix. At September 30, 1999, consumer and commercial loans comprised
33.2% of the loan portfolio, compared to 23.8% at December 31, 1998.
The allowance for loan losses was maintained at a level believed by management
to be adequate to absorb potential losses consistent with the risk profile of
the loan portfolio. Management's determination of the adequacy of the allowance
is based on 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. A $180,000 provision for loan losses was made
during the first nine months of 1999 in accordance with management's policy
described above.
8
<PAGE>
As further discussed in the following section titled "Year 2000 Readiness", the
Company has spent significant time, effort and monies to prepare for the year
2000 date change and its potential effect on the systems used in operations.
Additional planning required the accumulation of cash to meet customer needs in
the event Bank customers decide to exchange their deposit balances for currency.
In the third quarter of 1999, $8 million of cash and cash equivalents was set
aside for potential use by such customers. Since the allocation of large
balances to a non-interest bearing asset is detrimental to the earnings of the
Company, the need for this cash will be evaluated on a continuous basis as the
end of year approaches.
The Company's holdings of investment securities increased $1.9 million, or 3.2%,
since December 31, 1998. The Bank experienced a slow down of the early payoff of
its securities which had accelerated in 1998. For securities with mortgage loans
as the underlying collateral, prepayments closely tracked the refinance volume
prevalent in the industry during the low rate environment. When possible, the
funds received from payoff of these securities were used to acquire similar
investments, though generally at a lower yield reflecting current market
conditions at the time of purchase. Since June 1999, yields have stabilized or
increased slightly, improving the portfolio yield. Other security purchases were
funded with wholesale borrowings.
The level of property and equipment balances increased $204,000 as branch and
administrative office renovations were completed, construction of the new
"express" branch was completed and the Bank continued to upgrade its computer
equipment as a result of its Y2K readiness preparation.
Liabilities
Liability growth was managed to reflect the change in asset levels. Deposit
balances increased by .9% for the nine months ended September 30, 1999.
Competition for bank deposits continues to be intense with nondeposit
investments capturing an increasing share of its customers' financial assets.
Stockholders' Equity
Stockholders' equity increased $81,000 or .4% to $21.2 million at September 30,
1999 compared to $21.1 million at December 31, 1998. This reflects the net
income of $1,722,000 for the nine month period and a $963,000 decrease in
accumulated other comprehensive income. Reductions in equity occurred as a
result of a $.20 per share cash dividend paid to shareholders and the use of
$657,000 to purchase shares of the Company's common stock in the open market.
The cash dividends were distributed to shareholders on April 15, 1999.
Book value on a per share basis, $27.24 at September 30, 1999, as compared to
$26.79 at December 31, 1998, reflects a 1.8% increase. The ESOP acquired shares
utilizing the line of credit available from the Corporation. Whenever the ESOP
purchases shares using such borrowed funds, the shares purchased are pledged as
collateral for the loan and the loan balance is reflected as a reduction of
stockholders' equity.
As part of its capital management strategy, the Board has approved certain
purchases, for retirement, of shares offered for sale by its stockholders. For
the nine months ended September 30, 1999, the Corporation purchased 24,803
shares for $657,000. The cash for these stock purchases was provided to the
Company through cash dividends of $1,000,000 and $750,000 from the Bank in 1999
and 1998.
RESULTS OF OPERATIONS
The Company's net income for the nine months ended September 30, 1999 decreased
$164,000 or 8.7% from 1998's levels. As described in more detail in following
sections of this analysis, significant changes in specific income and expense
line items generated this decrease, rather than an overall trend applicable to
all areas. The decrease in net income for the nine months ended September 30,
1999 resulted from a $337,000 increase in net interest income, an $189,000
decrease in noninterest income, an increase of $438,000 in noninterest expenses
and a $125,000 decrease in income tax expense.
Interest and Dividend Income
Interest and dividend income on investment securities increased $171,000 or 5.9%
in the first nine months of 1999 compared to the first nine months of 1998.
Given that the balances invested increased $1.9 million or 3.2%, a smaller
increase in related income might be expected. However, the interest rates
available in the market, which had been steadily declining through June of 1999,
began to level off or increase slightly.
9
<PAGE>
The Bank has utilized a strategy of leveraging since the fourth quarter of 1996.
When opportunities become available, an investment is purchased with maturity
and rate terms that can be reasonably matched with available borrowings to
generate a specified net yield. Alternatively, there have been opportunities to
purchase relatively short-lived securities, those with projected lives of a year
or less. These have often been funded with borrowings that reprice daily because
short-term borrowing rates have been very low. In such cases, the daily rate
borrowing level is monitored closely so that a reversal of the low rate
borrowing will be identified early and longer term financing can be secured.
The portfolio net spread, the difference between interest earned on all
interest-earning assets and interest paid on all interest-bearing liabilities,
has been maintained at a very level rate over the last five years. Hovering at
just under 4.0%, changes from year to year have generally been less than 20
basis points; from September 30, 1998 to September 30, 1999, the spread
increased 5 basis points or 1.3%. The 5.5% overall growth in net interest income
for the nine months ended September 30, 1999 over the comparable period results
in 1998 is, therefore, attributable to a combination of balance sheet growth and
a change in spread.
Noninterest Income
In 1998, the Bank experienced a heavy volume of mortgage originations as
consumers reacted to lower market rates; this increased gains on sales of loans
originated for the purpose of resale. This high volume was maintained through
the first quarter of 1999, but fell off significantly in the second quarter of
1999 and, consequently, loan origination-related noninterest earnings declined.
Noninterest Expense
The Bank experienced an increase in noninterest expenses of $438,000 or 11.0%
for the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998. Compensation related expenses increased $350,000, or 16.00%,
as the Bank has created new positions to meet the needs of a commercial bank and
its customers. Occupancy costs increased $36,000 or 10.42% as a result of
operating the branch near the St. Charles mall and opening the new "express"
branch, as well as expanding its Dunkirk branch facility. Data processing
expense decreased by $30,000 or 13.2% over the comparable period in 1998. This
reflects the significant costs incurred in 1998 associated with the Bank's
efforts to implement its Year 2000 century date compliance; while these efforts
are ongoing, the majority of changes and acquisitions were made in 1998.
Depreciation expense increased $68,000 or 58.4% due to high levels of fixed
asset acquisitions in connection with branch expansion, administrative office
expansion and renovation and data processing equipment.
Earnings Per Share
Primary earnings per share for the nine months were $2.19 per share or $.18
lower than for the corresponding period in 1998.
10
<PAGE>
INTEREST RATE RISK MATTERS
The market risk of the Bank is managed through the Board's Asset and Liability
Committee (ALCO). Together with the Bank's management, the committee reviews the
sensitivity of the market value of the portfolio equity and interest rate
sensitivity of net income. The changes in the market value of portfolio equity,
as well as the interest income sensitivity are caused by shifts in the market
rates of interest and can cause a negative or a positive impact in given
scenarios. The portfolio is subjected to periodic modeling to test the effects
of sudden and sustained interest rate shocks on the market value and the net
interest income sensitivity. The Basle Committee on Banking Supervision has set
standard measures of portfolio market value equity and interest income
sensitivity in a shock environment of an up or down 200 basis point shift in
assumed interest rates. The impact of such a shock on the Bank's portfolio is
as follows:
September 30,1999 September 30, 1998
----------------- -------------------
Market value of portfolio equity:
Interest rate changes:
Up 200 basis points -10% -11%
Down 200 basis points +1% +4%
Interest rate sensitivity:
Interest rate changes:
Up 200 basis points +6% +1%
Down 200 basis points -4% -3%
The Bank's exposure to a 200 basis point increase in interest rates would result
in a decline in the market value of portfolio equity of 10% at September 30,
1999, compared to a projected decline of 11% at September 30, 1998 in the same
adverse scenario. A 200 basis point downward shift in rates would have a
slightly lower positive effect on the portfolio at September 30, 1999 compared
to 1998. This reflects the impact of multi-year flat yield curves at lower rate
levels. As prepayments have occurred, reinvestment of the proceeds was at lower
yields. An immediate market rate increase would make those new investments less
valuable. Because the net income of the Bank and Company is derived through the
interest spread of the portfolio, the Asset/Liability Committee is less
concerned with the shock of interest rates on the market value than it is on the
interest rate sensitivity because the assets are employed for their income
production rather than value appreciation upon sale.
Interest rate sensitivity reflects the change in the Bank's net interest income
given assumed interest rate shifts. In the scenarios presented, the Bank's
interest income would increase 6% in the event of a 200 basis point increase in
market rates. A 200 basis point decline would decrease net interest income by
4%. Management feels that a more difficult situation for the Bank to control
would exist with rising interest rates. With a higher likelihood of such
increases coming in the near future, management began structuring the Bank
assets to provide more protection against upward movements, generally shortening
the maturities of assets where possible and lengthening liability maturities.
This structure is expected to reasonably minimize the impact from sudden and
prolonged upward shifts in interest rates. The levels of change for both the
market value of the portfolio and the net interest income sensitivity fall
within the policy benchmarks established by the Board.
YEAR 2000 READINESS
The Bank's management and Board of Directors has been monitoring the
problems created by the year 2000 (Y2K) and its effect on data processing
systems. The Bank's capitalized cost of new technology and software over the
last three years has exceeded $520,000 and additional costs in the current and
next year could reach $100,000. All software systems have been upgraded. These
software costs were expensed during the years as a part of ongoing data
operations expense. The current technology utilized by the Bank and its eight
locations has been subjected to periodic reviews by its regulators. Testing of
the systems with third party providers has been ongoing through 1998 and early
1999. The Board is closely involved with this project and is aware that third
party providers of data processing services are conducting their own Y2K
projects to ensure that their users have adequate coverage of the problem.
However, the Board also realizes that third party providers' compliance is
largely out of the Bank's control and is monitoring their progress. Because of
the Company's reliance on third party data processing services, it does not
anticipate any material expenditures associated with the Y2K issue. There can be
no assurance that the Bank and its third party providers will be successful in
making all necessary changes to avoid computer system failure related to the
year 2000.
11
<PAGE>
In anticipation of potential customer demands, the Bank studied its cash levels
and projected its needs as the end of 1999 approaches. While the Bank has taken
reasonable steps to avoid disruption of service due to the date change, customer
reaction cannot be determined. In the event that a significant portion of the
Bank's customer base decides that large cash holdings are necessary for their
ease of mind, the Bank must be prepared. In the third quarter of 1999, the Bank
drew upon its borrowing capabilities at the Federal Home Loan Bank to acquire
additional cash balances to meet customer demand, should it materialize.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as
statutory capital requirements imposed under Maryland law. At September 30,
1999, the Bank's tangible, leverage and risk-based capital was 9.6%, 10.6% and
17.8%, respectively. These levels are well in excess of the required 4.0%, 4.0%
and 8.0% ratios required by the Federal Reserve Board.
12
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
--------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits
A. Exhibits
(27) Financial Data Schedule
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tri-County Financial Corporation:
Date: 11/12/99 By: /s/ Michael L. Middleton
-------------------- ----------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: 11/12/99 By: /s/ Eileen M. Ramos
-------------------- ----------------------------------
Eileen M. Ramos
Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,602,876
<INT-BEARING-DEPOSITS> 2,663,712
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,864,317
<INVESTMENTS-CARRYING> 2,108,090
<INVESTMENTS-MARKET> 2,112,651
<LOANS> 137,841,871
<ALLOWANCE> 1,604,397
<TOTAL-ASSETS> 218,582,241
<DEPOSITS> 153,159,401
<SHORT-TERM> 12,452,618
<LIABILITIES-OTHER> 357,342
<LONG-TERM> 31,400,000
0
0
<COMMON> 7,787
<OTHER-SE> 21,205,169
<TOTAL-LIABILITIES-AND-EQUITY> 218,582,241
<INTEREST-LOAN> 8,674,029
<INTEREST-INVEST> 3,088,650
<INTEREST-OTHER> 63,362
<INTEREST-TOTAL> 11,826,041
<INTEREST-DEPOSIT> 4,123,337
<INTEREST-EXPENSE> 1,325,279
<INTEREST-INCOME-NET> 6,377,425
<LOAN-LOSSES> 180,000
<SECURITIES-GAINS> (605)
<EXPENSE-OTHER> 4,437,438
<INCOME-PRETAX> 2,728,852
<INCOME-PRE-EXTRAORDINARY> 2,728,852
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,721,581
<EPS-BASIC> 2.19
<EPS-DILUTED> 2.05
<YIELD-ACTUAL> 3.95
<LOANS-NON> 0
<LOANS-PAST> 612,904
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 1,540,551
<RECOVERIES> 118,960
<ALLOWANCE-CLOSE> 2,806
<ALLOWANCE-DOMESTIC> 1,604,397
<ALLOWANCE-FOREIGN> 1,604,397
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
