<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to
Commission File Number 0-18279
------------------------------------------
Tri-County Financial Corporation
------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1652138
-------------------------------- ---------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(301) 645-5601
------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
As of July 31, 2000 registrant had outstanding 783,805 shares of Common
Stock.
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q
INDEX
-----
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999 2
Consolidated Statements of Income and Comprehensive Income -
Three and Six Months Ended June 30, 2000 and 1999 3
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2000 and 1999 4 - 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7 - 12
PART II - OTHER INFORMATION 13 - 14
Item 6 - Exhibits
SIGNATURES 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
June 30,
2000 December 31, 1999
<S> <C> <C>
Cash and due from banks $ 461,436 $ 3,469,304
Interest-bearing deposits with banks 5,275,373 3,063,279
Investment securities available for sale - at fair value 56,140,932 56,655,300
Investment securities held to maturity - at amortized cost 1,422,784 1,946,772
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 2,679,250 2,287,700
Loans held for sale
217,500 773,099
Loans receivable - net of allowance for loan losses
of $1,834,573 and $1,653,290, respectively 161,058,341 146,710,367
Premises and equipment, net 4,520,000 4,516,386
Foreclosed real estate
232,403 176,626
Accrued interest receivable 1,279,580 1,146,520
Other assets 2,158,986 2,151,927
$ 235,446,585 $ 222,897,280
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 12,319,486 $ 10,102,479
Interest-bearing deposits 147,547,618 145,639,321
------------- -------------
Total deposits 159,867,104 155,741,800
Short-term borrowings 36,162,697 13,398,378
Long-term debt 16,400,000 31,400,000
Accrued expenses and other liabilities 1,256,667 1,241,719
------------- -------------
Total liabilities 213,686,468 201,781,897
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 788,005 and 788,173 shares, respectively
7,880 7,882
Surplus 7,483,607 7,447,240
Retained earnings 15,307,839 14,555,324
Accumulated other comprehensive loss (899,610) (718,498)
Unearned ESOP shares (139,599) (176,565)
------------- -------------
Total stockholders' equity 21,760,117 21,115,383
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 235,446,585 $ 222,897,280
============= =============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30,2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 3,426,817 $ 2,857,012 $ 6,691,722 $ 5,824,944
Taxable interest and dividends on investment securities 1,031,033 1,085,150 2,081,082 2,013,504
Interest on bank deposits 29,625 11,442 49,919 32,718
----------- ----------- ----------- -----------
Total interest revenues 4,487,475 3,953,604 8,822,723 7,871,166
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 1,512,282 1,370,173 2,922,908 2,736,813
Interest on long term debt 465,428 347,192 765,140 617,768
Interest on other borrowings 311,654 88,260 649,437 220,371
----------- ----------- ----------- -----------
Total interest expenses 2,289,364 1,805,625 4,337,485 3,574,952
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,198,111 2,147,979 4,485,238 4,296,214
PROVISION FOR LOAN LOSSES 90,000 60,000 180,000 120,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,108,111 2,087,979 4,305,238 4,176,214
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges 23,436 53,155 39,128 113,782
Net gain on sale of loans held for sale 19,406 73,300 58,548 175,579
Service charges 258,116 202,895 487,058 369,680
Other 8,317 11,933 16,660 27,384
----------- ----------- ----------- -----------
Total noninterest income 309,275 341,283 601,394 686,425
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salary and employee benefits 916,539 912,141 1,804,379 1,652,221
Occupancy expense 145,259 131,134 303,932 255,282
Deposit insurance and surety bond premiums 7,936 35,672 15,925 71,555
Data processing expense 65,276 63,238 156,660 135,656
Advertising 87,220 63,192 130,972 104,515
Depreciation 54,562 58,348 108,017 129,197
Other 355,199 311,092 677,570 556,359
----------- ----------- ----------- -----------
Total noninterest expenses 1,631,991 1,574,817 3,197,455 2,904,785
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 785,395 854,445 1,709,177 1,957,854
INCOME TAXES 276,000 315,000 576,000 735,000
----------- ----------- ----------- -----------
NET INCOME 509,395 539,445 1,133,177 1,222,854
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Net unrealized holding gains (losses) arising during the period 22,021 (342,172) (181,112) (562,875)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 531,416 $ 197,273 $ 952,065 $ 659,979
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic .65 .60 1.44 1.47
Diluted .62 .57 1.38 1.38
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
---------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,133,177 $ 1,222,854
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 180,000 120,000
Depreciation and amortization 156,750 191,200
Net amortization of premium/discount on
investment securities (12,409) (102,606)
Deferred income tax benefit (49,000) (16,000)
(Increase) decrease in accrued interest receivable (133,060) 36,287
(Decrease) increase in deferred loan fees (58,241) (78,387)
Increase in accounts payable, accrued expenses,
and other liabilities 14,948 109,196
Decrease (Increase) in other assets 164,264 (54,563)
Gain on sale of premises and equipment
Loss on sale of investment securities 605
Origination of loans held for sale (1,605,274) (6,140,878)
Gain on sales of loans held for sale (58,548) (175,579)
Proceeds from sale of loans held for sale 2,219,421 8,153,704
------------ ------------
Net cash provided by operating activities 1,952,028 3,265,833
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits with banks (2,212,094) 1,882,168
Purchase of investment securities available for sale (8,586,841) (42,912,589)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 8,807,902 37,392,411
Purchase of investment securities held to maturity (200,000) (1,170,436)
Proceeds from maturities or principal payments
of investment securities held to maturity 726,269 883,729
Loans originated or acquired (33,736,415) (26,837,912)
Principal collected on loans 19,266,682 22,819,107
Purchase of premises and equipment (160,364) (373,669)
Acquisition of foreclosed real estate (55,777)
Purchase of FHLB and Federal Reserve stock (391,550) (229,850)
------------ ------------
Net cash used in investing activities (16,542,188) (8,547,041)
------------ ------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
---------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------
2000 1999
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 4,125,304 $ 4,345,785
Proceeds from long-term borrowings - 20,000,000
Payments of long-term borrowings (15,000,000) (15,096,450)
Net increase (decrease) in other borrowed funds 22,764,319 (3,400,148)
Exercise of stock options 36,402 58,172
Net change in unearned ESOP shares 36,984 (266,200)
Dividends paid (236,595) (158,714)
Redemption of common stock (144,122) 30,333
Net cash provided by financing activities 11,582,292 5,512,778
------------ ------------
(DECREASE) INCREASE IN CASH AND DUE FROM BANKS (3,007,868) 231,570
CASH AND DUE FROM BANKS - JANUARY 1 3,469,304 906,658
------------ ------------
CASH AND DUE FROM BANKS - JUNE 30 $ 461,436 $ 1,138,228
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the six months for:
Interest $ 4,185,240 $ 3,601,469
============ ============
Income taxes $ 475,000 $ 753,575
============ ============
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BASIS OF PRESENTATION
General - The consolidated financial statements of Tri-County Financial
Corporation (the Company) and its wholly owned subsidiary, Community Bank
of Tri-County (the Bank) included herein are unaudited; however, they
reflect all adjustments consisting only of normal recurring accruals that,
in the opinion of Management, are necessary to present fairly the results
for the periods presented. Certain information and note disclosures
normally included in financial statements prepared in accordance with
Generally Accepted Accounting Principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company believes that the disclosures are adequate to make
the information presented not misleading. The results of operations for the
six months ended June 30, 2000 are not necessarily indicative of the
results of operations to be expected for the remainder of the year. Certain
previously reported amounts have been restated to conform to the 2000
presentation.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31,
1999.
2. EARNINGS PER SHARE
Basic and diluted earnings per share, as adjusted for the stock dividend,
have been computed based on weighted-average common and common equivalent
shares outstanding as follows:
Six Months Ended
June 30,
-----------------------
2000 1999
Basic 787,597 829,303
Diluted 822,707 885,195
3. PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards 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 to 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 impact of adopting the 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 instrument in use at that time.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
This document contains forward-looking statements, including discussions of
Tri-County Financial Corporation's (the "Company's") goals, strategies and
expected outcomes; estimates of risks and future costs; and reports of the
Company's ability to achieve its financial and other goals. These
forward-looking statements are subject to significant known and unknown risks
and uncertainties because they are based upon future economic conditions,
particularly interest rates, competition within and without the banking
industry, changes in laws and regulations applicable to the Company and various
other matters. Because of these uncertainties, there can be no assurance that
actual results, performance or achievements of the Company will not differ
materially from any future results, performance or achievements expressed or
implied by these forward-looking statements.
GENERAL
Tri-County Financial Corporation operates under the Federal Reserve's Bank
Holding Company regulations. The consolidated financial statements include the
accounts of Tri-County Financial Corporation and its wholly owned subsidiary,
Community Bank of Tri-County ("the Bank") and the Bank's wholly owned
subsidiary, Tri-County Investment Corporation, collectively referred to as "the
Company". Community Bank of Tri-County has completed its third year of
operations as a commercial bank, following its thrift charter conversion on
March 29, 1997.
In its business plan as a newly chartered commercial bank, the Bank targeted
commercial and consumer product lines to augment its financial performance in a
variety of interest rate environments. Generally, the Bank is seeking to bring
its investment in these products to amounts comparable to similarly sized
commercial banks. To date, growth in these targeted product lines has exceeded
internal expectations. The Bank's focus on the local business and consumer
markets has resulted in strong loan and transactional deposit growth. While
these areas have been targeted for expansion, the Bank anticipates that, over
time, residential mortgage banking activity and investment securities will
represent a smaller portion of the total operations of the Company. The Bank
also anticipates that, over time,that a broader array of funding instruments
will be employed to supplant the traditional certificates of deposit funding
source normally associated with a thrift institution. These changes may, over
time, help to mitigate the impact of the overall interest rate movements on the
Bank's income.
The Bank conducts operations through eight full-service and one micro branch
offices in its market area consisting of Charles, St. Mary's and Calvert
counties in Maryland. Further full service or microbranch locations may be
sought depending on favorable market, cost, and other developments. The Bank is
developing plans for other distribution methods to complement its traditional
branch structure including expanding its internet and electronic banking
capabilities. The Bank continues to capitalize on its niche in community based
banking activities. The Bank also continues to pursue opportunities to offer fee
based services which are complimentary to its lending and deposit business.
The Bank is primarily engaged in the business of obtaining funds in the form of
deposits from the general public in the Bank's market area as well as certain
wholesale borrowings from its correspondents and capital markets. It invests
such funds in loans collateralized by residential and commercial real estate,
mortgage-backed securities and related investments as well as unsecured and
secured commercial and consumer loans. The Company's earnings, therefore, are
primarily dependent upon its net interest income. This is determined by the
Company's interest rate spread (the difference between the yields earned on its
loan and investment portfolios, and the rates paid on its deposits and borrowed
funds) and the relative holdings of interest-earning assets and interest-bearing
liabilities. This spread is affected by changes in the overall interest rate
environment as well as by competitors pricing for similar products.
Because the majority of the Bank's income is dependent upon the repayment of
loan interest and principal, the Bank's ability to manage the risk of repayment
of its loans is critical to continued success. The Bank is required to estimate
its exposure due to loan losses and to provide an allowance for such losses.
This estimate is inherently inexact and reflects management's expectations as to
future economic conditions in the Southern Maryland area as well as individual
borrower's circumstances. Management believes that its allowance for loan losses
is adequate.
Noninterest income including sales of loans, transaction and other fees, and
other income is a significant part of the Company's income. The Company's
ability to earn noninterest income is dependent on outside factors such as
market conditions in mortgage lending, and internal factors such as the
Company's expertise in offering attractive products to its customers. The
Company believes that its emphasis on consumer transaction accounts and
commercial lending and deposit services will enable it to compete for increasing
amounts of noninterest income.
7
<PAGE>
Noninterest expenses include the expenses necessary for the delivery of the
Banks products and services including the cost of operating the Bank's branches.
Noninterest expense also includes the general and administrative expenses of the
Corporation. The majority of noninterest expense consists of personnel related
costs. Other large components consist of occupancy expense related to the Bank's
branches and headquarters and depreciation on equipment and buildings.
SELECTED FINANCIAL DATA
Six Months Ended
June 30,
--------
2000 1999
Condensed Income Statement
Interest Income $8,822,723 $7,871,166
Interest Expense 4,337,485 3,574,952
Net Interest Income 4,485,238 4,296,214
Provision for Loan Losses 180,000 120,000
Noninterest Income 601,394 686,425
Noninterest Expenses 3,197,455 2,904,785
Income Before Income Taxes 1,709,177 1,957,854
Income Tax Expense 576,000 735,000
Net Income 1,133,177 1,222,854
Per Common Share
Basic Earnings $1.44 $1.47
Diluted Earnings 1.38 1.38
Book Value 27.61 26.79
FINANCIAL CONDITION
Assets
Total assets as of June 30, 2000 grew $12.5 million to $235.4 million from the
December 31, 1999 level of $222.9 million. This reflects growth of 5.6% as
compared to 2.9% asset growth during the same period in 1999. Residential first
mortgage assets increased slightly by $75 thousand in the current quarter to
$69.3 million. During the same period other loans increased from $79.9 million
to $94.3 million reflecting the Bank's increased emphasis on other lending
product lines. Overall loan balances including allowances and deferred income
increased during the quarter from $146.7 million to $161.1 million. Currently
loans (excluding loans held for sale) are 68.4% of total assets compared with
65.8% at December 31, 1999. Management believes that the continued development
of Southern Maryland as both commuter dependent community and an employment base
provides the Company with many opportunities to profitably expand its franchise.
During the quarter the Company's investment securities portfolio declined to
$57.6 million from $58.6 a decline of 1.8%. This decline reflects management's
emphasis on building the loan portfolio, particularly in targeted lending areas.
Investment securities continue to be primarily invested in mortgage related
securities such as collateralized mortgage obligations, REMIC's, and mortgage
backed securities. The Company purchased $ 3.4 million in investment securities
during the quarter as compared to $22.8 million for the same period in the prior
year. The Company may elect to increase the size of its investment portfolio in
the future based upon available investment opportunities.
The allowance for loan losses was maintained at a level believed by management
to be adequate to absorb potential losses consistent with the risk profile of
the loan portfolio. Management's determination of the adequacy of the allowance
is based on a periodic evaluation of the portfolio with consideration given to
the overall loss experience; current economic
8
<PAGE>
conditions; volume, growth and composition of the loan portfolio; financial
condition of the borrowers; and other relevant factors that, in management's
judgment, warrant recognition in providing an adequate allowance. The Bank's
allowance for loan losses was increased $181 thousand during the first six
months of 2000 in accordance with management's policy described above. Currently
the Bank's allowance for loan losses totals $1.8 million or 1.13% of loan
balances as compared to $1.6 million or 1.13% of loan balances at December 31,
1999.
Cash levels declined substantially during the first six months of 2000. Cash and
due from banks totaled $461 thousand down from $3.5 million at December 31,
1999. Cash levels were higher than normal at December 31, 1999 due to concerns
that problems with the century date change would lead to cash needs in excess of
normal. No unusual cash needs were noted as a result of the century date change.
The level of property and equipment balances increased $4 thousand due to
routine upgrades of computer equipment and premises partially offset by
continued depreciation of these assets.
Liabilities
Liability growth was managed to reflect the change in asset levels. Deposit
balances increased by $4 million or 2.6% for the six months ended June 30, 2000.
The Bank continues to aggressively market its deposit products in the Southern
Maryland area. Rate competition has been intense and recent stock market returns
have caused some customers to change their deposit philosophy and move their
money to uninsured investment vehicles.
Funding demands in excess of deposit growth have been met by the use of other
borrowed funds. Long and short term borrowings increased by a total of $7.8
million or 17.3% over December 1999 balances. Other liabilities also increased
by $15 thousand or 1%.
Stockholders' Equity
Stockholders' equity increased $644 thousand or 3.1% to $21.8 million at June
30, 2000 compared to $21.1 million at December 31, 1999. This reflects the net
income of $1,133,177 for the six month period and a $181,112 decrease in
accumulated other comprehensive income. Other reductions in equity occurred as a
result of a $.30 per share cash dividend paid to shareholders and the use of
$144 thousand to purchase shares in the open market and retire them. The cash
dividends were distributed to shareholders on April 17, 2000. Book value on a
per share basis, $27.61 at June 30, 2000, as compared to $26.79 at December 31,
1999, reflects a 3.1% increase, in line with the change in stockholder's equity.
As part of its capital management strategy, the Board has approved certain
purchases, for retirement, of shares offered for sale by its stockholders. For
the six months ended June 30, 2000, the Company purchased 5,487 shares for
$144,122. Additional stock acquisitions and retirements may be considered in the
future. The Company has $341 thousand of cash available at the holding company
level available for such purchases or for other cash needs of the holding
company. In addition to these funds, at their July 26, 2000 meeting, the Board
of Directors of the Bank voted to provide a dividend to Tri County Financial
Corporation in the amount of $500,000 to provide additional funds to the holding
company.
RESULTS OF OPERATIONS
The Company's net income for the six months ended June 30, 2000 decreased $89
thousand or 7.3% from 1999's levels. The decrease is reflective of several
trends including the effect of an increased interest rate environment on the
Bank's net interest and noninterest income items as well as continued investment
in the Bank's resources to serve our customers. As noted in the "General"
section above, the Bank continues to emphasize the gathering of noninterest
sensitive liabilities, the production of loans which reprice quickly, and the
marketing of services which produce noninterest income such as fees. These
changes in its operations may decrease, but will not eliminate, the effect of
changes in the overall interest rate environment on its income.
The Company believes that after several quarters of increasing short term
interest rates due to tightening by the Federal Reserve, the prospects for lower
short term interest rates in the future appear to be increasing. Accordingly,
the Bank will continue to pursue its current strategy of adding high quality
assets, especially in targeted loan areas. If necessary these assets may be
funded by wholesale funds, although the Bank will continue to aggressively
market its deposit products.
9
<PAGE>
Interest and Dividend Income
Interest and dividend income on investment securities increased $68 thousand or
3.4% in the first six months of 2000 compared to the same period in 1999. This
increase reflects the increased average yield on the investment portfolio which
more than offset a decline in average investment balances of 3.5%. Interest
income on loans also increased by $867 thousand or 14.9%. This reflects a higher
rate environment, an increase in average loan assets of 9.8%, and an increasing
emphasis on consumer and commercial loan products which carry a higher interest
rate than residential first mortgage loans.
Interest Expense
Interest expense increased by $763 thousand or 21.3% reflecting the higher
interest rate environment and higher interest bearing liabilities average
balances. Interest expenses related to deposits increased by $186 thousand, an
increase of 6.8% over the same period in the prior year. This reflects an
increase in interest bearing deposits of $1.9 million or 1.3% combined with an
increase in the level of interest rates. Interest expense related to long and
short term debt increased by $576 thousand or 68.8%. This reflects an increase
in the average balances from $34.2 million to $48.7 million, an increase of 42%,
combined with an increase in interest rates.
Net Interest Income
Total net interest income increased by $189 thousand or 4.4% over the same
period in the prior year. This is a reflection of the 9.1% increase in average
assets from the same period in the prior year, from $210 million in the first
two quarters of 1999 to $229 million in the first two quarters of 2000, offset
by a decrease in the average spread on earning assets in the current quarter.
Total portfolio spread for the current quarter is 3.69% versus 3.85% for the
same period in the prior year.
Provision for Loan Losses
Total provision for loan losses in the current quarter increased by $60 thousand
or 50% over the same period in the prior year. This is a reflection of the
Bank's changing loan focus from residential first mortgage loans to other loan
types which have both higher average balances and historically higher average
loan loss rates.
Noninterest Income
Total noninterest income for the first six months of 2000 decreased by $85
thousand or 12% compared to the same period in the prior year. The largest
components of this decrease were the reductions in income related to the strong
residential mortgage loan refinance market of the prior year. Loan appraisal and
other loan fees declined by $75 thousand or 66% from $114 thousand in the first
6 months of 1999 to $39 thousand in the current period. Similarly, gain on sales
of mortgage loans declined by $117 thousand or 67% to $59 thousand in the
current period from $176 thousand in the same period last year. These declines
were partially offset by an increase in service charge income of $117 thousand
or 32% to $487 thousand over the same period in the prior year. This increase
was due to the increased amount of services to consumer and commercial
customers.
Non interest Expense
The Bank experienced an increase in noninterest expenses of $293 thousand or
10.8% for the six months ended June 30, 2000 compared to the same period in the
prior year. Compensation related expenses increased $152 thousand, or 9.2%, as
the Bank has created new positions to meet the needs of a commercial bank and
its customers. Occupancy costs increased $49 thousand or 19% as a result of
adding the branch location near the St. Charles mall and expanding its Dunkirk
branch facility. Data processing expense increased by $21 thousand or 15% over
the comparable period in 1999. This reflects continued investment in the systems
capability to serve our customers. Depreciation expense decreased $21 thousand
or 16%.
Income Taxes
The Company's income tax expense for the period was 33.7% of net income as
opposed to 37.5% in the prior year. The reduction in the overall tax rate from
year to year is reflective of the movement of a large percentage of its
investment
10
<PAGE>
assets to its investment subsidiary, Tri County Investment Corporation in
Delaware. Income from these investments is not subject to Maryland income taxes,
reducing overall tax rates. Other reductions in tax rates were the result of
increased investment in assets that produced nontaxable income.
Earnings Per Share
Primary earnings per share for the six months were $1.44 per share or $.03 lower
than for the corresponding period in 1999. This is reflective of the changes in
net income as noted above. Diluted earnings per share for the period was $1.38
equal to the total from 1999.
RESULTS OF OPERATIONS -- SECOND QUARTER
The Company's net income for the second quarter of 2000 as compared to the same
period for the prior year declined to $509 thousand from $539 thousand for the
second quarter of 1999, a decline of 5.6%. This decline was the result of the
same factors noted in the change for the results of the first six months,
continued higher rates causing higher interest expenses and declining
noninterest income related to residential first mortgage production. Interest
income increased by $534 thousand or 13.5% from the same quarter in the prior
year. During the same period, interest expense increased by $484 thousand or
26.8%. Net interest income increased slightly by $18 thousand or .9%.
Noninterest income fell by $32 thousand or 9.4% in the second quarter of 2000,
compared to the second quarter of 1999. This decline was the result of the
decline in residential mortgage lending activity in the current quarter compared
to the same period in the prior year. This decline was partially offset by
continued growth in service charges on customer accounts. These charges
increased by $55 thousand or 27.2% from the same period in the prior year.
Noninterest expenses were also higher compared to the second quarter of the
prior year. Total noninterest expense increased by $57 thousand or 3.6% for the
second quarter compared to the same period last year. Earnings per share
increased from .60 to .65 based on the lower number of shares outstanding
offsetting the slightly lower earnings.
INTEREST RATE RISK MATTERS
The interest rate risk of the Bank is managed through the Board's Asset and
Liability Committee (ALCO). Together with the Bank's management, the committee
reviews the sensitivity of the market value of the portfolio equity and interest
rate sensitivity of net income. The changes in the market value of portfolio
equity, as well as the interest income sensitivity are caused by shifts in the
market rates of interest and can cause a negative or a positive impact in given
scenarios. The portfolio is subjected to periodic modeling to test the effects
of sudden and sustained interest rate shocks on the market value and the net
interest income sensitivity. The Basle Committee on Banking Supervision has set
standard measures of portfolio market value equity and interest income
sensitivity in a shock environment of an immediate up or down 200 basis point
shift in assumed interest rates. The impact of such a shock on the Bank's
portfolio has been estimated as follows:
June 30, 2000 June 30, 1999
Market value of portfolio equity:
Interest rate changes:
Up 200 basis points -13% -15%
Down 200 basis points +41% +5%
Interest rate sensitivity:
Interest rate changes:
Up 200 basis points -14% +1%
Down 200 basis points +12% -1%
The change in percentage for the Market Value of Portfolio Equity increased at
the adverse scenario of up 200 basis points in interest rate movement, while the
equity value improved slightly in the down 200 basis shock. This reflects the
impact of the cumulative effects of long term rate increases. The effect on
market value is asymmetrical because of the significant amount of customer
options embedded in various financial instruments on the Bank's balance sheet.
The fact that market value would rise if rates were to decline and fall if rates
rose means that the values of the Company's assets are more sensitive to changes
in interest rates than our liabilities.
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Because the net income of the Bank and Company is derived through the interest
spread of the portfolio, the Asset/Liability Committee is less concerned with
the shock of interest rates on the market value than it is on the interest rate
sensitivity because the assets and liabilities are employed for their income
production rather than value appreciation. Again the Company's net interest
income shows a heightened sensitivity to higher rates. The levels of change for
both the market value of the portfolio and the net interest income sensitivity
fall within the policy benchmarks established by the Board. Management will
continue to take steps to quantify and control the interest rate risk inherent
in its business.
The Bank will have reduced earnings from dramatic upward movements in interest
rates. However, the Bank's shift to commercial, consumer and other lending types
from residential first mortgages and its efforts to build demand deposit
business will help to reduce the amounts of earnings loss.
2000 READINESS
The Bank's management and Board of Directors closely monitored the potential
problems associated with the year 2000's effect on the Company's and its
customers' data processing and other operating systems. No significant problems
were noted with either Company or customer systems related to the date change.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as
statutory capital requirements imposed under Maryland law. At June 30, 2000, the
Bank's tangible, leverage and risk-based capital was 9.54%, 9.45% and 16.01%,
respectively. These levels are well in excess of the required 4.0%, 4.0% and
8.0% ratios required by the Federal Reserve Board. The Bank's capital level will
remain well in excess of the required ratios after payment of the $500,000
dividend to the Tri County Financial Corporation. As noted above, this dividend
was declared at the July 26, 2000 meeting of the Bank's board of directors.
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TRI-COUNTY FINANCIAL CORPORATION
--------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits
A. Exhibits
(27) Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tri-County Financial Corporation:
Date: August 8, 2000 By:
/s/ Michael L. Middleton
Michael L. Middleton, President
and Chairman of the Board
Date: August 8, 2000 By:
/s/ William J. Pasenelli
William J.Pasenelli
Chief Financial Officer
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