<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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
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Tri-County Financial Corporation
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(Exact name of registrant as specified in its charter)
Maryland 52-0692188
---------------------------------- -------------------
(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
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
As of May 5, 2000 registrant had outstanding 788,005 shares of Common
Stock.
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q
INDEX
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2000
and December 31, 1999 2
Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2000 and 1999 4 - 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7 - 11
PART II - OTHER INFORMATION 12 - 13
Item 6 - Exhibits
SIGNATURES 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
March 31, 2000 December 31, 1999
<S> <C> <C>
Cash and due from banks $ 357,584 $ 3,469,304
Interest-bearing deposits with banks 4,530,627 3,063,279
Investment securities available for sale - at fair value 55,264,684 56,655,300
Investment securities held to maturity - at amortized cost 1,669,665 1,946,772
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 2,437,700 2,287,700
Loans held for sale 336,150 773,099
Loans receivable - net of allowance for loan losses
of $1,747,318 and $1,653,290, respectively 152,757,192 146,710,367
Premises and equipment, net 4,566,024 4,516,386
Foreclosed real estate 285,503 176,626
Accrued interest receivable 1,153,905 1,146,520
Other assets 2,024,169 2,151,927
$225,383,202 $222,897,280
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 9,487,264 $ 10,102,479
Interest-bearing deposits 147,075,795 145,639,321
------------ ------------
Total deposits 156,563,059 155,741,800
Short-term borrowings 23,953,028 13,398,378
Long-term debt 21,400,000 31,400,000
Accrued expenses and other liabilities 2,234,526 1,241,719
------------ ------------
Total liabilities 204,150,613 201,781,897
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 788,250 and 788,173 shares, respectively 7,883 7,882
Surplus 7,483,185 7,447,240
Retained earnings 14,802,752 14,555,324
Accumulated other comprehensive loss (921,631) (718,498)
Unearned ESOP shares (139,599) (176,565)
------------ ------------
Total stockholders' equity 21,232,589 21,115,383
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $225,383,202 $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 ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------
2000 1999
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $3,264,905 $2,967,932
Taxable interest and dividends on investment securities 1,050,049 928,354
Interest on bank deposits 20,294 21,276
---------- ----------
Total interest revenues 4,335,248 3,917,562
---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,410,626 1,366,640
Interest on long term debt 284,255 132,111
Interest on other borrowings 353,240 270,576
---------- ----------
Total Interest Expenses 2,048,121 1,769,327
---------- ----------
NET INTEREST INCOME 2,287,127 2,148,235
PROVISION FOR LOAN LOSSES 90,000 60,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,197,127 2,088,235
---------- ----------
NONINTEREST INCOME:
Loss on sale of investment securities - (605)
Loan appraisal, credit, and miscellaneous charges 15,692 60,627
Net gain on sale of loans held for sale 39,142 102,279
Service charges 228,942 166,785
Other 8,343 16,056
---------- ----------
Total noninterest income 292,119 345,142
---------- ----------
NONINTEREST EXPENSE:
Salary and employee benefits 889,901 740,080
Occupancy expense 158,673 124,148
Deposit insurance and surety bond premiums 7,989 35,883
Data processing expense 91,384 72,418
Advertising 43,752 41,323
Depreciation 53,455 70,849
Other 322,371 245,267
---------- ----------
Total noninterest expense 1,567,524 1,329,968
---------- ----------
INCOME BEFORE INCOME TAXES 921,722 1,103,409
INCOME TAXES 300,000 420,000
---------- ----------
NET INCOME 621,722 683,409
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized holding losses on investment securities (203,133) (220,703)
Available for sale arising during the period ---------- ----------
COMPREHENSIVE INCOME $ 418,589 $ 462,706
========== ==========
EARNINGS PER SHARE
Basic .79 .87
Diluted .75 .81
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 621,722 $ 683,409
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 90,000 60,000
Depreciation and amortization 77,350 103,450
Net amortization of premium/discount on
investment securities (12,896) (30,782)
Deferred income tax benefit (27,000) (20,000)
Decrease (increase) in accrued interest receivable (7,385) 62,844
Decrease in deferred loan fees (59,365) (54,212)
Increase in accounts payable, accrued expenses,
and other liabilities 756,212 74,781
Increase in other assets 264,265 (22,885)
Loss on sale of investment securities - 605
Origination of loans held for sale (1,374,774) (3,824,376)
Gain on sales of loans held for sale (39,142) (102,279)
Proceeds from sale of loans held for sale 1,850,865 4,945,704
------------ ------------
Net cash provided by operating activities 2,139,852 1,876,259
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits with banks (1,467,348) (221,343)
Purchase of investment securities available for sale (3,181,024) (21,832,495)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 4,269,615 19,881,710
Purchase of investment securities held to maturity (200,000) (970,436)
Proceeds from maturities or principal payments
of investment securities held to maturity 479,388 346,535
Loans originated or acquired (17,802,236) (14,059,141)
Principal collected on loans 11,724,776 12,461,651
Purchase of premises and equipment (126,987) (202,079)
Acquisition of foreclosed real estate (108,877)
Purchase of FHLB and Federal Reserve stock (150,000) (7,350)
------------ ------------
Net cash used in investing activities (6,562,693) (4,602,948)
</TABLE>
4
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 821,259 $ 417,109
Proceeds from long-term borrowings - 15,000,000
Payments of long-term borrowings (10,000,000) (58,970)
Net increase in other borrowed funds 10,554,650 (12,785,381)
Exercise of stock options 35,980 32,088
Net change in unearned ESOP shares 36,984 30,318
Dividends paid - (90)
Redemption of common stock (137,752) (266,200)
------------ ------------
Net cash provided by financing activities 1,311,121 2,368,874
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,111,720) (357,815)
CASH AND CASH EQUIVALENTS - JANUARY 1 3,469,304 906,658
------------ ------------
CASH AND CASH EQUIVALENTS - MARCH 31 $ 357,584 $ 548,843
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest $ 1,905,011 $ 1,760,279
============ ============
Income taxes $ - $ 373,750
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
1. BASIS OF PRESENTATION
General - The consolidated financial statements of Tri-County Financial
Corporation (the Company) and its wholly owned subsidiary, Community Bank
of Tri-County (the Bank) included herein are unaudited; however, they
reflect all adjustments consisting only of normal recurring accruals that,
in the opinion of Management, are necessary to present fairly the results
for the periods presented. Certain information and note disclosures
normally included in financial statements prepared in accordance with
Generally Accepted Accounting Principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company believes that the disclosures are adequate to
make the information presented not misleading. The results of operations
for the three months ended March 31, 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:
Three Months Ended
March 31,
-------------------
2000 1999
Basic 787,184 786,159
Diluted 828,903 838,952
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.
As part of its plan to convert to a commercial bank, the Bank targeted
commercial and consumer product lines to create increased financial performance.
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 first mortgage
lending and investment securities will represent a smaller portion of the total
assets of the Company. The Bank also anticipates that, over time, certificates
of deposit will represent a smaller portion of total liabilities.
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, and investing
such funds in loans collateralized by residential and commercial real estate,
mortgage-backed securities and related investments, and, various types of
consumer and other loans. The Company's earnings, therefore, are primarily
dependent upon its net interest income. This is determined by the Company's
interest rate spread (the difference between the yields earned on its loan and
investment portfolios, and the rates paid on its deposits and borrowed funds)
and the relative holdings of interest-earning assets and interest-bearing
liabilities. 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>
SELECTED FINANCIAL DATA
Three Months Ended
March 31,
---------
2000 1999
Condensed Income Statement
Interest Income $4,335,248 $3,917,562
Interest Expense 2,048,121 1,769,327
Net Interest Income 2,287,127 2,148,235
Provision for Loan Losses 90,000 60,000
Noninterest Income 292,119 345,142
Noninterest Expenses 1,567,524 1,329,968
Income Before Income Taxes 921,722 1,103,409
Income Tax Expense 300,000 420,000
Net Income 621,722 683,409
Per Common Share
Basic Earnings $ 0.79 $ 0.87
Diluted Earnings 0.75 0.81
Book Value 26.94 27.05
FINANCIAL CONDITION
Assets
Total assets as of March 31, 2000 grew $2.5 million to $225.4 million from the
December 31, 1999 level of $222.9 million. This reflects growth of 1.1% as
compared to 1.3% asset growth during the same period in 1999. Residential first
mortgage assets declined in the current quarter from $69.3 million to $69.1
million. During the same period other loans increased from $79.9 million to
$86.2 million reflecting the Bank's increased emphasis on other lending.
Overall loan balances including allowances and deferred income increased during
the quarter from $146.7 million to $152.8 million. Currently loans (excluding
loans held for sale) are 67.8% of total assets compared with 65.8% at December
31, 1999. Management believes that the continued development of Southern
Maryland as both a bedroom 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
$56.9 million from $58.6 a decline of 3%. 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 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 $94,028 during the first quarter of 2000 in accordance with
management's policy described above. Currently the Bank's allowance for loan
losses totals $1.7 million or 1.14% of loan balances as compared to $1.6 million
or 1.09% of loan balances at December 31, 1999.
Cash levels declined substantially during the quarter. Cash and due from banks
totaled $358 thousand 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.
8
<PAGE>
The level of property and equipment balances increased $49,638 due to routine
upgrades of computer equipment and premises.
Liabilities
Liability growth was managed to reflect the change in asset levels. Deposit
balances increased by $821 thousand or .5% for the three months ended March 31,
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 $555
thousand or 1.2% over December 1999 balances. Other liabilities also increased
by $1.0 million or 80%.
Stockholders' Equity
Stockholders' equity increased $117 thousand or .6% to $21.2 million at March
31, 2000 compared to $21.1 million at December 31, 1999. This reflects the net
income of $621,722 for the three month period and a $203,133 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
$137,752 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, $26.94 at March 31, 2000, as compared to $26.79 at December 31,
1999, reflects a .6% 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 three months ended March 31, 2000, the Company purchased 5,242 shares for
$137,752. Additional stock acquisitions and retirements may be considered in the
future. The Company has $619 thousand of cash available at the holding company
level available for such purchases or for other cash needs of the holding
company.
RESULTS OF OPERATIONS
The Company's net income for the three months ended March 31, 2000 decreased $62
thousand or 9.0% 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.
Interest and Dividend Income
Interest and dividend income on investment securities increased $121 thousand or
13% in the first quarter of 2000 compared to the first quarter of 1999. This
increase reflects increased average investment balances of 3% as well as higher
average rates on our investment portfolio, primarily as a result of the changing
interest rate environment. Interest income on loans also increased by $296
thousand or 10%. Again this reflects a higher rate environment as well as
higher average loan assets.
Interest Expense
Interest expense increased by $279 thousand or 16% reflecting the higher
interest rate environment and higher interest bearing liabilities average
balances.
Net Interest Income
Total net interest income increased by $139 thousand or 6.5% over the same
period in the prior year. This is a reflection of the 7.6% increase in average
assets from the same period in the prior year, from $208 million in the first
quarter of 1999 to $224 million in the current quarter, as well as 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
9
<PAGE>
Total provision for loan losses in the current quarter increased by $30 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 yields and higher average loan loss rates.
Noninterest Income
Total noninterest income decreased by $53 thousand or 15% 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 $45
thousand or 74% from $60 thousand in the first quarter of 1999 to $16 thousand
in the current period. Similarly, gain on sales of mortgage loans declined by
$63 thousand or 62% to $39 thousand in the current quarter from $102 thousand in
the same period last year. These declines were partially offset by an increase
in service charge income of $62 thousand or 37% to $229 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 $238 thousand or 18%
for the three months ended March 31, 2000 compared to the three months ended
March 31, 1999. Compensation related expenses increased $150 thousand, or 20%,
as the Bank has created new positions to meet the needs of a commercial bank and
its customers. Occupancy costs increased $35 thousand or 28% as a result of
adding the branch location near the St. Charles mall and expanding its Dunkirk
branch facility. Data processing expense increased by $19 thousand or 26% over
the comparable period in 1999. This reflects continued investment in the systems
capability to serve our customers. Depreciation expense decreased $17 thousand
or 25%.
Income Taxes
The Company's income tax expense for the period was 32.6% of net income as
opposed to 38.1% 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 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 which produced
nontaxable income.
Earnings Per Share
Primary earnings per share for the three months were $.79 per share or $.08
lower than for the corresponding period in 1999. This is reflective of the
changes in net income as noted above.
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:
10
<PAGE>
March 31, 2000 March 31, 1999
--------------- ---------------
Market value of portfolio equity:
Interest rate changes:
Up 200 basis points - 22% -11%
Down 200 basis points +10% +3%
Interest rate sensitivity:
Interest rate changes:
Up 200 basis points - 7% +3%
Down 200 basis points +6% -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.
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 March 31, 2000,
the Bank's tangible, leverage and risk-based capital was 9.72%, 9.83% and
16.98%, respectively. These levels are well in excess of the required 4.0%,
4.0% and 8.0% ratios required by the Federal Reserve Board.
11
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
--------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits
A. Exhibits
(27) Financial Data Schedule
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tri-County Financial Corporation:
Date: May 12, 2000 By: /s/ Michael L. Middleton
--------------------- --------------------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: May 12, 2000 By: /s/ William J. Pasenelli
--------------------- --------------------------------------------
William J. Pasenelli
Chief Financial Officer
13
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-2000
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0
0
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