-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HK/ySWpqqqQgiimUIVNzGLSiLRzlJCemie1o/C6XZ57Zg5H1Wa6lgpOFXpZ5KZjL qcP2LypXyScd5OZfopi0rQ== 0000950109-99-001452.txt : 19990416 0000950109-99-001452.hdr.sgml : 19990416 ACCESSION NUMBER: 0000950109-99-001452 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRI COUNTY FINANCIAL CORP /MD/ CENTRAL INDEX KEY: 0000855874 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 520692188 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-18279 FILM NUMBER: 99594775 BUSINESS ADDRESS: STREET 1: 3035 LEONARDTOWN RD STREET 2: P O BOX 38 CITY: WALDORF STATE: MD ZIP: 20601 BUSINESS PHONE: 3016455601 MAIL ADDRESS: STREET 1: 3035 LEONARDTOWN ROAD CITY: WALDORF STATE: MD ZIP: 20601 10-K/A 1 FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ Mark One FORM 10-K/A (Amendment No. 1) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_____to_____ Commission File Number: 0-18279 --------- TRI-COUNTY FINANCIAL CORPORATION -------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 52-1652138 - -------------------------------------- ------------------ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 3035 Leonardtown Road, Waldorf, Maryland 20601 - ---------------------------------------- -------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code (301) 645-5601 ---------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of March 22, 1999, there were issued and outstanding 793,563 shares of the registrant's common stock. The registrant's voting stock is not regularly and actively traded in any established market and there are no regularly quoted bid and asked prices for the registrant's common stock. The registrant believes the approximate trading price for the stock to be $24.31 per share for an approximate aggregate market value of voting stock held by non-affiliates of the registrant of $14.3 million. For purposes of this calculation, the shares held by directors and executive officers of the registrant and by any stockholder beneficially owning more than 5% of the registrant's outstanding common stock are deemed to be shares held by affiliates. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Annual Report to Stockholders for the Fiscal Year Ended December 31, 1998. (Parts I and II) 2. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders. (Part III) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRI-COUNTY FINANCIAL CORPORATION Date: April 13, 1999 By: /s/ Michael L. Middleton ------------------------------------- Michael L. Middleton President and Chief Executive Officer (Duly Authorized Representative) Date: April 13, 1999 By: /s/ Eileen M. Ramos ---------------------------------------- Eileen M. Ramos Chief Financial Officer (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Michael L. Middleton By: /s/ Herbert N. Redmond, Jr. -------------------------------------- ---------------------------- Michael L. Middleton Herbert N. Redmond, Jr. (Director, President and Chief (Director) Executive Officer) Date: April 13, 1999 Date: April 13, 1999 By: /s/ Henry A. Shorter, Jr. By: /s/ W. Edelen Gough, Jr. -------------------------------------- ---------------------------- Henry A. Shorter, Jr. W. Edelen Gough, Jr. (Director) (Director) Date: April 13, 1999 Date: April 13, 1999 By: /s/ C. Marie Brown By: /s/ Gordon A. O'Neill -------------------------------------- ---------------------------- C. Marie Brown Gordon A. O'Neill (Director and Chief Operating Officer) (Director) Date: April 13, 1999 Date: April 13, 1999 By: /s/ Beaman Smith -------------------------------------- Beaman Smith (Director and Secretary/Treasurer) Date: April 13, 1999
29 EX-10.B 2 1995 STOCK OPTION PLAN FOR NON EMPLOYEE DIRECTORS EXHIBIT 10(b) TRI-COUNTY FINANCIAL CORPORATION 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purpose of the Plan. The purpose of this Tri-County Financial Corporation 1995 Stock Option Plan for Non-Employee Directors (the "Plan") is to advance the interests of the Company through providing Directors of the Company and its Affiliates with the opportunity to acquire Shares. By encouraging such stock ownership, the Company seeks to attract, retain, and motivate the best available personnel for positions of substantial responsibility and to provide additional incentive to Directors to promote the success of the business. 2. Definitions. As used herein, the following definitions shall apply. (a) "Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of the Company, as such terms are defined in Section 424(e) and (f), respectively, of the Code. (b) "Agreement" shall mean a written agreement entered into in accordance with Paragraph 5(c). (c) "Board" shall mean the Board of Directors of the Company. (d) "Change in Control" shall mean the acquisition of the beneficial ownership (as that term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended) of 25% or more of the voting securities of the Company by any person or by persons acting as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934). For purposes of this subparagraph only, the term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Board as to whether a change in control has occurred shall be conclusive and binding. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) "Common Stock" shall mean the common stock, par value $.01 per share, of the Company. (g) "Company" shall mean Tri-County Financial Corporation. (h) "Continuous Service" shall mean the absence of any interruption or termination of service as a Director of the Company or an Affiliate. Continuous Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Company or in the case of transfers between payroll locations of the Company or between the Company, an Affiliate or a successor. (i) "Director" shall mean any member of the Board or of the Board of Directors of an Affiliate, including advisory director Gough. (j) "Effective Date" shall mean the date specified in Paragraph 13 hereof. (k) "Employee" shall mean any person employed on a full-time basis by the Company or an Affiliate. (l) "Exercise Price" shall mean the price per Optioned Share at which an Option may be exercised. (m) "Market Value" shall mean the fair market value of the Common Stock, as determined under Paragraph 7(b) hereof. (n) "Option" means an option to purchase Common Stock which meets the requirements set forth in the Plan. Such Options shall not constitute "incentive stock options" within the meaning of Section 422 of the Code. (o) "Optioned Shares" shall mean Shares subject to an Option granted pursuant to this Plan. (p) "Participant" shall mean any person who receives an Option pursuant to the Plan. (q) "Plan" shall mean this Tri-County Financial Corporation 1995 Stock Option Plan for Non-Employee Directors. (r) "Share" shall mean one share of Common Stock. 3. Term of the Plan and Options. (a) Term of the Plan. The Plan shall continue in effect for a term of five years from the Effective Date, unless sooner terminated pursuant to Paragraph 14 hereof. No Option shall be granted under the Plan after five years from the Effective Date. (b) Term of Options. The term of each Option granted under the Plan shall be 10 years. 2 4. Shares Subject to the Plan. Except as otherwise required by the provisions of Paragraph 10 hereof, the aggregate number of Shares deliverable pursuant to Options shall not exceed 7,000 Shares. Such Shares may either be authorized but unissued Shares or Shares held in treasury. If Options should expire, become unexercisable or be forfeited for any reason without having been exercised or become vested in full, the Optioned Shares shall, unless the Plan shall have been terminated, be available for the grant of additional Options under the Plan. 5. Administration of the Plan. (a) General Rule. The Plan shall be administered by the Board, provided that the Board may appoint a committee of Directors to make any determinations required pursuant to the Plan. (b) Powers. Except as limited by the express provisions of the Plan, the Board shall have sole and complete authority and discretion (i) to determine the form and content of Options to be issued in the form of Agreements under the Plan, (ii) to interpret the Plan, (iii) to prescribe, amend and rescind rules and regulations relating to the Plan, and (iv) to make other determinations necessary or advisable for the administration of the Plan. (c) Agreement. Each Option shall be evidenced by a written agreement containing such provisions as may be approved by the Board. Each such Agreement shall constitute a binding contract between the Company and the Participant, and every Participant, upon acceptance of such Agreement, shall be bound by the terms and restrictions of the Plan and of such Agreement. The terms of each such Agreement shall be in accordance with the Plan. In particular, the Board shall set forth in each Agreement (i) the Exercise Price of an Option, (ii) the number of Shares subject to, and the expiration date of, the Option, (iii) the manner, time, and rate (cumulative or otherwise) of exercise or vesting of such Option, and (iv) the restrictions, if any, to be placed upon such Option, or upon Shares which may be issued upon exercise of such Option. The President of the Company and such Directors as shall be designated by the Board are hereby authorized to execute Agreements on behalf of the Company, and to cause them to be delivered to the recipients of Options. (d) Effect of the Board's Decisions. All decisions, determinations and interpretations of the Board shall be final and conclusive on all persons affected thereby. (e) Indemnification. In addition to such other rights of indemnification as they may have, the members of the Board shall be indemnified by the Company in connection with any claim, action, suit or proceeding relating to any action taken or failure to act under or in connection with the Plan or any Option, granted hereunder to the full extent provided for under the Company's governing instruments with respect to the indemnification of Directors. 3 (f) Certain Mandatory Abstentions. Notwithstanding anything herein to the contrary, no Director shall have any vote with regard to any Option previously granted to himself or herself. 6. Grant of Options. Each Director who is not an Employee but is a Director on the Effective Date shall receive, on said date, an Option to purchase 1,400 Shares at an Exercise Price per Share equal to its Market Value on the Effective Date. 7. Exercise Price for Options. (a) General Rule. The Exercise Price as to any particular Option shall be the Market Value of the Optioned Shares on the date of grant, as determined by the Board. (b) Standards for Determining Exercise Price. If the Common Stock is listed on a national securities exchange (including the NASDAQ National Market System) on the date in question, then the Market Value per Share shall be the average of the highest and lowest selling price on such exchange on such date, or if there were no sales on such date, then the Exercise Price shall be the mean between the bid and asked price on such date. If the Common Stock is traded otherwise than on a national securities exchange on the date in question, then the Market Value per Share shall be the mean between the bid and asked price on such date, or, if there is no bid and asked price on such date, then on the next prior business day on which there was a bid and asked price. If no such bid and asked price is available, then the Market Value per Share shall be its fair market value as determined by the Board, in its sole and absolute discretion. 8. Exercise of Options. (a) Generally. Each Option shall be fully (100%) exercisable immediately upon the date of its grant. (b) Procedure for Exercise. Options may be exercised from time to time by (i) written notice of intent to exercise the Option with respect to all or a specified number of the Optioned Shares, and (ii) payment to the Company (contemporaneously with the delivery of such notice), in cash, in Common Stock, or a combination of cash and Common Stock, of the amount of the Exercise Price for the number of the Optioned Shares with respect to which the Option is then being exercised. Each such notice and payment shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Treasurer of the Company at the Company's executive offices. A Director who exercises Options may satisfy all applicable federal, state and local income and employment tax withholding obligations, in whole or in part, by irrevocably electing to have the Company withhold shares of Common Stock, or to deliver to the Company shares of Common Stock that he already owns, having a value equal to the amount required to be withheld. 4 (c) Exercisability. Options granted under this Paragraph may be exercised only while the Participant is a Director of the Company, or within one year after termination of the Participant's Continuous Service as a Director, but in no event later than the date on which such Options would otherwise expire. In the event of such Director's death during the term of his directorship, Options granted under this Paragraph may be exercised within one year from the date of his death by the personal representatives of his estate or person or persons to whom his rights under such Option shall have passed by will or by laws of descent and distribution, but in no event later than the date on which such Options would otherwise expire. 9. Change in Control At the time of a Change in Control, each holder of an Option shall be entitled to receive cash from the Company in an amount equal to the excess of the Market Value of the Common Stock subject to the Option over the Exercise Price of the Optioned Shares, in exchange for the cancellation of such Option. 10. Effect of Changes in Common Stock Subject to the Plan. (a) Recapitalizations; Stock Splits, Etc. The number and kind of shares reserved for issuance under the Plan, and the number and kind of shares subject to outstanding Options (and the Exercise Price thereof) shall be proportionately adjusted for any increase, decrease, change or exchange of Shares for a different number or kind of shares or other securities of the Company which results from a merger, consolidation, recapitalization, reorganization, reclassification, stock dividend, split-up, combination of shares, or similar event in which the number or kind of shares is changed without the receipt or payment of consideration by the Company. (b) Transactions in which the Company is Not the Surviving Entity. Subject to Paragraph 9 hereof, in the event of (i) the liquidation or dissolution of the Company, (ii) a merger or consolidation in which the Company is not the surviving entity, or (iii) the sale or disposition of all or substantially all of the Company's assets (any of the foregoing to be referred to herein as a "Transaction"), all outstanding Options shall be surrendered. With respect to each Option so surrendered, the holder of the surrendered Option may elect to receive -- (1) for each Share then subject to an outstanding Option the number and kind of shares into which each outstanding Share (other than Shares held by dissenting stockholders) is changed or exchanged, together with an appropriate adjustment to the Exercise Price; or (2) a cash payment (from the Company or the successor corporation), in an amount equal to the Market Value of the Shares subject to the Option on the date of the Transaction, less the Exercise Price of the Option. 5 (c) Conditions and Restrictions on New, Additional, or Different Shares or Securities. If, by reason of any adjustment made pursuant to this Paragraph, a Participant becomes entitled to new, additional, or different shares of stock or securities, such new, additional, or different shares of stock or securities shall thereupon be subject to all of the conditions and restrictions which were applicable to the Shares pursuant to the Option before the adjustment was made. (d) Other Issuances. Except as expressly provided in this Paragraph, the issuance by the Company or an Affiliate of shares of stock of any class, or of securities convertible into Shares or stock of another class, for cash or property or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, shall not affect, and no adjustment shall be made with respect to, the number, class, or Exercise Price of Shares then subject to Options or reserved for issuance under the Plan. 11. Non-Transferability of Options. Options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Participant to whom an Option is so granted within a reasonable time after the date of such grant. 13. Effective Date. The Plan shall become effective immediately upon its approval by the Board. 14. Amendment and Termination of the Plan. The Board may from time to time amend the terms of the Plan and, with respect to any Shares at the time not subject to Options, suspend or terminate the Plan; provided that no provision hereof may be amended more than once every six months (other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder). No amendment, suspension or termination of the Plan shall, without the consent of any affected holders of an Option, alter or impair any rights or obligations under any Option theretofore granted. 15. Conditions Upon Issuance of Shares. (a) Compliance with Securities Laws. Shares of Common Stock shall not be issued with respect to any Option unless the issuance and delivery of such Shares shall comply with all 6 relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, any applicable state securities law, and the requirements of any stock exchange upon which the Shares may then be listed. (b) Special Circumstances. The inability of the Company to obtain approval from any regulatory body or authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of such Shares. As a condition to the exercise of an Option, the Company may require the person exercising the Option to make such representations and warranties as may be necessary to assure the availability of an exemption from the registration requirements of federal or state securities law. 16. Reservation of Shares. The Company, during the term of the Plan, will reserve and keep available a number of Shares sufficient to satisfy the requirements of the Plan. 17. Withholding Tax. The Company's obligation to deliver Shares upon exercise of Options shall be subject to the Participant's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. Each Participant may satisfy the obligation, in whole or in part, by irrevocably electing to have the Company withhold Shares, or to deliver to the Company Shares that he already owns, having a value equal to the amount required to be withheld. The value of Shares to be withheld, or delivered to the Company, shall be based on the Market Value of the Shares on the date the amount of tax to be withheld is to be determined. As an alternative, the Company may retain, or sell without notice, a number of such Shares sufficient to cover the amount required to be withheld. 18. No Employment or Other Rights. In no event shall a Director's eligibility to participate or participation in the Plan create or be deemed to create any legal or equitable right of the Director, or any other party to continue service with the Company or any Affiliate. No Director shall have a right to be granted an Option or, having received an Option, the right to again be granted an Option. However, a Director who has been granted an Option may, if otherwise eligible, be granted an additional Option or Options. 19. Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of Maryland, except to the extent that federal law shall be deemed to apply. 7 TRI-COUNTY FINANCIAL CORPORATION 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS --------------------- 1998 Amendment --------------------- WHEREAS, Tri-County Financial Corporation (the "Company") maintains the Tri-County Financial Corporation 1995 Stock Option Plan for Non-Employee Directors (the "Plan"); and WHEREAS, the Company has determined that said Plan should be amended to increase the number of shares reserved for future awards. NOW, THEREFORE, pursuant to Paragraph 14 of the Plan, the Plan is hereby amended as follows, effective immediately: 1. Paragraph 4 of the Plan shall be amended by inserting the following sentence immediately after its first sentence: The number of shares reserved under the Plan shall be increased by 11,000 Shares. 2. Nothing contained herein shall be held to alter, vary or affect any of the terms, provisions, or conditions of the Plan or any Option entered into thereunder, other than as stated above. WHEREFORE, on this 30th day of October, 1998, the Company hereby executes this 1998 Amendment to the Plan. TRI-COUNTY FINANCIAL CORPORATION By ------------------------------ Its --------------------------- - ----------------- Date Attest:______________________________(Seal) EX-13 3 ANNUAL REPORT TRI-COUNTY FINANCIAL CORPORATION REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 No extracts from this report may be published without our written consent. Stegman & Company TABLE OF CONTENTS INDEPENDENT AUDITORS' REPORT CONSOLIDATED FINANCIAL STATEMENTS Page ---- Balance Sheets 1 Statements of Income 2 Statements of Stockholders' Equity 3 Statements of Cash Flows 4 - 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - 27 Stockholders and Board of Directors Tri-County Financial Corporation Waldorf, Maryland We have audited the accompanying consolidated balance sheets of Tri-County Financial Corporation as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tri-County Financial Corporation as of December 31, 1998 and 1997, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Stegman & Company Baltimore, Maryland February 26, 1999 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 ASSETS
1998 1997 ---------- ---------- Cash and due from banks $ 906,658 $ 650,923 Interest-bearing deposits with banks 4,152,816 5,169,830 Investment securities available-for-sale - at fair value 55,976,606 52,878,583 Investment securities held-to-maturity - at amortized cost 2,139,069 1,149,137 Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 2,005,350 1,724,000 Loans held for sale 2,266,697 1,698,872 Loans receivable - net of allowance for loan losses of $1,540,551 and $1,310,365, respectively 132,645,936 121,866,762 Premises and equipment, net 4,316,207 4,189,222 Accrued interest receivable 1,486,776 1,276,376 Other assets 1,123,675 584,655 ------------ ------------ TOTAL ASSETS $207,019,790 $191,188,360 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Noninterest-bearing deposits $ 9,750,153 $ 7,196,053 Interest-bearing deposits 142,065,211 135,080,024 ------------ ------------ Total deposits 151,815,364 142,276,077 Other borrowed funds 16,937,882 12,523,210 Long-term debt 16,496,450 16,678,610 Accrued expenses and other liabilities 638,128 624,384 ------------ ------------ Total liabilities 185,887,824 172,102,281 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock - par value $.01; authorized - 15,000,000 shares; issued 789,334 and 782,699 shares, respectively 7,893 7,827 Surplus 7,309,901 6,574,162 Retained earnings 13,372,441 12,256,443 Accumulated other comprehensive income 648,614 442,032 Unearned ESOP shares (206,883) (194,385) ------------ ------------ Total stockholders' equity 21,131,966 19,086,079 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $207,019,790 $191,188,360 ============ ============
See notes to consolidated financial statements. 1 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ----------- INTEREST INCOME: Interest and fees on loans $11,642,029 $11,056,220 $10,045,429 Taxable interest and dividends on investment securities 3,941,744 3,782,205 3,301,725 Interest on deposits with banks 142,259 154,836 124,441 ----------- ----------- ----------- Total interest income 15,726,032 14,993,261 13,471,595 ----------- ----------- ----------- INTEREST EXPENSE: Interest on deposits 5,693,385 5,683,348 5,397,181 Interest on other borrowed funds 958,119 925,084 774,617 Interest on long-term debt 945,223 742,216 234,958 ----------- ----------- ----------- Total interest expense 7,596,727 7,350,648 6,406,756 ----------- ----------- ----------- NET INTEREST INCOME 8,129,305 7,642,613 7,064,839 PROVISION FOR LOAN LOSSES 240,000 240,000 408,000 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,889,305 7,402,613 6,656,839 ----------- ----------- ----------- NONINTEREST INCOME: Loan appraisal, credit, and miscellaneous charges 223,326 158,945 147,561 Net gains on sale of loans held for sale 416,838 240,407 192,468 Net realized loss on sales of investment securities available-for-sale (391) (17,502) - Service charges 600,067 496,972 382,228 Other income 180,696 51,923 76,148 ----------- ----------- ----------- Total noninterest income 1,420,536 930,745 798,405 ----------- ----------- ----------- NONINTEREST EXPENSES: Salaries and employee benefits 3,114,748 2,624,131 2,432,293 Occupancy expense 494,113 396,378 353,246 Deposit insurance 85,598 70,000 1,120,669 Data processing expense 259,025 253,677 262,375 Depreciation of furniture, fixtures, and equipment 204,230 185,548 144,512 Other 1,308,923 1,347,613 1,037,222 ----------- ----------- ----------- Total noninterest expenses 5,466,637 4,877,347 5,350,317 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 3,843,204 3,456,011 2,104,927 Income tax expense 1,457,000 1,372,000 785,200 ----------- ----------- ----------- NET INCOME $ 2,386,204 $ 2,084,011 $ 1,319,727 =========== =========== =========== INCOME PER COMMON SHARE (1): Basic earnings per share $3.00 $2.57 $1.65 Diluted earnings per share 2.80 2.40 1.53
(1) Restated to reflect 1998 stock dividends See notes to consolidated financial statements. 2 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Accumu- lated Other Compre- Unearned Common Paid-in Retained hensive ESOP Stock Capital Earnings Income Shares Total ----------- ------------- ------------ ---------- ----------- ------------- BALANCES, JANUARY 1, 1996 $6,851 $5,021,350 $10,710,824 $ 232,123 $ (138,223) $15,832,925 Comprehensive income: Net income - - 1,319,727 - - 1,319,727 Unrealized loss on investment securities net of tax of $(90,190) - - - (143,345) - (143,345) ------------- Total comprehensive income - - - - - 1,176,382 Cash dividend - $0.10 per share - - (70,574) - - (70,574) 5% stock dividend 351 525,489 (525,840) - - - Cash paid in lieu of stock dividend for fractional shares - - (3,471) - - (3,471) Exercise of stock options 308 177,890 - - - 178,198 Net change in unearned ESOP shares - - - - (36,008) (36,008) ----------- ------------- ------------ ---------- ---------- ------------- BALANCES, DECEMBER 31, 1996 7,510 5,724,729 11,430,666 88,778 (174,231) 17,077,452 Comprehensive income: Net income - - 2,084,011 - - 2,084,011 Unrealized gain on investment securities net of tax of $222,265 and reclassification adjustments of $16,950 - - - 353,254 - 353,254 ------------- Total comprehensive income - - - - - 2,437,265 Cash dividend - $0.10 per share - - (75,498) - - (75,498) 5% stock dividend 375 828,750 (829,125) - - - Cash paid in lieu of stock dividend for fractional shares - - (5,510) - - (5,510) Exercise of stock options 112 20,683 - - - 20,795 Repurchase of common stock (170) - (348,101) - - (348,271) Net change in unearned ESOP shares - - - - (20,154) (20,154) ----------- ------------- ------------ ---------- ----------- ------------- BALANCES, DECEMBER 31, 1997 7,827 6,574,162 12,256,443 442,032 (194,385) 19,086,079 Comprehensive income: Net income - - 2,386,204 - - 2,386,204 Unrealized gains on investment securities net of tax of $129,980 - - - 206,582 - 206,582 ------------- Total comprehensive income - - - - - 2,592,786 Cash dividend - $0.125 per share - - (97,627) - - (97,627) 4% stock dividend 310 693,962 (694,272) - - - Cash paid in lieu of stock dividend for fractional shares - - (4,871) - - (4,871) Exercise of stock options 58 41,777 - - - 41,835 Repurchase of common stock (200) - (473,436) - - (473,636) Net change in unearned ESOP shares (102) - - - (12,498) (12,600) ----------- ------------- ------------ ---------- ------------ ------------- BALANCES, DECEMBER 31, 1998 $7,893 $7,309,901 $13,372,441 $ 648,614 $ (206,883) $21,131,966 =========== ============= ============ ========== ============ =============
See notes to consolidated financial statements. 3 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,386,204 $ 2,084,011 $ 1,319,727 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 240,000 240,000 408,000 Depreciation and amortization 301,238 324,134 264,492 Amortization of premium/discount on mortgage- backed securities and investments 33,346 (50,456) (96,060) Deferred income tax benefit (131,000) 2,000 (143,800) Increase in accrued interest receivable (210,400) (111,185) (72,078) Decrease in deferred loan fees (130,320) (25,905) (85,781) Increase (decrease) in accrued expenses and other liabilities 14,765 (314,242) 257,778 Decrease in other assets (539,020) (219,661) (200,921) (Gain) loss on disposal of premises and equipment (66,813) 41,660 (9,610) Loss on sale of investment securities 391 17,502 - Origination of loans held for sale (23,740,825) (12,562,767) (8,812,925) Gain on sales of loans held for sale (416,839) (240,407) (192,468) Proceeds from sale of loans held for sale 23,589,839 12,116,232 8,887,468 Gain on sale of foreclosed real estate (61,654) (7,000) - ------------ ------------ ------------ Net cash provided by operating activities 1,268,912 1,293,916 1,523,822 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in interest-bearing deposits with banks 1,017,014 (2,378,112) 472,388 Purchase of investment securities available-for-sale (90,192,914) (47,628,227) (27,637,617) Proceeds from sale, redemption or principal payments of investment securities available-for-sale 87,391,528 49,084,708 19,559,529 Purchase of investment securities held-to-maturity (3,110,963) (189,525) (990,273) Proceeds from maturities or principal payments of investment securities held-to-maturity 2,127,218 797,119 334,682 Purchase of FHLB stock and Federal Reserve Bank stock (281,350) (424,000) (418,400) Loans originated or acquired (54,084,255) (53,126,555) (50,605,301) Principal collected on loans 42,431,995 41,896,388 46,238,710 Purchase of premises and equipment (478,661) (680,078) (859,884) Proceeds from sales of premises and equipment 117,251 - 9,610 Proceeds from disposition of foreclosed real estate 825,060 162,135 - ------------ ------------ ------------ Net cash used in investing activities (14,238,077) (12,486,147) (13,896,556) ------------ ------------ ------------
4 Tri-County Financial Corporation Consolidated Statements of Cash Flows (Continued) For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 -------------- -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits $ 9,539,287 $ 6,741,914 $ 5,500,120 Net increase (decrease) in other borrowed funds 4,414,672 (746,749) (2,497,413) Dividends paid (102,498) (81,008) (74,045) Exercise of stock options 41,835 20,795 178,198 Net change in unearned ESOP shares (12,600) (20,154) (36,008) Redemption of common stock (473,636) (348,271) - Proceeds from long-term borrowings - 22,400,000 11,000,000 Retirement of long-term borrowings (182,160) (17,235,267) (1,372,337) ----------- ------------ ----------- Net cash provided by financing activities 13,224,900 10,731,260 12,698,515 ----------- ------------ ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 255,735 (460,971) 325,781 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 650,923 1,111,894 786,113 ----------- ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 906,658 $ 650,923 $ 1,111,894 =========== ============ =========== Supplementary cash flow information: Cash paid during the year for: Interest $ 7,942,034 $ 7,284,916 $ 6,414,832 Income taxes 1,502,868 1,625,000 803,000 Transfers from loans receivable to foreclosed real estate 763,406 - 207,409
See notes to consolidated financial statements. 5 TRI-COUNTY FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Tri- County Financial Corporation and its wholly owned subsidiary, Community Bank of Tri-County (the Bank) and the Bank's wholly owned subsidiary, Tri-County Federal Finance One (collectively, "the Company"). All significant intercompany balances and transactions between the parent corporations and their subsidiaries have been eliminated. The accounting and reporting policies of the Company conform with generally accepted accounting principles and to general practices within the banking industry. Certain reclassifications have been made to amounts previously reported to conform with classifications made in 1998. Nature of Operations -------------------- The Company, through its bank subsidiary, conducts full service commercial banking operations throughout the Southern Maryland area. The primary financial services provided include mortgage loans on residential, construction and commercial real estate and various types of consumer lending as well as offering demand deposits, savings products, and safe deposit boxes. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities when purchased of three months or less to be cash equivalents. These instruments are presented as cash and due from banks. 6 Investment Securities --------------------- Investment securities are classified into the following three categories: trading, held-to-maturity, and available-for-sale. Trading securities are purchased and held principally for the purpose of reselling them within a short period of time. Their unrealized gains and losses are included in noninterest income. Securities classified as held-to-maturity are reported at amortized cost, and require the Company to have both the positive intent and ability to hold those securities to maturity. Securities not classified as either trading or held-to-maturity are considered to be available-for-sale. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported, net of deferred taxes, as a separate component of stockholders' equity until realized. Realized gains or losses on the sale of investment securities are recognized at the time of sale using the specific identification method and are classified as noninterest income in the accompanying consolidated statements of income. The Company invests in Federal Home Loan Bank and Federal Reserve Bank stock which are considered restricted as to marketability. Loans Receivable ---------------- Loans - Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal reduced by any charge-offs or specific valuation allowance accounts and any deferred fees or costs on originated loans. Loans Held for Sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value, determined in the aggregate. Market value considers commitment agreements with investors and prevailing market prices. A gain is recognized on the sale of these loans through collection of a premium over the adjusted carrying value, and through retention of an on-going rate differential as a normal servicing fee between the rate paid by the borrower to the Company and the rate paid by the Company to the purchaser. Income Recognition on Loans - Interest on commercial loans, real estate mortgages, and certain installment loans is accrued at the contractual rate on the principal amounts outstanding. When scheduled principal or interest payments are past due 90 days or more on any loan not fully secured by collateral and not in the process of collection, the accrual of interest income is discontinued and recognized only as collected. The loan is restored to an accruing status when all amounts past due have been paid and the borrower has demonstrated the ability to service the debt on a current basis. Loan fees and related direct costs of loan origination are deferred and recognized over the life of the loan as a component of interest income. Allowance for Loan Losses - The allowance for loan losses is maintained at a level believed by management to be adequate to absorb potential losses inherent in the loan portfolio. Management's determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to the overall loss experience; current economic conditions; volume, growth, and composition of the loan portfolio; financial condition of the borrowers; and other relevant factors that, in management's judgment, warrant recognition in providing an adequate allowance. The allowance is increased by provisions for loan losses charged against income and decreased by charge-offs (net of recoveries). Changes in the allowance are recorded periodically as conditions change or as more information becomes available. Such changes could result in material adjustments to future results of operations. 7 Impairment of Loans - The Company evaluates its loan portfolios for impairment. When deemed necessary, a valuation allowance is provided for these loans based on management's estimates of the risks inherent in the portfolios and analysis of prior loss experiences. Payments received relating to impaired loans and nonaccrual loans are recorded on a cash basis and are either applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of the ultimate collectibility of the loan. Premises and Equipment ---------------------- Depreciation of premises and equipment, which are carried at cost, is provided by the straight-line method over the estimated useful lives as follows: Buildings and improvements 15 - 50 years Furniture and equipment 5 - 15 years Automobiles 5 years Foreclosed Real Estate ---------------------- Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at the lower of the recorded investment or fair value at the date of foreclosure. Costs relating to the development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed. Valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value less estimated costs to sell. No charge to operations was required as a result of this review in 1998, 1997 or 1996. Mortgage Servicing Rights ------------------------- The rights to service certain mortgages, including those purchased as well as originated, are amortized in proportion to and over the estimated period of the related net servicing revenues and are evaluated for impairment based on their fair value. Total capitalized mortgage servicing rights approximated $546,000 and $170,000 at December 31, 1998 and 1997, respectively. Income Taxes ------------ The Company files a consolidated federal income tax return with its subsidiary. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Any deferred tax asset is reduced by the amount of any tax benefit that more likely than not will not be realized. 8 Income Per Common Share ----------------------- Basic net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year including any potential dilutive common shares outstanding, such as options and warrants. Stock-Based Compensation ------------------------ Stock-based compensation is recognized using the intrinsic value method. For disclosure purposes, pro forma net income and earnings per share impacts are provided as if the fair value method had been applied. New Accounting Standards ------------------------ In June 1997, Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), was issued and establishes standards for reporting and displaying comprehensive income and its components. SFAS 130 requires comprehensive income and its components, as recognized under the accounting standard, to be displayed in a financial statement with the same prominence as other financial statements. The Company adopted the standard, as required, beginning in 1998; adoption of this disclosure requirement had no impact on the financial position or results of operations of the Company. Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131), which was issued in June 1997 established new standards for reporting information about operating segments in annual and interim financial statements. The standard requires descriptive information about the way that operating segments are determined, the products and services provided by the segments and the nature of differences between reportable years beginning after December 15, 1997. Operating segments are defined under the Standard based on the availability and utilization of discrete financial information as well as the necessity for this discrete financial information to meet certain quantitative thresholds. Management believes that it has no reportable components that qualify as an operating segment under SFAS 131 for the year ended December 31, 1998. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet. The statement allows 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 provisions of this statement become effective for quarterly and annual reporting beginning January 1, 2000, and allow for early adoption in any quarterly period after June 1998. The Company will adopt SFAS 133 as required in 2000. It is expected that adoption of this standard will have no material impact. 9 2. INVESTMENT SECURITIES AVAILABLE-FOR-SALE The amortized cost and estimated fair values of investment securities available-for-sale at December 31 are as follows:
December 31, 1998 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ----------- ---------- ----------- Corporate equity securities $ 763,166 $458,123 $ - $1,221,289 Money Market and mutual funds 292,502 - - 292,502 Obligations of U.S. Government Agencies and U.S. Government Sponsored Enterprises (GSE's) 9,000,000 53,215 8,260 9,044,955 Asset-backed securities issued by: GSE's 31,299,272 465,934 41,235 31,723,971 Other 13,523,847 171,792 1,750 13,693,889 ----------- ---------- ------- ----------- $54,878,787 $1,149,064 $51,245 $55,976,606 =========== ========== ======= =========== The amortized cost and estimated fair values of investment securities available-for-sale at December 31 are as follows: December 31, 1997 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ----------- ---------- ----------- Corporate equity securities $ 263,166 $241,930 $ - $ 505,096 Money Market and mutual funds 4,010,505 - - 4,010,505 Obligations of U.S. Government Agencies and U.S. Government Sponsored Enterprises (GSE's) 5,000,000 14,200 10,800 5,003,400 Asset-backed securities issued by: GSE's 29,291,769 423,525 15,389 29,699,905 Other 13,586,982 86,830 14,135 13,659,677 ----------- -------- ------- ----------- $52,152,422 $766,485 $40,324 $52,878,583 =========== ======== ======= ===========
10 The scheduled maturities of investment securities available-for-sale at December 31, 1998 are as follows:
Available-for-Sale ------------------------ Amortized Fair Cost Value ----------- ----------- Due in one year or less $ 4,055,668 $ 4,545,580 Due after one year through five years 3,000,000 3,021,426 Due after five years through ten years 3,000,000 2,991,740 Asset-backed securities 44,823,119 45,417,860 ----------- ----------- $54,878,787 $55,976,606 =========== =========== Sales of investment securities available-for-sale during 1998, 1997 and 1996 resulted in the following: 1998 1997 1996 ---------- ------------ --------- Proceeds $408,500 $3,369,000 $ - Gross gains - 2,111 - Gross losses (391) (19,613) -
Asset-backed securities are comprised of mortgage-backed securities as well as mortgage derivatives such as collateralized mortgage obligations and real estate mortgage investment conduits. The outstanding balance of no single issuer, except for U.S. Government-Sponsored Enterprise Securities, exceeded five percent of the Company's stockholders' equity at December 31, 1998 and 1997. 3. INVESTMENT SECURITIES HELD-TO-MATURITY The amortized cost and estimated fair values of investments held-to- maturity at December 31 are as follows:
December 31, 1998 ---------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gain Losses Value ----------- ----------- ----------- ----------- Obligations of U.S. Government Agencies $ 196,967 $ - $ - $ 196,967 Asset-backed securities 544,696 19,966 - 564,662 Other investments 1,397,406 - - 1,397,406 ----------- ----------- ------------ ---------- $2,139,069 $19,966 $ - $2,159,035 =========== =========== ============ ==========
11
December 31, 1998 ---------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gain Losses Value ----------- ----------- ----------- ----------- Obligations of U.S. Government Agencies $ 192,025 $ - $ - $ 192,025 Asset-backed securities 675,720 29,813 - 705,533 Other investments 281,392 - - 281,392 ----------- ---------- ----------- ----------- $1,149,137 $ 29,813 $ - $1,178,950 =========== ========== =========== ===========
4. LOANS RECEIVABLE AND LOANS HELD FOR SALE Loans receivable at December 31, 1998 and 1997 consist of the following:
1998 1997 ------------ ------------ Commercial real estate $ 19,732,432 $ 15,153,167 Residential real estate 64,243,146 62,107,569 Residential construction 20,776,294 18,275,907 Second mortgage loans 16,313,728 17,428,330 Lines of credit - commercial 6,161,033 4,852,193 Consumer loans 7,889,792 6,420,219 ------------ ------------ 135,116,425 124,237,385 ------------ ------------ Less: Deferred loan fees 929,938 1,060,258 Allowance for loan losses 1,540,551 1,310,365 ------------ ------------ 2,470,489 2,370,623 ------------ ------------ Total $132,645,936 $121,866,762 ============ ============
The following table sets forth the activity in the allowance for loan losses:
1998 1997 1996 -------------- ------------ ------------ Balance, January 1 $1,310,365 $1,120,102 $ 733,573 Add: Provision charged to operations 240,000 240,000 408,000 Recoveries 275 105 180 Less: Charge-offs 10,089 49,842 21,651 ---------- ---------- ----------- Balance, December 31 $1,540,551 $1,310,365 $1,120,102 ========== ========== ===========
12 No loans included within the scope of SFAS 114 were identified as being impaired at December 31, 1998 or 1997 and for the years then ended. Loans on which the recognition of interest has been discontinued, which were not included within the scope of SFAS 114, amounted to approximately $269,000, $160,000, and $400,000 at December 31, 1998, 1997, and 1996, respectively. If interest income had been recognized on nonaccrual loans at their stated rates during 1998, 1997, and 1996, interest income would have been increased by approximately $21,000, $29,000, and $14,000, respectively. No income was recognized for these loans in 1998, 1997 and 1996. Included in loans receivable at December 31, 1998 and 1997, is $1,347,263 and $1,206,615 due from officers and directors of the Bank. Activity in loans outstanding to officers and directors is summarized as follows:
1998 1997 ------------- ------------- Balance, beginning of year $1,206,615 $ 918,566 New loans made during year 226,547 337,462 Repayments made during year (85,899) (49,413) ------------- ------------- Balance, end of year $1,347,263 $1,206,615 ============= =============
Loans serviced for others and not reflected in the balance sheets are $56,040,000 and $47,816,000 at December 31, 1998 and 1997, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. The Bank grants loans throughout the Southern Maryland area. Its borrowers' ability to repay is, therefore, dependent upon the economy of Southern Maryland. 5. PREMISES AND EQUIPMENT A summary of premises and equipment at December 31, 1998 and 1997 is as follows:
1998 1997 ---------- ---------- Cost: Land $1,437,761 $1,486,879 Building and improvements 2,769,246 2,648,684 Furniture and equipment 1,810,221 1,496,586 Automobiles 105,394 81,000 ---------- ---------- Total cost 6,122,622 5,713,149 Less accumulated depreciation 1,806,415 1,523,927 ---------- ---------- Premises and equipment, net $4,316,207 $4,189,222 ========== ==========
13 Certain bank facilities are leased under various operating leases. Rent expense was $161,167, $118,556 and $106,708 in 1998, 1997 and 1996, respectively. Future minimum rentals commitments under noncancellable leases are as follows: 1999 $ 164,155 2000 137,808 2001 118,336 2002 125,859 2003 125,124 Thereafter 498,547 ---------- Total $1,169,829 ========== 6. DEPOSITS Deposits outstanding at December 31 consist of:
1998 1997 ------------ ------------ Noninterest-bearing demand $ 9,750,153 $ 7,196,053 ------------ ------------ Interest-bearing: Demand 16,963,000 15,550,241 Money market deposits 20,775,000 11,479,000 Savings 25,771,211 26,338,783 Certificates of deposit of $100,000 or more 12,989,000 14,235,000 Other certificates of deposit 65,567,000 67,477,000 ------------ ------------ Total interest-bearing 142,065,211 135,080,024 ------------ ------------ Total deposits $151,815,364 $142,276,077 ============ ============
7. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF ATLANTA AND OTHER BORROWINGS The advances from the Federal Home Loan Bank are as follows: Weighted Average Interest Year Due Rate 1998 -------- ---------- ----------- 1999 5.18 $21,500,000 2002 5.81 11,400,000 14 Under the terms of an Agreement for Advances and Security Agreement with Blanket Floating Lien, the Company maintains eligible collateral consisting of 1-4 unit residential first mortgage loans, discounted at 75% of the unpaid principal balance, equal to 100% at December 31, 1998 and 1997, of its outstanding Federal Home Loan Bank advances. These amounts were $43,900,000 and $37,900,000 at December 31, 1998 and 1997, respectively. The advances due in 2002 have call provisions under which the Federal Home Loan Bank may require payment prior to the stated maturity date. Tri-County Federal Finance One (Finance One) is obligated on a note payable issued in connection with its participation in the Salomon Capital Access Collateralized Mortgage Obligation Bond Program. Under this program, Finance One has pledged Federal Home Loan Mortgage Corporation participation certificates having unpaid principal balances at December 31, 1998 and 1997, totaling $544,696 and $675,720, respectively, as security for the notes. The participation certificates are held in trust, and the principal and interest payments required by the note payable are made out of the monthly cash proceeds from the certificates. The maturity date and interest rate, which are subject to adjustment based on prepayments of the participation certificates, for the notes payable at December 31, 1998 and 1997, are as follows: Unpaid Principal (Net of Discount) December 31, ---------------------- Interest Maturity 1998 1997 Rate Date --------- ----------- -------- ---------------- $96,450 $278,610 8.50% July 1, 2010 The Company enters into sales of securities under agreements to repurchase with terms to maturity of less than one month and short-term borrowings from the Federal Home Loan Bank. The repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the statements of financial condition. The dollar amounts of securities underlying the agreements remain in the asset accounts. The securities underlying the agreements are book-entry securities and were delivered by appropriate entry into the counterparties' accounts maintained at the purchasing securities dealer's safekeeping house. The repurchase agreements subject the Company to the risk that its interest in the sold securities is inadequately protected in the event the purchasing securities dealer fails to perform its obligations. The Company attempts to reduce the effects of such risks by entering into such agreements only with well-capitalized securities dealers who are primary dealers in government securities and by limiting the maximum amount of agreements outstanding at any time with any single securities dealer. Additional information regarding short-term borrowings and repurchase agreements is as follows:
1998 1997 --------------- --------------- Balance outstanding at December 31 $16,937,882 $12,523,210 Average balance during the year 16,743,325 15,388,329 Average interest rate during the year 5.72% 5.77% Maximum outstanding balance at any month end during the year 26,619,724 20,905,025
15 Other borrowed funds consist of treasury tax and loan deposits that generally mature within one to 120 days from the transaction date. At December 31, 1998 and 1997, such borrowings were $437,882 and $523,210, respectively. The aggregate scheduled principal maturities on all borrowings outstanding at December 31, 1998 are as follows: 1999 $21,937,882 2000 - 2001 - 2002 11,400,000 2003 96,450 ----------- Total $33,434,332 =========== 8. INCOME TAXES Income tax expense was as follows: 1998 1997 1996 ---------- ----------- --------- Current: Federal $1,317,000 $ 1,122,000 $ 761,000 State 271,000 248,000 168,000 ---------- ----------- --------- 1,588,000 1,370,000 929,000 ---------- ----------- --------- Deferred: Federal (107,000) 1,600 (117,800) State (24,000) 400 (26,000) ---------- ----------- --------- (131,000) 2,000 (143,800) ---------- ----------- --------- Total income tax expense $1,457,000 $1,372,000 $785,200 ========== =========== ========= Total income tax expense differed from the amounts computed by applying the federal income tax rate of 34% to income before income taxes as a result of the following:
1998 1997 1996 --------------------- ------------------------ ------------------------ Percent of Percent of Percent of Pretax Pretax Pretax Amount Income Amount Income Amount Income ---------- ---------- ------------ ---------- ------------ ---------- Expected income tax expense at federal tax rate $1,307,000 34.0% $1,175,000 34.0% $715,700 34.0% State taxes, net of federal benefit 178,000 4.6 154,000 4.5 96,000 4.6 Nondeductible expenses 5,400 .1 5,000 .1 10,000 .4 Other (33,400) (.8) 38,000 1.1 (36,500) (1.7) ---------- ----- ------------ ----- ------------ ----- Total income tax expense $1,457,000 37.9% $1,372,000 39.7% $785,200 37.3% ========== ===== ============ ===== ============ =====
16 The net deferred tax liabilities in the accompanying balance sheets include the following components:
1998 1997 ----------- ------------ Deferred tax assets: Deferred fees $ 119,091 $ 177,886 Allowance for loan losses 327,407 196,594 Deferred compensation 58,982 - ----------- ------------ Total deferred assets 505,480 374,480 ----------- ------------ Deferred tax liabilities: FHLB stock dividends 152,896 152,896 Depreciation 80,840 80,840 Unrealized gain on investment securities available-for-sale 408,104 278,125 ----------- ------------ Total deferred liabilities 641,840 511,861 ----------- ------------ Net deferred liabilities $(136,360) $(137,381) =========== ============
Retained earnings at December 31, 1998, include approximately $1.2 million of bad debt deductions allowed for federal income tax purposes (the "base year tax reserve") for which no deferred income tax has been recognized. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, it would create income for tax purposes only and income taxes would be imposed at the then prevailing rates. The unrecorded income tax liability on the above amount was approximately $458,000 at December 31, 1998. Prior to January 1, 1996, the Bank computed its tax bad debt deduction based upon the percentage of taxable income method as defined by the Internal Revenue Code. The bad debt deduction allowable under this method equaled 8% of taxable income determined without regard to the bad debt deduction and with certain adjustments. The tax bad debt deduction differed from the bad debt expense used for financial accounting purposes. In August 1996, the Small Business Job Protection Act (the "Act") repealed the percentage of taxable income method of accounting for bad debts effective for years beginning after December 31, 1995. The Act requires the Bank to change its method of computing reserves for bad debts to the experience method. This method is available to banks with assets less than $500 million and will allow the Bank to maintain a tax reserve for bad debts and to take bad debt deductions for reasonable additions to the reserve. As a result of this change, the Bank will have to recapture into income a portion of its existing tax bad debt reserve. This recapture will occur ratably over a six-taxable year period, beginning with the 1998 tax year. For financial reporting purposes, this recapture will not result in additional tax expense as the Bank adequately provided deferred taxes in prior years. Furthermore, this change does not require the Bank to recapture its base year tax reserve. 17 9. COMMITMENTS AND CONTINGENCIES The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its borrowers. These financial instruments are commitments to extend credit. These instruments may, but do not necessarily, involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet loans receivable. As of December 31, 1998 and 1997, in addition to the undisbursed portion of loans receivable, the Company had outstanding loan commitments approximating $1,713,949 and $2,790,000, respectively. These commitments are normally met from deposit account growth, loan payments, excess liquidity, or borrowed money. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These guarantees are issued primarily to support construction borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds cash or a secured interest in real estate as collateral to support these commitments for which collateral is deemed necessary. Outstanding standby letters of credit amounted to $4,397,000 and $4,800,000 at December 31, 1998 and 1997, respectively. 10. PENSION PLAN On May 28, 1997, the Board of Directors, after due consideration of the projected cost of the Company's defined benefit pension plan, voted to terminate the Plan effective August 31, 1997. The present value of current benefits, plus any remaining pension assets, net of costs, were transferred into the Company's 401(k) plan on behalf of all defined benefit plan participants. The final benefit to the Company resulting from this plan curtailment was determined to be $104,653 by the plan administrator. This credit is reflected in the 1997 salaries and employee benefits in the accompanying financial statements. The Company's qualified, noncontributory defined benefit pension plan covered substantially all of its employees. Benefits were based on each employee's years of service up to a maximum of 35 years, and the average of the highest five consecutive annual salaries out of the ten years prior to retirement. The benefit formula used was the individual aggregate actuarial cost method. An employee became fully vested upon completion of seven years of qualifying service. It was the policy of the Company to fund the amount required to meet minimum funding standards. No contributions were required to be made in 1998 or 1997. 18 Net pension cost for the Company's plan consists of the following:
1998 1997 1996 --------- ----------- ----------- Service cost $ - $ 49,239 $ 68,705 Interest cost - 71,313 61,651 Actual return on plan assets - (76,268) (98,075) All other components - (6,618) 28,140 Charge resulting from plan curtailment - 73,314 - Credit resulting from plan settlement - (215,633) - --------- ----------- ----------- Net pension (credit) cost $ - $ (104,653) $ 60,421 ========= =========== ===========
Assumptions used to develop the net periodic pension cost were:
1998 1997 1996 -------- -------- -------- Discount rate N/A 7.5% 7.5% Expected long-term rate of return on plan assets N/A 8.0% 8.0% Rate of increase in compensation levels N/A 5.0% 5.0%
11. STOCK OPTION AND INCENTIVE PLAN The Company has a stock option and incentive plan to attract and retain personnel and provide incentive to employees to promote the success of the business. At December 31, 1998, 120,946 shares of stock have been authorized for grants of options for this plan. The following table provides the pro forma disclosures:
1998 1997 1996 ------------ ------------ ------------- Net income As reported $2,386,204 $2,084,011 $1,319,727 Pro forma 2,284,225 2,084,011 1,319,727 Basic earnings per share As reported 3.00 2.57 1.65 Pro forma 2.88 2.57 1.65 Diluted earnings per share As reported 2.80 2.40 1.53 Pro forma 2.68 2.40 1.53
For the purpose of computing the pro forma amounts indicated above, the fair value of each option on the date of grant is estimated using the Black- Scholes pricing model with the following weighted-average assumptions used for the 1998 grants: dividend yield of 0.5%, expected volatility of 15%, a risk- free rate of 4.97%, and an expected option life of 10 years. No stock options were granted in 1997 or 1996. The weighted-average fair value of each option granted during 1998 was $10.20. 19 Substantially all options are 100% vested when granted, and all options expire after 10 years. The following tables summarize activity in the plan:
1998 1997 1996 ---------------- ---------------- ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- ------- -------- Outstanding at beginning of year 85,566 $ 9.19 97,464 $8.56 131,233 $7.33 Granted 22,006 24.18 - .00 - .00 Exercised 7,627 7.08 11,898 5.69 33,625 5.30 Rescission of exercise 1,873 6.50 - .00 - - Forfeitures - - 144 3.58 ------- ------ ------- Outstanding at end of year 101,818 12.61 85,566 9.19 97,464 8.56 ======= ====== ======= Options Outstanding Options Exercisable ------------------------------------- -------------------------------- Weighted Weighted Number Remaining Number Average Outstanding Contractual Exercisable Exercise 12/31/98 Life 12/31/98 Price ------------- ----------- ------------ ---------- $ 18,141 1 year $ 18,141 $ 6.50 61,671 7 years 60,298 10.28 1,006 9 years 1,006 21.51 21,000 10 years 21,000 24.31 ------------- ------------ $101,818 $100,445 12.64 ============= ============
12. EMPLOYEE BENEFIT PLANS The Bank has an Employee Stock Ownership Plan (ESOP) that acquires stock of the Bank's parent corporation, Tri-County Financial Corporation. The Company accounts for its ESOP in accordance with AICPA Statement of Position 93-6. Accordingly, unencumbered shares held by the ESOP are treated as outstanding in computing earnings per share. Shares issued to the ESOP but pledged as collateral for loans obtained to provide funds to acquire the shares are not treated as outstanding in computing earnings per share. Dividends on ESOP shares are recorded as a reduction of retained earnings. The ESOP may acquire in the open market up to 195,700 shares. At December 31, 1998, the Plan owns 59,744 shares. The Company also has a 401(k) plan. Employee contributions are matched by the Bank at a ratio determined annually by the Board of Directors, currently one-half of an employee's 6% elective deferral. All employees who have completed one year of service and have reached the age of 21 are covered under these defined contribution plans. Contributions are determined at the discretion of management and the Board of Directors. For the years ended December 31, 1998, 1997, and 1996, the Company charged $186,000, $102,000, and $46,000 against earnings to fund the Plans. 20 13. STOCK DIVIDENDS On January 22, 1999, the Board of Directors declared a $.20 per share cash dividend to be distributed to holders of record on March 17, 1999. On February 15, 1998, the Board of Directors declared a 4% stock dividend and a $.125 per share cash dividend that was distributed to holders of record on March 13, 1998. The stock distribution increased the Corporation's issued stock by approximately 31,000 shares. On January 24, 1998, the Board of Directors declared a 5% stock dividend that was distributed to holders of record on March 7, 1998. The stock distribution increased the Corporation's issued stock by approximately 37,500 shares. 14. REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted assets (as defined), and of risk-based capital (as defined) to risk-weighted assets (as defined). Management believes, as of December 31, 1998, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1998, the most recent notification from the Office of Thrift Supervision (the last regulatory body to issue a report on the Bank's capital adequacy) categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company's or the Bank's category. 21 The Company's and the Bank's actual capital amounts and ratios for 1998 and 1997 are presented in the tables below:
To be Considered Well Capitalized Required for Under Prompt Capital Adequacy Corrective Action Actual Purposes Provisions ------------------ ------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- At December 31, 1998: Total capital (to risk- weighted assets): The Company $22,023 18.27% $9,640 8.0% The Bank 21,791 18.08% 9,640 8.0% $12,050 10.0% Tier 1 Capital (to risk- weighted assets): The Company 20,483 17.00% 4,820 4.0% The Bank 20,251 16.80% 4,820 4.0% 7,230 6.0% Tier 1 Capital (to average assets): The Company 20,483 10.28% 7,964 4.0% The Bank 20,251 10.17% 7,964 4.0% 6,025 5.0% At December 31, 1997: Total capital (to risk- weighted assets): The Company 19,953 17.38% 9,184 8.0% The Bank 19,855 17.29% 9,184 8.0% 11,480 10.0% Tier 1 capital (to risk- weighted assets): The Company 18,643 16.24% 4,592 4.0% The Bank 18,545 16.15% 4,592 4.0% 6,888 6.0% Tier 1 capital (to average assets): The Company 18,643 9.68% 7,702 4.0% The Bank 18,545 9.64% 7,692 4.0% 9,615 5.0%
22 Earnings Per Share ------------------ The calculations of basic and diluted earnings per share are as follows:
1998 1997 1996 ---------- ---------- ---------- Basic earnings per share: Net income $2,386,204 $2,084,011 $1,319,727 Average common shares outstanding 793,458 811,694 799,804 Net income per common share - basic $ 3.00 $ 2.57 $ 1.65 Diluted earnings per share: Net income 2,386,204 2,084,011 1,319,727 Average common shares outstanding 793,458 811,694 799,804 Stock option adjustment 59,687 55,809 62,222 Average common shares outstanding - diluted 853,145 867,503 862,026 Net income per common share - diluted $ 2.80 $ 2.40 $ 1.53
Charter Conversion ------------------ When the Small Business Job Protection Act was signed into law on August 20, 1996, all savings banks and savings associations became able to change to a commercial bank charter without having to recapture any of their pre-1988 bad debt reserve accumulations. Prior to the passage of this law, when management evaluated the benefits of changing to a commercial bank charter, the recapture tax on these bad debt reserves represented a material cost to be considered. With this significant obstacle removed, the opportunity to change the Bank's mode of operations was revisited. On October 30, 1996, the Board of Directors unanimously adopted a Plan of Conversion whereby the Savings Bank converted to a Maryland-chartered commercial bank to be known as "Community Bank of Tri-County." Following the Charter Conversion, effected March 29, 1997, both the Bank and the Corporation are regulated by the Federal Reserve Bank. The Charter Conversion allows the Bank more flexibility in the types of loans it is permitted to make as it is no longer required to meet the Qualified Thrift Lender Test. Specifically, the Bank can increase its consumer and commercial lending and is better able to offer products to its small business and retail customers. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Therefore, any aggregate unrealized gains or losses should not be interpreted as a forecast of future earnings or cash flows. Furthermore, the fair values disclosed should not be interpreted as the aggregate current value of the Company. 23
December 31, 1998 December 31, 1997 --------------------------- -------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------------- ------------ ------------ ------------ Assets: Cash and cash equivalents $ 906,658 $ 906,658 $ 650,923 $ 650,923 Interest-bearing deposits with banks 4,152,816 4,152,816 5,169,830 5,169,830 Investment securities and stock in FHLB and FRB 60,121,025 60,140,991 55,751,720 55,781,533 Loans receivable, net 132,645,936 134,181,574 121,866,762 124,180,547 Loans held for sale 2,266,697 2,266,697 1,698,872 1,698,872 Liabilities: Savings, NOW and money market accounts 73,229,364 73,259,364 60,564,077 60,564,077 Time certificates 78,556,000 78,085,030 81,712,000 81,339,062 Long-term debt and other borrowed funds 33,434,332 33,367,035 29,201,820 29,275,120
At December 31, 1998 and 1997, the Company had outstanding loan commitments and standby letters of credit of $6.1 million and $5.3 million, respectively. Based on the short-term lives of these instruments, the Company does not believe that the fair value of these instruments differs significantly from their carrying values. Valuation Methodology --------------------- Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. Investment Securities - Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Mortgage-Backed Securities - Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans Receivable and Loans Held for Sale - For conforming residential first-mortgage loans, the market price for loans with similar coupons and maturities was used. For nonconforming loans with maturities similar to conforming loans, the coupon was adjusted for credit risk. Loans which did not have quoted market prices were priced using the discounted cash flow method. The discount rate used was the rate currently offered on similar products. Loans priced using the discounted cash flow method included residential construction loans, commercial real estate loans, and consumer loans. The estimated fair value of loans held for sale is based on the terms of the related sale commitments. 24 Deposits - The fair value of checking accounts, saving accounts, and money market accounts was the amount payable on demand at the reporting date. Time Certificates - The fair value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products. Long-Term Debt and Other Borrowed Funds - These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1998 and 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purpose of these financial statement since that date and, therefore, current estimates of fair value may differ significantly from the amount presented herein. 16. SAIF RECAPITALIZATION The Federal Deposit Insurance Corporation administers two separate deposit insurance funds, the Bank Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF). Congress passed legislation in August 1996, that recapitalized the SAIF fund through a special assessment on FDIC-insured institutions with SAIF deposits. This deposit assessment resulted in an after-tax expense to the Company of approximately $504,000 for the year ended December 31, 1996. 25 17. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY Condensed Balance Sheets: ASSETS
1998 1997 ----------- ----------- Cash $ 44,935 $ 120,288 Accounts receivable 11,734 1,383 Investment securities available-for-sale 224,970 - Investment in wholly owned subsidiary 20,899,960 19,004,345 ----------- ----------- TOTAL ASSETS $21,181,599 $19,126,016 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 49,633 $ 39,937 Stockholders' equity: Common stock 7,893 7,827 Surplus 7,309,901 6,574,162 Retained earnings 13,372,441 12,256,443 Unearned ESOP shares (206,883) (194,385) Accumulated other comprehensive income 648,614 442,032 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,181,599 $19,126,016 =========== =========== Condensed Statements of Income: Year Ended December 31, ------------------------------------------ 1998 1997 1996 ------------ ------------- ------------- Dividends from subsidiary $750,000 $ - $ - Interest income 13,882 41,879 38,463 Loss on sale of investment securities (391) (250) - Amortization and miscellaneous expenses (76,671) (72,323) (53,981) ------------ ------------- ------------- Income (loss) before income taxes and equity in undistributed net income of subsidiary 686,820 (30,694) (15,518) Federal and state income tax benefit 10,350 10,436 5,276 Equity in undistributed net income of subsidiary 1,689,034 2,104,269 1,329,969 ------------ ------------- ------------- NET INCOME $2,386,204 $2,084,011 $1,319,727 ============ ============= =============
26 Condensed Statements of Cash Flows:
1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,386,204 $ 2,084,011 $ 1,319,727 Adjustments to reconcile net income to net cash provided by operating activities: Increase in investment in wholly owned subsidiary (1,689,034) (2,114,705) (1,335,245) Loss on sale of investment securities 391 250 - Amortization of discount on investments - (25,140) (24,187) Increase in current assets (10,350) - - Increase (decrease) in current liabilities 9,696 273 (30,936) ----------- ----------- ----------- Net cash provided (used) by operating activities 696,907 (55,311) (70,641) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities available-for-sale (633,861) (343,295) (431,598) Maturity or redemption of investment securities available-for-sale 408,500 815,750 430,000 ----------- ----------- ----------- Net cash (used) provided by investing activities (225,361) 472,455 (1,598) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (102,498) (81,008) (74,045) Exercise of stock options 41,835 20,795 178,198 Net change in ESOP loan (12,600) (20,154) (36,008) Redemption of common stock (473,636) (348,271) - ----------- ----------- ----------- Net cash (used) provided by financing activities (546,899) (428,638) 68,145 ----------- ----------- ----------- DECREASE IN CASH (75,353) (11,494) (4,094) CASH AT BEGINNING OF YEAR 120,288 131,782 135,876 ----------- ----------- ----------- CASH AT END OF YEAR $ 44,935 $ 120,288 $ 131,782 =========== =========== ===========
27 MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL The year ended December 31, 1998 was the first complete year of operations as a commercial banking institution. The Community Bank of Tri-County ("the Bank") provided the Tri-County Financial Corporation ("the Company") with record earnings of $2.4 million, an increase of 14.5% over the year ended December 31, 1997. In the five year business plan of the Bank, specific areas of portfolio growth and marketing programs were targeted to create an earnings stream comparable to established community banks. The key component of this strategy was to increase the levels of commercial and consumer loan products. Utilizing the Bank's existing delivery systems, the management began to capitalize on the lucrative niche for community based lending. Market response was favorable and the initial momentum generated even greater increases in commercial and consumer loans than management had expected. The outcome of management's efforts to restructure its portfolio and lines of business was evident in the percentages of growth in targeted lines. Net loans receivable increased by $10.8 million, or 8.8%. Commercial real estate loans grew by $2.9 million or 17.4% and lines of credit grew by $1.3 million or 27.0%. Management failed to meet business plan target growth in the area of second mortgages. With low fixed rate loans available, many borrowers paid off their second mortgages while refinancing their first mortgages to a lower rate. Second mortgages declined $1.1 million, or 6.0%. On the deposit side of the balance sheet, non-interest bearing demand accounts grew by $2.6 million or 35.0% during the year. Transactional accounts comprise $38.5 million, or 25.3% of the deposit base of the Bank at December 31, 1998 compared to $22.7 million or 16% at December 31, 1997. This increase resulted from the Bank's development of accounts geared for the small business customer as well as the creation of a money market indexed account with check withdrawal privileges. Residential mortgage lending continued to be a profit center for the Bank and has produced a volume of $54.8 million in loans, up 4.5% over 1997's level. The low rate environment continued the high refinancing activity. The majority of fixed rate long term loans were sold in the secondary market, with the servicing retained by the Bank, while adjustable rate mortgages and certain shorter maturity fixed rate loans were originated for the Bank's portfolio. In 1998, the continuation of a flat yield curve and the downward pressure on long term treasury rates due to the international flight to quality in fixed rate investments increased the prepayment rate of the Bank's loan portfolio. The high rate of prepayment and subsequent reinvestment of the proceeds in new loans resulted in a marked decline in the overall yield of the loan portfolio. This reduction will affect the future earning stream until the funding costs are able to reprice under a falling rate scenario. The margin between rates earned on the Bank's loan portfolio and the rates paid on its customer deposits was narrowed by 5 basis points from 5.14% to 5.09%. 28 The Bank is continuing to search for locations and platforms to deliver its products to the region in a cost efficient manner. A prime location adjacent to Southern Maryland's only regional mall was acquired in late 1997 and put into operation in the first quarter of 1998. This provided a highly visible commercial branch for further development of market share. The Bank is expanding on its "micro-branching" concept by using lobbies connected with convenience stores while providing full service drive-in hours and ATM access. These micro-branches will be used as in-fill delivery sites and be supported by our anchor branch staffs. Additional ATM sites have been acquired in several retail establishments and management continues to seek such opportunities to serve the local market. These steps are taken to generate fee income and further advance the name recognition of the Bank. In an effort to provide a wider range of services and products to Bank customers and generate additional fee income, two new lines of business were offered in 1998. First, an arrangement was made with a local insurance agency so that property and casualty coverage will be offered, initially to loan customers, but ultimately available to all. Second, with investment and retirement planning of such importance to Bank customers, an investment representative was hired to provide such services. Management anticipates that fee income from these sources will develop slowly, but the customer relationships established will solidify Community Bank's position in the area market. FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's net income for 1998 increased $302,000 or $.43 in basic earnings per share over 1997's record levels. This was a slowing of the earnings growth momentum experienced in 1997 when net income increased $764,000 or $.92 in basic earnings per share over 1996 levels. The Board of the Bank has elected to increase the allowance for loan losses to achieve a sufficient reserve level commensurate with the Bank's portfolio risks and business plan in anticipation of the impending conversion to a commercial bank. The Bank continues to provide for increased loan losses that can be associated with more risky commercial and consumer lending. In both 1998 and 1997, $240,000 was charged against earnings to increase the allowance for loan losses. The weighted average yield on all interest-earning assets was 8.07% in 1998, 8.29% in 1997 and 8.25% in 1996. The interest rate yield curve during the year was flat with a general decline in the level of rates earned. The decrease in the weighted average yield occurred as principal curtailments or payoffs were received and somewhat lower yields were available on the investments acquired with the cash received. Management's asset/liability strategy was to protect against upside movements in interest rates, therefore, maturity extension of investments would have been counterproductive to the strategy. The current economic expansion is entering its seventh year without significant inflationary pressure. 29 As evidenced in the "Gap" chart in the "Market Risk Analysis" section of this discussion, the Bank has exposure to rising rates, particularly in the short to moderate term sectors. There were periods during 1997 when short term rates exceeded long term rates, an "inverted yield curve"; 1998 saw some improvement in the yield curve. However, there is still significant pressure on the Bank's net interest spread because no appreciable relief is obtained in the cost of money with short and intermediate term rates tracking so close to the long term rates. The decline in the level of rates reduced the Bank's cost of funds at a slower pace than the decline in asset returns. The weighted average rate paid on all interest-bearing liabilities was 4.24% in 1998, 4.37% in 1997 and 4.22% in 1996. The Board of Directors of the Bank continually monitors the situation carefully to develop a balance in the portfolio that will conservatively position the Bank for a continuation of the trend without undue risk to market rate turns in either direction. The net interest rate spread was 3.84% in 1998 compared to 3.92% in 1997 and 4.03% in 1996. The trend has been toward a narrowing of the yield over the past several years; the interest rate spread will increase in the future only if a normal interest rate cycle is regained in the economy. If the classic pattern of inflationary pressures and interest rate volatility return to the economic front, a restructuring of the Bank's assets will be necessary to realize increased returns. An interest rate sensitivity analysis follows this section and will provide a more detailed discussion. The continued negative effect of the low long term rate environment on the refinancing activity of the fixed rate portfolio and of the loans serviced for others has decreased loan yields. Further, the Bank's adjustable rate mortgage portfolio is repricing at levels consistent with or above the current fixed rates found in the market. This exposes the ARM portfolio to a faster runoff of loans as well as a flat yield from those which do not pay off. The loan portfolio continues to hold its quality and has no loans identified as impaired under the criteria established by the scope of Statement of Financial Accounting Standards Nos. 114 and 118. The nonaccrual loans for 1998 totaled $269,00 compared to $160,000 for 1997 and $400,000 for 1996. Increasing levels of commercial and consumer loans are expected to create some additional collection problems for the Bank, but these loans are still relatively new and the Bank has not yet experienced an increase in delinquencies in these loan groups. The Bank owned no real estate acquired through foreclosure at the end of 1998 and 1997. OPERATIONAL ANALYSIS Noninterest expense increased by 12.1% or $589,000 to $5,467,000 for 1998 compared to $4,877,000 in 1997 and $4,530,000 after adjustment for the $820,000 SAIF recapitalization charge in 1996. Salaries and employee benefits generated the largest line item dollar increase in 1998, $491,000, as higher personnel levels were required to handle the increase in transactional and business activity and to staff the growing branch network. The Bank has implemented a branch wide incentive plan for its managers that is based on specific operational goals as well as corporate rates of return and quality of loan criteria. The managers may receive cash incentives as well as stock options based on their success in obtaining strategic goals. This greatly expands the coverage of employees under an incentive based pay structure and more closely aligns the manager or executive to the overall performance of the Bank. Further incentive plans for the remaining employees are currently under development. 30 During 1997, in an effort to control future personnel costs, the Board of Directors of the Bank studied the projected long term costs associated with the defined benefit pension plan. As the result of the study, the Board elected to terminate the Defined Benefit Pension Trust of the Bank and to transfer the assets into the participants' 401(k) plan. The net benefit to the Company resulting from this plan curtailment was $105,000 in 1997. No future costs are expected with this plan. This continued the strategy of the Bank to link compensation with performance for its employees. Occupancy expense is increasing as the branch network expands and as the administrative office space is expanded within the home office facility. Deposit insurance costs are incurred at a level just under $100,000 since the conversion to a commercial bank. As a thrift prior to that, the normal recurring costs approached $400,000 annually. YEAR 2000 READINESS DISCLOSURE The Bank's management and Board of Directors has been closely monitoring the problems created by the year 2000 (Y2K) and its effect on data processing systems. Banks are particularly aware of the potential problems due to the high reliance on technology and computerized information systems. Whether an actual threat exists or not, the Bank customer's perception of the problem will directly affect Bank operations. If consumer confidence in general retail operations is lacking, the bank may experience large cash withdrawal demands. This cash would then be used, instead of checks or credit, to satisfy the customer's needs for daily living supplies. Projections of customer withdrawal demands are being made to adequately prepare for the maintenance of cash balances in the branch system. Standby funding sources are being evaluated to meet cash demands. At the same time, an ongoing information program has been established to inform our customers of our state of readiness and of tips for coping with the coming date change. The Bank began its Y2K program in early 1997 and included complete analysis of all Bank functions, documentation of the technology reliance and rating of the systems in order of critical need. Contingency plans are being written and timetables developed for the implementation of the contingency operations in the event of failure in any given area. Testing of the plans will be performed for critical areas. The Bank's capitalized cost of new technology and software over the last three years has exceeded $520,000. All mission critical software systems have been evaluated and upgraded where necessary and possible. The majority of 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 branch locations has been subjected to periodic reviews by its regulators. It has completed its Phase II examination by the Federal Reserve. No material changes to the Bank's Y2K Readiness Plans were required. The Bank complies with the Federal Financial Institutions Examination Council guidelines for Y2K compliance. Continual testing of the systems with its third party provider is ongoing and the testing of mission critical systems is scheduled for completion by June 30, 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. 31 Bank customers can put the Bank at risk by their failure to attain Y2K compliance. In early 1998, borrowers were contacted about their readiness to determine if the collection of loans may be adversely affected. New loan approval procedures include an evaluation of the borrower's Y2K compliance and loan documentation requires certification of the borrower's compliance. The Bank is put at risk by outside parties due to its reliance on them for electricity, telecommunications and other operating needs. The readiness of these outside parties is beyond the Bank's control, though alternative sources are evaluated where available. NET PREMISES AND EQUIPMENT Net premises and equipment increased by 3% or $127,000 in 1998 compared to a 9.5% or $365,000 increase in 1997 over 1996. Continued investment in technology platforms, particularly to prepare for the Y2K situation, and various internal office expansion and renovation required capital outlays in 1998. The purchase of the St. Patrick's Drive branch building during the fourth quarter of 1997 and investment in technology platforms required significant outlays in 1997. BORROWINGS The Bank's borrowing, consisting mainly of advances from the Federal Home Loan Bank of Atlanta ("FHLB"), increased to $32.9 million from $28.4 million at December 31, 1997. These borrowings were used to fund specific loan projects or to create arbitrages with authorized investments matched to the borrowings for a managed spread. This strategy allows for the prudent leveraging of equity to maximize revenue production while managing asset and liability interest rate risk. STOCKHOLDERS' EQUITY Stockholders' equity grew by 10.7%, or $2,046,000 during 1998 to $21,132,000 compared to 11.8% or $2,009,000 to $19,086,000 during 1997. This represents an average net worth to total assets ratio of 10.1%, up from 9.8% in 1997. The net unrealized gain on investment and mortgage-backed securities available for sale included in accumulated other comprehensive income continued to grow, increasing by $207,000 in 1998 in addition to the increase of $353,000 in 1997 due to the effects of the lower long term rate environment on the mortgage portfolio. The valuation allowance is subject to the fluctuations in interest rates and will be reflected in the quarterly statements to the regulatory agencies and shareholders. The Company's total risk based capital ratio for 1998 was 18.27% or $22,023,000 compared to 17.38% or $19,953,000 in 1997. The Tier I risk based capital level for 1998 was $20,483,000 or 17.00% compared to $18,643,000 or 16.24% in 1997. A discussion of the quantitative measures of capitalization and regulatory capital requirements of the Company and its banking subsidiary may be found in Footnote 14 "Regulatory Matters" of the Consolidated Financial Statements. At December 31, 1998, the Bank exceeded all capital requirements and was considered to be "well-capitalized" under regulatory definitions. 32 During the year, the Board of Directors of the Company continued to provide liquidity to its shareholder base through stock repurchases. The Company purchased and retired 20,039 shares for $474,000 in 1998 and 17,000 shares for $348,000 in 1997. With the downward shift in market values for financial institution stock during 1998, the Company utilized its capital management strategy to include repurchases and retirement of stock at levels that would be antidilutive to the shareholder base. LIQUIDITY The Company's liquidity management policies for the Bank are designed to provide for prudent levels of liquidity to be maintained at all times, consistent with the nature of the business being conducted by the Bank. The assets classified as Investment Securities Available-for-Sale are available for leveraging as well as for immediate sale if the situation dictates that course of action. Additionally, the Federal Home Loan Bank of Atlanta is extensively utilized as the Bank's liquidity source in its asset/liability management strategy. The Bank currently has approval to borrow up to thirty percent (30%) of its assets. At December 31, 1998, it had $32.9 million outstanding or 15.9% of its assets. Its year 2000 liquidity plan has been developed and is currently being operated in conjunction with the guidelines of the Federal Reserve and with the cooperation of the FHLB, its primary wholesale source. MARKET RISK ANALYSIS The market risk of the Bank is managed through the Board's Asset and Liability Committee (ALCO). Together with the Bank's management, the committee reviews the sensitivity of the market value of the portfolio equity and interest rate sensitivity of net income. The changes in the market value of portfolio equity as well as the interest income sensitivity are caused by shifts in the market rates of interest and can cause a negative as well as a positive impact in given scenarios. The portfolio is subjected to periodic modeling to test the effects of sudden and sustained interest rate shocks on the market value and the net interest income sensitivity. The Basle Committee on Banking Supervision has set standard measures of portfolio market value equity and interest income sensitivity in a shock environment of an 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:
1998 1997 ------ ------ Sensitivity of market value of portfolio equity: Interest rate changes - adverse scenario: Up 200 basis points -12% -4% Down 200 basis points +5% -5% Sensitivity of net interest income: Interest rate changes - adverse scenario: Up 200 basis points -1% +7% Down 200 basis points +1% -9%
33 The change in percentage for the Market Value of Portfolio Equity declined at the adverse scenario of up 200 basis points in interest rate movement, while the equity value improved in the down 200 basis shock. This reflects the impact of multi-year flat yield curves at lower rate levels. As prepayments have occurred, reinvestment of the proceeds was a lower yields. An immediate market rate increase would made those new investments less valuable. Because the net income of the Bank and Company is derived through the interest spread of the portfolio, the ALCO committee is less concerned with the shock of interest rates on the market value than it is on the interest rate sensitivity because the assets are employed for their income production rather that value appreciation upon sale. The levels of change for both the market value of the portfolio equity and the net interest income sensitivity fall within the policy benchmarks established by the Board. Interest rate sensitivity reflects the change in the Bank's net interest income given assumed interest rate shifts. In the scenarios presented, the most detrimental for the Bank is an upward movement of rates. Neither scenario, however, generates a severe impact to the Bank's earnings. Management feels that a more difficult situation for the Bank to control would exist with rising interest rates. This is due to the composition of the cost of funds and the percentage of wholesale borrowings needed to finance the activities of the Bank. Typically, wholesale borrowings are in large denominations and reprice quickly to reflect sudden changes in the global market. Retail deposits typically are in smaller amounts and are less likely to respond to shifts in rates in a short time period. Therefore, the Bank's portfolio has been structured with an attempt to reasonably minimize the impact from sudden and prolonged upward shifts in interest rates. Interest rate sensitivity may also be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. Gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income and a positive gap would result in an increase in net interest income while, conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The following table illustrates the "gap" position of the Bank at December 31, 1998: 34
0 to 90 91 to 365 Over 1 to Over 3 to Over 5 days days 3 years 5 years years ------- --------- --------- --------- -------- (amounts in thousands) Rate Sensitive Assets: Interest bearing deposits with banks $ 4,152 $ - $ - $ - $ - Investment securities 8,915 - - 10,640 36,852 Loans 33,387 16,908 59,518 12,079 13,021 --------- --------- --------- -------- ------- Total rate sensitive assets 46,454 16,908 59,518 22,719 49,873 Rate Sensitive Liabilities: Noninterest bearing deposits 9,753 - - - - Interest bearing demand deposits 17,005 - - - - Money market deposits 20,775 - - - - Regular savings deposits 25,771 - - - - Time deposits 11,061 26,858 36,586 4,051 - Other borrowed funds and long-term debt 16,500 15,096 - 11,400 - --------- --------- --------- -------- ------- Total rate sensitive liabilities 100,865 31,954 36,586 15,451 - Interest rate sensitivity gap (54,411) (15,046) 22,933 7,268 49,873 Cumulative interest rate sensitivity gap (54,411) (69,457) (46,524) (39,256) 10,617
While a perfectly matched portfolio of assets and borrowings would seem optimal, in community banking enterprises, there exists too little margin for normal profitability and coverage of the cost of operations to attempt a complete match. Therefore, the Board of Directors, through its ALCO committee, monitors certain levels of mismatch in the portfolio consistent with the equity leveraging policies to maintain a profitable level of mismatched assets and their funding costs. IMPACT OF INFLATION The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. In the current interest rate risk environment, liquidity and the maturity structure of the Bank's assets and liabilities are critical to the maintenance of acceptable performance levels. 35 STOCK INFORMATION Tri-County Financial Corporation's stock is not traded or listed on any public exchange. However, stock does change hands over the course of the year. In 1998, the Company was made aware of several trades which occurred. During 1998, a total of 29,176 shares traded, with a high price of $27.50 and a low price of $20. The weighted average price was $23.40. The number of shareholders at March 17, 1999 was 534 and the total outstanding shares was 793,563. On January 22, 1999, the Board of Directors declared a $.20 per share cash dividend payable on April 17, 1999 to shareholders of record on March 17, 1999. On February 25, 1998, the Board of Directors declared a 4% stock dividend and a $.125 per share cash dividend, both payable on April 13, 1998 to shareholders of record on March 13, 1998. Federal regulations impose certain limitations on the payment of dividends and other capital distributions by the Bank. The Bank's ability to pay dividends is governed by the Maryland Financial Institutions Code and the regulations of the Federal Reserve Board. Under the Maryland Financial Institutions Code, a Maryland bank (1) may only pay dividends from undivided profits or, with prior regulatory approval, its surplus in excess of 100% of required capital stock and (2) may not declare dividends on its common stock until its surplus fund equals the amount of required capital stock or, if the surplus fund does not equal the amount of capital stock, in an amount in excess of 90% of net earnings. The Bank's payment of dividends is also subject to the Federal Reserve Board's Regulation H, which limits the dividends payable by a state member bank to the net profits of the Bank then on hand, less the Bank's losses and bad debts. Additionally, the Federal Reserve Board has the authority to prohibit the payment of dividends by a Maryland commercial bank when it determines such payment to be an unsafe and unsound banking practice. Finally, the Bank is not able to pay dividends on its capital stock if its capital would thereby reduced below the remaining balance of the liquidation account established in connection with the Stock Conversion. The Company's ability to pay dividends is governed by the policies and regulations of the Federal Reserve Board which prohibit the payment of dividends under certain circumstances involving the bank holding company's financial condition and capital adequacy. 36 Portfolio Net Spread - -------------------------------------------------------------------------------- PORTFOLIO NET SPREAD December 31, 1998 Weighted Weighted average average rate paid on all on all interest- interest- earning bearing Date assets liabilities Net Spread ------ ---------- ------------- ------------ 1994 8.03% 4.16% 3.87% 1995 8.45% 4.28% 4.17% 1996 8.25% 4.22% 4.03% 1997 8.29% 4.37% 3.92% 1998 8.15% 4.24% 3.91% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RETURN ON ASSETS 1994 1.08% 1995 1.28% 1996 0.77% 1997 1.13% 1998 1.20% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NET INCOME 1994 $1,583,057 1995 $2,027,814 1996 $1,319,727 1997 $2,084,011 1998 $2,386,20 - --------------------------------------------------------------------------------
At December 31, ------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------------------------------------------------------------------------- Total Amount of: Loans Outstanding ......................... $ 134,912,633 $ 123,565,634 $ 111,862,620 $ 107,678,852 $ 98,646,221 Interest and Noninterest-bearing Cash ..... 5,059,474 5,820,753 3,903,612 4,050,219 3,471,953 Investment Securities ..................... 60,121,025 55,751,720 56,783,231 46,858,152 44,526,381 Assets .................................... 207,019,790 191,188,360 178,146,326 164,124,420 153,008,090 Savings Deposits .......................... 151,815,364 142,276,077 135,534,163 130,034,043 126,840,279 Borrowed Money ............................ 33,434,332 29,201,820 24,733,466 17,552,845 12,480,128 Stockholders' Equity ...................... 21,131,966 19,086,079 17,077,452 15,832,925 13,325,589 Number of: Loans Outstanding ......................... 3,063 3,023 2,854 2,792 2,667 Savings Accounts .......................... 15,565 15,303 14,849 14,090 14,409 Offices Open - All Full Service ........... 8 8 8 6 6 For the Year Ended December 31, ------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------------------------------------------------------ Weighted Average Yield on: Loan Portfolio ............................................... 9.00% 9.20% 9.13% 9.38% 8.44% Investment Portfolio .......................................... 6.42 6.48 6.42 6.45 5.24 All Interest-earning Assets ................................... 8.15 8.29 8.25 8.45 8.03 Weighted Average Rate Paid on: Savings Deposits and Escrow ................................... 3.91 4.06 4.05 4.06 3.67 Federal Home Loan Bank Advances and Other Borrowings .......... 5.72 5.91 5.46 6.21 7.02 All Interest-bearing Liabilities .............................. 4.24 4.37 4.22 4.28 3.87 Interest Rate Spread (Spread Between Weighted Average Rate on All Interest-earning Assets and All Interest-bearing Liabilities) ......................... 3.91 3.92 4.03 4.17 4.16 Net Yield (Net Interest Income as a Percentage of Average Interest-earning Assets) ................ 4.21 4.23 4.32 4.46 4.38
SUMMARY OF OPERATIONS
At December 31, --------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------------------------------------------------------------------- Interest Income .............................................. $ 15,726,032 $ 14,993,261 $ 13,471,595 $ 12,900,876 $ 11,262,969 Interest Expense ............................................. 7,596,727 7,350,648 6,406,756 6,094,968 5,117,503 --------------------------------------------------------------------- Net Interest Income .......................................... $ 8,129,305 $ 7,642,613 $ 7,064,839 $ 6,805,908 $ 6,145,466 Loss Provision and Charge offs of Loans ...................... 240,000 240,000 408,000 210,000 154,000 --------------------------------------------------------------------- Net Interest Income After Provision for Loss on Loans ....................... $ 7,889,305 $ 7,402,613 $ 6,656,839 $ 6,595,908 $ 5,991,466 Other Income ................................................. 1,420,536 930,745 798,405 857,467 562,297 Less Noninterest Expense ..................................... 5,466,637 4,877,347 5,350,317 4,098,561 3,928,991 --------------------------------------------------------------------- Income Before Federal Income Tax ............................. $ 3,843,204 $ 3,456,011 $ 2,104,927 $ 3,354,814 $ 2,624,772 Income Tax Expense ........................................... 1,457,000 1,372,000 785,200 1,327,000 1,041,715 Income Tax Benefit - Change in Accounting for Deferred Taxes . -- -- -- -- -- --------------------------------------------------------------------- Net Income ................................................... $ 2,386,204 $ 2,084,011 $ 1,319,727 $ 2,027,814 $ 1,583,057 --------------------------------------------------------------------- Net Income Per Common Share (1) .............................. $ 3.00 $ 2.57 $ 1.65 $ 2.62 $ 1.98 Cash Dividends Declared Per Common Share (2) ................. 158,712 97,627 75,498 70,574 64,751
(1) Restated to reflect 1995, 1996, 1997 and 1998 stock dividends. (2) a $0.10 per common share cash dividend was declared on January 31, 1995, payable to shareholders of record March 3, 1995; a $0.10 per common share cash dividend was declared on January 24, 1996, payable to shareholders of record March 4, 1996; a $0.10 per common share cash dividend was declared on January 24, 1997, payable to shareholders of record March 7, 1997; a $0.125 per common share cash dividend was declared on February 15, 1998, payable to shareholders of record March 13, 1998; a $0.20 per common share cash dividend was declared on January 22,1999, payable to shareholders of record March 17, 1999 Dear Shareholder: I am pleased to report the operating results of Tri-County Financial Corporation and its banking subsidiary, Community Bank of Tri-County, for the year ended December 31, 1998. Net Income increased by 14.5% to $2.4 million while basic earnings per share increased by $.53 or 21.4% to $3.00 per share. At December 31,1999, the total assets of the company had increased 8.3% to $207,000,000. The success of the Company can be attributed to the excellent market position of Community Bank and the growing awareness in the market that defines it as "the" local bank. With eight locations strategically placed in three counties, it enjoys the advantage of competing with the super regional banks by using its closeness to the customer culture while being price sensitive to competition. In utilizing a blend of wholesale investment strategies with commercial banking operations, a consistent return on equity has been realized by the Company over the last several years while the net worth of the Company increased from strong earning streams. The Company's return on average assets has improved to 1.20% in 1998, up from 1.13% in 1997 and .77% in 1996. The bank is following its long-term business strategy by increasing lines of business with higher profit potential than residential lending and establishing fee generating divisions to broaden its relationship with each customer. In 1999, it introduced an affiliation with UVEST, a brokerage service that serves over 150 banks in providing full service brokerage sales. In addition, an agreement with a local general insurance firm has resulted in the increased marketing of property and casualty insurance to our customers. Together, these divisions can begin to penetrate the insurance sector of financial product lines for our customers. The current fee income stream, while modest, is expected to become more substantial as these services gain customer recognition. As we approach the year 2000 date change issue, it is important for our shareholders to know the state of readiness of the Company. For several years your Board and management have closely attended to the issue of mission critical data systems. The Bank's internal data processing systems have been tested and upgraded where necessary. The third party providers of data services are in the process of certifying that they will be ready to handle the date change. Our correspondent banks have advised us of their state of readiness. Even our commercial customers have been notified and are expressing an awareness that is of reasonable comfort to the Bank. The Bank has recently completed the Federal Reserve's Phase II examination without material changes in its readiness plan. For the time available until the end of the year, what remains is the completion and testing of contingency plans. The economic environment in which we operate has created its own set of opportunities as well as problems. While customer confidence in equities has buoyed the stock market, the formation of deposits has virtually ceased in America. This problem will be manifested in a greater dependence by banks on wholesale funds. Further, banks will have to operate as a payment processing entity instead of its more traditional role as a spread based lender. In order to attract those payment streams, the Bank is redefining its traditional retail center strategy and will focus on micro-delivery centers that will be supported by its anchor centers. This should help increase its market share at an efficient cost basis. In closing, our success results from the efforts of many stockholders, all of whom feel an ownership in the Company. That philosophy helps balance long- term growth objectives with short-term horizons, both in decision making and operations. On behalf of the Board of Directors, management and staff, thank you for your support. I am looking forward to serving you in the coming century. Yours truly Michael L. Middleton President and Chairman -----END PRIVACY-ENHANCED MESSAGE-----