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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File Number 0-18279
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Tri-County Financial Corporation
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(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
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(Registrant's telephone number, including area code)
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(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 August 4, 1999 registrant had outstanding 797,576 shares of Common
Stock.
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q
INDEX
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PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 2
Consolidated Statements of Income and Comprehensive Income -
Three and Six Months Ended June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1999 and 1998 4 - 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7 - 11
PART II - OTHER INFORMATION 12 - 13
Item 6 - Exhibits
SIGNATURES 14
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
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June 30, December 31,
1999 1998
---------------- ------------------
ASSETS
Cash and due from banks $ 1,138,228 $ 906,658
Interest-bearing deposits with banks 2,270,648 4,152,816
Investment securities available for sale - at fair value 61,042,230 55,976,606
Investment securities held to maturity - at amortized cost 2,427,798 2,139,069
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 1,872,700 2,005,350
Loans held for sale 429,450 2,266,697
Loans receivable - net of allowance for loan losses
of $1,555,489 and $1,540,551, respectively 136,623,128 132,645,936
Premises and equipment, net 4,498,676 4,316,207
Accrued interest receivable 1,450,489 1,486,776
Other assets 1,178,238 1,123,675
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TOTAL ASSETS $212,931,585 $207,019,790
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 11,427,462 $ 9,750,153
Interest-bearing deposits 144,733,687 142,065,211
------------ ------------
Total deposits 156,161,149 151,815,364
Other borrowed funds 13,537,734 16,937,882
Long-term debt 21,400,000 16,496,450
Accrued expenses and other liabilities 377,166 638,128
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Total liabilities 191,476,049 185,887,824
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STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 788,892 and 789,334 shares, respectively 7,888 7,893
Surplus 7,367,992 7,309,901
Retained earnings 14,170,482 13,372,441
Accumulated other comprehensive income 85,739 648,614
Unearned ESOP shares (176,565) (206,883)
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Total stockholders' equity 21,455,536 21,131,966
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $212,931,585 $207,019,790
============ ============
See notes to consolidated financial statements.
2
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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Three Months Ended Six Months Ended
June 30, June 30
--------------------------- ----------------------------
1999 1998 1999 1998
INTEREST INCOME:
Interest and fees on loans $2,857,012 $2,905,591 $5,824,944 $5,753,207
Taxable interest and dividends on investment securities 1,085,150 947,644 2,013,504 1,842,052
Interest on deposits with banks 11,442 28,845 32,718 63,081
---------- ---------- ---------- ----------
Total interest income 3,953,604 3,882,080 7,871,166 7,658,340
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,370,173 1,410,750 2,736,813 2,833,682
Interest on other borrowed funds 88,260 159,869 220,371 348,297
Interest on long-term debt 347,192 227,066 617,768 457,748
---------- ---------- ---------- ----------
Total interest expense 1,805,625 1,797,685 3,574,952 3,639,727
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,147,979 2,084,395 4,296,214 4,018,613
PROVISION FOR LOAN LOSSES 60,000 60,000 120,000 120,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,087,979 2,024,395 4,176,214 3,898,613
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Loss on sale of investment securities - - (605) -
Loan appraisal, credit and miscellaneous charges 53,155 109,778 113,782 222,290
Net gains on sale of loans held for sale 73,300 124,176 175,579 221,021
Service charges 202,895 107,466 369,680 256,086
Other 11,933 85,861 27,989 113,677
---------- ---------- ---------- ----------
Total noninterest income 341,283 427,281 686,425 813,074
---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries and employee benefits 912,141 860,284 1,652,221 1,481,380
Occupancy expense 131,134 104,210 255,282 214,064
Deposit insurance and surety bond premium 35,672 35,564 71,555 73,858
Data processing expense 63,238 102,297 135,656 164,548
Advertising 63,192 32,028 104,515 63,876
Depreciation of furniture, fixtures, and equipment 58,348 37,251 129,197 75,781
Other 311,092 302,548 556,359 596,643
---------- ---------- ---------- ----------
Total noninterest expenses 1,574,817 1,474,182 2,904,785 2,670,150
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 854,445 977,494 1,957,854 2,041,537
INCOME TAXES 315,000 347,000 735,000 724,000
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NET INCOME 539,445 630,494 1,222,854 1,317,537
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized holding gains (losses)
ising during the period (342,172) 16,682 (562,875) 87,321
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME $ 197,273 $ 647,176 $ 659,979 $1,404,858
========== ========== ========== ==========
EARNINGS PER SHARE (Note 2):
Basic .60 .79 1.47 1.64
Diluted .57 .73 1.38 1.54
See notes to consolidated financial statements.
3
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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Six Months Ended
June 30,
-------------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,222,854 $ 1,317,537
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 120,000 120,000
Depreciation and amortization 191,200 123,568
Net amortization of premium/discount on
investment securities (102,606) (12,953)
Deferred income tax benefit (16,000) (109,000)
Decrease (increase) in accrued interest receivable 36,287 (137,177)
(Decrease) increase in deferred loan fees (78,387) 13,184
Increase in accounts payable, accrued expenses, and other liabilities 109,196 160,657
Increase in other assets (54,563) (188,315)
Gain on sale of premises and equipment - (7,051)
Loss on sale of investment securities 605 -
Origination of loans held for sale (6,140,878) (12,388,104)
Gain on sales of loans held for sale (175,579) (221,021)
Proceeds from sale of loans held for sale 8,153,704 13,007,021
Gain on sale of foreclosed real estate - (63,436)
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Net cash provided by operating activities 3,265,833 1,614,910
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits with banks 1,882,168 179,821
Purchase of investment securities available for sale (42,912,589) (23,898,455)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 37,392,411 26,940,182
Purchase of investment securities held to maturity (1,170,436) (2,018,147)
Proceeds from maturities or principal payments
of investment securities held to maturity 883,729 1,442,73
Purchase of FHLB and Federal Reserve Bank stock (229,850) (6,350)
Loans originated or acquired (26,837,912) (28,407,285)
Principal collected on loans 22,819,107 22,493,765
Purchase of premises and equipment (373,669) (238,062)
Proceeds from sales of premises and equipment - 7,051
Proceeds from disposition of foreclosed real estate - 826,842
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Net cash used in investing activities (8,547,041) (2,678,565)
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4
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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Six Months Ended
--------------------------------
1999 1998
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $4,345,785 $2,144,539
Proceeds from long-term borrowings 20,000,000 -
Payments of long-term borrowings (15,096,450) 109,530)
Net decrease in other borrowed funds (3,400,148) 624,131)
Exercise of stock options 58,172 1,058
Net change in unearned ESOP shares (266,200) 12,600)
Redemption of common stock 30,333 (82,600)
Dividends paid (158,714) (102,407)
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Net cash provided by financing activities 5,512,778 1,214,329
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INCREASE IN CASH AND CASH EQUIVALENTS 231,570 150,674
CASH AND CASH EQUIVALENTS - JANUARY 1 906,658 650,923
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CASH AND CASH EQUIVALENTS - JUNE 30 $1,138,228 $ 801,597
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the six months for:
Interest $3,601,469 $3,679,547
========== ==========
Income taxes $753,575 $872,500
========== ==========
Tri-County Financial Corporation declared a 4% stock dividend payable April 13,
1998, to shareholders of record on March 13, 1998. Retained earnings in the
amount of $694,384 was transferred to capital in excess of par and common stock
to reflect this dividend.
See notes to consolidated financial statements.
5
TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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, 1999 are not necessarily indicative of
the results of operations to be expected for the remainder of the
year. Certain previously reported amounts have been restated to
conform to the 1999 presentation.
It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report for the year ended
December 31, 1998.
2. EARNINGS PER SHARE
Basic and diluted earnings per share, as adjusted for the stock
dividend, have been computed based on weighted-average common and
common equivalent shares outstanding as follows:
Six Months Ended June 30,
1999 1998
-------- --------
Basic 829,303 800,942
Diluted 885,195 853,311
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
This document contains forward-looking statements, including discussions of
Tri-County Financial Corporation's (the "Company's") goals, strategies and
expected outcomes; estimates of risks and future costs; and reports of the
Company's ability to achieve its financial and other goals. These
forward-looking statements are subject to significant known and unknown risks
and uncertainties because they are based upon future economic conditions,
particularly interest rates, statements by providers of data processing services
and equipment and government agencies in connection with year 2000 compliance,
competition within and without the banking industry, changes in laws and
regulations applicable to the Company and various other matters. Because of
these uncertainties, there can be no assurance that actual results, performance
or achievements of the Company will not differ materially from any future
results, performance or achievements expressed or implied by these
forward-looking statements.
GENERAL
Tri-County Financial Corporation operates under the Federal Reserve's Bank
Holding Company regulations. The consolidated financial statements include the
accounts of Tri-County Financial Corporation and its wholly owned subsidiary,
Community Bank of Tri-County ("the Bank") and the Bank's wholly owned
subsidiary, Tri-County Federal Finance One, collectively referred to as "the
Company". Community Bank of Tri-County has completed its second year of
operations as a commercial bank, following its thrift charter conversion on
March 29, 1997.
In its business plan for the commercial bank, specific product lines,
particularly commercial and consumer loan products, were targeted for
concentrated efforts to bring the balances to levels normally found in
established commercial banks. Growth in these asset categories has exceeded
internal goals set in the plan. Strategies to broaden the scope of services to
attract transactional accounts of local business as well as consumers have
successfully gained the attention of the community and resulted in continuous
growth in these low cost funding sources.
In its efforts to expand its product and service offerings, the Bank now offers
investment and retirement planning services through its affiliation with UVEST
Investment Services and an investment representative based in the home office
branch. While this investment division is anticipated to contribute a relatively
small amount of net earnings to the Bank, the benefit to our customers is
expected to be great, enabling them to have a "one stop" source for all their
investment and borrowing needs.
In the third quarter of 1999, the Bank received state banking approval to create
a "passive investment company" subsidiary, Tri-County Investment Corporation.
This subsidiary will be used to hold investment securities that are not used in
the general operations of the Bank. The investment company will be operated from
facilities in Delaware as income from "passive investments" does not incur taxes
in that state. Similar income in Maryland is subject to state tax at 7%. This
action is expected to save approximately $70,000 in state taxes in 1999, with
the income generated in Delaware for the remaining 4 months of 1999. Higher tax
savings are expected in 2000, when the investment company will be in operation
for the full year.
The Bank also acquired a 7% interest in a Maryland Title Company for the purpose
of sharing in title insurance commissions generated by its mortgage lending
activities. The Bank's capital investment was $9,800. Its participation in the
title insurance business commenced on August 1, 1999.
The Bank conducts operations through eight full-service offices in its market
area consisting of Charles, St. Mary's and Calvert counties in Maryland.
Construction will be completed in August of 1999 on its newest "express" branch
location as part of a mini-mart on a key homeward bound commuter route in
Charles County. The Bank's strategy is to utilize "express" banks to fill in the
market between its established anchor banks.
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, to a lesser, but
growing, extent, various types of consumer and other loans. The Company's
earnings, therefore, are primarily dependent upon its net interest income. This
is determined by the Company's interest rate spread (the difference between the
yields earned on its loan and investment portfolios, and the rates paid on its
deposits and borrowed funds) and the relative holdings of interest-earning
assets and interest-bearing liabilities.
7
Also of significance to the Company's net income is its provision for estimated
loan losses, as well as the amount of noninterest income derived from activities
that are not dependent on spread based lending. Transaction charges, non-deposit
products and additional services are under continuous consideration to augment
the non-interest income contribution to the net earnings of the Bank.
The Company's deposit flows and cost of funds are determined by interest rates
on competing investments and general market rates of interest. Lending
activities are affected by consumer demand, the interest rates in the market and
the level of funds available. The Company grants loans throughout the Southern
Maryland area. Its borrowers' ability to repay is, therefore, dependent upon the
economy of Southern Maryland.
SELECTED FINANCIAL DATA
Six Months Ended June 30,
1999 1998
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Condensed Income Statement
Interest Income $ 7,871,166 $ 7,658,340
Interest Expense 3,574,952 3,639,727
Net Interest Income 4,296,214 4,018,613
Provision for Loan Losses 120,000 120,000
Noninterest Income 686,425 813,074
Noninterest Expenses 2,904,785 2,670,150
Income Before Income Taxes 1,957,854 2,041,537
Income Tax Expense 735,000 724,000
Net Income 1,222,854 1,317,537
Per Common Share
Basic Earnings $ 1.47 $ 1.64
Diluted Earnings 1.38 1.54
Book Value 27.20 25.05
FINANCIAL CONDITION
Assets
Total assets as of June 30, 1999 grew $5.9 million to $212.9 million from the
December 31, 1998 level of $207.0 million. This reflects a growth rate of 2.9%
as compared to 1.5% asset growth during the same period in 1998. Continuing
development of the Southern Maryland area as a bedroom community for Washington,
DC workers and military base expansion in the Bank's market area have maintained
a strong real estate market. Mortgage loan originations during the first six
months of 1999 were $32,979,000, compared to $40,795,000 during the first six
months of 1998, a 19% decline. Loan sales and repayments during the first six
months of 1999 were $30,973,000, compared to $35,501,000 during the first six
months of 1998, a 13% decline. The higher rate environment in 1999 reduced or
eliminated the incentive for homeowners to refinance their loans. The Bank was
able to retain its overall market share by offering competitive residential loan
products as well as emphasizing products outside the single family residential
loan group. With its increased focus on consumer and commercial loans, the Bank
continued to attract these customers in greater numbers, resulting in a change
in the portfolio mix. At June 30, 1999, consumer and commercial loans comprised
29.0% of the loan portfolio, compared to 23.8% at December 31, 1998.
The allowance for loan losses was maintained at a level believed by management
to be adequate to absorb potential losses consistent with the risk profile of
the loan portfolio. Management's determination of the adequacy of the allowance
is based on 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. A $120,000 provision for loan losses was made
during the first six months of 1999 in accordance with management's policy
described above.
8
The Company's holdings of investment securities increased $5.4 million, or 9.2%,
since December 31, 1998. The Bank experienced a slow down of the early payoff of
its securities which had accelerated in 1998. For securities with mortgage loans
as the underlying collateral, prepayments closely tracked the refinance volume
prevalent in the industry during the low rate environment. When possible, the
funds received from payoff of these securities were used to acquire similar
investments, though generally at a lower yield reflecting the current market
conditions at the time of purchase. Other security purchases were funded with
wholesale borrowings.
The level of property and equipment balances increased $182,000 as branch and
administrative office renovations were completed, construction commenced on the
new "express" branch and the Bank continued to upgrade its computer equipment as
a result of its Y2K readiness preparation.
Liabilities
Liability growth was managed to reflect the change in asset levels. Deposit
balances increased by 2.9% for the six months ended June, 1999. The Bank's
strategy has been to focus on attracting customers disenfranchised by the
shrinking pool of locally run banks in Southern Maryland. Competition for bank
deposits continues to be intense with nondeposit investments capturing an
increasing share of its customers' financial assets.
Stockholders' Equity
Stockholders' equity increased $323,000 or 1.5% to $21.5 million at June 30,
1999 compared to $21.1 million at December 31, 1998. This reflects the net
income of $1,223,000 for the six month period and a $563,000 decrease in
accumulated other comprehensive income. Reductions in equity occurred as a
result of a $.20 per share cash dividend paid to shareholders and the use of
$266,000 to purchase shares in the open market. The cash dividends were
distributed to shareholders on April 15, 1999.
The Company's book value per share, $27.20 at June 30, 1999, reflects a 1.6%
increase over December 31, 1998's level of $26.77. The ESOP acquired shares
utilizing the line of credit available from the Corporation. Whenever the ESOP
purchases shares using such borrowed funds, the shares purchased are pledged as
collateral for the loan and the loan balance is reflected as a reduction of
stockholders' equity.
As part of its capital management strategy, the Board has approved certain
purchases, for retirement, of shares offered for sale by its stockholders. The
cash for these purchases was provided to the Company through a $750,000 cash
dividend from the Bank in 1998. The Board of Directors approved a $1,000,000
cash dividend from the Bank in 1999 to provide the funds necessary for such
purchases.
RESULTS OF OPERATIONS
The Company's net income for the six months ended June 30, 1999 decreased
$95,000 or 7.2% from 1998's levels. As described in more detail in following
sections of this analysis, significant changes in specific income and expense
line items generated this decrease, rather than an overall trend applicable to
all areas. The decrease in net income for the six months ended June 30, 1999
resulted from a $278,000 increase in net interest income, an $127,000 decrease
in noninterest income, an increase of $234,000 in noninterest expenses and a
$11,000 increase in income tax expense.
Interest and Dividend Income
Interest and dividend income on investment securities increased $171,000 or 9.2%
in the first six months of 1999 compared to the first six months of 1998. This
corresponds to the $5.3 million or 9.2% increase in the investment portfolio
balance. However, the interest rates available in the market have been steadily
declining, and as investments mature or pay off, they are replaced with lower
yielding securities, resulting in lower overall yield on the portfolio.
The Bank has utilized a strategy of leveraging its net worth since the fourth
quarter of 1996. When opportunities become available, an investment is purchased
with maturity and rate terms that can be reasonably matched with available
borrowings to generate a specified net yield. Alternatively, there have been
opportunities to purchase relatively short-lived securities, those with
projected lives of a year or less. These have often been funded with borrowings
that reprice daily because short-term borrowing rates have been very low. In
such cases, the daily rate borrowing level is monitored closely so that a
reversal of the low rate borrowing will be identified early and longer term
financing can be secured. The portfolio net spread, the difference between
interest earned on all interest-earning assets and interest paid on all
9
interest-bearing liabilities, has remained virtually constant over the last five
years. The variance between the high of 3.67% in 1999 and the low of 3.54% in
March 1994 is only 13 basis points or 3.7%. The variance over the last three
years is only 9 basis points or 2.5%. The 6.6% overall growth in net interest
income for the six months ended June 30, 1999 over the comparable period results
in 1998 is, therefore, attributable to the balance sheet growth, not yield
appreciation.
Noninterest Income
In 1998, the Bank experienced a heavy volume of mortgage originations as
consumers reacted to lower market rates and increased gains on sales of loans
originated for the purpose of resale. This high volume was maintained through
the first quarter of 1999, but fell off significantly in the second quarter of
1999 and, consequently, loan origination-related noninterest earnings declined.
Noninterest Expense
The Bank experienced an increase in noninterest expenses of $234,000 or 8.8% for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998. Compensation related expenses increased $171,000, or 11.5%, as the Bank
has created new positions to meet the needs of a commercial bank and its
customers. Occupancy costs increased $41,000 or 19.2% as a result the operation
of the branch located near the St. Charles mall and expansion of its Dunkirk
branch facility. Depreciation expense increased $53,000 or 70% due to high
levels of fixed asset acquisitions in connection with branch expansion, the
administrative office expansion and acquisition of data processing equipment for
Y2K readiness.
Earnings Per Share
Primary earnings per share for the six months were $1.47 per share or $.17 lower
than for the corresponding period in 1998.
MARKET RISK ANALYSIS
The Bank's management reviews the sensitivity of the market value of the
portfolio equity and interest rate sensitivity of net income. The changes in the
market value of portfolio equity, as well as the interest income sensitivity,
are caused by shifts in the market rates of interest and can cause a negative or
a positive impact in given scenarios. The portfolio is subjected to periodic
modeling to test the effects of sudden and sustained interest rate shocks on the
market value and the net interest income sensitivity. The Basle Committee on
Banking Supervision has set standard measures of portfolio market value equity
and interest income sensitivity in a shock environment of an up or down 200
basis point shift in assumed interest rates. The impact of such a shock on the
Bank's portfolio is as follows:
June 30, 1999 June 30, 1998
------------- -------------
Market value of portfolio:
Interest rate changes:
Up 200 basis points -15% -7%
Down 200 basis points +5% +3%
Interest rate sensitivity:
Interest rate changes:
Up 200 basis points +1% +7%
Down 200 basis points -1% -8%
The Bank's exposure to a 200 basis point increase in interest rates would result
in a decline in the market value of portfolio equity of 15% at June 30, 1999,
compared to a projected decline of 7% at June 30, 1998 in the same adverse
scenario. A 200 basis point downward shift in rates would have a slightly more
positive effect on the portfolio at June 30, 1999 compared to 1998. This
reflects the impact of multi-year flat yield curves at lower rate levels. As
prepayments have occurred, reinvestment of the proceeds was at lower yields. An
immediate market rate increase would make those new investments less valuable.
Because the net income of the Bank and Company is derived through the interest
spread of the net portfolio, management is less concerned with the shock of
interest rates on the market value than it is on the interest rate sensitivity
because the assets are employed for their income production rather than value
appreciation.
10
Interest rate sensitivity reflects the change in the Bank's net interest income
given assumed interest rate shifts. In the scenarios presented, the Bank's
inerest income is at little risk from either an upward or downward 200 basis
point shift. The changes in the market value as well as the net interest income
are well within the boundaries established by the Board.
YEAR 2000 READINESS
The Bank's management and Board of Directors has been monitoring the
problems created by the year 2000 (Y2K) and its effect on data processing
systems. The Bank's capitalized cost of new technology and software over the
last three years has exceeded $520,000 and additional costs in the current and
next year could reach $100,000. All software systems have been upgraded. These
software costs were expensed during the years as a part of ongoing data
operations expense. The current technology utilized by the Bank and its eight
locations has been subjected to periodic reviews by its regulators. Testing of
the systems with third party providers has been ongoing through 1998 and early
1999. The Board is closely involved with this project and is aware that third
party providers of data processing services are conducting their own Y2K
projects to ensure that their users have adequate coverage of the problem.
However, the Board also realizes that third party providers' compliance is
largely out of the Bank's control and is monitoring their progress. Because of
the Company's reliance on third party data processing services, it does not
anticipate any material expenditures associated with the Y2K issue. There can be
no assurance that the Bank and its third party providers will be successful in
making all necessary changes to avoid computer system failure related to the
year 2000.
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, 1999, the
Bank's tangible, leverage and risk-based capital was 9.6%, 10.4% and 17.8%,
respectively. These levels are well in excess of the required 4.0%, 4.0% and
8.0% ratios required by the Federal Reserve Board.
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TRI-COUNTY FINANCIAL CORPORATION
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PART II - OTHER INFORMATION
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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: 8/13/1999 By: /s/ Michael L. Middleton
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Michael L. Middleton, President
and Chairman of the Board
Date: 8/16/99 By: /s/ Eileen M. Ramos
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Eileen M. Ramos
Chief Financial Officer
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