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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999
OR
[_] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
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(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 Exchange Act: None
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Securities registered pursuant to Section 12(g) of the Exchange 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
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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. [X]
As of March 21, 2000, there were issued and outstanding 795,515 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 $26.38 per share for an approximate aggregate market
value of voting stock held by non-affiliates of the registrant of $15.2 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, 1999. (Parts I and II)
2. Portions of Proxy Statement for the 2000 Annual Meeting of Stockholders.
(Part III)
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PART I
Item 1. Business
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The Corporation. Tri-County Financial Corporation (the "Corporation") is a
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 subsidiaries.
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
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. For further information concerning the UVEST
arrangement, including the income generated by it during 1999, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Corporation's 1999 Annual Report to Stockholders (the "Annual Report") which is
attached hereto as Exhibit 13 and incorporated herein by reference.
Recent Events
In 1999, the Bank received regulatory approval to have as an affiliate a
passive investment company. Tri-County Investment Corporation (the "Investment
Company") was established by the Bank as a wholly owned, Delaware-incorporated
subsidiary to hold and manage a portion of the Bank's investment securities
portfolio. Formation of the Investment Company provides the Bank with the
opportunity to reduce the overall tax expense of the Bank since passive
investment corporations are not subject to Delaware or Maryland state taxes.
In 1999, the Bank received regulatory approval to open a branch to be
located at 10195 Berry Road, Waldorf, Maryland. This "express" branch opened
August 31, 1999 as part of a mini-mart on a key homeward bound commuter route in
Charles County. All bank services are offered at this location.
Also in 1999, the Bank received regulatory approval to purchase a non-
controlling interest in Maryland Title Center West, L.L.C. (the "LLC"). The LLC
is a Maryland limited liability company which acts as a title insurance agent.
The LLC is jointly owned by several national and state banks located in the
State of Maryland. The Bank invested in the LLC in June 1999. When possible, the
Bank will process loan settlements utilizing the LLC rather than the independent
agents used in prior years.
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Financial Modernization Legislation
On November 12, 1999, President Clinton signed legislation which could have
a far-reaching impact on the financial services industry. The Gramm-Leach-
Bliley ("G-L-B") Act authorizes affiliations between banking, securities and
insurance firms and authorizes bank holding companies and national banks to
engage in a variety of new financial activities. Among the new activities that
will be permitted to bank holding companies are securities and insurance
brokerage, securities underwriting, insurance underwriting and merchant banking.
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"), in consultation with the Secretary of the Treasury, may approve
additional financial activities.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the G-L-
B Act. The G-L-B Act directs the federal banking agencies, the National Credit
Union Administration, the Secretary of the Treasury, the Securities and Exchange
Commission and the Federal Trade Commission, after consultation with the
National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act.
The G-L-B Act empowers the FHLB system to expand collateral eligibility to
member banks under $500 million in asset size. This provision should allow the
Bank to pledge certain small business assets, as well as its residential loan
assets, as collateral for its funding. As the Bank evolves its lending strategy,
the new provision will assist in funding the underlying assets.
While the G-L-B Act is expected to facilitate affiliations with companies
in the financial services industry, the Company is unable to predict the impact
of the G-L-B Act on its operations at this time.
Lending and Investment Activities
General. The principal lending activity of the Bank has been the
origination of single family conventional mortgage loans (i.e., loans that are
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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. Its long term strategy is to
focus on this type of lending while maintaining its residential lending
activity.
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, 1999, approximately 67% 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, 1999, the
Bank had $29.6 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, the
Federal National Mortgage Association ("FNMA") and the Mortgage Partnership
Finance program of the FHLB, 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 $16.7 million at December 31, 1999, 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 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 $10.2 million or
52% during 1999. 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 $29.9 million or 20% of
the Bank's loan portfolio at December 31, 1999. 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
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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.
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. As a result of the greater emphasis that
the Bank places on commercial real estate loans under its business plan as a
commercial bank, the Bank is increasingly exposed to the risks posed by this
type of lending.
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 $17.1 million, or 12% of the Bank's loan portfolio, at December 31,
1999.
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 $4.4 million at December 31, 1999. The Bank offers a
builder's master note program in which the builder receives a revolving line of
credit at a market rate and the Bank obtains security in the form of a first
lien on home sites under construction. At December 31, 1999, $3.5 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, 1999.
The Bank originated approximately $1.0 million of lot loans during 1999, which
consisted of 15 loans secured by land in the Bank's market area, the largest of
which had a balance of $350,000 at December 31, 1999.
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
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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.
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,
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1999 1998 1997 1996 1995
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(In thousands)
Type of Loan:
Real Estate Loans --
Residential construction... $ 12,726 $ 16,147 $ 13,222 $ 7,946 $ 6,787
Mortgage................... 96,211 83,976 77,261 77,845 78,729
Builders Line of Credit.... 4,416 4,629 5,054 3,810 3,191
Home Equity................ 16,691 16,314 17,428 14,147 12,155
Commercial Lines of Credit.. 10,025 6,161 4,852 3,887 3,389
Consumer Loans.............. 9,102 7,889 6,420 5,422 4,841
Less: Deferred Loan Fees.. 808 930 1,060 1,086 1,172
Loan Loss Reserve... 1,653 1,540 1,310 1,120 733
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Total..................... $146,710 $132,646 $121,867 $110,851 $107,187
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Loan Solicitation and Processing. The Bank actively solicits mortgage loan
applications from existing customers, local real estate agents, business
entities, 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
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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 $400,000. The Business Development Officer has
loan authority of $150,000. Any two of the aforementioned individuals may
combine their limits to approve a loan up to $1,000,000. 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 $252,700.
Selected branch personnel have authority to approve secured loans up to $75,000
and unsecured up to $50,000. 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, 1999, the Bank was servicing
approximately $62 million of loans for others. Fee income from loan servicing
totaled approximately $217,500 during 1999. 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 $1.9 million of such
loans was outstanding at December 31, 1999. 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,
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1999 1998 1997
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(In thousands)
Loans originated:
Real estate loans:
Construction loans.......... $ 9,665 $14,775 $17,549
Loans on existing property.. 8,416 10,502 11,542
Loans refinanced............ 8,418 12,780 4,081
Land loans.................. 4,201 4,061 1,337
Builder lines of credit..... 20,879 20,195 19,691
Commercial mortgage loans... 4,917 1,585 2,898
Commercial lines of credit..... 9,383 8,171 4,357
Consumer loans................. 5,877 5,756 4,234
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Total loans originated.... $71,756 $77,825 $65,689
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Loans sold:
Participation loans......... $ 1,600 $ -- $ --
Whole loans................. 10,775 23,173 11,876
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Total loans sold.......... $82,531 $23,173 $11,876
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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 1999,
the Bank sold $10.8 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, 1999, was
approximately $359,000 million, 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, 1999 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 31, December 31, December 31,
1999 1999 1999 Total
------------ ------------- ----------- --------
(In thousands)
Mortgage ................... $ 6,570 $ 55,139 $ 32,286 $ 93,995
Residential construction ... 12,780 -- -- 12,780
Builder line of credit ..... 4,416 -- -- 4,416
Commercial line of credit .. 9,846 -- -- 9,846
Home equity ................ 13,352 713 2,626 16,691
Consumer ................... 227 7,114 1,640 8,982
-------- -------- -------- --------
$ 47,191 $ 62,966 $ 36,552 $146,710
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The next table sets forth the dollar amount of all loans due after one year
from December 31, 1999 which have predetermined interest rates and have floating
or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -------
(In thousands)
Mortgage ................. $40,857 $46,568 $87,425
Home equity .............. 3,339 -- 3,339
Consumer ................. 8,755 -- 8,755
------- ------- -------
$52,951 $46,568 $99,519
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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.
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The Bank's loan origination fees and discounts are generally 1% to 2% on
conventional residential mortgages and 1% or less 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.
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 pay ments 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 foreclosed real estate
with a fair market value of approximately $176,000 at December 31, 1999.
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The following table sets forth information with respect to the Bank's non-
performing assets for the periods indicated. During the periods shown, the Bank
had no impaired loans within the meaning of Statement of Financial Accounting
Standards No. 114 and 118.
At December 31,
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In thousands)
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential...........................$ 171 $ 196 $ 165 $ 262 $ 226
Commercial............................ -- -- -- -- --
Commercial Business.................... -- -- -- -- --
Consumer............................... -- -- -- 79 --
----- ----- ----- ----- -----
Total................................$ 171 $ 196 $ 165 $ 341 $ 226
===== ===== ===== ===== =====
Percentage of Total Loans................ .12% .15% .14% .32% .21%
===== ===== ===== ===== =====
Loans accounted for on a nonaccrual
basis: (1)
Real Estate:
Residential...........................$ 20 $ 126 $ 34 $ 358 $ 323
Commercial Business................... -- 85 30 -- --
Consumer.............................. 198 58 95 -- 17
----- ----- ----- ----- -----
Total................................ 218 269 159 358 340
----- ----- ----- ----- -----
Total nonperforming loans................$ 389 $ 465 $ 324 $ 699 $ 566
===== ===== ===== ===== =====
- ----------------
(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.
During the fiscal year ended December 31, 1999, gross interest income of
$27,000 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 1999.
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The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
Year Ended December 31,
-----------------------------------------
1999 1998 1997 1996 1995
------ ------- ------- ------- ------
(In thousands)
Balance at Beginning of Period....... $1,540 $1,310 $1,120 $ 734 $ 564
------ ------ ------ ------ -----
Loans Charged-Off:
Real Estate:
Residential........................ -- -- 11 17 34
Commercial......................... -- -- -- -- --
Commercial Business................. 102 -- 21 -- --
Consumer............................ 32 10 18 5 12
------ ------ ------ ------ -----
Total Charge-Offs.................... 134 10 50 22 46
------ ------ ------ ------ -----
Recoveries:
Residential Real Estate............ -- -- -- -- 2
Consumer Loans..................... 7 -- -- -- 4
------ ------ ------ ------ -----
Total Recoveries..................... 7 -- -- -- 6
Provision for Possible Loan Losses.. 240 240 240 408 210
------ ------ ------ ------ -----
Balance at End of Period............. $1,653 $1,540 $1,310 $1,120 $ 734
====== ====== ====== ====== =====
Ratio of Net Charge-Offs to Average
Loans Outstanding During
the Period......................... .09% .01% .04% .02% .04%
====== ====== ====== ====== =====
10
<PAGE>
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,
----------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- --------------------------- -----------------------------
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....................... $ 955 67.0% $1,029 74.9% $ 881 75.7%
Commercial and other.............. 399 20.2 281 14.6 255 15.2
Commercial and unsecured........... 178 6.7 117 4.6 87 5.2
Consumer........................... 121 6.1 113 5.9 87 3.9
------ ----- ------ ----- ------ -----
Total allowance for loan losses.. $1,653 100.0% $1,540 100.0% $1,310 100.0%
====== ===== ====== ===== ====== =====
<CAPTION>
At December 31,
----------------------------------------------------------
1996 1995
---------------------------- ---------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------------- -------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate:
Residential....................... $ 786 79.3% $ 694 81.1%
Commercial and other.............. 240 12.5 -- 11.4
Commercial and unsecured........... 41 3.4 -- 3.1
Consumer........................... 53 4.8 40 4.4
------ ----- ------ -----
Total allowance for loan losses.. $1,120 100.0% $ 734 100.0%
====== ===== ====== =====
</TABLE>
11
<PAGE>
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, 1999, the Bank's interest-bearing cash and
investment securities portfolio of $64 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 Annual Report. It has been the Bank's
policy in the past to maintain a liquidity portfolio that met regulatory
requirements, and at December 31, 1999, 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 Federal Home Loan Bank ("FHLB") and Federal
Reserve Bank stock at the dates indicated. At December 31, 1999, their market
value was $60.9 million.
At December 31,
--------------------------
1999 1998 1997
------- ------- --------
(In thousands)
Investment securities:
Asset-backed securities...................... $47,465 $45,964 $44,035
Money market funds........................... 820 293 4,011
FHLMC, FNMA, SLMA and FHLB notes............. 7,619 9,045 5,003
Federal Home Loan Bank of Atlanta, Federal
Reserve, Federal Home Loan Mortgage
Corporation and Federal National Mortgage
Corporation Stock.......................... 3,039 3,226 2,229
Treasury bills............................... 198 196 192
Other investments............................ 1,749 1,397 281
------- ------- -------
Total investment securities and FHLB and
Federal Reserve Bank stock.............. $60,890 $60,121 $55,752
======= ======= =======
12
<PAGE>
The maturities and weighted average yields for investment securities
available for sale and held to maturity at December 31, 1999 are shown below.
<TABLE>
<CAPTION>
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 ................... $ 751 3.84% $ -- --% $ -- --% $ -- --%
Asset-backed securities ....... -- -- -- -- 9,028 6.77 38,437 6.95
Money market funds ............ 820 6.45 -- -- -- -- -- --
Obligations of U.S. ...........
government sponsored
enterprises (GSE) ............ -- -- 988 6.48 6,631 7.02 -- --
------- ------ ------ ------
Total investment securities
available for sale ....... $ 1,571 5.20 $ 988 6.48 $15,659 6.88 $38,437 6.95
======= ======= ======= ======
Investment securities
held-to-maturity:
Asset-backed securities ....... $ -- -- $ -- -- $ -- -- $ -- --
Treasury bills ................ -- -- 198 4.45 -- -- -- --
Other investments ............. 1,749 6.48 -- -- -- -- -- --
------- ------- --------- ------- ------- ----- ------- -----
Total investment securities
held-to-maturity ......... $ 1,749 $ 198 $ -- $ --
======= ======== ======= =======
</TABLE>
13
<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 its lending activity. In addition, to prudently leverage its
net worth, the Bank purchases certain authorized investments using 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, 1999.
Certificates
Maturity Period of Deposit
------------------ --------------
(In thousands)
One through three months... $ 501
Three through six months... 1,799
Six through twelve months.. 2,651
Over twelve months......... 6,683
-------
Total.................. $11,634
=======
14
<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, a portion of the
Bank's residential mortgage loans and its eligible investments. At December 31,
1999, advances from the FHLB of Atlanta were as follows:
At or for the
Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- ----------
(Dollars in thousands)
Long-term amounts outstanding at end of period:
FHLB advances.................................. $31,400 $16,400 $16,400
Other borrowings............................... -- 96 279
Weighted average rate on
outstanding long-term:
FHLB advances.................................. 5.54% 5.64% 5.91%
Other borrowings............................... -- 8.50 8.50
Maximum amount of long-term borrowings
outstanding at any month end:
FHLB advances.................................. $31,400 $16,400 $16,400
Other borrowings............................... 37 207 427
Short-term borrowings outstanding
with respect to:
FHLB advances.................................. $13,000 $16,500 $12,000
Other borrowings............................... 398 437 523
Approximate weighted average rate paid
on short-term: (1)
FHLB advances.................................. 5.57% 5.76% 5.80%
Other borrowings............................... 4.42 5.37 4.65
- -------------------------
(1) Based on month-end balances.
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.
15
<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.
At Years Ended December 31,
December 31, ----------------------------
1999 1999 1998 1997
----------- ------ ----- -----
Weighted average yield on
loan portfolio ................... 8.05% 8.37% 9.00% 9.18%
Weighted average yield on
interest-bearing cash and
investment securities portfolio ... 7.70 6.46 6.42 6.48
Weighted average yield on
all interest-earning assets ... 7.94 7.75 8.15 8.27
Weighted average rate paid on
savings deposits and escrow ....... 3.68 3.59 3.91 4.06
Weighted average rate paid on
Federal Home Loan Bank advances
and other borrowings .............. 5.64 5.33 5.72 5.91
Weighted average rate paid on
all interest-bearing liabilities 4.10 3.92 4.24 4.37
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all
interest-bearing liabilities) ..... 3.84 3.83 3.91 3.90
Net yield (net interest income as
a percentage of average
interest-earning assets) .......... 4.04 4.11 4.21 4.21
16
<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, 1999 1999 1998
--------------------- ------------------------------- ------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan portfolio ........ $147,483 8.05% $138,140 $ 11,563 8.37% $129,375 $ 11,638 9.00%
Cash and investment
securities ........... 63,953 7.70 66,379 4,290 6.46 63,609 4,084 6.42
-------- ---- -------- -------- ---- -------- -------- ----
Total
interest-earning
assets ............ 211,436 7.94 204,519 15,853 7.75 192,984 15,722 8.15
-------- ---- -------- -------- ---- -------- -------- ----
Interest-bearing
liabilities:
Savings deposits and
escrow ............... $155,742 3.68% $154,699 $ 5,529 3.59% $145,752 $ 5,694 3.91%
FHLB advances and other
borrowings ........... 44,798 5.64 35,859 1,912 5.33 33,294 1,903 5.72
---- -------- -------- ---- -------- -------- ----
Total interest-
bearing liabilities $201,540 4.16% $190,558 7,441 3.92 $179,046 7,597 4.24
======== ---- ======== ========
Net interest income........ $ 8,412 $ 8,125
======= =======
Interest rate spread....... 3.84% 3.83% 3.91%
==== ==== ====
Net yield on
interest-earning assets... 4.04% 4.11% 4.21%
==== ==== ====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities............. 104.9% 105.1% 107.8%
===== ===== =====
<CAPTION>
1997
---------------------------
Average
Average Yield/
Balance Interest Cost
-------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Loan portfolio ........ $120,178 $ 11,029 9.18%
Cash and investment
securities ........... 60,716 3,937 6.48
-------- -------- ----
Total
interest-earning
assets ............ 180,894 14,966 8.27
-------- -------- ----
Interest-bearing
liabilities:
Savings deposits and
escrow ............... $139,941 $ 5,683 4.06%
FHLB advances and other
borrowings ........... 28,184 1,667 5.91
-------- -------- ----
Total .............. $168,125 7,350 4.37%
======== -------- ----
Net interest income........ $ 7,616
=======
Interest rate spread....... 3.90%
====
Net yield on
interest-earning assets... 4.21%
====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities............. 107.6%
=====
</TABLE>
17
<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,
-------------------------------------------------------------------
1998 vs. 1999 1997 vs. 1998
-------------------------------- ---------------------------------
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................... $ 789 $(809) $ (55) $ (75) $ 844 $(218) $(18) $608
Interest-earning cash and
investment portfolio........... 180 25 1 206 185 (36) (2) 147
----- ----- ----- ----- ------ ----- ---- ----
Total interest-earning assets....... $ 969 $(784) $ (54) $ 131 $1,029 $(254) $(20) $755
----- ----- ----- ----- ------ ----- ---- ----
Interest expense:
Savings deposits and escrow...... $ 350 $(486) $ (29) $(165) $ 229 $(210) $ (9) $ 10
FHLB advances and other
borrowings..................... 147 (128) (10) 7 300 (54) (10) 236
----- ----- ----- ----- ------ ----- ---- ----
Total interest-bearing liabilities.. $ 497 $(614) $ (39) $(156) $ 529 $(264) $(19) $246
===== ===== ===== ===== ====== ===== ==== ====
</TABLE>
Key Operating Ratios
The table below sets forth certain performance ratios of the Corporation
for the periods indicated.
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
Return on Assets
(Net Income Divided by Average Total Assets).. 1.00% 1.20% 1.13%
Return on Equity
(Net Income Divided by Average Equity)........ 10.23% 11.87% 11.53%
Equity-to-Assets Ratio
(Average Equity Divided by Average
Total Assets)................................ 9.79% 10.10% 9.79%
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 June 1999, the obligation was satisfied, allowing the return of
the participation certificates serving as collateral to the Bank and closing the
subsidiary. 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. In August
1999, the Bank
18
<PAGE>
formed a wholly owned subsidiary, Tri-County Investment Corporation to hold and
manage a portion of the Bank's investment portfolio in the State of Delaware.
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, 1999 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
19
<PAGE>
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.
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, 1999, 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
20
<PAGE>
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 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 requirement is to reduce the amount of the
institution's interest-earning assets. At December 31, 1999, 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
21
<PAGE>
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.
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. (S) 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.
22
<PAGE>
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; 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.
- -- ----
23
<PAGE>
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."
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, 1999, 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
Bank currently determines the amount of the bad debt reserve deduction with
respect to qualifying real property loans based upon actual loss experience (the
"experience method").
Neither the Corporation nor the Bank's federal income tax returns have been
audited by the Internal Revenue Service 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.
24
<PAGE>
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,
savings and loan associations, and 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, brokerage
services and miscellaneous services. The Bank has also utilized direct mail,
billboard and 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, 1999, the Bank had 70 full-time employees and 11 part-
time employees. The employees are not represented by a collective bargaining
agreement. The Bank believes its employee relations are good.
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,
1999.
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
(continued on following page)
25
<PAGE>
Year
Facility Leased Approximate
Office Commenced or Square
Location Operation Owned Footage
- -------- ---------- -------- -----------
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
Branch Office 1999 Leased 600
10195 Berry Road
Waldorf, 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.
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 $4.5 million at
December 31, 1999. 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, 1999.
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.
26
<PAGE>
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.
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 2000 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
The executive officers of the Corporation are as follows:
Michael L. Middleton (52 years old) is President and 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 Rotary Club of Waldorf and is a Paul Harris Fellow. Since
December 1995, Mr. Middleton has served on the Board of Directors of the Federal
Home Loan Bank of Atlanta and also serves as its Board Representative to the
Council of Federal Home Loan Banks. In January 2000, Mr. Middleton was
appointed to the National Association of Home Builders Mortgage Roundtable.
C. Marie Brown (57 years old) has been employed with the Bank for over 27
years and has served as Chief Operating Officer since 1999. Prior to her
appointment as Chief Operating Officer, Ms. Brown served as Senior Vice
President of the Bank. She is a supporter of the Handicapped and Retarded
Citizens of Charles County, of Zonta and serves on various administrative
committees of the Hughesville Baptist Church and the board of the Charles County
Chapter of the American Red Cross.
H. Beaman Smith (54 years old) was the Treasurer of the Corporation in 1998
and became Secretary-Treasurer in January 1999 and has been the president of
Accoware, 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.
27
<PAGE>
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 (43 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 (45 years old) joined the Bank in November 1988 and
has served as Senior Vice President of Lending since 1996. Prior to his
appointment as Senior Vice President, Mr. Cockerham served as Vice President of
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.
(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,
1999 and 1998
(b) Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997
(c) Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
28
<PAGE>
(d) Consolidated Statements of Cash Flow for the Years Ended
December 31, 1999, 1998 and 1997
(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 Agreements with Michael L. Middleton, as amended,
C. Marie Brown, as amended, and Gregory C. Cockerham ***
(13) Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1999
(21) Subsidiaries of the Registrant
(23) Consent of Stegman & Company
(27) Financial Data Schedule
(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.
*** Incorporated by reference to the registrant's Form 10-K for the fiscal
year ended December 31, 1998.
29
<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 27, 2000 By: /s/ Michael L. Middleton
-----------------------------------
Michael L. Middleton
President and Chief Executive Officer
(Duly Authorized Representative)
Date: March 27, 2000 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.
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 27, 2000 Date: March 27, 2000
By: /s/ Henry A. Shorter, Jr. By: /s/ W. Edelen Gough, Jr.
------------------------------ -----------------------------------
Henry A. Shorter, Jr. W. Edelen Gough, Jr.
(Director) (Director)
Date:March 27, 2000 Date: March 27, 2000
By: /s/ C. Marie Brown By: /s/ Gordon A. O'Neill
------------------------------ -----------------------------------
C. Marie Brown Gordon A. O'Neill
(Director and Chief Operating (Director)
Officer)
Date: March 27, 2000 Date: March 27, 2000
By: /s/ Beaman Smith
------------------------------
Beaman Smith
(Director and Secretary/Treasurer)
Date: March 27, 2000
30
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
(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 Agreements with Michael L. Middleton, as amended,
C. Marie Brown, as amended, and Gregory C. Cockerham**
(13) Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1999
(21) Subsidiaries of the Registrant
(23) Consent of Stegman & Company
(27) Financial Data Schedule
- -----------------
* Incorporated by reference to the registrant's Form S-4 Registration
Statement No. 33-31287.
** Incorporated by reference to the registrant's Form 10-K for the fiscal year
ended December 31, 1998.
31
<PAGE>
Dear Shareholder:
I am pleased to report to you the results of the operations of
Tri-County Financial Corporation and its banking subsidiary, Community Bank of
Tri County for the year ended December 31, 1999. The total assets of the Company
increased by 7.75% to $222.9 million dollars. Net income for the period declined
slightly to $2.2 million, down 9.6% over 1998's record year. The Basic Income
per Share was $2.75 versus $3.00 for 1998 and $2.53 for 1997.
The operating environment over the last five quarters has been a study
in contrast. In late 1998, the Federal Reserve was clearly guarding against
deflation and lowered short-term interest rates. Some three quarters later, it
reversed policy and moved to guard against inflation! The impact of this unique
policy shift was to lower the yield on the Bank's earning assets and precipitate
refinancing of the underlying principle. This produced a change in the
portfolio's yield on interest earning assets of minus 40 basis points for 1999
as compared to minus 12 basis points for 1998. To date, there have been five
changes in the short-term rates accompanied by a flat yield curve, which affects
the spread in which to operate the bank.
During this period, the Bank continued to follow its long-term business
plan of migrating its portfolio to that of a commercial bank. It was very
successful in attracting those assets which should provide a better revenue
stream than that of a residential lender. Loan balances in commercial real
estate products increased 52% while its commercial lines of credit grew 63%. In
total, loans targeted by its business plan totaled 52% of total loans in 1999 up
12% from 1998's balance.
In conjunction with our efforts to restructure our operations, your
Board and management have embraced a sales culture at all levels of the Bank. A
full time sales coordinator has been hired and a formal sales training
curriculum has been developed. Every employee must complete the class and all
branch managers are required to achieve a specific level of sales effectiveness
as part of their incentive plan.
The volatility in the stock price of financial institutions and price
deflation from historic highs presented the Board with the opportunity to
purchase and retire a portion of the stock offered for sale during 1999. The
price at which the stock was purchased was accretive to the earnings per share
of the Company. While a very small percentage of our stock actually trades, less
than 5% annually of the outstanding shares, the stock repurchase strategy
effectively utilizes capital to add liquidity to the market.
With the conversion to a commercial bank well underway, the Company has
benefited from this well timed strategy by gaining recognition as a bank holding
company with a Blue Ribbon bank designation by Veribanc, an independent bank
rating company. In my last correspondence with our shareholders, I outlined the
dividend strategy that the Board is pursuing. That is, to provide cash
dividends, in lieu of stock dividends, that compare favorably to other publicly
traded commercial banks. To that point, the Board increased the dividend payable
in 2000 by 50% to $.30 per share.
As we enter a new phase in our economic environment, your Board and
management are confident that your Company will continue in its endeavor to be
the leading community banking company in Southern Maryland. With your continued
support, I am confident that we can obtain that goal in the near future.
Yours truly,
/s/ Michael L. Middleton
Michael L. Middleton
President and Chairman
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
For the year ended December 31, 1999, the Community Bank of Tri-County
("the Bank") provided the Tri-County Financial Corporation ("the Company") with
earnings of $2.2 million, down 9.6% from the preceding year ended December 31,
1998.
The decline in earnings reflected the economic events of the third quarter
of 1998, during the international bond crisis, wherein the Federal Reserve
lowered short-term interest rates to add liquidity to the market. That move
forced down rates available on investments and triggered extensive loan
portfolio refinancing. This resulted in lower revenue from those sources during
1999. Subsequent changes in the Federal Reserve position on rates caused a rise
in rates during the second half of 1999. The combined effect of accelerated
principal curtailments in the portfolio with lower yielding reinvestment
opportunities followed by a series of quick increases in the short term rates
produced an unusual environment for the Bank to operate.
Entering its fourth year as a commercial bank, the business plan of the
Bank, specifies areas of portfolio growth and targeted marketing programs to
create an earnings stream comparable to established community banks. The key
component of this strategy is to increase the levels of commercial and consumer
loan products. Utilizing the Bank's existing delivery systems, 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 the portfolio and lines
of business is evident in the percentages of growth in targeted lines. Net loans
receivable increased by $14.1 million, or 10.6% in 1999. Commercial real estate
loans grew by $10.2 million or 51.8 % and lines of credit grew by $3.9 million
or 62.7%. Growth in the home equity product line was minimal due to the low
interest rate environment experienced during the first half of 1999 wherein many
borrowers paid off their second mortgages in conjunction with refinancing their
first mortgages to a lower rate.
There are additional prepayment risks associated with commercial real
estate lending since payments on loans secured by commercial real estate are
typically dependent on the successful operation or management of the properties,
which in turn is dependent on favorable real estate and other economic
conditions. The Bank will therefore be increasingly exposed to these risks as it
implements its business plan over time.
On the liability side of the balance sheet, transactional accounts comprise
$51.6 million, or 33.2% of the deposit base of the Bank at December 31, 1999
compared to $38.5 million or 25.3% at December 31, 1998. This increase resulted
from the Bank's development of accounts for its small business customers as well
as the creation of a money market indexed account with check withdrawal
privileges.
<PAGE>
Residential mortgage lending continued to provide loans for the Bank's
portfolio and produced a volume of $45.9 million in loans, down 16.3 % from
1998's level. In the first half of 1999, low interest rates continued to
stimulate 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. Loan production was adversely affected in
the second half of the year by a series of interest rate increases made by the
Federal Reserve in an effort to contain the economy's growth. The margin between
rates earned on the Bank's loan portfolio and the rates paid on its customer
deposits declined by 31 basis points from 5.09% to 4.78%. This suggests that a
narrowing of margins may continue to erode earnings in the future.
The Bank is continuing to search for new markets and facilities 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 will 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, the Bank entered into an agreement
with UVEST to provide a wide range of investment products and services to the
Bank's customers. 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 1999 decreased $228,000 or $.25 in basic
income per share over 1998's level. This was a continuation of the slowing of
the earnings growth which began in 1998. The flat yield curve produced few
opportunities to increase the interest rate spread when the cost of funds
tracked so closely with the yield on investments and loans during the year.
The average yield on all interest-earning assets was 7.75% for 1999
compared to 8.15% in 1998 and 8.27% in 1997. During the first half of the year,
the interest rate yield curve was flat with a general decline in the level of
rates earned. The decrease in the weighted average yield occurred as accelerated
principal curtailments or payoffs were received and somewhat lower yields were
available on the investments acquired with the cash received. In the second half
of 1999, a series of interest rate increases slowed loan production
significantly and immediately affected the repricing of short-term money market
indexed deposits.
During the period of low rates in 1998 and early 1999, the Bank experienced
rapid loan prepayment. Management's asset/liability strategy was to protect
against upside
<PAGE>
movements in interest rates. Because long term maturity extension of investments
would have been counterproductive to the strategy, intermediate range
investments and loans were pursued.
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. For several years the yield curve has been
essentially flat which has imposed significant pressure on the Bank's net
spread. This is 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 average rate paid on all
interest-bearing liabilities was 3.92% in 1999, 4.24% in 1998 and 4.37% in 1997.
The change in the cost of funds was -32 basis points ("bp") in 1999 versus -13
bp in 1998. This contrasted to a net change in the yield on interest earning
assets of -40 bp in 1999 and -12 bp in 1998. The Board of Directors of the Bank
monitors the situation carefully to develop a balance in the portfolio that will
conservatively position the Bank.
The net interest rate spread was 3.83% in 1999 compared to 3.91% in 1998
and 3.90% in 1997. The trend has been toward a narrowing of the yield over the
past several years. The interest rate spread may increase in the future if a
traditional yield curve pattern is regained. If the classic pattern of
inflationary pressures and interest rate volatility return, as indicated by the
recent Federal Reserve moves, the repricing of the Bank's earning assets should
increase returns over time. An interest rate sensitivity analysis follows this
section and will provide a more detailed discussion.
As previously stated, 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. During the first half
of 1999, the Bank's adjustable rate mortgage ("ARM") portfolio repriced at
levels consistent with or above the current fixed rates found in the market.
That exposed the ARM portfolio to a faster runoff of loans.
The loan portfolio continues its quality and has no loans identified as
impaired. The nonaccrual loans for 1999 totaled $218,000 compared to $269,000
for 1998 and $160,000 for 1997. Increasing levels of commercial and consumer
loans are expected to create some additional collection activity 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 real estate
acquired through foreclosure at the end of the year with a fair market value of
approximately $176,000.
OPERATIONAL ANALYSIS
Noninterest expense increased by 14.8% or $809,000 to $6,276,000 for 1999
compared to $5,467,000 in 1998 and $4,877,000 for 1997. Salaries and employee
benefits generated the largest line item dollar increase in 1999, $485,000, as
higher personnel levels were required to handle the increase in transactional
and business activity and to staff the growing branch network and middle
management. 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 loan quality criteria. The managers may receive cash incentives as
well as stock options based on their success in achieving strategic goals. This
greatly expands the coverage of employees under an incentive-based pay structure
and
<PAGE>
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.
Occupancy expense increased as new branch facilities were on line for a
full year. Older facilities and the administrative offices have been expanded
and reconditioned. Deposit insurance costs are incurred at a level just under
$90,000 since the conversion to a commercial bank.
YEAR 2000 ISSUES
The Bank successfully completed the Y2K date change without incident. 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 were written and timetables
developed for the implementation of the contingency operations in the event of
failure in any given area. Testing of the plans was performed for critical
areas. Additional cash was maintained on hand to meet potential customer
demands, taking the asset out of interest earning investments. Additional
security was required to safeguard the cash and protect the staff during what
was deemed to be a period more susceptible to robbery attempts. Generators and
emergency lighting systems were acquired to allow operation of critical systems
in the event of electrical failure. The cost of addressing potential problems
related to the date change is estimated at $550,000.
NET PREMISES AND EQUIPMENT
Net premises and equipment increased by 4.6% or $200,000 in 1999 compared
to a 3% or $127,000 increase in 1998 over 1997's level. Continued investment in
technology platforms, and various internal office expansion and renovation
required capital outlays in 1999.
WHOLESALE BORROWINGS
The Bank's wholesale borrowing, consisting mainly of advances from the
Federal Home Loan Bank of Atlanta, increased to $44.4 million at December 31,
1999 from $32.9 million at December 31, 1998. These borrowings were used to fund
specific loan projects or to create arbitrages with authorized investments for a
managed interest spread. This strategy allows for the prudent leveraging of net
worth to maximize revenue production while managing asset and liability interest
rate risk.
STOCKHOLDERS' EQUITY
Stockholders' equity grew by .7%, or $140,000 during 1999 to 21,115,000
compared to an increase of 10.7% or $2,045,000 to $20,975,000 during 1998. This
represents an average equity to average assets ratio of 9.8%, down from 10.1% in
1998.
A net unrealized loss on investment and mortgage-backed securities
available for sale was experienced in 1999 due to the rapid change in the
interest rate posture of the Federal Reserve. A loss of $1.4 million, net of
deferred tax, in 1999 as compared to a gain of $207,000 in 1998 was recognized
as an adjustment to stockholders' equity. The net unrealized gain or loss is
calculated on a monthly basis and will be reflected in the quarterly statements
to the regulatory agencies and shareholders.
<PAGE>
The Company's total risk based capital ratio at December 31, 1999 was
17.23% or $23,486,000 compared to 18.27% or $22,023,000 at December 31, 1998.
The Tier I risk based capital level at December 31, 1999 was $21,833,000 or
16.02% compared to $20,483,000 or 17.00% at December 31, 1998. 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,
1999, the Company and the Bank exceeded all capital requirements and were
considered to be "well-capitalized" under regulatory definitions.
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 24,803 shares for $657,000 in 1999 and 20,039 shares for
$474,000 in 1998.
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, 1999, it had $44.4 million outstanding or 19.9%
of its assets. The 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 Federal Home Loan Bank, 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 immediate 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:
<PAGE>
1999 1998
Sensitivity of market value of portfolio equity:
Interest rate changes:
Up 200 basis points -13% -12%
Down 200 basis points +4% +5%
Sensitivity of net interest income:
Interest rate changes:
Up 200 basis points -1% -1%
Down 200 basis points +3% +1%
The change in percentage for the market value of portfolio equity declined
slightly in both the adverse scenario of up 200 basis points in interest rate
movement and in the down 200 basis shock. This reflects the impact of multi-
year flat yield curves at lower rate levels. As prepayments have occurred,
reinvestment of the proceeds was at lower yields. An immediate market rate
increase would make those new investments less valuable. Because the net income
of the Bank and Company is derived through the interest spread of the portfolio,
the 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 than 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. Neither scenario generates a severe
impact to the Bank's earnings. In the scenarios presented, the most detrimental
for the Bank is an upward movement of rates. An upward rate movement would
reduce the market value of the portfolio, but with no intent to liquidate, the
decline would affect earnings. Due to the composition of the cost of funds and
the percentage of wholesale borrowings needed to finance its activities, the
Bank may be adversely affected in the event of rising rates. 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 on earnings 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, such as
was the case in the second half of 1999, a negative gap would adversely affect
net interest income and a positive gap would result in an increase in net
interest
<PAGE>
income. 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, 1999:
<TABLE>
<CAPTION>
0 to 90 91 to 365 Over 1 to Over 3 to Over 5
days days 3 years 5 years years
--------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
(amounts in thousands)
Rate Sensitive Assets:
Interest bearing deposits
with banks $ 3,063 $ - $ - $ - $ -
Investment securities 12,442 - 3,946 - 44,503
Loans 26,582 24,176 63,502 11,506 21,717
-------- ------- -------- -------- -------
Total assets $ 42,087 $24,176 $ 67,448 $ 11,506 $66,220
======== ======= ======== ======== =======
Rate Sensitive Liabilities:
Noninterest bearing deposits $ 10,102 $ - $ - $ - $ -
Interest bearing demand deposits 18,331 - - - -
Money market deposits 34,669 - - - -
Regular savings deposits 21,427 - - - -
Time deposits 12,325 25,634 27,647 4,897 -
Other borrowed funds and
long-term debt 3,398 - 11,400 10,000 10,000
------- ------- -------- ------- -------
Total liabilities $110,252 $25,634 $39,047 $14,897 $10,000
======== ======= ======= ======= =======
Interest rate sensitivity gap $(68,165) $(1,458) $28,401 $(3,391) $56,220
Cumulative interest rate
sensitivity gap $(68,165) $(69,623) $(41,222) $(44,613) $11,607
</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 net
worth 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
<PAGE>
structure of the Bank's assets and liabilities are critical to the maintenance
of acceptable performance levels.
STOCK INFORMATION
Tri-County Financial Corporation's stock is not traded or listed on a
public exchange. However, stock does change hands over the course of the year.
In 1999, the Company was made aware of several trades which occurred.
During 1999, a total of 35,672 shares traded, with a high price of $33.00
and a low price of $20. The weighted average price was $26.61. The number of
shareholders at March 14, 2000 was 609 and the total outstanding shares was
795,515. On February 3, 2000, the Board of Directors declared a $.30 per share
cash dividend payable on April 14, 2000 to shareholders of record on March 14,
2000. 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.
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 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 will not
pay dividends on its capital stock if its capital would thereby reduced below
the remaining balance of the liquidation account established when the Bank
converted from mutual to stock ownership in 1987.
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.
<PAGE>
NET INCOME
[GRAPH OF NET INCOME APPEARS HERE]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
$2,027,814 $1,319,727 $2,057,204 $2,381,847 $2,153,490
[GRAPH OF TRI-COUNTY FINANCIAL CORPORATION
MEASURES OF PERFORMANCE RETURN OF ASSETS APPEARS HERE]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
1.28% 0.77% 1.13% 1.20% 1.00%
[GRAPH OF TRI-COUNTY FINANCIAL CORPORATION
PORTFOLIO NET SPREAD DECEMBER 31, 1999 APPEARS HERE]
Weighted average rate paid
Weighted average on all on all interest-bearing
interest-earning assets liabilities Net Spread
----------------------- -------------------------- ----------
1995 8.45% 4.17% 4.28%
1996 8.25% 4.22% 4.03%
1997 8.29% 4.37% 3.92%
1998 8.15% 4.24% 3.91%
1999 7.75% 3.92% 3.83%
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Amount of:
Loans Outstanding..................................... $ 147,483,466 $ 134,912,633 $ 123,565,634 $ 111,862,620 $ 107,678,852
Interest and Noninterest-bearing cash................. 6,532,583 5,059,474 5,820,753 3,903,612 4,050,219
Investment Securities................................. 60,889,772 60,121,025 55,751,720 56,783,231 46,858,152
Assets................................................ 222,897,280 206,863,119 191,188,360 178,146,326 164,124,420
Savings Deposits...................................... 155,741,800 151,815,364 142,276,077 135,534,163 130,034,043
Borrowed Money........................................ 44,798,378 33,434,332 29,201,820 24,733,466 17,552,845
Stockholders' Equity.................................. 21,115,383 20,975,295 19,086,079 17,077,452 15,832,925
Number of:
Loans Outstanding..................................... 3,111 3,063 3,023 2,854 2,792
Savings Accounts...................................... 17,177 15,565 15,303 14,849 14,090
Offices Open - All Full Service....................... 9 8 8 8 6
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted Average Yield on:
Loan Portfolio........................................ 8.37 9.00% 9.20% 9.13% 9.38%
Investment Portfolio.................................. 6.46 6.42 6.48 6.42 6.45
All Interest-earning Assets........................... 7.75 8.15 8.29 8.25 8.45
Weighted Average Rate Paid on:
Savings Deposits and Escrow........................... 3.59 3.91 4.06 4.05 4.06
Federal Home Loan Bank Advances and Other Borrowings.. 5.33 5.72 5.91 5.46 6.21
All Interest-bearing Liabilities...................... 3.92 4.24 4.37 4.22 4.28
Interest Rate Spread (Spread between Weighted
Average Rate on All Interest-earning Assets
and All Interest-bearing Liabilities)................. 3.83 3.91 3.92 4.03 4.17
Net Yield (Net Interest Income as a
Percentage of Average Interest-earning Assets)........ 4.11 4.21 4.23 4.32 4.46
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONTINUED)
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS
At December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income......................................... $ 15,853,330 $ 15,721,675 $ 14,966,454 $ 13,741,595 $ 12,900,876
Interest Expense........................................ 7,441,179 7,596,727 7,350,648 6,406,756 6,094,968
-------------------------------------------------------------------------
Net Interest Income..................................... $ 8,412,151 $ 8,124,948 $ 7,615,806 $ 7,064,839 $ 6,805,908
Loss Provision and Charge-offs of Loans................. 240,000 240,000 240,000 408,000 210,000
-------------------------------------------------------------------------
Net Interest Income
After Provision for Loss on Loans..................... $ 8,172,151 $ 7,884,948 $ 7,375,806 $ 6,656,839 $ 6,595,908
Other Income............................................ 1,271,464 1,420,536 930,745 798,405 857,467
Less Noninterest Expense................................ 6,278,125 5,466,637 4,877,347 5,350,317 4,098,561
-------------------------------------------------------------------------
Income Before Federal Income Tax........................ $ 3,167,490 $ 3,838,847 $ 3,429,204 $ 2,104,927 $ 3,354,814
Income Tax Expense...................................... 1,014,000 1,457,000 1,372,000 785,200 1,327,000
Income Tax Benefit - Change in Accounting for Deferred
Taxes.................................................. - - - - -
-------------------------------------------------------------------------
Net Income.............................................. $ 2,153,490 $ 2,381,847 $ 2,057,204 $ 1,319,727 $ 2,027,814
-------------------------------------------------------------------------
Net Income Per Common Share (1)......................... $ 2.75 $ 3.00 $ 2.57 $ 1.65 $ 2.62
Cash Dividends Declared Per Common Share (2)............ 238,655 158,712 97,627 75,498 70,574
(1) Restated to reflect 1995, 1996, 1997, and 1998 stock dividends.
(2) a $0.10 per common share cash dividend was declared on January 24, 1996, payable to shareholders of record March 4, 1996;
a $0.10 per common share cash dividend was declared on January 24, 1997, payable to shareholders of record March 7, 1997;
a $0.125 per common share cash dividend was declared on February 15, 1998, payable to shareholders of record March 13, 1998;
a $0.20 per common share cash dividend was declared on January 22, 1999, payable to shareholders of record March 17, 1999
a $0.30 per common share cash dividend was declared on February 03, 2000, payable to shareholders of record March 14, 2000
</TABLE>
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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 Changes in Stockholders' Equity 3
Statements of Cash Flows 4 - 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - 26
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
results of its operations and cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Stegman & Company
Baltimore, Maryland
February 25, 2000
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
------------ ------------
Cash and due from banks $ 3,469,304 $ 906,658
Interest-bearing deposits with banks 3,063,279 4,152,816
Investment securities available-for-sale
- at fair value 56,655,300 55,976,606
Investment securities
held-to-maturity - at amortized cost 1,946,772 2,139,069
Stock in Federal Home Loan
Bank and Federal Reserve
Bank - at cost 2,287,700 2,005,350
Loans held for sale 773,099 2,266,697
Loans receivable - net of allowance
for loan losses of $1,653,290 and
$1,540,551, respectively 146,710,367 132,645,936
Premises and equipment, net 4,516,386 4,316,207
Foreclosed real estate 176,626 --
Accrued interest receivable 1,146,520 1,330,105
Other assets 2,151,927 1,123,675
------------- -------------
TOTAL ASSETS $ 222,897,280 $ 206,863,119
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 10,102,479 $ 9,750,153
Interest-bearing deposits 145,639,321 142,065,211
------------- -------------
Total deposits 155,741,800 151,815,364
Short-term borrowings 13,398,378 16,937,882
Long-term debt 31,400,000 16,496,450
Accrued expenses and other
liabilities 1,241,719 638,128
------------- -------------
Total liabilities 201,781,897 185,887,824
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01;
authorized - 15,000,000 shares;
issued 788,173 and 789,334 shares,
respectively 7,882 7,893
Surplus 7,447,240 7,309,901
Retained earnings 14,555,324 13,215,770
Accumulated other comprehensive
(loss) income (718,498) 648,614
Unearned ESOP shares (176,565) (206,883)
------------- -------------
Total stockholders' equity 21,115,383 20,975,295
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 222,897,280 $ 206,863,119
============= =============
See notes to consolidated financial statements.
1
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 11,562,846 $ 11,637,672 $ 11,029,413
Taxable interest and
dividends on investment
securities 4,197,132 3,941,744 3,782,205
Interest on deposits with
banks 93,352 142,259 154,836
------------ ------------ ------------
Total interest income 15,853,330 15,721,675 14,966,454
------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits 5,528,672 5,693,385 5,683,348
Interest on short term
borrowings 501,644 958,119 925,084
Interest on long-term debt 1,410,863 945,223 742,216
------------ ------------ ------------
Total interest expense 7,441,179 7,596,727 7,350,648
------------ ------------ ------------
NET INTEREST INCOME 8,412,151 8,124,948 7,615,806
PROVISION FOR LOAN LOSSES 240,000 240,000 240,000
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,172,151 7,884,948 7,375,806
------------ ------------ ------------
NONINTEREST INCOME:
Loan appraisal, credit,
and miscellaneous charges 182,494 223,326 158,945
Net gains on sale of loans 238,215 416,838 240,407
Net loss on sales of
investment securities (605) (391) (17,502)
Service charges and fees 811,991 600,067 496,972
Other income 39,369 180,696 51,923
------------ ------------ ------------
Total noninterest
income 1,271,464 1,420,536 930,745
------------ ------------ ------------
NONINTEREST EXPENSES:
Salaries and employee
benefits 3,600,119 3,114,748 2,624,131
Occupancy expense 540,667 494,113 396,378
ATM and deposit expenses 287,178 255,645 205,998
Advertising 280,044 162,133 170,116
Data processing expense 215,227 259,025 253,677
Depreciation of
furniture, fixtures, and
equipment 231,240 204,230 185,548
Other expenses 1,121,650 976,743 1,041,499
------------ ------------ ------------
Total noninterest
expenses 6,276,125 5,466,637 4,877,347
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 3,167,490 3,838,847 3,429,204
Income tax expense 1,014,000 1,457,000 1,372,000
------------ ------------ ------------
NET INCOME $ 2,153,490 $ 2,381,847 $ 2,057,204
============ ============ ============
INCOME PER COMMON SHARE:
Basic income per share $ 2.75 $ 3.00 $ 2.53
Diluted income per share 2.59 2.79 2.37
See notes to consolidated financial statements.
2
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<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, 1997 -
as previously reported $7,510 $5,724,729 $11,430,666 $ 88,778 $(174,231) $17,077,452
Adjustment for correction of accrued interest - - (125,507) - - (125,507)
------ ------------ ----------- ----------- --------- -----------
Beginning balances, January 1, 1997 -
as restated 7,510 5,724,729 11,305,159 88,778 (174,231) 16,951,945
Comprehensive income:
Net income - - 2,057,204 - - 2,057,204
Unrealized gain on investment securities
net of tax of $222,265 and reclassification
adjustments of $16,950 - - - 353,254 - 353,254
-----------
Total comprehensive income - - - - - 2,410,458
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 12,104,129 442,032 (194,385) 18,933,765
Comprehensive income:
Net income - - 2,381,847 - - 2,381,847
Unrealized gains on investment securities
net of tax of $129,980 - - - 206,582 - 206,582
-----------
Total comprehensive income - - - - - 2,588,429
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 13,215,770 648,614 (206,883) 20,975,295
Comprehensive income:
Net income - - 2,153,490 - - 2,153,490
Unrealized loss on investment securities
net of tax of $770,187 - - - (1,367,112) - (1,367,112)
-----------
Total comprehensive income 786,378
Cash dividend - $0.20 per share - - (157,034) - - (157,034)
Excess of fair market value over cost
of leveraged ESOP shares released - 11,401 - - - 11,401
Exercise of stock options 222 125,938 - - - 126,160
Repurchase of common stock (248) - (656,902) - - (657,150)
Net change in unearned ESOP shares 15 - - - 30,318 30,333
------ ------------ ----------- ----------- --------- -----------
BALANCES, DECEMBER 31, 1999 $7,882 $7,447,240 $14,555,324 $ (718,498) $(176,565) $21,115,383
====== ============ =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,153,490 $ 2,381,847 $ 2,057,204
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 240,000 240,000 240,000
Depreciation and amortization 336,383 301,238 324,134
Amortization of premium/discount
on mortgage-backed securities
and investments (236,443) 33,346 (50,456)
Deferred income tax (benefit) (68,000) (131,000) 2,000
Decrease (increase) in accrued
interest receivable 183,585 (206,043) (84,378)
Decrease in deferred loan fees (122,180) (130,320) (25,905)
Increase (decrease) in accrued
expenses and other liabilities 690,273 14,765 (314,242)
Decrease in other assets (276,747) (539,020) (219,661)
Loss (gain) on disposal of
premises and equipment 3,256 (66,813) 41,660
Loss on sale of investment
securities 605 391 17,502
Origination of loans held for sale (9,268,298) (23,740,825) (12,562,767)
Proceeds from sale of loans held
for sale 11,000,111 23,589,839 12,116,232
Gain on sales of loans (238,215) (416,839) (240,407)
Gain on sale of foreclosed real
estate -- (61,654) (7,000)
------------ ------------ ------------
Net cash provided by operating
activities 4,397,820 1,268,912 1,293,916
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in
interest-bearing deposits with banks 1,089,537 1,017,014 (2,378,112)
Purchase of investment securities
available-for-sale (74,254,708) (90,192,914) (47,628,227)
Proceeds from sale, redemption or
principal payments
of investment securities
available-for-sale 71,673,801 87,391,528 49,084,708
Purchase of investment securities
held-to-maturity (1,697,520) (3,110,963) (189,525)
Proceeds from maturities or
principal payments of investment
securities held-to-maturity 1,890,569 2,127,218 797,119
Net purchase of FHLB stock and
Federal Reserve Bank stock (282,350) (281,350) (424,000)
Loans originated or acquired (62,475,059) (54,084,255) (53,126,555)
Principal collected on loans 48,239,092 42,431,995 41,896,388
Purchase of premises and equipment (551,968) (478,661) (680,078)
Proceeds from sales of premises and
equipment 12,150 117,251 --
Proceeds from disposition of
foreclosed real estate -- 825,060 162,135
Acquisition from foreclosed real
estate (122,910) -- --
------------ ------------ ------------
Net cash used in investing
activities (16,479,366) (14,238,077) (12,486,147)
------------ ------------ ------------
4
<PAGE>
Tri-County Financial Corporation
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 3,926,436 $ 9,539,287 $ 6,741,914
Net (decrease) increase in short-term borrowings (3,539,504) 4,414,672 (746,749)
Dividends paid (157,034) (102,498) (81,008)
Exercise of stock options 126,160 41,835 20,795
Net change in unearned ESOP shares 41,734 (12,600) (20,154)
Repurchase of common stock (657,150) (473,636) (348,271)
Proceeds from long-term debt 35,000,000 - 22,400,000
Payments of long-term debt (20,096,450) (182,160) (17,235,267)
------------ ----------- ------------
Net cash provided by financing activities 14,644,192 13,224,900 10,731,260
------------ ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,562,646 255,735 (460,971)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 906,658 650,923 1,111,894
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,469,304 $ 906,658 $ 650,923
============ =========== ============
Supplementary cash flow information:
Cash paid during the year for:
Interest $ 7,368,462 $ 7,942,034 $ 7,284,916
Income taxes 1,288,882 1,502,868 1,625,000
Transfers from loans receivable to
foreclosed real estate 53,716 763,406 -
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 subsidiaries, Tri-County
Investment Corporation and 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 1999.
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 and savings products.
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 as accumulated other comprehensive income, a
separate component of stockholders' equity, net of deferred taxes, 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 1999, 1998 or
1997.
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
$586,000 and $546,000 at December 31, 1999 and 1998, respectively.
Income Taxes
------------
The Company files a consolidated federal income tax return with its
subsidiaries. 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
effects are provided as if the fair value method had been applied.
New Accounting Standards
------------------------
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133, requires derivative instruments
be carried at fair value on the balance sheet. The statement continues to allow
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 Company plans to adopt the provisions of this statement, as
amended, for its quarterly and annual reporting beginning January 1, 2001, the
statement's effective date. The effect of adopting the provisions of this
statement on the Company's financial position, results of operations and cash
flows subsequent to the effective date is not currently estimable and will
depend on the financial position of the Company and the nature and purpose of
any derivative instruments in use at that time.
Prior Period Restatement
------------------------
In December 1999, management discovered an error in its method of
calculating accrued interest on mortgage loans. This error resulted in the Bank
recording interest earned on certain loans which had been sold to participants.
The effect of correcting this error was a reduction in retained earnings as of
January 1, 1997 in the amount of $125,507 (net of $78,968 in taxes). The
correction is reflected in the accompanying financial statements as a reduction
of 1998 and 1997 net income of $4,357 (net of $2,741 in taxes) and $26,807 (net
of $16,867 in taxes), respectively.
9
<PAGE>
1998 1997
-------------- --------------
Net income:
As initially reported $2,386,204 $2,084,011
As corrected 2,381,847 2,057,204
Basic earnings per share:
As initially reported $ 3.00 $2.57
As corrected 3.00 2.53
Diluted earnings per share:
As initially reported $ 2.80 2.40
As corrected 2.79 2.37
2. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair values of investment securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Corporate equity securities $ 511,206 $ 239,890 $ - $ 751,096
Money Market and mutual funds 820,125 - - 820,125
Obligations of U.S. Government
Agencies and U.S. Government
Sponsored Enterprises (GSE's) 8,000,000 - 381,073 7,618,927
Asset-backed securities issued by:
GSE's 30,213,481 102,799 815,203 29,501,077
Other 18,191,069 42,643 269,637 17,964,075
----------- ---------- ---------- -----------
$57,735,881 $ 385,332 $1,465,913 $56,655,300
=========== ========== ========== ===========
December 31, 1998
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
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 31,340,373 465,934 82,336 31,723,971
Other 13,523,847 171,792 1,750 13,693,889
----------- ---------- ---------- -----------
$54,919,888 $1,149,064 $ 92,346 $55,976,606
=========== ========== ========== ===========
</TABLE>
10
<PAGE>
The scheduled maturities of investment securities available-for-sale at
December 31, 1999 are as follows:
Available-for-Sale
---------------------------
Estimated
Amortized Fair
Cost Value
-------------- -----------
Due in one year or less $ 5,331,331 $ 5,441,579
Due after one year through five years 4,000,000 3,748,569
Asset-backed securities 48,317,335 47,465,152
----------- -----------
57,648,666 $56,655,300
=========== ===========
Sales of investment securities available-for-sale during 1999, 1998 and
1997 resulted in the following:
1999 1998 1997
-------- -------- ----------
Proceeds $200,000 $408,500 $3,369,000
Gross gains - - 2,111
Gross losses (605) (391) (19,613)
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, 1999 and
1998.
3. INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost and estimated fair values of investments held-to-
maturity are as follows:
December 31, 1999
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Obligations of U.S.
Government Agencies $ 197,719 $ - $ - $ 197,719
Other investments 1,749,053 - - 1,749,053
---------- ---------- ---------- ----------
$1,946,772 $ - $ - $1,946,772
========== ========== ========== ==========
11
<PAGE>
December 31, 1998
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
---------- ---------- ------------ -----------
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
========== ========== ========== ==========
4. LOANS RECEIVABLE
Loans receivable at December 31, 1999 and 1998 consist of the following:
1999 1998
---------- ----------
Commercial real estate $ 29,947,350 $ 19,732,432
Residential real estate 66,263,457 64,243,146
Residential construction 17,142,072 20,776,294
Second mortgage loans 16,691,345 16,313,728
Lines of credit - commercial 10,024,782 6,161,033
Consumer loans 9,102,409 7,889,792
------------ ------------
149,171,415 135,116,425
------------ ------------
Less:
Deferred loan fees 807,758 929,938
Allowance for loan losses 1,653,290 1,540,551
------------ ------------
2,461,048 2,470,489
------------ ------------
Total $146,710,367 $132,645,936
============ ============
The following table sets forth the activity in the allowance for loan
losses:
1999 1998 1997
---------- ---------- ----------
Balance, January 1 $1,540,551 $1,310,365 $1,120,102
Add:
Provision charged to operations 240,000 240,000 240,000
Recoveries 6,790 275 105
Less:
Charge-offs 134,051 10,089 49,842
---------- ---------- ----------
Balance, December 31 $1,653,290 $1,540,551 $1,310,365
========== ========== ==========
12
<PAGE>
No loans included within the scope of SFAS 114 were identified as being
impaired at December 31, 1999 or 1998 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
$218,000, $269,000, and $160,000 at December 31, 1999, 1998, and 1997,
respectively. If interest income had been recognized on nonaccrual loans at
their stated rates during 1999, 1998, and 1997, interest income would have been
increased by approximately $27,001, $21,000, and $29,000, respectively. No
income was recognized for these loans in 1999, 1998 and 1997.
Included in loans receivable at December 31, 1999 and 1998, is $1,379,274
and $1,347,263 due from officers and directors of the Bank. Activity in loans
outstanding to officers and directors is summarized as follows:
1999 1998
----------- -----------
Balance, beginning of year $1,347,263 $1,206,615
New loans made during year 908,424 226,547
Repayments made during year (876,413) (85,899)
---------- ----------
Balance, end of year $1,379,274 $1,347,263
========== ==========
Loans serviced for others and not reflected in the balance sheets are
$61,992,725 and $56,040,000 at December 31, 1999 and 1998, 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, 1999 and 1998 is as
follows:
1999 1998
---------- ----------
Cost:
Land $1,439,224 $1,437,761
Building and improvements 2,964,425 2,769,246
Furniture and equipment 2,133,436 1,810,221
Automobiles 103,144 105,394
---------- ----------
Total cost 6,640,229 6,122,622
Less accumulated depreciation 2,123,843 1,806,415
---------- ----------
Premises and equipment, net $4,516,386 $4,316,207
========== ==========
13
<PAGE>
Certain bank facilities are leased under various operating leases. Rent
expense was $175,949, $161,167 and $118,556 in 1999, 1998 and 1997,
respectively.
Future minimum rentals commitments under noncancellable leases are as
follows:
2000 $ 154,906
2001 130,534
2002 133,859
2003 125,124
2004 125,124
Thereafter 373,423
----------
Total $1,042,970
==========
6. DEPOSITS
Deposits outstanding at December 31 consist of:
1999 1998
------------ ------------
Noninterest-bearing demand $ 10,102,479 $ 9,750,153
------------ ------------
Interest-bearing:
Demand 19,041,881 16,963,000
Money market deposits 34,669,161 20,775,000
Savings 21,427,279 25,771,211
Certificates of deposit of $100,000 or more 13,734,000 12,989,000
Other certificates of deposit 56,767,000 65,567,000
------------ ------------
Total interest-bearing 145,639,321 142,065,211
------------ ------------
Total deposits $155,741,800 $151,815,364
============ ============
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 Amount
---------- --------- -----------
2000 5.65 $13,000,000
2002 6.51 11,400,000
2004 5.03 10,000,000
2009 4.95 10,000,000
-----------
$44,400,000
===========
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, 1999 and 1998, of its
outstanding Federal Home Loan Bank advances. These amounts were $59,200,000 and
$43,900,000 at December 31, 1999 and 1998, 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.
Until July 1999, when the liability was paid off, Tri-County Federal
Finance One (Finance One) was 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 pledged Federal Home
Loan Mortgage Corporation participation certificates having unpaid principal
balances at December 31, 1998 totaling $544,696 as security for the notes. The
participation certificates were held in trust, and the principal and interest
payments required by the note payable were made out of the monthly cash proceeds
from the certificates.
The maturity date and interest rate, which were subject to adjustment
based on prepayments of the participation certificates, for the notes payable at
December 31, 1999 and 1998, are as follows:
Unpaid Principal
(Net of Discount)
December 31,
-------------------- Interest Maturity
1999 1998 Rate Date
------- -------- -------- --------
$ - $96,450 N/A N/A
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 balance sheets. 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:
1999 1998
------------ ------------
Balance outstanding at December 31 $13,398,378 $16,937,882
Average balance during the year 9,449,297 16,743,325
Average interest rate during the year 5.53% 5.72%
Maximum outstanding balance at any
month end during the year 16,806,734 26,619,724
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, 1999 and 1998, such borrowings were $398,378 and $437,882,
respectively.
The aggregate scheduled principal maturities on all borrowings outstanding
at December 31, 1999 are as follows:
2000 $13,398,378
2002 11,400,000
2004 10,000,000
2009 10,000,000
-----------
Total $44,798,378
===========
8. INCOME TAXES
Income tax expense was as follows:
1999 1998 1997
----------- ----------- ----------
Current:
Federal $ 973,000 $ 1,317,000 $ 1,122,000
State 109,000 271,000 248,000
----------- ----------- -----------
1,082,000 1,588,000 1,370,000
----------- ----------- -----------
Deferred:
Federal (56,000) (107,000) 1,600
State (12,000) (24,000) 400
----------- ----------- -----------
(68,000) (131,000) 2,000
----------- ----------- -----------
Total income tax expense $ 1,014,000 $ 1,457,000 $ 1,372,000
=========== =========== ===========
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>
1999 1998 1997
----------------------- ----------------------- ----------------------
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 $1,077,000 34.0% $1,307,000 34.0% $1,175,000 34.0%
State taxes, net of federal benefit 62,000 2.0 178,000 4.6 154,000 4.5
Nondeductible expenses 14,000 .4 5,400 .1 5,000 .1
Deduction for stock options exercised (90,000) (2.9) - .0 - .0
Other (49,000) (1.5) (33,400) (.8) 38,000 1.1
---------- ---- ---------- ---- ---------- ----
Total income tax expense $1,014,000 32.0% $1,457,000 37.9% $1,372,000 39.7%
========== ==== ========== ==== ========== ====
</TABLE>
16
<PAGE>
The net deferred tax assets (liabilities) in the accompanying balance
sheets include the following components:
1999 1998
-------- ----------
Deferred tax assets:
Deferred fees $ 74,199 $ 119,091
Allowance for loan losses 423,906 327,407
Deferred compensation 78,168 58,982
Unrealized loss on investment
securities available-for-sale 362,083 -
-------- ---------
Total deferred assets 938,356 505,480
-------- ---------
Deferred tax liabilities:
FHLB stock dividends 152,896 152,896
Depreciation 83,633 80,840
Unrealized gain on investment
securities available-for-sale - 408,104
-------- ---------
Total deferred liabilities 236,529 641,840
-------- ---------
Net deferred assets (liabilities) $701,827 $(136,360)
======== =========
Retained earnings at December 31, 1999, 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, 1999.
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 required 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 allows 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 has to
recapture into income a portion of its existing tax bad debt reserve. This
recapture occurs ratably over a six-taxable year period, beginning with the 1998
tax year. For financial reporting purposes, this recapture does 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 balance sheets. 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, 1999 and 1998, in addition to the undisbursed portion
of loans receivable of approximately $3,763,000 and $4,353,000, respectively,
the Company had outstanding loan commitments approximating $530,512 and
$1,713,949 as of December 31, 1999 and 1998, 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 those commitments
for which collateral is deemed necessary. Standby letters of credit outstanding
amounted to $5,556,000 and $4,397,000 at December 31, 1999 and 1998,
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.
18
<PAGE>
Net pension cost for the Company's plan consists of the following:
1999 1998 1997
------- --------- -----------
Service cost $ - $ - $ 49,239
Interest cost - - 71,313
Actual return on plan assets - - (76,268)
All other components - - (6,618)
Charge resulting from plan
curtailment - - 73,314
Credit resulting from plan
settlement - - (215,633)
------- --------- ---------
Net pension (credit) cost $ - $ - $(104,653)
======= ========= =========
Assumptions used to develop the net periodic pension cost were:
1999 1998 1997
------- --------- ---------
Discount rate N/A N/A 7.5%
Expected long-term rate of return on
plan assets N/A N/A 8.0%
Rate of increase in compensation levels N/A N/A 5.0%
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, 1999, 120,946 shares of stock have been authorized for
grants of options for this plan. There were no options granted during 1997.
The following table provides the pro forma disclosures:
1999 1998
---------- ----------
Net income As reported $2,153,490 $2,386,204
Pro forma 1,990,645 2,284,225
Basic earnings per share As reported 2.75 3.00
Pro forma 2.54 2.88
Diluted earnings per share As reported 2.59 2.79
Pro forma 2.39 2.68
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 grants:
1999 1998
------- -------
Dividend yield 0.75% 0.50%
Expected volatility 15.00% 15.00%
Risk-free interest rate 5.72% 4.97%
Expected lives (in years) 10 10
Weighted average fair value $11.51 $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>
1999 1998 1997
--------------------- ------------------ ------------------
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 101,818 $12.61 85,566 $ 9.19 97,464 $8.56
Granted 14,143 25.24 22,006 24.18 - -
Exercised (24,369) 7.61 (7,627) 7.08 (11,898) 5.69
Recission of exercise - - 1,873 6.50 - -
Forfeitures (408) 26.60 - - - -
-------- ------- --------
Outstanding at end of year 91,184 15.85 101,818 12.61 85,566 9.19
======== ======= ========
</TABLE>
Options Outstanding Options Exercisable
------------------------ ------------------------
Weighted Weighted
Number Remaining Number Average
Outstanding Contractual Exercisable Exercise
12/31/99 Life 12/31/99 Price
----------- ----------- ----------- ---------
55,693 6 years 55,693 6 years
1,006 8 years 1,006 8 years
28,736 9 years 28,736 9 years
5,749 10 years 5,749 10 years
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, 1999, the Plan owns 60,035
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, 1999,
1998, and 1997, the Company charged $342,000, $186,000 and $102,000, against
earnings to fund the Plans.
20
<PAGE>
13. STOCK DIVIDENDS
On February 3, 2000, the Board of Directors declared a $.30 per share cash
dividend to be distributed April 14, 2000 to holders of record March 14, 2000.
On January 22, 1999, the Board of Directors declared a $.20 per share cash
dividend which was distributed April 17, 2000 to holders of record March 17,
2000.
On February 15, 1998, the Board of Directors declared a 4% stock dividend
and a $.125 per share cash dividend that was distributed on April 13, 1998 to
holders of record on March 13, 1998. The stock distribution increased the
Corporation's issued stock by approximately 31,000 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, 1999, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve 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 1999
and 1998 are presented in the tables below: (dollar amounts in thousands)
To be Considered
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
--------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ -------- ------- --------- -------
At December 31, 1999:
Total capital (to risk-
weighted assets):
The Company $23,486 17.23% $10,906 8.0%
The Bank 22,936 16.82% 10,906 8.0% $13,633 10.0%
Tier 1 capital (to risk-
weighted assets):
The Company 21,833 16.02% 5,453 4.0%
The Bank 21,283 15.61% 5,453 4.0% 8,179 6.0%
Tier 1 capital (to
average assets):
The Company 21,833 9.86% 8,857 4.0%
The Bank 21,283 9.61% 8,857 4.0% 11,072 5.0%
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%
22
<PAGE>
15. EARNINGS PER SHARE
The calculations of basic and diluted earnings per share are as follows:
1999 1998 1997
---------- ---------- ----------
Basic earnings per share:
Net income $2,153,490 $2,381,847 $2,057,204
Average common shares outstanding 782,950 793,458 811,694
Net income per common share - basic $ 2.75 $ 3.00 $ 2.53
Diluted earnings per share:
Net income 2,153,490 2,381,847 2,057,204
Average common shares outstanding 782,950 793,458 811,694
Stock option adjustment 49,333 59,687 55,809
Average common shares outstanding - diluted 832,283 853,145 867,503
Net income per common share - diluted $ 2.59 $ 2.79 $ 2.37
16. 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.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,469,304 $ 3,469,304 $ 906,658 $ 906,658
Interest-bearing deposits
with banks 3,063,279 3,063,279 4,152,816 4,152,816
Investment securities and
stock in FHLB and FRB 61,883,138 60,889,772 60,121,025 60,140,991
Loans receivable, net 146,710,367 146,978,389 132,645,936 134,181,574
Loans held for sale 773,099 773,099 2,266,697 2,266,697
Liabilities:
Savings, NOW and money
market accounts 84,530,443 84,530,443 73,259,364 73,259,364
Time certificates 70,501,000 70,439,300 78,556,000 78,085,030
Long-term debt and other
borrowed funds 44,798,378 46,058,410 33,434,332 33,367,035
</TABLE>
At December 31, 1999 and 1998, the Company had outstanding loan commitments and
standby letters of credit of $5.5 million and $6.1 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.
23
<PAGE>
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.
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, 1999 and 1998. 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.
24
<PAGE>
18. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY
Condensed Balance Sheets:
ASSETS
1999 1998
---------- -------------
Cash - noninterest-bearing $ 151 $ 3,044
Cash - interest-bearing 719,068 41,891
Accounts receivable 40,247 11,734
Investment securities available-for-sale 28,002 224,970
Investment in wholly owned subsidiary 20,564,441 20,743,289
----------- -----------
TOTAL ASSETS $21,351,909 $21,024,928
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 236,526 $ 49,633
Stockholders' equity:
Common stock 7,882 7,893
Surplus 5,968,801 7,309,901
Retained earnings 16,033,763 13,215,770
Unearned ESOP shares (176,565) (206,883)
Accumulated other comprehensive income (718,498) 648,614
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $21,351,909 $21,024,928
=========== =============
Condensed Statements of Income:
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- ------------
Dividends from subsidiary $ 1,000,000 $ 750,000 $ --
Interest income 42,675 13,882 41,879
Loss on sale of investment securities (605) (391) (250)
Amortization and miscellaneous expenses (97,844) (76,671) (72,323)
----------- ---------- ----------
Income (loss) before income taxes and
equity in undistributed net
income of subsidiary 944,226 686,820 (30,694)
Federal and state income tax benefit 21,000 10,350 10,436
Equity in undistributed net income
of subsidiary 1,188,264 1,684,677 2,077,462
----------- ---------- ----------
NET INCOME $ 2,153,490 $2,381,847 $2,057,204
=========== ========== ==========
25
<PAGE>
Condensed Statements of Cash Flows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,153,490 $ 2,381,847 $ 2,057,204
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in investment in wholly owned subsidiary (1,188,264) (1,684,677) (2,087,898)
Loss on sale of investment securities 605 391 250
Amortization of discount on investments - - (25,140)
Increase in current assets (28,513) (10,350) -
Increase in current liabilities 186,893 9,696 273
----------- ----------- -----------
Net cash provided (used) by
operating activities 1,124,211 696,907 (55,311)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease interest-bearing deposits (677,177) 77,829 7,103
Purchase of investment securities available-for-sale (3,637) (633,861) (343,295)
Maturity or redemption of investment
securities available-for-sale 200,000 408,500 815,750
----------- ----------- -----------
Net cash (used) provided by
investing activities (480,814) (147,532) 479,558
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (157,034) (102,498) (81,008)
Exercise of stock options 126,160 41,835 20,795
Net change in ESOP loan 41,734 (12,600) (20,154)
Redemption of common stock (657,150) (473,636) (348,271)
----------- ----------- -----------
Net cash used in financing activities (646,290) (546,899) (428,638)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH (2,893) 2,476 (4,391)
CASH AT BEGINNING OF YEAR 3,044 568 4,959
----------- ----------- -----------
CASH AT END OF YEAR $ 151 $ 3,044 $ 568
=========== =========== ===========
</TABLE>
26
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CORPORATE INFORMATION: Tri-County Financial Corporation
Community Bank of Tri-County
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DIRECTORS OF BOTH
Michael L. Middleton
Chairman of the Board
C. Marie Brown W. Edelen Gough, Jr. Henry A. Shorter, Jr.
Herbert N. Redmond, Jr. Gordon A. O'Neill H. Beaman Smith
- -------------------------------------------------------------------------------------------------------------------
OFFICERS OF COMMUNITY BANK OF TRI-COUNTY
Michael L. Middleton
President and Chief Executive Officer
C. Marie Brown Gregory C. Cockerham Eileen M. Ramos
Senior Vice President Senior Vice President Chief Financial Officer
Chief Operations Officer Chief Lending Officer
David D. Vaira John H. Buckmaster H. Beaman Smith
Vice President Vice President Secretary/Treasurer
- -------------------------------------------------------------------------------------------------------------------
COUNSEL
Corporate: Local Counsel:
Franklin Goldstein Louis P. Jenkins, Esq.
Semmes, Bowen & Semmes P. O. Box 280
250 West Pratt Street La Plata, Maryland 20646
Baltimore, Maryland 21201 (301) 934-9571
(410) 539-5040
Special Counsel: Auditors:
Gary R. Bronstein, Esq. Stegman & Company
Housley Kantarian & Bronstein, P.C. 405 East Joppa Road, Suite 200
1220 19th Street, NW, Suite 700 Baltimore, Maryland 21286
Washington, DC 20036 (410) 823-8000
(202) 822-9611
</TABLE>
FORM 10-K
A copy of Form 10-K, including financial statements as filed with the Securities
and Exchange Commission will be furnished without charge to stockholders as of
the record date upon written request to H. Beaman Smith, Secretary, Tri-County
Financial Corporation, P. O. Box 38, Waldorf, Maryland 20604.
STOCK TRANSFER AGENT: STOCK TRANSACTIONS AND INQUIRIES:
Bank of New York Christy Lombardi, Executive Secretary
101 Barclay Street Community Bank of Tri-County
New York, NY 10286 P. O. Box 38
Waldorf, Maryland 20604
1-888-745-BANK, ext. 614
FAX (301) 843-3625
ANNUAL MEETING:
May 5, 2000, 10:00 a.m.
Community Bank of Tri-County
2nd Floor Board Room
3035 Leonardtown Road
Waldorf, Maryland
<PAGE>
Main Office St. Patrick's Drive Branch
- ----------- --------------------------
P.O. Box 38 20 St. Patrick's Drive
3035 Leonardtown Road Waldorf, MD 20603
Waldorf, MD 20604
Bryans Road Branch Campus Center Branch
- ------------------ --------------------
P.O. Box 522 Charles County Comm. College
8010 Matthews Road P. O. Box 1810
Bryans Road, MD 20616 8730 Mitchell Road
La Plata, MD 20646
Dunkirk Branch La Plata Branch
- -------------- ---------------
P. O. Box 373 P.O. Box 1810
10321 Southern Maryland Boulevard 9405 Chesapeake Street
Dunkirk, MD 20745 La Plata, MD 20646
Leonardtown Branch Lexington Park Branch
- ------------------ ---------------------
P.O. Box 241 P.O. Box 561
25395 Point Lookout Road 22730 Three Notch Road
Leonardtown, MD 20650 California, MD 20619
Berry Road Branch
- -----------------
10195 Berry Road
P.O. Box 6265
Waldorf, MD 20603
<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
Tri-County Investment Corporation (1) 100% Delaware
- -------------------------
(1) Wholly-owned subsidiary of Community Bank of Tri-County.
<PAGE>
[LETTERHEAD OF STEGMAN & COMPANY]
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement No. 333-79327 on Form S-8, and in the Annual Report on Form 10-K of
Tri-County Financial Corporation for the year ended December 31, 1999, of our
report dated February 25, 2000, relating to the consolidated financial
statements of Tri-County Financial Corporation.
/s/ Stegman & Company
Baltimore, Maryland
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,469,304
<INT-BEARING-DEPOSITS> 3,063,279
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,655,300
<INVESTMENTS-CARRYING> 4,234,472
<INVESTMENTS-MARKET> 4,234,472
<LOANS> 147,483,466
<ALLOWANCE> 1,653,290
<TOTAL-ASSETS> 222,897,280
<DEPOSITS> 155,741,800
<SHORT-TERM> 13,398,378
<LIABILITIES-OTHER> 1,241,719
<LONG-TERM> 31,400,000
0
0
<COMMON> 7,882
<OTHER-SE> 21,107,501
<TOTAL-LIABILITIES-AND-EQUITY> 222,897,280
<INTEREST-LOAN> 11,562,846
<INTEREST-INVEST> 4,197,132
<INTEREST-OTHER> 93,352
<INTEREST-TOTAL> 15,853,330
<INTEREST-DEPOSIT> 5,528,672
<INTEREST-EXPENSE> 7,441,179
<INTEREST-INCOME-NET> 8,412,151
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> (605)
<EXPENSE-OTHER> 6,276,125
<INCOME-PRETAX> 3,167,490
<INCOME-PRE-EXTRAORDINARY> 3,167,490
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,153,490
<EPS-BASIC> 2.75
<EPS-DILUTED> 2.59
<YIELD-ACTUAL> 4.11
<LOANS-NON> 218,000
<LOANS-PAST> 171,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,540,551
<CHARGE-OFFS> 134,051
<RECOVERIES> 6,790
<ALLOWANCE-CLOSE> 1,653,290
<ALLOWANCE-DOMESTIC> 1,653,290
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
