SECURITIES AND EXCHANGE COMMISSION ---------------------------------- WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q --------- Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended: Commission File Number 0-18279 ------- June 30, 1997 Tri-County Financial Corporation -------------------------------------------------- (Exact Name of Registrant as Specified in Charter) Maryland 52-0692188 - ------------------------------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identificaiton Number) 3035 Leonardtown Road Waldorf, Maryland 20601 - ---------------------------------------- (Address of Principal Executive Offices) Registrant's Telephone Number: (301) 645-5601 Securities Registered Pursuant to Section 12(g) of Act: Capital Stock, Par Value $.01 per Share --------------------------------------- (Title of Class) 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 ----- ----- Number of Shares of Capital Stock Outstanding as of July 31, 1997 799,043 TRI-COUNTY FINANCIAL CORPORATION TABLE OF CONTENTS - ------------------------------------------------------------------------------- PAGE INDEX PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Statements of Financial Condition at June 30, 1997 (Unaudited) and December 31, 1996 2 Consolidated Statements of Operations for the Six-Month and the Three-Month Periods Ended June 30, 1997 and 1996 (Unaudited) 3 Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 1997 and 1996 (Unaudited) 4-5 Notes to Unaudited Consolidated Financial Statements 6 Management's Discussion and Analysis of Operations 8-12 PART II - OTHER INFORMATION 13 SIGNATURES 14 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 - --------------------------------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, ASSETS 1997 1996 CASH AND CASH EQUIVALENTS: Noninterest-bearing $ 646,594 $ 1,111,894 Interest-bearing 1,758,970 2,791,718 ------------ ------------ Total cash and cash equivalents 2,405,564 3,903,612 INVESTMENT SECURITIES AVAILABLE FOR SALE - At fair value, amortized cost of $8,438,215 and $11,117,063, respectively 8,645,548 11,265,358 INVESTMENT SECURITIES HELD TO MATURITY - At amortized cost, fair value of $631,723 and $863,757, respectively 631,723 863,757 MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE - At fair value, amortized cost of $48,652,654 and $42,473,979, respectively 48,734,834 42,470,319 MORTGAGE-BACKED SECURITIES HELD TO MATURITY - At amortized cost, fair value of $826,103 and $919,349, respectively 793,611 883,887 LOANS RECEIVABLE - Net of allowance for loan losses of $1,208,565 and $1,120,102, respectively 120,432,688 111,024,921 STOCK IN FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK - At cost 1,524,000 1,300,000 LOANS HELD FOR SALE 1,146,164 1,011,930 NET PREMISES AND EQUIPMENT 3,941,150 3,824,568 ACCRUED INTEREST RECEIVABLE 1,283,119 1,165,191 OTHER ASSETS 520,339 607,014 ------------ ------------ TOTAL ASSETS $190,058,740 $178,320,557 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits $139,463,468 $134,818,992 Advances from Federal Home Loan Bank 29,400,000 24,000,000 Notes payable and other borrowings 940,578 733,466 Advance payments by borrowers for taxes and insurance 1,473,449 715,171 Accounts payable, accrued expenses, and other liabilities 555,661 724,055 Current and deferred income taxes - 77,190 ------------ ------------ Total liabilities 171,833,156 161,068,874 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock 7,929 7,510 Additional paid-in capital 6,599,120 5,724,729 Net unrealized gain on investment securities and mortgage-backed securities available for sale, net of taxes 177,703 88,778 Retained earnings 11,570,173 11,430,666 Loan to ESOP (129,341) - ------------ ------------ Total stockholders' equity 18,225,584 17,251,683 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $190,058,740 $178,320,557 ============ ============ See notes to consolidated financial statements. 2 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS SIX-MONTH AND THREE-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------------------------------ 1997 1996 1997 1996 INTEREST REVENUES: Interest on loans $ 5,355,012 $ 4,974,819 $2,742,295 $2,444,209 Interest on mortgage-backed securities 1,510,620 1,154,274 771,873 593,900 Interest and dividends on investment securities 457,989 460,957 233,024 204,960 ------------ ------------ ----------- ----------- Total interest revenues 7,323,621 6,590,050 3,747,192 3,243,069 ------------ ------------ ----------- ----------- INTEREST EXPENSES: Deposits 2,797,799 2,707,374 1,388,152 1,354,635 Federal Home Loan Bank advances 698,042 365,407 376,594 183,694 Notes payable and other borrowings 50,071 110,463 47,535 27,858 ------------ ------------ ----------- ----------- Total interest expenses 3,545,912 3,183,244 1,812,281 1,566,187 ------------ ------------ ----------- ----------- NET INTEREST INCOME 3,777,709 3,406,806 1,934,911 1,676,882 LOAN LOSS PROVISION 120,000 120,000 60,000 60,000 ------------ ------------ ----------- ----------- Net interest income after loan loss provision 3,657,709 3,286,806 1,874,911 1,616,882 ------------ ------------ ----------- ----------- OTHER INCOME: Loan appraisal, credit, and miscellaneous charges 177,242 134,046 91,694 66,290 Gain on sale of loans held for sale 83,247 71,312 39,505 30,092 Service charges 234,417 174,492 119,407 100,618 Other 50,635 42,058 23,962 24,054 ------------ ------------ ----------- ----------- Total other income 545,541 421,908 274,568 221,054 ------------ ------------ ----------- ----------- OPERATING EXPENSES: Employee compensation and benefits 1,327,104 1,179,368 765,377 642,792 Occupancy expense 185,625 173,450 91,426 80,758 Federal insurance premium and surety bond premiums 53,000 173,914 17,882 86,860 Data processing expense 115,592 116,903 58,941 57,601 Advertising 83,509 67,737 44,654 35,442 Depreciation for furniture, fixtures, and equipment 74,125 96,828 33,325 44,471 Other 630,255 397,511 327,843 190,630 ------------ ------------ ----------- ----------- Total operating expenses 2,469,210 2,205,711 1,339,448 1,138,554 ------------ ------------ ----------- ----------- INCOME BEFORE INCOME TAXES 1,734,040 1,503,003 810,031 699,382 INCOME TAXES 684,400 567,700 336,700 281,766 ------------ ------------ ----------- ----------- NET INCOME $ 1,049,640 $ 935,303 $ 473,331 $ 417,616 ============ ============ =========== =========== EARNINGS PER SHARE (Note 2): Primary $1.26 1.15(1) $0.57 $0.51 On a fully diluted basis $1.26 1.15(1) 0.57 $0.51 - --------------------- (1) Restated to reflect 1997 stock dividends See notes to consolidated financial statements. 3 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, -------------------------- 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,049,640 $ 935,303 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 120,000 120,000 Provision for depreciation and amortization 144,325 120,979 Amortization of premium/discount on mortgage-backed securities and investments (40,352) (48,308) Provision for deferred income tax benefit (3,600) (300) Increase in interest receivable (117,928) (54,819) Increase (decrease) in deferred loan fees 46,574 (31,966) (Decrease) increase in accounts payable, accrued expenses, and other liabilities (301,778) 149,086 Increase in other assets (64,617) (70,592) Gain on sale of premises and equipment - (9,610) Origination of loans held for sale (3,671,991) (3,930,155) Gain on sales of loans held for sale (83,247) (71,312) Proceeds from sale of loans held for sale 3,729,232 5,006,312 ------------ ------------ Net cash provided by operating activities 806,258 2,114,618 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities available for sale (8,302,912) (9,851,574) Principal collected on loans 15,370,130 23,497,258 Principal collected on mortgage-backed securities held to maturity 90,276 130,389 Loans originated or acquired (25,182,040) (25,505,670) Purchase of mortgage-backed securities available for sale (8,466,271) (5,030,000) Proceeds from sale or redemption of mortgage-backed securities available for sale 2,311,988 1,995,826 Principal collected on investment securities held to maturity 236,578 - Proceeds from sale or redemption of investment securities available for sale 10,993,174 12,427,478 Purchase of premises and equipment (235,722) (266,754) Proceeds from sales of premises and equipment - 9,610 Investment in real estate - (207,936) Purchase of FHLB stock and Federal Reserve Bank stock (224,000) - Proceeds from disposition of foreclosed real estate 155,135 - ------------ ------------ Net cash used in investing activities (13,253,664) (2,801,373) ------------ ------------ (Continued) 4 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OFCASH FLOWS SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, ------------------------- 1997 1996 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 4,644,476 4,060,591 Proceeds from Federal Home Loan Bank advances 34,400,000 41,500,000 Payments of maturing Federal Home Loan Bank advances (29,000,000) (41,750,000) Net increase (decrease) in other short-term borrowings 279,024 (3,038,351) Net increase in advance payments by borrowers for taxes and insurance 758,278 765,360 Dividends paid (81,008) (74,046) Exercise of stock options 45,685 103,562 Payments on notes payable (97,097) (189,571) ------------ ------------ Net cash provided by financing activitiesb 10,949,358 1,377,545 ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,498,048) 690,790 CASH AND CASH EQUIVALENTS - JANUARY 1, 3,903,612 4,050,219 ------------ ------------ CASH AND CASH EQUIVALENTS - JUNE 30, $ 2,405,564 $ 4,741,009 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the six months for: Interest $ 3,498,845 $ 3,224,332 Income taxes 820,000 470,000 Tri-County Financial Corporation declared a 5% stock dividend payable April 15, 1997, and April 15, 1996, to shareholders of record on March 7, 1997, and March 4, 1996, respectively. Retained earnings in the amount of $834,635 in 1997 and $525,840 in 1996 was transferred to capital in excess of par and common stock to reflect these dividends. See notes to consolidated financial statements. (Concluded) 5 TRI-COUNTY FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION General - The consolidated financial statements of Tri-County Financial Corporation (the Company) and its wholly owned subsidiary, Community Bank of Tri-County (the Bank) included herein are unaudited; however, they reflect all adjustments consisting only of normal recurring accruals that, in the opinion of Management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the six months ended June 30, 1997, are not necessarily indicative of the results of operations to be expected for the remainder of the year. 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, 1996. 2. EARNINGS PER SHARE Primary and fully 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 THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------ 1997 1996 1997 1996 Primary 831,281 810,136 832,587 812,722 Fully diluted 834,048 813,288 834,692 813,570 3. NEW ACCOUNTING PRONOUNCEMENTS Effective for periods ending after December 15, 1997, Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," is applicable for computing and presenting earnings per share (EPS) for entities, such as the Company, with publicly held common stock or potential common stock. This statement simplifies the standards for computing EPS, making them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. If the Company had adopted SFAS No. 128 as of June 30, 1997, it would have reported basic and diluted EPS of $1.35 and $1.26, respectively, for the six months then ended. 6 4. CURTAILMENT OF THE DEFINED BENEFIT PLAN On May 28, 1997, the Board of Directors, after due consideration of the projected cost of the Bank'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, will be rolled into the Bank's ESOP/401K on behalf of all Defined Benefit Plan participants. The final cost or benefit to the Bank resulting from this Plan curtailment has not been determined by the plan administrator. However, management does not expect the termination to materially affect the financial position or results of operation of the Bank. * * * * * * 7 MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL On June 30, 1997, Community Bank of Tri-County completed its first quarter of operations as a commercial bank, following its thrift charter conversion on March 29. Tri-County Financial Corporation owns 100% of the issued and outstanding common stock of Community Bank of Tri-County (the Bank), which is the principal asset of the Company. Tri-County Financial Corporation does not presently own or operate any subsidiaries other than the Bank and its subsidiary, and the entities are collectively referred to as "the Company." The Bank is well positioned to operate as a community-oriented commercial bank. While functioning as a thrift, the Bank's operations had expanded into the community bank market with the product lines available to the thrift. Seasoned bank officers were recruited for the branches and the corporate team, and business was conducted to attract more commercial customers. The hurdle faced by the Bank was the customers' perception that thrifts are more limited in the type of transactions they could undertake than are banks. This charter change allows the Bank to adequately address the total financial needs of its communities rather than just concentrate on residential lending. For the business community, having a local decision center provides the Bank with a considerable advantage over those institutions with headquarters in distant cities and states. The Bank conducts operations through eight full-service offices in its market area consisting of Charles, St. Mary's, and Calvert counties in Maryland. 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, and investing such funds in loans collateralized by residential and commercial real estate, mortgage-backed securities and, to a lesser extent, various types of consumer and other loans and investment and money market securities. 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 loans, mortgage-backed securities 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. Also of significance to the Company's net income is its provision for estimated loan losses, as well as the amount of noninterest income, including fees and service charges, gains or losses on sales of loans, mortgage-backed securities, investment securities, and other noninterest income, and noninterest expense, including employee compensation and benefits, occupancy expense, other noninterest expenses, and income taxes, The Company's deposit flows and cost of funds are determined by interest rates on competing investments and general market rates of interest. Lending activities are affected by consumer demand, the interest rates in the market and the level of funds available. The Company grants loans throughout the Southern Maryland area. Its borrowers' ability to repay is, therefore, dependent upon the economy of Southern Maryland. 8 SELECTED FINANCIAL DATA SIX MONTHS ENDED JUNE 30, ------------------------ 1997 1996 Condensed Income Statement: Interest income $7,324,000 $6,590,000 Interest expense 3,546,000 3,183,000 Net interest income 3,778,000 3,407,000 Provision for loan losses 120,000 120,000 Other income 545,000 422,000 Operating expenses 2,469,000 2,206,000 Income before income taxes 1,734,000 1,503,000 Income tax expense 684,000 568,000 Net income 1,050,000 935,000 Per Common Share: Primary earnings $ 1.26 $ 1.15 Cash dividends declared 0.10 0.10 Book value 22.99 22.29 RESULTS OF OPERATIONS The Company reported net income of $1,050,000 and $935,000 during the six months ended June 30, 1997 and 1996, respectively, representing a $115,000, or 12.3%, increase for the six months ended June 30, 1997, compared to the comparable period in 1996. The increase in net income resulted from the $371,000 increase in net interest income and a $123,000 increase in noninterest income, which were offset by increases of $263,000 in noninterest expenses, primarily employee compensation and benefits and advertising and supplies costs incurred relating to the charter conversion and name change, plus a $116,000 increase in income tax expense relating to the increased earnings. Interest and Dividend Income Interest and dividend income on investment securities declined during the first quarter as a result of the exercise of calls imbedded in several of the Bank's securities; this decline was offset in the second quarter by increased market yields on the securities remaining in the portfolio. The Federal Reserve Board's action to raise interest rates in mid March may affect the prepayment speeds on mortgage-related investments to a limited degree and may ultimately result in slowing down the pace of the current economic expansion. The Bank is currently benefiting from the rate increase as the adjustable portfolio items reprice to higher yields. The asset side is repricing at a faster rate than our liabilities, both deposits and borrowings, further increasing the net yield. The combination of the increased net yield and the balance sheet growth contributed to the 11.3% overall growth in net interest income for the six months ended June 30, 1997, over the comparable period results for 1996. Other Income Contributing to the increase in earnings were increases in loan service charges resulting from higher commercial loan volume, which in turn generates higher per-loan appraisal fees and other fees, as well as increased gains on sales of loans originated for the purpose of reselling. Overall loan originations remained stable in 1997 as compared to 1996. The conversion to a commercial bank charter resulted in a change in the composition of originations, however, with an increased proportion of originations occurring in the commercial real 9 estate and lines of credit loans. Bank mergers and mortgage company restructurings have left the Bank as one of a few long-standing, stable, and reputable sources of funds for the Southern Maryland market, so mortgage activity remains strong. An additional commission-based mortgage loan originator was hired to further strengthen the Bank's presence in its market. An effort has been made to identify the customer services provided by the Bank which can be used to generate additional revenues. This led to the imposition of fees for the use of the Bank's ATMs by noncustomers. In addition, Bank customers have been utilizing certain demand deposit account features that have a related service fee. These items resulted in a $60,000, or 34%, increase in service charge income in the six months ended June 30, 1997, as compared to the comparable period in 1996. Operating Expense The first six months of 1997 saw a significant $263,000 or 11.9%, increase in operating expenses as compared to the first six months of 1996. Compensation- related expenses increased $148,000, or 12.5%, as the Bank expanded its branch network to include a traditionally designed full service office in Bryans Road, Maryland, in October 1996 and a "micro" branch, utilizing limited square footage to provide full customer service, at Charles County Community College in February 1997. In connection with the conversion to commercial bank operations, the cost of stationery, printing, and certain other supplies costs increased $72,000, or 148%, as the entire inventory had to be replaced with items reflecting the new corporate name. In addition, advertising costs incurred to publicize and promote the conversion and its ensuing benefits to the customers and community went from $35,000 to $84,000, an increase of 136%. The benefit to the Bank of the BIF/SAIF recapitalization in the fall of 1996 is clearly seen in the $121,000 reduction in federal insurance and surety bond premiums for the first six months of 1997 as compared to the comparable period in 1996. Income Tax Expense Income tax expenses increased 20.6% as a result of the increase in pretax income. Earnings Per Share Primary earnings per share for the six months were $1.26 per share or $0.11 higher than for the corresponding period in 1996. Book value on a per-share basis reflects only a 3.1% increase, primarily because the number of shares outstanding was increased by the 5% stock dividend. Additional factors were the $0.10 per share cash dividend distribution and the exercise of stock options by members of the senior management team and the board of directors. 10 FINANCIAL CONDITION Assets Total assets as of June 30, 1997, grew $11.7 million to $190 million from the December 31, 1996 level of $178.3 million. This reflects a growth rate of 6.6% as compared to 1.2% asset growth during the previous year. Increased development of the Southern Maryland area as a bedroom community for Washington, DC workers and military base expansion in the Bank's market area continues to keep the real estate market strong despite higher long-term real estate loan rates. Loan growth was $9.5 million or 8.5% for the six-month period as compared to an increase of $0.9 million, or .85%, for the six months ended June 30, 1996. Loan origination volume in 1997 was 2% lower than in the comparable period in 1996; however, in 1997 fewer loans were originated for sale and subsequently sold than during the first six months of 1996. With rates at a slightly higher level in 1997 than in 1996, the Bank experienced a much lower rate of repayment through refinancings. Overall loan repayments from payoffs and scheduled principal curtailments were $15.3 million during the first six months of 1997 compared to $23.5 million in 1997, a decline of $8.1 million, or 34.6%. In connection with the charter conversion, the Bank adopted a business plan that focuses on originating more consumer and commercial loans, while creating a mortgage subsidiary to handle the production and sale of residential loans. This plan is still in the development and analysis stage. 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 Bank's provision for loan losses was $120,000 during the first six months of 1997 in accordance with management's policy described above. The Company's holdings of investment securities declined $2.9 million since December 31, 1996. Several securities experienced early payoff since the issuer was able to obtain better rates by calling the investment and reissuing it at the more attractive long-term rates currently available in the market. As part of the Bank's strategic plan to prudently leverage capital, holdings of mortgage-backed securities were increased $6.3 million, or 15%, since December 31, 1997. This was accomplished using funds obtained through Federal Home Loan Bank Advances under terms which matched the rate index and maturity of the securities acquired. This strategy will continue to be utilized as long as the interest rate spread obtained meets management's criteria and adequate net worth levels are maintained. The level of property and equipment balances increased $117,000 as branch network expansion continued through construction of the "micro" branch described above. In addition, continued upgrade of the branch teller system equipment has required expenditures for computer equipment, Liabilities Liability growth was controlled to stay in line with the change in asset levels. Deposit growth was 3.4% for the first six months of 1997. The deposit base provides a source of funds at a lower average rate than could be realized by borrowing. The Bank will be focusing on attracting customers disenfranchised by the shrinking pool of locally run banks in Southern Maryland. Loan demand was stable; the funds obtained through increased deposit account balances and the call of certain investment securities were sufficient to meet this demand. Advances from the FHLB were used to acquire mortgage-backed securities; 11 borrowings were generally obtained with maturity and rate index characteristics similar to those of the security purchased so that an acceptable interest rate spread was obtained in the transaction. Advance payments by borrowers for taxes and insurance increased $758,000, and the balance will continue to increase until the real estate tax payments are made in September 1997. Stockholders' Equity Stockholders' equity increased $974,000, or 5.6% to $18.2 million at June 30, 1997, compared to $17.3 million at December 31, 1996. This reflects the net income of $1,050,000 for the six-month period, an $89,000 increase in unrealized holding gains on investment and mortgage-backed securities available for sale, $46,000 realized from the exercise of outstanding stock options by members of senior management and the Board of Directors, and a cash distribution to shareholders in the form of a $0.10 per share cash dividend. A shift in the components of stockholders' equity occurred as a result of the declaration of a 5% stock dividend to shareholders. This resulted in a transfer of $829,000 from retained earnings to common stock and capital surplus. REGULATORY MATTERS The Bank is subject to Federal Reserve Board capital requirements as well as to statutory capital requirements imposed by Maryland law. At June 30, 1997, the Bank's tangible, leverage, and risk-based capital were 9.3%, 9.3%, and 17.0%, respectively. These levels are well in excess of the required 1.5%, 3.0% and 8.0% ratios required by the Federal Reserve Board. 12 TRI-COUNTY FINANCIAL CORPORATION -------------------------------- PART II - OTHER INFORMATION --------------------------- Item 1 - Legal Proceedings ----------------- Not Applicable. Item 2 - Changes in Securities --------------------- Not Applicable. Item 3 - Defaults Upon Senior Securities ------------------------------- Not Applicable. Item 4 - Submission of Matters to a Vote of Security Holders --------------------------------------------------- Not Applicable. Item 5 - Other Information ----------------- None. Item 6 - Exhibits and Reports on Form 8-K -------------------------------- None. 13 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, 1997 By: /S/ Michael L. Middleton -------------- ------------------------------- Michael L. Middleton, President and Chairman of the Board Date: August 8, 1997 By: /S/ Henry A. Shorter, Jr. -------------- ------------------------------- Henry A. Shorter, Jr. Secretary 14