-----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, WMSwLt907UaBEiGslK/EbvnC/Jbo1cqwsQzRTkduu5zYXzAWV2vDrdMBs0ZuldT3 CgOYccZHkSw0W3QaqFytZg== 0000950109-99-001187.txt : 19990402 0000950109-99-001187.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950109-99-001187 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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 SEC ACT: SEC FILE NUMBER: 000-18279 FILM NUMBER: 99581152 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 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ Mark One FORM 10-K [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) PART I Item 1. Business The Corporation. Tri-County Financial Corporation (the "Corporation") is a --------------- Maryland corporation that serves as the holding company of Community Bank of Tri-County ("Community Bank" or the "Bank"). The Corporation engages in no significant activity other than holding the stock of the Bank and operating the business of a Maryland chartered commercial bank through the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiary. The Corporation's executive offices are located at 3035 Leonardtown Road, Waldorf, Maryland. Its telephone number is (301) 645-5601. The Bank. The Bank is a Maryland chartered commercial bank which 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. Since its conversion from a federally chartered savings and loan association to a state commercial bank in March of 1997, the Bank's business plan has focused on expanding its business and consumer loan portfolios and increasing the level of its transactional accounts and business deposits. In 1998, the Bank entered into an agreement with UVEST Financial Services Group, Inc. under which the Bank offers investment in various financial products to Bank customers. Under this arrangement, a dual employee of the brokerage service and the Bank sells various investments, including mutual funds, annuities and stocks. The Bank receives a share of the commissions paid by the fund or insurance agency when the customer makes a purchase. The Bank began the UVEST arrangement in late 1998 and, consequently, the arrangement did not generate any income for the Bank in fiscal 1998. In 1997, the Bank entered into an agreement with a local insurance company under which the Bank sells insurance as agent to its customers and others from its branch office located in Bryans Road, Maryland. Under this arrangement, a dual employee of the insurance company and the Bank sells various insurance products including automobile insurance, life and casualty, health and property and credit coverage. The Bank and the insurance company share commission income attributable to these activities. The program did not generate any significant income for the Bank in fiscal 1998. Lending and Investment Activities General. The principal lending activity of the Bank is the origination of single family conventional mortgage loans (i.e., loans that are neither insured nor partially guaranteed by government agencies). To a lesser extent, the Bank also makes second mortgage loans, home equity loans, construction loans, and loans secured by multi-family dwellings. Since its conversion to a commercial bank, the Bank has put more emphasis on attracting and servicing consumer and commercial customers. The Bank offers real estate loans with both fixed and adjustable rates. The Bank's fixed-rate real estate loans may be packaged for resale in the secondary market or securitized for outside borrowings. The Bank has also purchased mortgage-backed securities. Geographic Lending Area. The Bank is authorized to make real estate loans throughout the United States, provided the Bank continues to meet the provisions of the Community Reinvestment Act to serve the communities in which it operates offices. The Bank's lending area consists of Charles, Calvert and St. Mary's counties in Maryland. 1 Residential Real Estate Loans. The primary lending activity of the Bank is the granting of conventional loans to enable borrowers to purchase existing homes. At December 31, 1998, approximately 75% of the Bank's total loan portfolio consisted of loans secured by residential real estate, including residential apartment buildings. Mortgage loans made by the Bank are generally long-term loans, amortized on a monthly basis, with principal and interest due each month. The initial contractual loan payment period for residential loans typically ranges from 10 to 30 years. The Bank's experience indicates that real estate loans remain outstanding for significantly shorter periods than their contractual terms. Borrowers may refinance or prepay loans at their option. The Bank aggressively markets adjustable-rate loans with rate adjustments based upon a United States Treasury bill index. As of December 31, 1998, the Bank had $29.9 million in loans using a U.S. Treasury bill index. The Bank offers mortgages which are adjustable on a one, a three and a five year basis with limitations on upward adjustments of 2% per year and 6% over the life of the loan. The Bank also offers long term fixed rate loans. The fixed rate loans may be packaged and sold in the secondary market, primarily to the Federal Home Loan Mortgage Corporation ("FHLMC"), private mortgage correspondents and the Federal National Mortgage Association ("FNMA") or are exchanged for FHLMC participation certificates or FNMA mortgage-backed securities. The retention of adjustable-rate mortgage loans in the Bank's loan portfolio helps reduce the Bank's exposure to increases in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank makes loans up to 95% of appraised value or sales price of the property, whichever is less, to qualified owner occupants upon the security of single family homes. Non-owner occupied one to four family loans and loans secured by other than residential real estate are generally permitted to a maximum 70% loan-to-value of the appraised value depending on the overall strength of the application. The Bank currently requires that substantially all residential loans with loan to value ratios in excess of 80% carry private mortgage insurance to bring the Bank's exposure down to approximately 70% of the value of the property. All improved real estate which serves as security for a loan made by the Bank must be insured, in the amount and by such companies as may be approved by the Bank, against fire, vandalism, malicious mischief and other hazards. Such insurance must be maintained through the entire term of the loan and in an amount not less than that amount necessary to pay the Bank's indebtedness in full. The Bank has maintained a growing level of home equity loans in recent years. These loans, which totaled $16.3 million at December 31, 1998, are generally made in minimum amounts of $5,000, have terms of up to 20 years, variable rates priced at prime or some margin above prime and require an 80% or 90% loan-to-value ratio, depending on the specific loan program. Commercial Real Estate and Other Non-Residential Real Estate Loans. The Bank has been giving increased emphasis to loans for the construction and permanent financing of commercial and other improved real estate projects, including, to a limited extent, office buildings, as well as churches and other special purpose projects. As a result, commercial real estate loans increased $4.6 million or 30% during 1998. The primary security on a commercial real estate loan is the real property and the leases which produce income for the real property. Commercial real estate loans amounted to approximately $19.7 million or 15% of the Bank's loan portfolio at December 31, 1998. The Bank generally limits its exposure to a single borrower to 15% of the Bank's net worth and frequently participates with other lenders on larger projects. Loans secured by commercial real estate are generally limited to 75% of appraised value and generally have an initial contractual loan payment period ranging from three to 20 years. Virtually all of the Bank's commercial real estate loans, as well as its construction loans discussed below, are secured by real estate located in the Bank's primary market area. 2 Loans secured by commercial real estate are larger and involve greater risks than one- to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank restricts its commercial real estate lending primarily to owner occupied buildings which will, to some extent, be occupied by the borrower as opposed to speculative rental projects. Construction Loans. The Bank offers construction loans to individuals and building contractors primarily for the construction of one- to four-family dwellings. These loans have constituted a significant portion of the Bank's loan originations in recent years. Most of these loans are construction/permanent loans which have fixed rates, payable monthly for the construction period and are followed by a 30 year fixed or adjustable rate permanent loan. Most construction loans provide for disbursement of loan funds based on draw requests submitted by the builder during construction and site inspections by independent inspectors. The Bank will also make a construction loan if the borrower has a commitment from another lender for a permanent loan at the completion of the construction. These loans typically have terms of six months. The application process includes the same items which are required for other mortgage loans and also requires the borrower to submit to the Bank accurate plans, specifications, and costs of the property to be constructed. These items are used as a basis to determine the appraised value of the subject property. Construction loans totaled $16.1 million, or 12% of the Bank's loan portfolio, at December 31, 1998. Construction financing involves a higher degree of risk than long-term financing on improved, occupied real estate. The Bank's risk of loss on a construction loan is dependent primarily upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost, including interest, of completion. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves to be inaccurate, the project may have a value which is insufficient to assure full repayment of the loan. The Bank also offers builders lines of credit, which are revolving notes generally secured by real property. Outstanding builders lines of credit amounted to approximately $4.6 million at December 31, 1998. The Bank offers a builder's master note program in which the builder receives a revolving line of credit at a rate over prime and the Bank obtains security in the form of a first lien on home sites under construction. At December 31, 1998, $3.1 million in such loans were outstanding. In addition, the Bank offers loans for the purpose of acquisition and development of land, as well as loans on undeveloped, subdivided lots for home building by individuals. Land acquisition and development loans, included in construction loans discussed above, totaled $6.8 million at December 31, 1998. The Bank originated approximately $4.1 million of lot loans during 1998, which consisted of 25 loans secured by land in the Bank's market area, the largest of which had a balance of $228,000 at December 31, 1998. Land acquisition and development lending generally involves a higher degree of credit risk than lending on existing residential properties due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on development projects. The Bank's ability to originate all types of construction loans is heavily dependent on the continued demand for single family housing construction in the Bank's market areas. In the event the demand for new houses in the Bank's market areas were to decline, the Bank may be forced to shift a portion of its lending emphasis. There can be no assurance of the Bank's ability to continue growth and profitability in its construction lending activities in the event of such a decline. Consumer and Commercial Loans. The Bank has developed a number of programs to serve the needs of its customers with primary emphasis upon loans secured by automobiles, boats, recreational vehicles and trucks and heavy equipment. The Bank also makes home improvement loans and offers both secured and unsecured lines of credit. 3 The Bank also offers a variety of commercial loan services including term loans, lines of credit and equipment financing. The Bank's commercial loans are primarily underwritten on the basis of the borrower's ability to service the debt from income. Such loans are generally made for terms of five years or less at interest rates which adjust periodically. The Bank believes that the shorter terms and the normally higher interest rates available on various types of consumer and commercial business loans have been helpful in maintaining a profitable spread between the Bank's average loan yield and its cost of funds. Consumer and commercial business loans do, however, entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various Federal and state laws including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee such as the Bank, and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of the underlying collateral. Loan Portfolio Analysis. Set forth below is selected data relating to the composition of the Bank's loan portfolio by type of loan and type of security on the dates indicated. At December 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- (In thousands) Type of Loan: Real Estate Loans -- Residential construction .......... $ 16,147 $ 13,222 $ 7,946 Mortgage .......................... 83,976 77,261 77,845 Builders Line of Credit ........... 4,629 5,054 3,810 Home Equity ....................... 16,314 17,428 14,147 Commercial Lines of Credit ........... 6,161 4,852 3,887 Consumer Loans ....................... 7,889 6,420 5,422 Less: Deferred Loan Fees ......... 930 1,060 1,086 Loan Loss Reserve ....... 1,540 1,310 1,120 -------- -------- -------- Total ........................ $132,646 $121,867 $110,851 ======== ======== ======== Loan Solicitation and Processing. The Bank actively solicits mortgage loan applications from existing customers, local real estate agents, contractors and real estate developers. In addition, the Bank has several commissioned loan officers who originate loans with laptop computers to produce additional loan volume. Loan processing is centralized at the Bank's main office. Upon receipt of a loan application from a prospective borrower, a credit report and verifications are ordered to verify specific information relating to the loan applicant's employment, income and credit standing. An appraisal of the real estate intended to secure the proposed loan is undertaken by a staff or an independent fee appraiser. The Bank uses FHLMC's Prospector Software and Purchase program. This provides the Bank with faster loan approval turnaround and competitive pricing of loans. The Bank's President has the authority to approve loans in amounts up to $750,000. The Bank's Senior Vice Presidents individually have the authority to approve loans in amounts up to $300,000. The residential loan underwriter has authority to approve FHLMC and FNMA conforming loans up to the limits established from time to time by those organizations, currently $240,000. The Business Development Officer has loan authority of $100,000. Any two of 4 the aforementioned individuals may jointly approve a loan up to $1,000,000. Selected branch personnel have lending limits ranging from $10,000 to $50,000 depending on loan type and the employee's position. A loan committee, consisting of the President and two members of the Board of Directors on a rotating basis, ratify all real estate mortgage loans and all other large (in excess of $100,000) loans. Loan applicants are promptly notified of the decision of the Bank by a letter setting forth the terms and conditions of the decision. If approved, these terms and conditions include the amount of the loan, interest rate, amortization term, a brief description of real estate to be mortgaged to the Bank, and the notice of requirement of insurance coverage to be maintained to protect the Bank's interest. Title insurance is required on all loans except second mortgages and home equity loans. Hazard insurance policies are required on all loans in an amount equal to the lesser of the loan balance or the replacement value of the structure. Loan Originations, Purchases and Sales. The Bank actively originates mortgage loans primarily for its own portfolio, and, periodically, for sale in the secondary mortgage market. At December 31, 1998, the Bank was servicing approximately $54 million of loans for others. Fee income from loan servicing totaled approximately $190,000 during 1998. The Bank has periodically purchased whole loans, participation interests in loans and participation certificates. In recent years, the Bank has participated in several residential home construction loans with other well capitalized lenders. Approximately $1.7 million of such loans was outstanding at December 31, 1998. These participation loans are for the acquisition and development of residential properties located in Maryland and the construction of housing stock on a pre sold basis. These loans have competitively priced terms and various maturity structures. Year Ended December 31, --------------------------------- 1998 1997 1996 ------- ------- ------- (In thousands) Loans originated: Real estate loans: Construction loans ................... $14,775 $17,549 $ 9,157 Loans on existing property ........... 10,502 11,542 18,092 Loans refinanced ..................... 12,780 4,081 2,182 Land loans ........................... 4,061 1,337 1,167 Builder lines of credit .............. 20,195 19,691 15,360 Non-residential mortgage loans ....... 1,585 2,898 6,691 Commercial lines of credit .............. 8,171 4,357 3,594 Consumer loans .......................... 5,756 4,234 3,175 ------- ------- ------- Total loans originated ............. $77,825 $65,689 $59,418 ======= ======= ======= Loans sold: Participation loans .................. $ -- $ -- -- Whole loans .......................... 23,173 11,876 8,965 ------- ------- ------- Total loans sold ................... $23,173 $11,876 $ 8,965 ======= ======= ======= The Bank occasionally packages some fixed rate loans it originates into mortgage participation certificates or direct sales utilizing the FHLMC, FNMA and private mortgage correspondents as its secondary market buyer. During 1998, the Bank sold $23 million of loans under direct sales agreements. For further information, see "Management's Discussion and Analysis" in the Annual Report. Loan Commitments. The Bank does not normally negotiate standby commitments for the construction and purchase of real estate. Conventional loan commitments are granted for a one month period. The total amount of the Bank's outstanding commitments to originate real estate loans at December 31, 1998, was approximately $1.7 million, 5 excluding undisbursed portions of loans in process. It has been the Bank's experience that few commitments expire unfunded. Maturity of Loan Portfolio. The following table sets forth certain information at December 31, 1998 regarding the dollar amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity. Demand loans (loans having no stated schedule of repayments and no stated maturity) and home equity loans which reprice within one year are reported as due in one year or less. Due after Due more Due within 1 through 5 than 5 1 year after years from years from December December December 31, 1998 31, 1998 31, 1998 Total ------------ ----------- ---------- ------- (In thousands) Mortgage ....................... $ 1,087 $ 45,442 $ 35,206 $ 81,736 Residential construction ....... 16,147 -- -- 16,147 Builder line of credit ......... 4,629 -- -- 4,629 Commercial line of credit ...... 6,044 -- -- 6,044 Home equity .................... 13,279 526 2,509 16,314 Consumer ....................... 265 5,970 1,541 7,776 -------- -------- -------- -------- $ 41,451 $ 51,938 $ 39,256 $132,646 ======== ======== ======== ======== The next table sets forth the dollar amount of all loans due after one year from December 31, 1998 which have predetermined interest rates and have floating or adjustable interest rates. Floating or Fixed Rates Adjustable Rates Total ---------------- ------- (In thousands) Mortgage ....................... $39,563 $41,085 $80,648 Home equity .................... 3,035 -- 3,035 Consumer ....................... 7,511 -- 7,511 ------- ------- ------- $50,109 $41,085 $91,194 ======= ======= ======= Loan Origination Fees. In addition to interest earned on loans, the Bank receives loan origination fees and discounts for originating loans which are computed as a percentage of the principal amount of the mortgage loan and are charged to the borrower for creation of the loan. The Bank's loan origination fees and discounts are generally 2% to 3% on conventional residential mortgages and 1% to 2% for commercial real estate loans. Loan origination and loan commitment fees are volatile sources of income. Such fees vary with the volume and type of loans and commitments made and purchased and with competitive conditions in mortgage markets which, in turn, tend to vary in response to the demand and availability of money. The Bank has experienced a decrease in loan fee income during periods of unusually high interest rates due to the resulting lack of demand for mortgage loans. The Bank receives other fees and charges relating to existing loans, late charges, and fees collected in connection with a change in borrower or other loan modifications. These fees and charges have not constituted a material source of income for the Bank. 6 Delinquencies. The Bank's collection procedures provide that when a loan is 15 days delinquent, the borrower is contacted by mail and payment is requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower. In certain instances, the Bank will modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his financial affairs. If the loan continues in a delinquent status for 90 days or more, the Bank will generally initiate foreclosure proceedings. Non-Performing Assets and Asset Classification. Loans are reviewed on a regular basis and are placed on a non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. Residential mortgage loans are placed on non-accrual status when either principal or interest is 90 days or more past due unless they are adequately secured and there is reasonable assurance of full collection of principal and interest. Consumer loans generally are charged off when the loan becomes over 120 days delinquent. Commercial business and real estate loans are placed on non-accrual status when the loan is 90 days or more past due. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as foreclosed real estate until such time as it is sold. When such property is acquired, it is recorded at its fair market value. Subsequent to foreclosure, the property is carried at the lower of cost or fair value less selling costs. Any write-down of the property at foreclosure is charged to the allowance for loan losses. The Bank had no foreclosed real estate at December 31, 1998. The following table sets forth information with respect to the Bank's non-performing assets for the periods indicated. During the periods shown, the Bank had no impaired loans within the meaning of Statement of Financial Accounting Standards No. 114 and 118. At December 31, ---------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Accruing loans which are contractually past due 90 days or more: Real Estate: Residential ...................................... $196 $165 $262 Commercial ....................................... -- -- -- Commercial Business ............................... -- -- -- Consumer .......................................... -- -- 79 ---- ---- ---- Total ........................................... $196 $165 $341 ==== ==== ==== Percentage of Total Loans ........................... .15% .14% .32% ==== ==== ==== Loans accounted for on a nonaccrual basis:(1) Real Estate: Residential ...................................... $126 $ 34 $358 Commercial Business .............................. 85 30 -- Consumer ......................................... 58 95 -- ---- ---- ---- Total ........................................... 269 159 358 ---- ---- ---- Total nonperforming loans ........................... $465 $324 $699 ==== ==== ==== - ----------------- (1) Nonaccrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet nonaccrual criteria as established by regulatory authorities. 7 During the fiscal year ended December 31, 1998, gross interest income of $21,000 would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period. No interest on such loans was included in income during 1998. The following table sets forth an analysis of the Bank's allowance for possible loan losses for the periods indicated. Year Ended December 31, ---------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Balance at Beginning of Period ................ $1,310 $1,120 $ 734 ------ ------ ------ Loans Charged-Off: Real Estate: Residential ................................. -- 11 17 Commercial .................................. -- -- -- Commercial Business .......................... -- 21 -- Consumer ..................................... 10 18 5 ------ ------ ------ Total Charge-Offs ............................. 10 50 22 ------ ------ ------ Provision for Possible Loan Losses ........... 240 240 408 ------ ------ ------ Balance at End of Period ...................... $1,540 $1,310 $1,120 ====== ====== ====== Ratio of Net Charge-Offs to Average Loans Outstanding During the Period ............... .01% .04% .02% ====== ====== ====== 8 The following table allocates the allowance for loan losses by loan category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
At December 31, ---------------------------------------------------------------------------- 1998 1997 1996 ----------------------- ----------------------- ----------------------- Percent of Percent of Percent of Loans in Each Loans in Each Loans in Each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Real Estate: Residential ................................. $1,029 74.9% $ 881 75.7% 786 79.3% Commercial and other ........................ 281 14.6 255 15.2 240 12.5 Commercial and unsecured ....................... 117 4.6 87 5.2 41 3.4 Consumer ....................................... 113 5.9 87 3.9 53 4.8 ------ ------ ------ ------ ------ ------ Total allowance for loan losses ........ $1,540 100.0% $1,310 100.0% $1,120 100.0% ====== ====== ====== ====== ====== ======
9 The Bank closely monitors the loan payment activity of all its loans. Any consumer loan which is determined to be uncollectible is charged off against the allowance for loan losses. A loan loss provision is provided by a monthly accrual based on analysis of the loan portfolio characteristics and industry norms. The allowance for loan losses was approximately 1% of outstanding loan balances. This measure was deemed prudent to achieve a sufficient reserve level commensurate with the Bank's portfolio risk. While the Bank believes it has established its existing allowances for loan losses in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to significantly increase its allowance for loan losses, thereby negatively affecting the Bank's financial condition and earnings. Investment Activities Interest income from cash deposits and investment securities generally provides the second largest source of income for the Bank after interest payments on loans. At December 31, 1998, the Bank's interest-bearing cash and investment securities portfolio of $61 million consisted of deposits in other financial institutions, corporate equity securities, money market funds, obligations of U.S. Government Corporations and agencies and asset-backed securities. The Bank is in compliance with applicable liquidity requirements. The Bank is required under Maryland regulations to maintain a minimum amount of liquid assets sufficient to meet the operating needs of the Bank and its customers. These assets may be invested in interest and noninterest-bearing cash and certain other investments. See "Regulation -- Liquidity Requirements" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity" in the Corporation's 1998 Annual Report to Stockholders (the "Annual Report"), which is attached as Exhibit 13 hereto and is incorporated herein by reference. It has been the Bank's policy in the past to maintain a liquidity portfolio above regulatory requirements, and at December 31, 1998, the Bank's liquidity was in compliance with Maryland requirements. Investment decisions are made by authorized officers of the Bank under the supervision of the Bank's Board of Directors. Brokers periodically approved by the Board of Directors are used to effect securities transactions. See Notes 2 and 3 of Notes to Consolidated Financial Statements in the Annual Report. The following table sets forth the carrying value of the Corporation's investment securities portfolio and FHLB and Federal Reserve Bank stock at the dates indicated. At December 31, 1998, their market value was $60.1 million. At December 31, --------------------------- 1998 1997 1996 ------- ------- ------- (In thousands) Investment securities: Asset-backed securities ...................... $45,964 $44,035 $43,354 Money market funds ........................... 293 4,011 4,531 FHLMC, FNMA, SLMA and FHLB notes ............. 9,045 5,003 5,320 Federal Home Loan Bank of Atlanta, Federal Reserve, Federal Home Loan Mortgage Corporation and Federal National Mortgage Corporation Stock .......................... 3,226 2,229 2,267 Treasury bills ............................... 196 192 640 Other investments ............................ 1,397 281 671 ------- ------- ------- Total investment securities and FHLB and Federal Reserve Bank stock .............. $60,121 $55,752 $56,783 ======= ======= ======= 10 The maturities and weighted average yields for investment securities available for sale and held to maturity at December 31, 1998 are shown below. After One After Five One Year or Less Through Five Years Through Ten Years After Ten Years ----------------- ------------------- --------------------- ------------------- Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield -------- ------- -------- ------- -------- ------- -------- -------- (Dollars in thousands) Investment securities available for sale: Corporate equity securities ............ $ 1,221 3.39% $ 1,009 6.34% $ -- --% $ -- --% Asset-backed securities ................ -- -- -- -- 5,936 6.51 41,475 6.67 Money market funds ..................... 293 5.30 -- -- -- -- -- -- Obligations of U.S. government sponsored enterprises (GSE) .......... -- -- -- -- 6,043 6.66 -- -- ------- ------- ------- ------- Total investment securities available for sale ................ $ 1,514 3.76 $ 1,009 6.34 $11,979 6.59 $41,475 6.67 ======= ======= ======= ======= Investment securities held-to-maturity: Asset-backed securities ................ $ -- -- $ -- -- $ -- -- $ 545 8.48 Treasury bills ......................... 197 4.00 -- -- -- -- -- -- Other investments ...................... 1,397 7.30 -- -- -- -- -- -- ------- ------- ------- ------- Total investment securities held-to-maturity .................. $ 1,594 6.89 $ -- -- $ -- -- $ 545 8.48 ======= ======= ======= =======
11 The Bank's investment policy provides that securities that will be held for indefinite periods of time, including securities that will be used as part of the Bank's asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors, are classified as available for sale and accounted for at the fair value. Management's intent is to hold securities reported at amortized cost to maturity. For further information regarding the Corporation's investment securities, see Notes 2 and 3 of Notes to Consolidated Financial Statements in the Annual Report. Savings Activities and Other Sources of Funds General. Deposits are the major source of the Bank's funds for lending and other investment purposes. In addition to deposits, the Bank derives funds from loan principal repayments, advances from the FHLB of Atlanta and other borrowings. Loan repayments are a relatively stable source of funds, while deposit inflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short term basis to compensate for reductions in the availability of other sources of funds. They may also be used on a longer term basis for general business purposes. Deposits. Deposits are solicited throughout the Bank's market area through the Bank's branch system. The Bank offers a wide variety of deposit accounts with terms that vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate. To date, the Bank has not obtained any funds through brokers. In recent years, the Bank has relied increasingly on newly authorized types of short-term accounts and other savings alternatives that are responsive to changes in market rates of interest. Advances. With its membership in the FHLB, the Bank utilizes wholesale borrowings to fund specific loans, such as acquisition and development loans. In addition, to prudently leverage its net worth, the Bank matches certain authorized investments with corresponding borrowings from the FHLB for a managed spread. The following table indicates the amount of the Bank's certificates of deposit and other time deposits of more than $100,000 by time remaining until maturity as of December 31, 1998. Certificates Maturity Period of Deposit --------------- ---------- (In thousands) One through three months.................. $ 1,641 Three through six months.................. 1,721 Six through twelve months................. 2,521 Over twelve months........................ 7,106 ---------- Total................................ $ 12,989 ========== 12 Borrowings. Savings deposits are the primary source of funds for the Bank's lending and investment activities and for its general business purposes. The Bank does, however, rely upon advances from the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Atlanta has served as the Bank's primary borrowing source. Advances from the FHLB are typically secured by the Bank's stock in the FHLB and a portion of the Bank's first mortgage loans. At December 31, 1998, advances from the FHLB of Atlanta were as follows: Weighted Average Year Due Interest Rate Balance -------- ------------- ------- 1999 5.18% $ 21,500,000 2002 5.81% 11,400,000 -------------- $ 32,900,000 The FHLB of Atlanta functions as a central reserve bank providing credit for member institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its home mortgages and other assets (principally, securities which are obligations of, or guaranteed by, the United States government) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an association's net worth or on the FHLB's assessment of the association's creditworthiness. Under its current credit policies, the FHLB limits advances to 30% of a member's assets, but there are no other limitations on the amount of advances which may be made to an association. The Bank, through a finance subsidiary, has also borrowed funds through a collateralized mortgage obligation program. For further information, see Note 7 of Notes to Consolidated Financial Statements. For more information regarding the Bank's borrowings, see Note 7 of Notes to Consolidated Financial Statements. Yields Earned and Rates Paid The pre-tax earnings of the Bank depend significantly upon the spread between the income it receives from its loan and investment portfolios and its cost of money, consisting of the interest paid on deposit accounts and borrowings. 13 The following table sets forth for the periods and at the dates indicated, the weighted average yields earned on the Bank's assets, the weighted average interest rates paid on the Bank's liabilities, together with the interest rate spread and net yield on interest-earning assets.
At Years Ended December 31, December 31, -------------------------- 1998 1998 1997 1996 ------------ ------ ------ ------ Weighted average yield on loan portfolio ................ 8.63% 9.00% 9.20% 9.13% Weighted average yield on interest-bearing cash and investment securities portfolio ....................... 6.13 6.42 6.48 6.42 Weighted average yield on all interest- earning assets ................................... 7.82 8.15 8.29 8.25 Weighted average rate paid on savings deposits and escrow ............................................ 3.75 3.91 4.06 4.05 Weighted average rate paid on Federal Home Loan Bank advances and other borrowings ......................... 5.69 5.72 5.91 5.46 Weighted average rate paid on all interest-bearing liabilities ..................................... 4.10 4.24 4.37 4.22 Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest bearing liabilities) .................................. 3.72 3.91 3.92 4.03 Net yield (net interest income as a percentage of average interest-earning assets) .............................. 4.01 4.21 4.23 4.32
14 Average Balance Sheet The following table presents for the periods indicated the Bank's average balance sheet and reflects the amount of interest income from average interest-earning assets and the resultant yields, as well as the amount of interest expense on average interest-bearing liabilities and the resultant costs, expressed both in dollars and rates. Interest income includes fees which are considered adjustments to yields. Average balances are based on average month-end balances.
For the Year Ended December 31, ---------------------------- At December 31, 1998 1998 --------------------- ---------------------------- Average Average Yield/ Average Yield/ Balance Cost Balance Interest Cost ------- -------- ------- -------- -------- (Dollars in thousands) Interest-earning assets: Loan portfolio ................... $134,912 8.63% $129,375 $ 11,642 9.00% Cash and investment securities ... 64,273 6.13 63,609 4,084 6.42 -------- ---- -------- -------- ---- Total interest-earning assets . 199,185 7.82 192,984 15,726 8.15 -------- ---- -------- -------- ---- Interest-bearing liabilities: Savings deposits and escrow ...... $151,815 3.75% $145,752 $ 5,694 3.91% FHLB advances and other borrowings 33,434 5.69 33,294 1,903 5.72 -------- ---- -------- -------- ---- Total ......................... $185,249 4.10% $179,046 -------- ---- -------- Net interest income................. $ 8,129 ======== Interest rate spread................ 3.72% 3.91% ====== ====== Net yield on interest-earning assets............................ 4.01% 4.21% ====== ====== Ratio of average interest-earning assets to average interest- bearing liabilities............... 107.5% 107.8% ===== ===== For the Year Ended December 31, ----------------------------------------------------------- 1997 1996 --------------------------- ----------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- -------- ------- -------- -------- (Dollars in thousands) Interest-earning assets: Loan portfolio ................... $120,178 $ 11,056 9.20% $110,024 $ 10,045 9.13% Cash and investment securities ... 60,716 3,937 6.48 53,335 3,426 6.42 -------- -------- ---- -------- -------- ---- Total interest-earning assets . 180,894 14,993 8.29 163,359 13,471 8.25 -------- -------- ---- -------- -------- ---- Interest-bearing liabilities: Savings deposits and escrow ...... $139,941 $ 5,683 4.06% $133,331 $ 5,397 4.05% FHLB advances and other borrowings 28,184 1,667 5.91 18,493 1,010 5.46 -------- -------- ---- -------- -------- ---- Total ......................... $168,125 7,350 4.37% $151,824 6,407 4.22% -------- -------- ---- -------- -------- ---- Net interest income................. $ 7,643 $ 7,064 ======== ======== Interest rate spread................ 3.92% 4.03% ====== ====== Net yield on interest-earning assets............................ 4.23% 4.32% ====== ====== Ratio of average interest-earning assets to average interest- bearing liabilities............... 107.6% 107.6% ===== =====
15 Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); (2) changes in rate (changes in rate multiplied by old volume); (3) changes in rate-volume (changes in rate multiplied by the change in volume).
Year Ended December 31, ------------------------------------------------------------------------------ 1997 vs. 1998 1996 vs. 1997 ------------------------------------- -------------------------------------- Increase (Decrease) Increase (Decrease) Due to Due to ------------------------------------- -------------------------------------- Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total ------ ---- ------ ----- ------ ---- ------ ----- (In thousands) Interest income: Loan portfolio................... $ 844 $ (240) $ (18) $ 586 $ 927 $ 77 $ 7 $ 1,011 Interest-earning cash and investment portfolio........... 185 (36) (2) 147 475 32 4 511 -------- ------- ------- ------- ------- -------- -------- -------- Total interest-earning assets....... $ 1,029 $ (276) $ (20) $ 733 $ 1,402 $ 109 $ 11 $ 1,522 ------- ------- ------- ------- ------- -------- -------- -------- Interest expense: Savings deposits and escrow...... $ 229 $ (210) $ (9) $ 10 $ 272 $ 13 $ 1 $ 286 FHLB advances and other borrowings..................... 300 (54) (10) 236 530 83 44 657 -------- ------- ------- ------- ------- ------- -------- -------- Total interest-bearing liabilities.. $ 529 $ (264) $ (19) $ 246 $ 802 $ 96 $ 45 $ 943 ======= ======== ======= ======= ======= ======== ======== ========
Key Operating Ratios The table below sets forth certain performance ratios of the Corporation for the periods indicated. Year Ended December 31, -------------------------- 1998 1997 1996 ------ ------ ------ Return on Assets (Net Income Divided by Average Total Assets) ... 1.20% 1.13% .77% Return on Equity (Net Income Divided by Average Equity) ......... 11.87% 11.53% 7.94% Equity-to-Assets Ratio (Average Equity Divided by Average Total Assets) ................................. 10.10% 9.79% 9.70% Subsidiary Activity In 1985, the Bank formed Tri-County Federal Bank Finance One as a finance subsidiary for the purpose of issuing a $6.5 million collateralized mortgage obligation. In April 1997, the Bank formed a wholly owned subsidiary, Community Mortgage Corporation of Tri-County, to offer mortgage banking and brokerage services to the public. To date, this corporation has been inactive. 16 Depository Institution Regulation General. The Bank is a Maryland commercial bank and its deposit accounts are insured by the Savings Association Insurance Fund ("SAIF"). The Bank is a member of the Federal Reserve System. The Bank is subject to supervision, examination and regulation by the State of Maryland Commissioner of Financial Regulation ("Commissioner") and the Board of Governors of the Federal Reserve (the "FRB") and to Maryland and federal statutory and regulatory provisions governing such matters as capital standards, mergers and establishment of branch offices. The Bank is subject to the FDIC's authority to conduct special examinations. The Bank is required to file reports with the Commissioner and the FRB concerning its activities and financial condition and will be required to obtain regulatory approvals prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions. As a federally insured depository institution, the Bank is subject to various regulations promulgated by the FRB, including Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD (Truth in Savings). The system of regulation and supervision applicable to the Bank establishes a comprehensive framework for the operations of the Bank and is intended primarily for the protection of the FDIC and the depositors of the Bank. Changes in the regulatory framework could have a material effect on the Bank and its respective operations that in turn, could have a material effect on the Corporation. Liquidity Requirements. The Bank is subject to the reserve requirements imposed by the State of Maryland. A Maryland commercial bank is required to have at all times a reserve equal to at least 15% of its demand deposits. The board of directors of a Maryland commercial bank must by resolution direct the commercial bank to maintain this reserve ratio in: (i) cash on hand; (ii) demand deposits in a bank of good standing in any state; or (iii) as to 5% of its demand deposits, on approval of the Commissioner, (a) registered or coupon bonds, or (b) general obligations guaranteed by the United States government, an agency of the United States government, the State of Maryland, or any political subdivision. Additionally, a Maryland commercial bank must have at all times a reserve equal to at least 3% of all time deposits. Time deposit reserves must be kept in: (i) cash on hand; (ii) deposits in a bank of good standing in any state; or (iii) direct obligations of the United States government or of the State of Maryland. Under the Maryland statute, "demand deposits" are defined as deposits payable within 30 days and "time deposits" are defined to be deposits that are payable after 30 days, including a savings account or certificate of deposit that requires at least a 30-day notice before payment. As of December 31, 1998 the Bank was in compliance with Maryland's reserve requirements. Regulatory Capital Requirements. The Bank is subject to FRB capital requirements as well as statutory capital requirements imposed under Maryland law. FRB regulations establish two capital standards for state-chartered banks that are members of the Federal Reserve System ("state member banks"): a leverage requirement and a risk-based capital requirement. In addition, the Federal Reserve may on a case-by-case basis, establish individual minimum capital requirements for a bank that vary from the requirements which would otherwise apply under FRB regulations. A bank that fails to satisfy the capital requirements established under the FRB's regulations will be subject to such administrative action or sanctions as the FRB deems appropriate. The leverage ratio adopted by the FRB requires a minimum ratio of "Tier 1 capital" to adjusted total assets of 5% for banks rated composite 1 under the CAMELS rating system for banks. Banks not rated composite 1 under the CAMELS rating system for banks are required to maintain a minimum ratio of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level and nature of risks of their operations. For purposes of the FRB's leverage requirement, Tier 1 capital generally consists of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits. 17 The risk-based capital requirements established by the FRB's regulations require state member banks to maintain "total capital" equal to at least 8% of total risk-weighted assets. For purposes of the risk-based capital requirement, "total capital" means Tier 1 capital (as described above) plus "Tier 2 capital" defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as Tier 1 capital, certain approved subordinated debt, certain other capital instruments and a portion of the bank's general loss allowance. Total risk-weighted assets equal the sum of the amount of each asset and credit-equivalent amount of each off-balance sheet item after such asset or item is multiplied by an assigned risk weight. The FRB's regulations establish four risk weights, 0%, 20%, 50% and 100%. In addition, the Bank is subject to the statutory capital requirements imposed by the State of Maryland. Under Maryland statutory law, if the surplus of a Maryland commercial bank at any time is less than 100% of its capital stock, then, until the surplus is 100% of the capital stock, the commercial bank: (i) must transfer to its surplus annually at least 10% of its net earnings; and (ii) may not declare or pay any cash dividends that exceed 90% of its net earnings. Prompt Corrective Regulatory Action. Under requirements implementing the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators generally measure a depository institution's capital adequacy on the basis of the institution's total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). Under the regulations, an institution that is not subject to an order or written directive to meet or maintain a specific capital level will be deemed "well capitalized" if it also has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized" institution is an institution that does not meet the definition of well capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the institution has a composite 1 CAMEL rating). An "undercapitalized institution" is an institution that has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the association has a composite 1 CAMEL rating). A "significantly undercapitalized" institution is defined as an institution that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically undercapitalized" institution is defined as an institution that has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights. The FRB may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically under-capitalized) if the FRB determines, after notice and an opportunity for a hearing, that the institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMEL rating category. At December 31, 1998, the Bank was classified as "well capitalized" under these regulations. Deposit Insurance. The Bank is required to pay assessments based on a percentage of its insured deposits to the FDIC for insurance of its deposits by the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC, which is determined by the institution's capital level and supervisory evaluations. Based on the data reported to regulators for the date closest to the last day of the seventh month preceding the semi-annual assessment period, institutions are assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- using the same percentage criteria as in the prompt corrective action regulations. See " -- Prompt Corrective Action." Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. Subgroup A consists of financially sound institutions with only a few minor weaknesses. Subgroup B consists of 18 institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the deposit insurance fund. Subgroup C consists of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. The Bank is currently classified in Subgroup A under these regulations. Federal Reserve System. Pursuant to regulations of the FRB, all FDIC-insured depository institutions must maintain average daily reserves against their transaction accounts. Because required reserves must be maintained in the form of vault cash or in a noninterest bearing account at a Federal Reserve Bank, the effect of the reserve require ment is to reduce the amount of the institution's interest-earning assets. At December 31, 1998, the Bank met its reserve requirements. The Bank is a member of the Federal Reserve System and has subscribed for stock in the Federal Reserve Bank of Richmond in an amount equal to 6% of the Bank's common stock and surplus. The monetary policies and regulations of the FRB have a significant effect on the operating results of commercial banks. The FRB's policies affect the levels of bank loans, investments and deposits through its open market operation in United States government securities, its regulation of the interest rate on borrowings of member banks from Federal Reserve Banks and its imposition of non-earning reserve requirements on all depository institutions, such as the Bank, that maintain transaction accounts or non-personal time deposits. Transactions with Affiliates. Transactions between state member banks and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a state member bank is any company or entity which controls, is controlled by or is under common control with the state member bank. In a holding company context, the parent holding company of a state member bank (such as the Corporation) and any companies which are controlled by such parent holding company are affiliates of the savings association or state member bank. Generally, Sections 23A and 23B (i) limit the extent to which the institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no state member bank may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the state member bank. State member banks are also subject to the restrictions contained in Section 22(h) of the Federal Reserve Act on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to an executive officer and to a greater than 10% stockholder of a state member bank (18% in the case of institutions located in an area with less than 30,000 in population), and certain affiliated entities of either, may not exceed, together with all other outstanding loans to such person and affiliated entities the institution's loan to one borrower limit (generally equal to 15% of the institution's unimpaired capital and surplus and an additional 10% of such capital and surplus for loans fully secured by certain readily marketable collateral). Section 22(h) also prohibits loans, above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and greater than 10% stockholders of a state member bank, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any "interested" director not participating in the voting. The FRB has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval if required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, the FRB pursuant to Section 22(h) requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons. 19 State member banks are also subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act on loans to executive officers and the restrictions of 12 U.S.C. ss. 1972 on certain tying arrangements and extensions of credit by correspondent banks. Section 22(g) of the Federal Reserve Act requires that loans to executive officers of depository institutions not be made on terms more favorable than those afforded to other borrowers, requires approval for such extensions of credit by the board of directors of the institution, and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. Section 1972 prohibits (i) a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions, and (ii) extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. Dividend Limitations. The Bank's ability to pay dividends is governed by the Maryland Financial Institutions Code and the regulations of the FRB. 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 are subject to the FRB'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 FRB has the authority to prohibit the payment of dividends by a state member bank when it determines such payment to be an unsafe and unsound banking practice. Finally, the Bank would not be 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 its mutual to stock conversion. Regulation of the Corporation General. The Corporation, as the sole shareholder of the Bank, is a bank holding company and registered as such with the FRB. Bank holding companies are subject to comprehensive regulation by the FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and the regulations of the FRB. As a bank holding company, the Corporation is required to file with the FRB annual reports and such additional information as the FRB may require, and is subject to regular examinations by the FRB. The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things, operating a savings institution, mortgage company, finance company, credit card company or factoring company; 20 performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers' checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. Under Maryland statutory law, acquisitions of 25% or more of the voting stock of a commercial bank or a bank holding company and other acquisitions of voting stock of such entities which affect the power to direct or to cause the direction of the management or policy of a commercial bank or a bank holding company must be approved in advance by the Commissioner. Any person proposing to make such an acquisition must file an application with the Commissioner at least 60 days before the acquisition becomes effective. The Commissioner may deny approval of any such acquisition if the Commissioner determines that the acquisition is anticompetitive or threatens the safety or soundness of a banking institution. Any voting stock acquired without the approval required under the statute may not be voted for a period of 5 years. This restriction is not applicable to certain acquisitions by bank holding companies of the stock of Maryland banks or Maryland bank holding companies which are governed by Maryland's holding company statute. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and its Application in Maryland. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Act") was enacted to ease restrictions on interstate banking. Effective September 29, 1995, the Act allows the FRB to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Act also prohibits the FRB from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. The Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the Act. Pursuant to the Act, the FRB may approve an application of an adequately capitalized and adequately managed non-Maryland bank holding company to acquire control of, or acquire all or substantially all of the assets of, a Maryland bank, as long as certain requirements of the Act are met. Additionally, the Act authorizes the federal banking agencies to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks opts out of the Act by adopting a law after the date of enactment of the Act and prior to June 1, 1997 that applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. The State of Maryland has enacted legislation that authorizes interstate mergers involving Maryland banks. The Maryland statute also authorizes out-of-state banks to establish branch offices in Maryland by means of merger, branch acquisition or de novo branching. Dividends. The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company's capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the FRB pursuant to FDICIA, the FRB may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized". See "Depository Institution Regulation -- Prompt Corrective Regulatory Action." 21 Bank holding companies are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the their consolidated retained earnings. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. Capital Requirements. The FRB has established capital requirements, similar to the capital requirements for state member banks described above, for bank holding companies with consolidated assets of $150 million or more. As of December 31, 1998, the Corporation's levels of consolidated regulatory capital exceeded the FRB's minimum requirements. Federal and State Taxation The Corporation and its subsidiaries currently file a consolidated federal income tax return based on a fiscal year ending December 31. The Bank is subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Code") in the same general manner as other corporations. In its form as a savings bank until March 1997, through tax years beginning before December 31, 1995, savings associations such as the Bank which met certain definitional tests and other conditions prescribed by the Code benefitted from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. For purposes of the bad debt reserve deduction, loans are separated into "qualifying real property loans," which generally are loans secured by interests in real property, and nonqualifying real property loans, which are all other loans. The bad debt reserve deduction with respect to nonqualifying loans must be based on actual loss experience. The amount of the bad debt reserve deduction with respect to qualifying real property loans may be based upon actual loss experience (the "experience method") or a percentage of taxable income determined without regard to such deduction (the "percentage of taxable income method"). The Bank generally elected to use the method which resulted in the greatest deduction for federal income tax purposes in any given year. Neither the Corporation nor the Bank's federal income tax returns have been audited during the past five years. For 1997, the Bank was required to file a franchise tax return with the State of Maryland which computes the tax at a rate of 7% on the Bank's net earnings, as defined. Under current tax laws, the Bank is no longer subject to the franchise tax, but files a corporate return with the State of Maryland. For additional information regarding federal and state taxes payable by the Corporation, see Note 8 of the Notes to Consolidated Financial Statements. Competition The Bank faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of real estate loans. Its most direct competition for deposits and loans comes from other banks, from savings and loan associations, federal and state credit unions located in its primary market area. The Bank faces additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The Bank competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of the services it provides borrowers, real estate brokers, and home builders. It competes for deposits by offering depositors a wide variety of savings accounts, checking accounts, convenient office locations, tax-deferred retirement programs, and other miscellaneous services. The Bank has also utilized direct mail, telemarketing and 22 newspaper advertising to help increase deposits. It provides ongoing training for its staff in an attempt to ensure high quality service. Personnel As of December 31, 1998, the Bank had 75 full-time employees and 10 part-time employees. The employees are not represented by a collective bargaining agreement. The Bank believes its employee relations are good. 23 Item 2. Properties - ------------------- The following table sets forth the location of the Bank's offices, as well as certain additional information relating to these offices as of December 31, 1998. Year Facility Leased Approximate Office Commenced or Square Location Operation Owned Footage - -------- --------- ----- ------- Main Office 1974 Owned 16,500 3035 Leonardtown Road Waldorf, Maryland Branch Office (1) 1974 Owned 1,000 502 Great Mills Road Lexington Park, Maryland Branch Office (1) 1992 Owned 2,500 Rt. 235 and Maple Road Lexington Park, Maryland Branch Office 1961 Owned 2,500 Route 5 and Lawrence Avenue Leonardtown, Maryland Branch Office (2) 1990 Leased 24,200 Potomac Square 729 North 301 Highway La Plata, Maryland Branch Office 1991 Leased 1,400 10321 Southern Md. Blvd. Dunkirk, Maryland Branch Office 1996 Owned 2,500 8010 Matthews Road Bryans Road, Maryland Branch Office (3) 1998 Leased (Land) 2,840 20 St. Patrick's Drive Owned (Building) Waldorf, Maryland Branch Office 1997 Leased 126 Charles County Community College 8730 Mitchell Road La Plata, Maryland - ------------- (1) The Bank purchased land early in 1992, and built a new Lexington Park branch office which opened in August 1992. The Bank is currently leasing out the former office space and is actively seeking to sell the site. (2) Includes land purchased in February 1993 as potential branch location. (3) The Bank purchased the location in 1998. The building is owned by the Bank with the land on a lease basis. 24 NCR currently maintains all accounting records for the Bank's deposits and loans. The Bank's general ledger and other accounting needs are met through the use of internal computer systems. The net book value of the Bank's investment in premises and equipment less accumulated depreciation totaled $4.3 million at December 31, 1998. See Note 5 of the Notes to Consolidated Financial Statements. Item 3. Legal Proceedings - -------------------------- Neither the Corporation, the Bank, nor any subsidiary is engaged in any legal proceedings of a material nature at the present time. From time to time the Bank is a party to legal proceedings in the ordinary course of business. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1998. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder - -------------------------------------------------------------------------------- Matters ------- The information contained under the section caption "Stock Information" in the Annual Report is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- The information contained in the table captioned "Selected Consolidated Financial and Other Data" in the Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations ------------- The information contained in the section captioned "Results of Operations" in the Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The financial statements contained in the Annual Report which are listed under Item 14 herein, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure -------------------- Not applicable. 25 PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information contained under the section captioned "Proposal I -- Election of Directors" in the Corporation's definitive proxy statement for the Corporation's 1998 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. The executive officers of the Corporation are as follows: Michael L. Middleton (51 years old) is Chief Executive Officer of the Corporation and the Bank. He joined the Bank in 1973 and served in various management positions until 1979 when he became president of the Bank. Mr. Middleton is a Certified Public Accountant and holds a Masters of Business Administration. As President and Chief Executive Officer of the Bank, Mr. Middleton is responsible for the overall operation of the Bank pursuant to the policies and procedures established by the Board of Directors. Mr. Middleton is a member of the Board of Directors of the FHLB of Atlanta, a member of the Rotary Club of Waldorf and is a Paul Harris Fellow. Henry A. Shorter, Jr. (68 years old) was the Secretary of the Corporation and the Bank until December 31, 1998. He has served in this capacity with the Bank since 1968. Mr. Shorter is a past member of the Board of Directors of the Physicians Memorial Hospital located in La Plata, Maryland. C. Marie Brown (56 years old) has been employed with the Bank for over 20 years and was appointed Chief Operating Officer (COO) in 1998. Prior to her appointment as COO, Ms. Brown served as Senior Vice President of the Bank. Beaman Smith (53 years old) was the Treasurer of the Corporation in 1998 and became Secretary-Treasurer in January 1999 and has been the president of Accosystems, Inc., a computer software company, since 1989. Prior to that time, Mr. Smith was a majority owner of the Smith's Family Honey Company in Bryans Road, Maryland. Mr. Smith is a Vice President of Fry Plumbing Company of Washington, D.C., a Trustee of the Ferguson Foundation, a member of the Bryans Road Sports Council and the Treasurer of the Mayaone Association. Eileen M. Ramos (42 years old) joined the Bank as Chief Financial Officer in September 1994. Prior to that time, Ms. Ramos was a partner with the accounting firm of Councilor, Buchanan & Mitchell, P.C. She is a member of the American Institute of CPAs, the District of Columbia Institute of CPAs and the Financial Managers Society. Gregory C. Cockerham (44 years old) joined the Bank in November 1988 and has served as Chief Lending Officer (CLO) since 1998. Prior to his appointment as CLO, Mr. Cockerham served as Senior Vice President of Lending at the Bank. Mr. Cockerham has been in banking for 22 years. He is a Paul Harris Fellow with the Rotary Club of Charles County and serves on various civic boards in the County. Item 11. Executive Compensation - -------------------------------- The information contained under the section captioned "Proposal I -- Election of Directors - Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Owners The information required by this item is incorporated herein by reference to the sections captioned "Proposal I -- Election of Directors" and "Voting Securities and Principal Holders Thereof" of the Proxy Statement. 26 (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned "Proposal I -Election of Directors" of the Proxy Statement. (c) Changes in Control Management of the Corporation knows of no arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the registrant. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors" and "Transactions with the Corporation and the Bank" of the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Report of Independent Certified Public Accountants* Tri-County Financial Corporation* (a) Consolidated Statements of Financial Condition at December 31, 1998 and 1997 (b) Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 (c) Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 (d) Consolidated Statements of Cash Flow for the Years Ended December 31, 1998, 1997 and 1996 (e) Notes to Consolidated Financial Statements --------------- * Incorporated by reference to the Annual Report. 2. All schedules have been omitted as the required information is either inapplicable or included in the Notes to Consolidated Financial Statements. 3. Exhibits (3)(a) Articles of Incorporation of Tri-County Financial Corporation** (3)(b) Bylaws of Tri-County Financial Corporation ** (10)(a) Tri-County Financial Corporation 1995 Stock Option and Incentive Plan, as amended (10)(b) Tri-County Financial Corporation 1995 Stock Option Plan for Non-Employee Directors, as amended (10)(c) Employment Agreement with Michael L. Middleton, as amended, C. Marie Brown, as amended and Gregory C. Cockerham, as amended (13) Annual Report to Stockholders for the Fiscal Year Ended December 31, 1998 (21) Subsidiaries of the Registrant (23) Consent of Stegman & Company (27) Financial Data Schedule 27 (b) No reports on Form 8-K have been filed during the last quarter of the fiscal year covered by this report. (c) The exhibits required by Item 601 of Regulation S-K are either filed as part of this Annual Report on Form 10-K or incorporated by reference herein. (d) There are no other financial statements and financial statement schedules which were excluded from the Annual Report pursuant to Rule 14a-3(b)(1) which are required to be included herein. ---------------- ** Incorporated by reference to the registrant's Form S-4 Registration Statement No. 33-31287. 28 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: March 26, 1999 By: /s/ Michael L. Middleton ------------------------------------- Michael L. Middleton President and Chief Executive Officer (Duly Authorized Representative) Date: March 26, 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: March 26, 1999 Date: March 26, 1999 By: /s/ Henry A. Shorter, Jr. By: /s/ W. Edelen Gough, Jr. -------------------------------------- ---------------------------- Henry A. Shorter, Jr. W. Edelen Gough, Jr. (Director) (Director) Date:March 26, 1999 Date: March 26, 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: March 26, 1999 Date: March 26, 1999 By: /s/ Beaman Smith -------------------------------------- Beaman Smith (Director and Secretary/Treasurer) Date: March 26, 1999
29 INDEX TO EXHIBITS
Exhibit No. Description Page - ----------- ----------- ---- (3)(a) Articles of Incorporation of Tri-County Financial Corporation* (3)(b) Bylaws of Tri-County Financial Corporation* (10)(a) Tri-County Financial Corporation 1995 Stock Option and Incentive Plan, as amended (10)(b) Tri-County Financial Corporation 1995 Stock Option Plan for Non-Employee Directors, as amended (10)(c) Employment Agreement with Michael L. Middleton, as amended, C. Marie Brown, as amended and Gregory C. Cockerham, as amended (13) Annual Report to Stockholders for the Fiscal Year Ended December 31, 1998 (21) Subsidiaries of the Registrant (23) Consent of Stegman & Company (27) Financial Data Schedule
- --------------- * Incorporated by reference to the registrant's Form S-4 Registration Statement No. 33-31287. 30 EX-10.A 2 1995 STOCK OPTION AND INCENTIVE PLAN EXHIBIT 10(a) TRI-COUNTY FINANCIAL CORPORATION 1995 STOCK OPTION AND INCENTIVE PLAN 1. Purpose of the Plan. The purpose of this Tri-County Financial Corporation Stock Option and Incentive Plan (the "Plan") is to advance the interests of the Company through providing select key Employees of the Bank, the Company, and their 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 addi tional incentive to key Employees of the Company or any Affiliate 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) "Awards" shall mean, collectively, Options and SARs, unless the context clearly indicates a different meaning. (d) "Bank" shall mean Tri-County Federal Savings Bank of Waldorf. (e) "Board" shall mean the Board of Directors of the Company. (f) "Change in Control" shall mean: (i) the execution of an agreement for the sale of all, or a material portion, of the assets of the Company; (ii) the execution of an agreement for a merger or recapitalization of the Company or any merger or recapitalization whereby the Company is not the surviving entity; (iii) a change of control of the Company, as otherwise defined or determined by the Office of Thrift Supervision or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Company by any person, trust, entity or group. "Imminent Change in Control" shall refer to any offer or announcement, oral or written, by any person or persons acting as a group, to acquire control of the Company. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. (h) "Committee" shall mean the Stock Option Committee appointed by the Board in accordance with Paragraph 5(a) hereof. (i) "Common Stock" shall mean the common stock, par value $$.01 per share, of the Company. (j) "Company" shall mean Tri-County Financial Corporation (k) "Continuous Service" shall mean the absence of any interruption or termination of service as an Employee of the Company or an Affiliate. Continuous Service shall not be considered interrupted in the case of sick 1 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. (l) "Disability" shall mean a physical or mental condition, which in the sole and absolute discretion of the Committee, is reasonably expected to be of indefinite duration and to substantially prevent a Participant from fulfilling his or her duties or responsibilities to the Company or an Affiliate. (m) "Disinterested Person" shall mean any member of the Board who, at the time discretion under the Plan is exercised, is a "disinterested person" within the meaning of Rule 16b-3. (n) "Effective Date" shall mean the date specified in Paragraph 14 hereof. (o) "Employee" shall mean any person employed by the Company, the Bank, or an Affiliate. (p) "Exercise Price" shall mean the price per Optioned Share at which an Option or SAR may be exercised. (q) "ISO" means an option to purchase Common Stock which meets the requirements set forth in the Plan, and which is intended to be and is identified as an "incentive stock option" within the meaning of Section 422 of the Code. (r) "Market Value" shall mean the fair market value of the Common Stock, as determined under Paragraph 7(b) hereof. (s) "Non-ISO" means an option to purchase Common Stock which meets the requirements set forth in the Plan but which is not intended to be and is not identified as an ISO. (t) "Option" means an ISO and/or a Non-ISO. (u) "Optioned Shares" shall mean Shares subject to an Award granted pursuant to this Plan. (v) "Participant" shall mean any person who receives an Award pursuant to the Plan. (w) "Plan" shall mean this Tri-County Financial Corporation 1995 Stock Option and Incentive Plan. (x) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. (y) "Share" shall mean one share of Common Stock. (z) "SAR" (or "Stock Appreciation Right") means a right to receive the appreciation in value, or a portion of the appreciation in value, of a specified number of shares of Common Stock. (aa) "Year of Service" shall mean a full twelve-month period, measured from the date of an Award and each annual anniversary of that date, during which a Participant has continuously been an Employee of the Company or an Affiliate. 3. Term of the Plan and Awards. 2 (a) Term of the Plan. The Plan shall continue in effect for a term of ten years from the Effective Date, unless sooner terminated pursuant to Paragraph 17 hereof. No Award shall be granted under the Plan after ten years from the Effective Date. (b) Term of Awards. The term of each Award granted under the Plan shall be established by the Committee, but shall not exceed 10 years; provided, however, that in the case of an Employee who owns Shares representing more than 10% of the outstanding Common Stock at the time an ISO is granted, the term of such ISO shall not exceed five years. 4. Shares Subject to the Plan. (a) General Rule. Except as otherwise required by the provisions of Paragraph 11 hereof, the aggregate number of Shares deliverable pursuant to Awards shall not exceed 32,375 Shares. Such Shares may either be authorized but unissued Shares or Shares held in treasury. If any Awards should expire, become unexercisable, or be forfeited for any reason without having been exercised or without having become vested in full, the Optioned Shares shall, unless the Plan shall have been terminated, be available for the grant of additional Awards under the Plan. (b) Special Rule for SARs. The number of Shares with respect to which an SAR is granted, but not the number of Shares which the Company delivers or could deliver to an Employee or individual upon exercise of an SAR, shall be charged against the aggregate number of Shares remaining available under the Plan; provided, however, that in the case of an SAR granted in conjunction with an Option, under circumstances in which the exercise of the SAR results in termination of the Option and vice versa, only the number of Shares subject to the Option shall be charged against the aggregate number of Shares remaining available under the Plan. The Shares involved in an Option as to which option rights have terminated by reason of the exercise of a related SAR, as provided in Paragraph 9 hereof, shall not be available for the grant of further Options under the Plan. 5. Administration of the Plan. (a) Composition of the Committee. The Plan shall be administered by the Committee, which shall consist of not less than three (3) members of the Board who are Disinterested Persons. Members of the Committee shall serve at the pleasure of the Board. In the absence at any time of a duly appointed Committee, the Plan shall be administered by those members of the Board who are Disinterested Persons. (b) Powers of the Committee. Except as limited by the express provisions of the Plan or by resolutions adopted by the Board, the Committee shall have sole and complete authority and discretion (i) to select Participants and grant Awards, (ii) to determine the form and content of Awards to be issued in the form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to prescribe, amend and rescind rules and regulations relating to the Plan, and (v) to make other determinations necessary or advisable for the administration of the Plan. The Committee shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be deemed the action of the Committee. (c) Agreement. Each Award shall be evidenced by a written agreement containing such provisions as may be approved by the Committee. 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, but each Agreement may include such additional provisions and restrictions determined by the Committee, in its discretion, provided that such additional provisions and restrictions are not inconsistent with the terms of the Plan. In particular, the Committee shall set forth in each Agreement (i) the Exercise Price of an Option or SAR, (ii) the 3 number of Shares subject to, and the expiration date of, the Award, (iii) the manner, time and rate (cumulative or otherwise) of exercise or vesting of such Award, and (iv) the restrictions, if any, to be placed upon such Award, or upon Shares which may be issued upon exercise of such Award. The Chairman of the Committee and such other directors and officers as shall be designated by the Committee are hereby authorized to execute Agreements on behalf of the Company and to cause them to be delivered to the recipients of Awards. (d) Effect of the Committee's Decisions. All decisions, determinations and interpretations of the Committee 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 Committee 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 Award, granted hereunder to the full extent provided for under the Company's governing instruments with respect to the indemnification of directors. 6. Grant of Options. (a) General Rule. Only Employees shall be eligible to receive Awards. In selecting those Employees to whom Awards will be granted and the number of shares covered by such Awards, the Committee shall consider the position, duties and responsibilities of the eligible Employees, the value of their services to the Company and its Affiliates, and any other factors the Committee may deem relevant. (b) Special Rules for ISOs. The aggregate Market Value, as of the date the Option is granted, of the Shares with respect to which ISOs are exercisable for the first time by an Employee during any calendar year (under all incentive stock option plans, as defined in Section 422 of the Code, of the Company or any present or future Affiliate of the Company) shall not exceed $100,000. Notwithstanding the foregoing, the Committee may grant Options in excess of the foregoing limitations, in which case such Options granted in excess of such limitation shall be Options which are Non-ISOs. 7. Exercise Price for Options. (a) Limits on Committee Discretion. The Exercise Price as to any particular Option granted under the Plan shall not be less than 100% of the Market Value of the Optioned Shares on the date of grant. In the case of an Employee who owns Shares representing more than 10% of the Company's outstanding Shares of Common Stock at the time an ISO is granted, the Exercise Price shall not be less than 110% of the Market Value of the Optioned Shares at the time the ISO is granted. (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 not less than 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 not less than 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 not less than 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 Committee, in its sole and absolute discretion. Notwithstanding the foregoing, in the event that either (i) the Committee exercises its discretion to impose transfer (or other) restrictions on the Shares subject to an Option, or (ii) the Plan requires specified transfer restrictions, the Committee shall make an appropriate adjustment 4 in determining the Market Value of the Shares subject to such an Option (in order to take into account that their fair market value may be less than the fair market value of unrestricted Shares). (c) Reissuance of Options and SARs. Notwithstanding anything herein to the contrary, the Committee shall have the authority to cancel outstanding Options and/or SARs with the consent of the Participant and to reissue new Options and/or SARs at a lower Exercise Price equal to the then Market Value per share of Common Stock in the event that the Market Value per share of Common Stock at any time prior to the date of exercise of outstanding Options and/or SARs falls below the Exercise Price. 8. Exercise of Options. (a) Generally. Any Option granted hereunder shall be exercisable at such times and under such conditions as shall be permissible under the terms of the Plan and of the Agreement granted to a Participant. An Option may not be exercised for a fractional Share. (b) Procedure for Exercise. A Participant may exercise Options, subject to provisions relative to its termination and limitations on its exercise, only by (1) written notice of intent to exercise the Option with respect to a specified number of Shares, and (2) payment to the Company (contemporaneously with 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 Shares with respect to which the Option is then being exercised. Each such notice (and payment where required) shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Treasurer of the Company at the Company's executive offices. Common Stock utilized in full or partial payment of the Exercise Price for Options shall be valued at its Market Value at the date of exercise, and may consist of Shares subject to the Option being exercised. (c) Period of Exercisability. Except to the extent otherwise provided in the terms of an Agreement, an Option may be exercised by a Participant only while he is an Employee and has maintained Continuous Service from the date of the grant of the Option, or within three months after termination of such Continuous Service (but not later than the date on which the Option would otherwise expire), except if the Employee's Continuous Service terminates by reason of (1) "Just Cause" which for purposes hereof shall have the meaning set forth in any unexpired employment or severance agreement between the Participant and the Bank and/or the Company (and, in the absence of any such agreement, shall mean termination because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order), then the Participant's rights to exercise such Option shall expire on the date of such termination; (2) death, then to the extent that the Participant would have been entitled to exercise the Option immediately prior to his death, such Option of the deceased Participant may be exercised within two years from the date of his death (but not later than the date on which the Option would otherwise expire) 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; (3) Disability, then to the extent that the Participant would have been entitled to exercise the Option immediately prior to his or her Disability, such Option may be exercised within one year from the date of termination of employment due to Disability, but not later than the date on which the Option would otherwise expire. 5 Notwithstanding the provisions of any Option which provides for its exercise in installments or based on the Participant's future Continuous Service, such Option shall become immediately and fully exercisable upon the Participant's death or Disability. (d) Effect of the Committee's Decisions. The Committee's determination whether a Participant's Continuous Service has ceased, and the effective date thereof, shall be final and conclusive on all persons affected thereby. 6 9. SARs (Stock Appreciation Rights) (a) Granting of SARs. In its sole discretion, the Committee may from time to time grant SARs to Employees either in conjunction with, or independently of, any Options granted under the Plan. An SAR granted in conjunction with an Option may be an alternative right wherein the exercise of the Option terminates the SAR to the extent of the number of shares purchased upon exercise of the Option and, correspondingly, the exercise of the SAR terminates the Option to the extent of the number of Shares with respect to which the SAR is exercised. Alternatively, an SAR granted in conjunction with an Option may be an additional right wherein both the SAR and the Option may be exercised. An SAR may not be granted in conjunction with an ISO under circumstances in which the exercise of the SAR affects the right to exercise the ISO or vice versa, unless the SAR, by its terms, meets all of the following requirements: (1) The SAR will expire no later than the ISO; (2) The SAR may be for no more than the difference between the Exercise Price of the ISO and the Market Value of the Shares subject to the ISO at the time the SAR is exercised; (3) The SAR is transferable only when the ISO is transferable, and under the same conditions; (4) The SAR may be exercised only when the ISO may be exercised; and (5) The SAR may be exercised only when the Market Value of the Shares subject to the ISO exceeds the Exercise Price of the ISO. (b) Exercise Price. The Exercise Price as to any particular SAR shall not be less than the Market Value of the Optioned Shares on the date of grant. (c) Timing of Exercise. Any election by a Participant to exercise SARs shall be made during the period beginning on the 3rd business day following the release for publication of quarterly or annual financial information and ending on the 12th business day following such date. This condition shall be deemed to be satisfied when the specified financial data is first made publicly available. In no event, however, may an SAR be exercised within the six-month period following the date of its grant. The provisions of Paragraph 8(c) regarding the period of exercisability of Options are incorporated by reference herein, and shall determine the period of exercisability of SARs. (d) Exercise of SARs. An SAR granted hereunder shall be exercisable at such times and under such con ditions as shall be permissible under the terms of the Plan and of the Agreement granted to a Participant, provided that an SAR may not be exercised for a fractional Share. Upon exercise of an SAR, the Participant shall be entitled to receive, without payment to the Company except for applicable withholding taxes, an amount equal to the excess of (or, in the discretion of the Committee if provided in the Agreement, a portion of) the excess of the then aggregate Market Value of the number of Optioned Shares with respect to which the Participant exercises the SAR, over the aggregate Exercise Price of such number of Optioned Shares. This amount shall be payable by the Company, in the discretion of the Committee, in cash or in Shares valued at the then Market Value thereof, or any combination thereof. (e) Procedure for Exercising SARs. To the extent not inconsistent herewith, the provisions of Paragraph 8(b) as to the procedure for exercising Options are incorporated by reference, and shall determine the procedure for exercising SARs. 7 10. Change in Control; Other Acceleration of Vesting (a) General Rule. Notwithstanding the provisions of any Award which provides for its exercise or vesting in installments, for a period of 60 days beginning on the date of a Change in Control or an Imminent Change in Control, all Options and SARs shall be immediately exercisable and fully vested. With respect to Options, at the time of a Change in Control or an Imminent Change in Control, the Participant shall, at the discretion of the Committee, be entitled to receive cash in an amount equal to the excess of the Market Value of the Common Stock subject to such Option over the Exercise Price of such Shares, in exchange for the cancellation of such Options by the Participant. (b) Acceleration of Vesting. The Committee shall at all times have the power to accelerate the exercise date of Options and SARs. 11. 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 Awards, 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. 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 Awards, together with the Exercise Prices thereof, shall be equitably adjusted for any change or exchange of Shares for a different number or kind of shares or other securities which results from the Transaction. (c) Special Rule for ISOs. Any adjustment made pursuant to subparagraphs (a) or (b)(1) hereof shall be made in such a manner as not to constitute a modification, within the meaning of Section 424(h) of the Code, of outstanding ISOs. (d) 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 Award before the adjustment was made. (e) 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 Awards or reserved for issuance under the Plan. 12. Non-Transferability of Awards. Awards 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, or pursuant to the terms of a "qualified domestic relations order" (within the meaning of Section 414(p) of the Code and the regulations and rulings thereunder). 8 13. Time of Granting Awards. The date of grant of an Award shall, for all purposes, be the later of the date on which the Committee makes the determination of granting such Award, or the Effective Date. Notice of the determination shall be given to each Participant to whom an Award is so granted within a reasonable time after the date of such grant. 14. Effective Date. The Plan shall become effective on January 31, 1995. Awards may be made prior to approval of the Plan by the stockholders of the Company if the exercise of Awards in the form of Options and/or SARs, are conditioned upon stockholder approval of the Plan. 15. Approval by Stockholders. The Plan shall be approved by stockholders of the Corporation within twelve (12) months before or after the Effective Date. 16. Modification of Awards. At any time, and from time to time, the Board may authorize the Committee to direct execution of an instrument providing for the modification of any outstanding Award, provided no such modification shall confer on the holder of said Award any right or benefit which could not be conferred on him by the grant of a new Award at such time, or impair the Award without the consent of the holder of the Award. 17. 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 Awards, suspend or terminate the Plan; provided that amendment of the Plan shall be approved by stockholders to the extent that such stockholder approval is necessary to comply with applicable provisions of the Code, rules promulgated pursuant to Section 16 of the Securities Exchange Act of 1934, applicable state law, or NASD or exchange listing requirements. No amendment, suspension or termination of the Plan shall, without the consent of any affected holder of an Award, alter or impair any rights or obligations under any Award theretofore granted. 18. Conditions Upon Issuance of Shares. (a) Compliance with Securities Laws. Shares of Common Stock shall not be issued with respect to any Award unless the issuance and delivery of such Shares shall comply with all 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. The Plan is intended to comply with Rule 16b-3, and any provision of the Plan which the Committee determines in its sole and absolute discretion to be inconsistent with said Rule shall, to the extent of such inconsistency, be inoperative and null and void, and shall not affect the validity of the remaining provisions of the Plan. (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 or SAR, the Company may require the person exercising the Option or SAR 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. 9 (c) Committee Discretion. The Committee shall have the discretionary authority to impose in Agreements such restrictions on Shares as it may deem appropriate or desirable, including but not limited to the authority to impose a right of first refusal or to establish repurchase rights or both of these restrictions. 19. 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. 20. Withholding Tax. The Company's obligation to deliver Shares upon exercise of Options and/or SARs (or such earlier time that the Participant makes an election under Section 83(b) of the Code) shall be subject to the Participant's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. The Committee, in its discretion, may permit the Participant to satisfy the obligation, in whole or in part, by irrevocably electing to have the Corporation withhold Shares, or to deliver to the Corporation 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 Corporation, 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 Corporation may retain, or sell without notice, a number of such Shares sufficient to cover the amount required to be withheld. 21. No Employment or Other Rights. In no event shall an Employee's eligibility to participate or participation in the Plan create or be deemed to create any legal or equitable right of the Employee, or any other party to continue service with the Company, the Bank, or any Affiliate of such corporations. No Employee shall have a right to be granted an Award or, having received an Award, the right to again be granted an Award. However, an Employee who has been granted an Award may, if otherwise eligible, be granted an additional Award or Awards. 22. 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. 10 TRI-COUNTY FINANCIAL CORPORATION 1995 STOCK OPTION AND INCENTIVE PLAN _____________________ 1998 Amendment _____________________ WHEREAS, Tri-County Financial Corporation (the "Company") maintains the Tri-County Financial Corporation 1995 Stock Option and Incentive Plan (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 17 of the Plan, the Plan is hereby amended as follows, effective immediately: 1. Paragraph 4(a) 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 79,400 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-10.B 3 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 10,000 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-10.C 4 EMPLOYMENT AGREEMENT EXHIBIT 10(c) COMMUNITY BANK OF TRI-COUNTY ____________________________________ Restated Employment Agreement with Michael L. Middleton ____________________________________ AGREEMENT, originally entered into as of June 1, 1986 and amended as of March 1, 1991 and August ___, 1996, and restated effective this ________ day of February, 1998, by and between Community Bank of Tri-County (the "Bank") and Michael L. Middleton (the "Employee"). WHEREAS, the Employee has heretofore been employed by the Bank as its President and Chief Executive Officer and is experienced in all phases of the business of the Bank; and WHEREAS, the Bank and Employee are parties to an employment agreement dated June 1, 19986 and amended as of March 1, 1991 and August ___, 1996; and WHEREAS, the parties desire by this writing to restate the terms of such employment agreement. NOW, THEREFORE, it is AGREED as follows: 1. Defined Terms ------------- When used anywhere in this Agreement, the following terms shall have the meaning set forth herein. (a) "Change in Control" shall mean any one of the following events: (i) the acquisition of ownership, holding or power to vote more than 25% of the voting stock of the Bank or the Company, (ii) the acquisition of the ability to control the election of a majority of the Bank's or the Company's directors, (iii) the acquisition of a controlling influence over the management or policies of the Bank or 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), or (iv) during any period of two consecutive years, individuals (the "Continuing Directors") who at the beginning of such period constitute the Board of Directors of the Bank or of the Company (the "Existing Board") cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Existing Board was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director. Notwithstanding the foregoing, the Company's ownership of the Bank shall not of itself constitute a Change in Control for purposes of the Agreement. For purposes of this paragraph 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. (b) "Company" shall mean Tri-County Financial Corporation. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and as interpreted through applicable rulings and regulations in effect from time to time. (d) "Code '280G Maximum" shall mean the product of 2.99 and the Employee's "base amount" as defined in Code '280G(b)(3). (e) "Disability" shall mean a physical or mental infirmity which impairs the Employee's ability to substantially perform his duties under this Agreement and which results in the Employee becoming eligible for long-term disability benefits under the Bank's long-term disability plan (or, if the Bank has no such plan in effect, which impairs the Employee's ability to substantially perform his duties under this Agreement for a period of 180 consecutive days). (f) "Effective Date" shall mean the date of restatement of this Agreement, February __, 1998. (g) "Good Reason" shall mean any of the following events, which has not been consented to in advance by the Employee in writing: (i) the requirement that the Employee move his personal residence, or perform his principal executive functions, more than 30 miles from his primary office as of the later of the Effective Date and the most recent voluntary relocation by the Employee; (ii) a material reduction in the Employee's base compensation under this Agreement as the same may be increased from time to time; (iii) the failure by the Bank or the Company to continue to provide the Employee with compensation and benefits provided under this Agreement as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Bank or the Company which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him under this Agreement; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position; (v) a failure to reelect the Employee to the Board of Directors of the Bank (the "Board") or the Company; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (h) "Just Cause" shall mean, in the good faith determination of the Bank's Board of Directors, the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. No act, or failure to act, on the Employee's part shall be considered "willful" unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Bank and the Company. (i) "Protected Period" shall mean the period that begins on the date six months before a Change in Control and ends on the later of the second annual anniversary of the Change in Control or the expiration date of this Agreement. -2- (j) "Trust" shall mean a grantor trust that is designed in accordance with Revenue Procedure 92-64 and has a trustee independent of the Bank and the Company. 2. Employment. The Employee is employed as the President and Chief ---------- Executive Officer of the Bank. The Employee shall render such administrative and management services for the Bank as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Bank. The Employee's other duties shall be such as the Board may from time to time reasonably direct, including normal duties as an officer of the Bank. 3. Base Compensation. The Bank agrees to pay the Employee during the ----------------- term of this Agreement a salary at the rate of $142,100 per annum, payable in cash not less frequently than monthly. The Board shall review, not less often than annually, the rate of the Employee's salary, and in its sole discretion may decide to increase his salary. 4. Discretionary Bonuses. The Employee shall participate in an --------------------- equitable manner with all other senior management employees of the Bank in discretionary bonuses that the Board may award from time to time to the Bank's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. 5. Participation in Retirement, Medical and Other Plans. ---------------------------------------------------- (a) The Employee shall be eligible to participate in any of the following plans or programs that the Bank may now or in the future maintain: group hospitalization, disability, health, dental, sick leave, life insurance, travel and/or accident insurance, auto allowance/auto lease, retirement, pension, and/or other present or future qualified or nonqualified plans provided by the Bank, generally which benefits, taken as a whole, must be at least as favorable as those in effect on the Effective Date. (b) The Employee shall also be eligible to participate in any fringe benefits which are or may become available to the Bank's senior management employees, including for example: any stock option or incentive compensation plans, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket business expenses which he shall incur in connection with his services under this Agreement upon substantiation of such expenses in accordance with the policies of the Bank. 6. Term. The Bank hereby employs the Employee, and the Employee hereby ---- accepts such employment under this Agreement, for the period commencing on the Effective Date and ending 60 months thereafter (or such earlier date as is determined in accordance with Section 10 or 12 hereof). Additionally, on each annual anniversary date from the Effective Date, the Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date, provided the Board determines in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards, and that this Agreement shall be extended. Only those members of the Board of Directors who have no personal interest in this Employment Agreement shall discuss and vote on the approval and subsequent review of this Agreement. -3- 7. Loyalty; Noncompetition. ----------------------- (a) During the period of his employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all his full business time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, from time to time, the Employee may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Bank or any of its subsidiaries or affiliates, or unfavorably affect the performance of the Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of his employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Bank. (b) Nothing contained in this Section shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Bank, or, solely as a passive or minority investor, in any business. 8. Standards. The Employee shall perform his duties under this --------- Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Bank will provide the Employee with the working facilities and staff customary for similar executives and necessary for him to perform his duties. 9. Vacation and Sick Leave. At such reasonable times as the Board ----------------------- shall in its discretion permit, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, all such voluntary absences to count as vacation time, provided that: (a) The Employee shall be entitled to an annual vacation in accordance with the policies that the Board periodically establishes for senior management employees of the Bank, which shall in no event be less than four (4) weeks per annum. (b) The Employee shall not receive any additional compensation from the Bank on account of his failure to take a vacation or sick leave, and the Employee shall not accumulate unused vacation or sick leave from one fiscal year to the next, except in either case to the extent authorized by the Board. (c) In addition to the aforesaid paid vacations, the Employee shall be entitled without loss of pay, to absent himself voluntarily from the performance of his employment with the Bank for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as such Board in its discretion may determine. (d) In addition, the Employee shall be entitled to an annual sick leave benefit as established by the Board. In the event any sick leave time shall not have been used during any year, such leave shall accrue to subsequent years only to the extent authorized by the Board. -4- 10. Termination and Termination Pay. Subject to Section 12 hereof, the ------------------------------- Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall terminate upon his death during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which his death occurred. (b) Disability. (1) The Bank may terminate the Employee's employment after having established the Employee's Disability, in which event the Employee shall be entitled to the compensation and benefits provided for under this Agreement for (i) any period during the term of this Agreement and prior to the establishment of the Employee's Disability during which the Employee is unable to work due to the physical or mental infirmity, and (ii) any period of Disability which is prior to the Employee's termination of employment pursuant to this Section 10(b); provided that any benefits paid pursuant to the Bank's long term disability plan will continue as provided in such plan without ------- reduction for payments made pursuant to this Agreement. (2) During any period that the Employee shall receive disability benefits and to the extent that the Employee shall be physically and mentally able to do so, he shall furnish such information, assistance and documents so as to assist in the continued ongoing business of the Bank and, if able, shall make himself available to the Bank to undertake reasonable assignments consistent with his prior position and his physical and mental health. The Bank shall pay all reasonable expenses incident to the performance of any assignment given to the Employee during the disability period. (c) Just Cause. The Board may, by written notice to the Employee, immediately terminate his employment at any time, for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. (d) Without Just Cause; Constructive Discharge. The Board may, by written notice to the Employee, immediately terminate his employment at any time for a reason other than his Disability or Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits (unless such termination occurs during the Protected Period, in which event the benefits and compensation provided for in Section 12 shall apply): (i) the salary provided pursuant to Section 3 hereof, together with accrued incentive pay (based on the level of such pay for the year in which the termination occurs) for a period of three years following termination of employment, and (ii) at the Employee's election either (A) cash in an amount equal to the cost to the Employee of obtaining all health, life, disability and other benefits which the Employee would have been eligible to participate for a period of three years following termination of employment, based upon the benefit levels substantially equal to those that the Bank provided for the Employee at the date of termination of employment or (B) continued participation under such Bank benefit plans for a period of three years following termination of employment, to the extent the Employee continues to qualify for participation therein. -5- All amounts payable to the Employee shall be paid, at the option of the Employee, either (I) in periodic payments, through the Expiration Date, or (II) in one lump sum within ten days of such termination. (e) Good Reason. The Employee shall be entitled to receive the compensation and benefits payable under subsection 10(d) hereof in the event that the Employee voluntarily terminates employment within 90 days of an event that constitutes Good Reason, (unless such voluntary termination occurs during the Protected Period, in which event the benefits and compensation provided for in Section 12 shall apply). (f) Termination or Suspension Under Federal Law. (1) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (2) If the Bank is in default (as defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. (3) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Bank's affairs, the Bank's obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (4) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with applicable law and regulations. (g) Voluntary Termination by Employee. Subject to Section 12 hereof, the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least 90 days' prior written notice to the Board of Directors, in which case the Employee shall receive only his compensation, vested rights and employee benefits up to the date of his termination (unless such termination occurs pursuant to Section 10(d) hereof or within the Protected Period, in Section 12(a) hereof, in which event the benefits and compensation provided for in Sections 10(d) or 12, as applicable, shall apply). (h) Post-termination Health Insurance. If the Employee's employment terminates with the Bank or the Company for any reason other than Just Cause, the Employee shall be entitled to purchase from the Bank, at the Employee's own expense which shall not exceed applicable COBRA rates, family medical insurance under any group health plan that the Bank or the Company maintains for its employees. This right shall be (i) in addition to, and not in lieu of, any other rights that the Employee has under this Agreement, and (ii) shall continue until the Employee first becomes eligible for participation in Medicare. -6- 11. No Mitigation. The Employee shall not be required to mitigate the ------------- amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 12. Change in Control. ----------------- (a) Trigger Events. The Employee shall be entitled to collect the severance benefits set forth in Subsection (b) hereof in the event that either (i) the Employee voluntarily terminates employment for any reason within the 30- day period beginning on the date of a Change in Control, (ii) the Employee voluntarily terminates employment within 90 days of an event that both occurs during the Protected Period and constitutes Good Reason, or (iii) the Bank or the Company or their successor(s) in interest terminate the Employee's employment without his written consent and for any reason other than Just Cause during the Protected Period. (b) Amount of Severance Benefit. If the Employee becomes entitled to collect severance benefits pursuant to Section 12(a) hereof, the Bank shall: (i) pay the Employee a severance benefit equal to the difference between the Code '280G Maximum and the sum of any other "parachute payments" as defined under Code '280G(b)(2) that the Employee receives on account of the Change in Control, and (ii) pay for long-term disability and provide such medical benefits as are available to the Employee under the provisions of COBRA, for eighteen (18) months (or such longer period, up to 24 months, if COBRA is amended). The amount payable under this Section 12(b) shall be paid either (i) in one lump sum within ten days of the later of the date of the Change in Control and the Employee's last day of employment with the Bank or the Company, or (ii) if prior to the date which is 90 days before the date on which a Change in Control occurs, the Employee filed a duly executed irrevocable written election in the form attached hereto as Exhibit AA@, payment of such amount shall be made according to the elected schedule. Deferred amounts shall bear interest from the date on which they would otherwise be payable until the date paid at a rate equal to 120% of the applicable federal rate, compounded semiannually, as determined under Code Section 1274(d) and the regulations thereunder. In the event that the Employee, the Bank, and the Company jointly agree that the Employee has collected an amount exceeding the Code '280G Maximum, the parties may agree in writing that such excess shall be treated as a loan ab -- initio, which the Employee shall repay to the Bank, on terms and conditions - ------ mutually agreeable to the parties, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code. (c) Funding of Grantor Trust upon Change in Control. Not later than ten business days after a Change in Control, the Bank shall (i) deposit in a Trust an amount equal to the Code '280G Maximum, unless the Employee has previously provided a written release of any claims under this -7- Agreement, and (ii) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Employee, and to follow the procedures set forth in the next paragraph as to the payment of such amounts from the Trust. Upon the later of the Trust's final payment of all amounts due under the following paragraph or the date 27 months after the Change in Control, the trustee of the Trust shall pay to the Bank the entire balance remaining in the segregated account maintained for the benefit of the Employee. The Employee shall thereafter have no further interest in the Trust. During the 27-consecutive month period after a Change in Control, the Employee may provide the trustee of the Trust with a written notice requesting that the trustee pay to the Employee an amount designated in the notice as being payable pursuant to this Agreement. Within three business days after receiving said notice, the trustee of the Trust shall send a copy of the notice to the Bank via overnight and registered mail return receipt requested. On the tenth (10th) business day after mailing said notice to the Bank, the trustee of the Trust shall pay the Employee the amount designated therein in immediately available funds, unless prior thereto the Bank provides the trustee with a written notice directing the trustee to withhold such payment. In the latter event, the trustee shall submit the dispute to non-appealable binding arbitration for a determination of the amount payable to the Employee pursuant to this Agreement, and the costs of such arbitration shall be paid by the Bank. The trustee shall choose the arbitrator to settle the dispute, and such arbitrator shall be bound by the rules of the American Arbitration Association in making his determination. The parties and the trustee shall be bound by the results of the arbitration and, within 3 days of the determination by the arbitrator, the trustee shall pay from the Trust the amounts required to be paid to the Employee and/or the Bank, and in no event shall the trustee be liable to either party for making the payments as determined by the arbitrator. 13. Indemnification. The Bank and the Company agree that their --------------- respective Bylaws shall continue to provide for indemnification of directors, officers, employees and agents of the Bank and the Company, including the Employee during the full term of this Agreement, and to at all times provide adequate insurance for such purposes. 14. Reimbursement of Employee for Enforcement Proceedings. In the ----------------------------------------------------- event that any dispute arises between the Employee and the Bank as to the terms or interpretation of this Agreement, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to defend against any action taken by the Bank or the Company, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, provided that the Employee obtains either a written settlement or a final judgement by a court of competent jurisdiction substantially in his favor. Such reimbursement shall be paid within ten days of the Employee's furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Employee. 15. Federal Income Tax Withholding. The Bank may withhold all federal ------------------------------ and state income or other taxes from any benefit payable under this Agreement as shall be required pursuant to any law or government regulation or ruling. -8- 16. Successors and Assigns. ---------------------- (a) Bank. This Agreement shall not be assignable by the Bank, provided that this Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank. (b) Employee. Since the Bank is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank; provided, however, that nothing in this paragraph shall preclude (i) the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Employee or his estate from assigning any rights hereunder to the person or persons entitled thereunto. (c) Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 17. Amendments. No amendments or additions to this Agreement shall be ---------- binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 18. Applicable Law. Except to the extent preempted by Federal law, the -------------- laws of the State of Maryland shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 19. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 20. Entire Agreement. This Agreement, together with any understanding ---------------- or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto and shall supersede any prior agreement between the parties, including their agreement entered into on June 1, 1986. -9- Employment Agreement Deferred Payment Election Form Page 2 IN WITNESS WHEREOF, the parties have executed this restated Agreement on the day and year first hereinabove written. ATTEST: COMMUNITY BANK OF TRI-COUNTY By: - ---------------------------- ------------------------------ Secretary Its Chairman of the Board WITNESS: /s/ Michael L. Middleton - ---------------------------- ------------------------------ Michael L. Middleton -10- RESTATED EMPLOYMENT AGREEMENT with C. Marie Brown THIS AGREEMENT originally entered into as of December 17, 1993, and restated effective this 23 day of February 1998, by and between Community Bank of Tri-County (the "BANK") and C. Marie Brown (the "Employee"), effective as of the date hereof (the "Effective Date"). WHEREAS, the Employee has heretofore been employed by the bank as and is experienced in all phases of the business of the Bank; and WHEREAS, the parties desire by this writing to set forth the continuing employment relationship of the Bank and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Employment. The Employee is employed as the Senior Vice President of ---------- the Bank. The Employee shall render such administrative and management services for the Bank as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Bank. The Employee's other duties shall be such as the Board of Directors of the Bank ("Board") may from time to time reasonably direct, including normal duties as an officer of the Bank. 2. Base Compensation. The Bank agrees to pay the Employee during the ----------------- term of this agreement a salary at the rate of $88,200 per annum, payable in cash not less frequently than monthly. The Board shall review, not less than annually, the rate of the Employee's salary, and in its sole discretion may decide to increase his/her salary. 3. Discretionary Bonus. The Employee shall participate in an equitable ------------------- manner with all other senior management employees of the Bank in discretionary bonuses that the Board may award from time to time to the Bank's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. 4. (a) Participation in Retirement, Medical and Other Plans. The ---------------------------------------------------- Employee shall participate in any plan that the Bank maintains for the benefit of its employees if the plan relates to (i) pension, profit-sharing, or other retirement benefits, (ii) medical insurance or the reimbursement of medical or dependent care expenses, or (iii) other group benefits, including disability and life insurance plans. (b) Employee Benefits; Expenses. The Employee shall participate in --------------------------- any fringe benefits which are or may become available to the Bank's senior management employees, 1 any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employees shall be reimbursed for all reasonable out-of-pocket business expenses which he/she shall incur in connection with his/her services under this Agreement upon substantiation of such expenses in accordance with the policies of the Bank. 5. Term. The Bank hereby employs the Employee, and the Employee hereby ---- accepts such employment under this Agreement, for the period commencing on the Effective Date and ending 36 months thereafter (or such earlier date as is determined in accordance with Section 9). Additionally, on each annual anniversary date from the Effective date, the Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date provided the Board determined in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards, and that this Agreement shall be extended. 6. Loyalty; Non-competition. ------------------------ (a) During the period of his/her employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all his/her full business time, attention, skill, and efforts to the faithful performance of his/her duties hereunder; provided, however, from time to time, the Employee may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Bank or any of its subsidiaries or affiliates, or unfavorably affect the performance of Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of his/her employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interest of the Bank, or be gainfully employed in any other position or job other than as provided above. (b) Nothing contained in this Paragraph 6 shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Bank, or, solely as a passive or minority investor, in any business. 7. Standards. The Employee shall perform his/her duties under this --------- Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Bank will provide Employee with the working facilities and staff customary for similar executives and necessary for him/her to perform his/her duties. 8. Vacation and Sick Leave. At such reasonable times as the Board shall ----------------------- in its discretion permit, the Employee shall be entitled, without loss of pay, to absent himself/herself voluntarily from the performance of his/her employment under this Agreement, all such voluntary absences to count as vacation time, provided that: 2 (a) The Employee shall be entitled to an annual vacation in accordance with the policies that the Board periodically established for senior management employees of the Bank. (b) The Employee shall not receive any additional compensation from the Bank on account of his/her failure to take a vacation, and the Employee shall not accumulate unused vacation, and the Employee shall not accumulate unused vacation from one fiscal year to the next, except in either case to the extent authorized by the Board. (c) In addition to the aforesaid paid vacations, the Employee shall be entitled, without loss of pay, to absent himself/herself voluntarily from the performance of his/her employment with the Bank for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as the Board in its discretion may determine. (d) In addition, the Employee shall be entitled to an annual sick leave benefit as established by the Board. 9. Termination and Termination Pay. Subject to Section11 hereof, the ------------------------------- Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall ----- terminate upon his/her death during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which his/her death occurred. (b) Disability. The Bank may terminate the Employee's employment after ---------- having established the Employee's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Employee's ability to substantially perform his/her duties under this Agreement and which results in the Employee becoming eligible for long-term disability benefits under the Bank's long-term disability plan (or, if the Bank has no such plan in effect, which impairs the Employee's ability to substantially perform his/her duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Employee shall be entitled to the compensation and benefits provided for under this Agreement for (I) any period during the term of this Agreement and prior to the establishment of the Employee's Disability during which the Employee is unable to work due to the physical or mental infirmity, or (ii) any period of Disability which is prior to the Executive's termination of employment pursuant to this Section 9(b). (c) Just Cause. The Board may, by written notice to the Employee, ---------- immediately terminate his/her employment at any time for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. Termination for "Just Cause" shall mean termination because of, in the good faith determination of the Board, the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final 3 cease-and desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, (i) the Employee shall not be deemed to have been terminated for Just Cause unless there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less that a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Employee and an opportunity for the Employee to be heard before the board), finding that in the good faith opinion of the board the Employee was guilty of conduct set forth above in the second sentence of this Subsection (c) and specifying the particulars thereof in detail. (d) Without Just Cause. Subject to Section II hereof, the board may, ------------------ by written notice to the Employee, immediately terminate his/her employment at any time for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits: (i) the salary provided pursuant to Section 2 hereof for a period of one year following termination of employment, and (ii) the cost to the Employee of obtaining all health, life, disability and other benefits which the Employee would have been eligible to participate in for a period of one year following termination of employment based upon benefit levels substantially equal to those that the Bank provided for the Employee at the date of termination of employment. Said sum shall be paid, at the option of the Employee, either (I) in period payment over the remaining term of this Agreement, as if the Employee's employment had not been terminated, or (II) in one lump sum within ten (10) days of such termination. Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under clause (i) hereof shall be reduced to the extent that on the date of the Employee's termination of employment, the present value of the benefits payable under clauses (i) and (ii) hereof exceeds three times his/her average annual compensation based on his/her most recent five taxable years. (e) Termination or Suspension under Federal Law. (1) If the Employee ------------------------------------------- is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Sections 8(e) (4) or 8(g) (1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818 (e) (4) or (g) (1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (2) If the Bank is in default (as defined in section 3(x) (1) of FDIA), all obligations under this agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. (3) If a notice served under Section 8 (e) (3) or (g) (1) of the FDIA (12 U.S.C. 1818 (e) (3) or (g) (1)) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Bank's affairs, the Bank's obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. 4 (4) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with applicable laws and regulations. (f) Voluntary Termination by Employee. Subject to Section 11 hereof, --------------------------------- the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least 60 days' prior written notice to the Board of Directors, in which case the employee shall receive only his/her compensation, vested rights and employee benefits up to the date of his/her termination. 10. No Mitigation. The Employee shall not be required to mitigate the ------------- amount of any payment provided for this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 11. Change in Control. ----------------- (a) Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Bank, without the Employee's prior written consent and for a reason other than Just Cause, in connection with or within twelve (12) months after any change in control of the Bank or Tri-County Financial Corporation (the "Corporation"), the Employee shall be paid an amount equal to the difference between (i) the product of 2.00 times his/her "base amount" as defined in Section 280G (b) (3) of the Internal Revenue Code of 1986, as amended (the "Code") and regulations promulgated thereunder, and (ii) the sum of any other parachute payments (as defined under Section 280G (b) (2) of the Code) that the Employee receives an account of the change in control. Said sum shall be paid in one lump sum within ten (10) days of such termination. The term "change in control" shall mean (1) the ownership, holding or power to vote more than 25% of the Bank's or Corporation's voting stock, (2) the control of the election of a majority of the Bank's or Corporation's directors, (3) the exercise of a controlling influence over the management or policies of the Bank or the Corporation by any person or by persons acting as a "group" (within the meaning of Section 13 (d) of the Securities Exchange Act of 1934), or (4) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation of the Bank (the "Company Board") (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Company Board was approved by a vote of at least two thirds of the Continuing directors then in office shall be considered a Continuing Director. The term "person" means an individual other than the Employee, or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other for of entity not specifically listed herein. (b) Notwithstanding any other provision of this Agreement to the contrary, the Employee may voluntarily terminate his/her employment under this Agreement within twelve (12) months following a change in control of the Bank or Corporation, and the Employee shall thereupon be entitled to receive the payment described in Section 11(a) of this Agreement, upon 5 the occurrence of any of the following events, or within ninety (90) days thereafter, which have not been consented to in advance by the Employee in writing: (i) the requirement that the Employee move his/her personal residence, or perform his/her principal executive functions, more than thirty-five (35) miles from his/her primary office as of the date of the change in control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the change in control or as the same may be increased from time to time; (iii) the failure by the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him/her under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Bank which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him/her at the time of the change of control; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his/her position as referenced at Section 1; (v) a failure to elect or reelect the Employee to the Board of Directors of the Bank, if the Employee is serving on the Board on the date of the change in control; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his/her employment with the Bank. (c) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (d) In the event that any dispute arises between the Employee and the Bank as to the terms or interpretation of this agreement, including this Section 11, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to enforce the terms of this Section 11 or to defend against any action taken by the Bank, the Employee shall be reimbursed for all costs and expenses, including reasonable attorney's fees, arising form such dispute, proceedings or actions, provided that the Employee shall obtain a final judgment by a court of competent jurisdiction in favor of the Employee. Such reimbursement shall be paid within ten (10) days of Employee's furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Employee. 6 12. Successors and Assigns. ---------------------- (a) This Agreement shall incur to the benefit of and be binding upon any corporate of other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank. (b) Since The Bank is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his/her rights or duties hereunder without first obtaining the written consent of the Bank. 13. Amendments. No amendments or additions to the Agreement shall be ---------- binding unless made in writing and signed by all of the parities, except as herein otherwise specifically provided. 14. Applicable Law. Except to the extent preempted by Federal law, the -------------- laws of the State of Maryland shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 15. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. Entire Agreement. This Agreement, together with any understanding or ----------------- modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove the written. ATTEST: COMMUNITY BANK OF TRI-COUNTY - ---------------------------------- ------------------------------------ Henry A. Shorter, Jr. Michael L. Middleton Secretary President WITNESS: EMPLOYEE: - ---------------------------------- ------------------------------------ C. Marie Brown EMPLOYMENT AGREEMENT AS AMENDED THIS AGREEMENT entered into this 23 day of February 1998, by and between Community Bank of Tri-County (the "BANK") and Gregory C. Cockerham (the "Employee"), effective as of the date hereof (the "Effective Date"). WHEREAS, the Employee has heretofore been employed by the bank as and is experienced in all phases of the business of the Bank; and WHEREAS, the parties desire by this writing to set forth the continuing employment relationship of the Bank and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Employment. The Employee is employed as the Senior Vice President ---------- of the Bank. The Employee shall render such administrative and management services for the Bank as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Bank. The Employee's other duties shall be such as the Board of Directors of the Bank ("Board") may from time to time reasonably direct, including normal duties as an officer of the Bank. 2. Base Compensation. The Bank agrees to pay the Employee during the ----------------- term of this agreement a salary at the rate of $78,800 per annum, payable in cash not less frequently than monthly. The Board shall review, not less than annually, the rate of the Employee's salary, and in its sole discretion may decide to increase his/her salary. 3. Discretionary Bonus. The Employee shall participate in an ------------------- equitable manner with all other senior management employees of the Bank in discretionary bonuses that the Board may award from time to time to the Bank's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. 4. (a) Participation in Retirement, Medical and Other Plans. The ---------------------------------------------------- Employee shall participate in any plan that the Bank maintains for the benefit of its employees if the plan relates to (i) pension, profit-sharing, or other retirement benefits, (ii) medical insurance or the reimbursement of medical or dependent care expenses, or (iii) other group benefits, including disability and life insurance plans. (b) Employee Benefits; Expenses. The Employee shall participate --------------------------- in any fringe benefits which are or may become available to the Bank's senior management employees, 1 any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employees shall be reimbursed for all reasonable out-of-pocket business expenses which he/she shall incur in connection with his/her services under this Agreement upon substantiation of such expenses in accordance with the policies of the Bank. 5. Term. The Bank hereby employs the Employee, and the Employee ---- hereby accepts such employment under this Agreement, for the period commencing on the Effective Date and ending 36 months thereafter (or such earlier date as is determined in accordance with Section 9). Additionally, on each annual anniversary date from the Effective date, the Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date provided the Board determined in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards, and that this Agreement shall be extended. 6. Loyalty; Non-competition. ------------------------ (a) During the period of his/her employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all his/her full business time, attention, skill, and efforts to the faithful performance of his/her duties hereunder; provided, however, from time to time, the Employee may serve on the boards of directors of , and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Bank or any of its subsidiaries or affiliates, or unfavorably affect the performance of Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of hi/her employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interest of the Bank, or be gainfully employed in any other position or job other than as provided above. (b) Nothing contained in this Paragraph 6 shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Bank, or, solely as a passive or minority investor, in any business. 7. Standards. The Employee shall perform his/her duties under this --------- Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Bank will provide Employee with the working facilities and staff customary for similar executives and necessary for him/her to perform his/her duties. 8. Vacation and Sick Leave. At such reasonable times as the Board ----------------------- shall in its discretion permit, the Employee shall be entitled, without loss of pay, to absent himself/herself voluntarily from the performance of his/her employment under this Agreement, all such voluntary absences to count as vacation time, provided that: 2 (a) The Employee shall be entitled to an annual vacation in accordance with the policies that the Board periodically established for senior management employees of the Bank. (b) The Employee shall not receive any additional compensation from the Bank on account of his/her failure to take a vacation, and the Employee shall not accumulate unused vacation, and the Employee shall not accumulate unused vacation from one fiscal year to the next, except in either case to the extent authorized by the Board. (c) In addition to the aforesaid paid vacations, the Employee shall be entitled, without loss of pay, to absent himself/herself voluntarily from the performance of his/her employment with the Bank for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as the Board in its discretion may determine. (d) In addition, the Employee shall be entitled to an annual sick leave benefit as established by the Board. 9. Termination and Termination Pay. Subject to Section11 hereof, the ------------------------------- Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall ----- terminate upon his/her death during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which his/her death occurred. (b) Disability. The Bank may terminate the Employee's employment ---------- after having established the Employee's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Employee's ability to substantially perform his/her duties under this Agreement and which results in the Employee becoming eligible for long-term disability benefits under the Bank's long-term disability plan (or, if the Bank has no such plan in effect, which impairs the Employee's ability to substantially perform his/her duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Employee shall be entitled to the compensation and benefits provided for under this Agreement for (I) any period during the term of this Agreement and prior to the establishment of the Employee's Disability during which the Employee is unable to work due to the physical or mental infirmity, or (ii) any period of Disability which is prior to the Executive's termination of employment pursuant to this Section 9(b). (c) Just Cause. The Board may, by written notice to the Employee, ---------- immediately terminate his/her employment at any time for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. Termination for "Just Cause" shall mean termination because of, in the good faith determination of the Board, the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final 3 cease-and desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, (i) the Employee shall not be deemed to have been terminated for Just Cause unless there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less that a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Employee and an opportunity for the Employee to be heard before the board), finding that in the good faith opinion of the board the Employee was guilty of conduct set forth above in the second sentence of this Subsection (c) and specifying the particulars thereof in detail. (d) Without Just Cause. Subject to Section II hereof, the board ------------------ may, by written notice to the Employee, immediately terminate his/her employment at any time for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits: (i) the salary provided pursuant to Section 2 hereof for a period of one year following termination of employment, and (ii) the cost to the Employee of obtaining all health, life, disability and other benefits which the Employee would have been eligible to participate in for a period of one year following termination of employment based upon benefit levels substantially equal to those that the bank provided for the employee at the date of termination of employment. Said sum shall be paid, at the option of the Employee, either (I) in period payment over the remaining term of this Agreement, as if the Employee's employment had not been terminated, or (II) in one lump sum within ten (10) days of such termination. Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under clause (i) hereof shall be reduced to the extent that on the date of the Employee's termination of employment, the present value of the benefits payable under clauses (i) and (ii) hereof exceeds three times his/her average annual compensation based on his/her most recent five taxable years. (e) Termination or Suspension under Federal Law. (1) If the ------------------------------------------- Employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Sections 8(e) (4) or 8(g) (1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818 (e) (4) or (g) (1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (2) If the Bank is in default (as defined in section 3(x) (1) of FDIA), all obligations under this agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. (3) If a notice served under Section 8 (e) (3) or (g) (1) of the FDIA (12 U.S.C. 1818 (e) (3) or (g) (1)) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Bank's affairs, the Bank's obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. 4 (4) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with applicable laws and regulations. (f) Voluntary Termination by Employee. Subject to Section 11 hereof, the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least 60 days' prior written notice to the Board of Directors, in which case the employee shall receive only his/her compensation, vested rights and employee benefits up to the date of his/her termination. 10. No Mitigation. The Employee shall not be required to mitigate the ------------- amount of any payment provided for this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 11. Change in Control. ----------------- (a) Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Bank, without the Employee's prior written consent and for a reason other than Just Cause, in connection with or within twelve (12) months after any change in control of the Bank or Tri-County Financial Corporation (the "Corporation"), the Employee shall be paid an amount equal to the difference between (i) the product of 2.00 times his/her "base amount" as defined in Section 280G (b) (3) of the Internal Revenue Code of 1986, as amended (the "Code") and regulations promulgated thereunder, and (ii) the sum of any other parachute payments (as defined under Section 280G (b) (2) of the Code) that the Employee receives an account of the change in control. Said sum shall be paid in one lump sum within ten (10) days of such termination. The term "change in control" shall mean (1) the ownership, holding or power to vote more than 25% of the Bank's or Corporation's voting stock, (2) the control of the election of a majority of the Bank's or Corporation's directors, (3) the exercise of a controlling influence over the management or policies of the Bank or the Corporation by any person or by persons acting as a "group" (within the meaning of Section 13 (d) of the Securities Exchange Act of 1934), or (4) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation of the Bank (the "Company Board") (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Company Board was approved by a vote of at least two thirds of the Continuing directors then in office shall be considered a Continuing Director. The term "person" means an individual other than the Employee, or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other for of entity not specifically listed herein. (b) Notwithstanding any other provision of this Agreement to the contrary, the Employee may voluntarily terminate his/her employment under this Agreement within twelve (12) months following a change in control of the Bank or Corporation, and the Employee shall thereupon be entitled to receive the payment described in Section 11(a) of this Agreement, upon 5 the occurrence of any of the following events, or within ninety (90) days thereafter, which have not been consented to in advance by the Employee in writing: (i) the requirement that the Employee move his/her personal residence, or perform his/her principal executive functions, more than thirty-five (35) miles from his/her primary office as of the date of the change in control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the change in control or as the same may be increased from time to time; (iii) the failure by the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him/her under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Bank which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him/her at the time of the change of control; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his/her position as referenced at Section 1; (v) a failure to elect or reelect the Employee to the Board of Directors of the Bank, if the Employee is serving on the Board on the date of the change in control; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his/her employment with the Bank. (c) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (d) In the event that any dispute arises between the Employee and the Bank as to the terms or interpretation of this agreement, including this Section 11, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to enforce the terms of this Section 11 or to defend against any action taken by the Bank, the Employee shall be reimbursed for all costs and expenses, including reasonable attorney's fees, arising form such dispute, proceedings or actions, provided that the Employee shall obtain a final judgment by a court of competent jurisdiction in favor of the Employee. Such reimbursement shall be paid within ten (10) days of Employee's furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Employee. 6 12. Successors and Assigns. ---------------------- (a) This Agreement shall incur to the benefit of and be binding upon any corporate of other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank. (b) Since The Bank is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his/her rights or duties hereunder without first obtaining the written consent of the Bank. 13. Amendments. No amendments or additions to the Agreement shall be ---------- binding unless made in writing and signed by all of the parities, except as herein otherwise specifically provided. 14. Applicable Law. Except to the extent preempted by Federal law, the -------------- laws of the State of Maryland shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 15. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. Entire Agreement. This Agreement, together with any understanding ---------------- or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove the written. ATTEST: COMMUNITY BANK OF TRI-COUNTY - ------------------------------ ------------------------------------ Henry A. Shorter, Jr. Michael L. Middleton Secretary President WITNESS: EMPLOYEE: - ------------------------------- ------------------------------------ Gregory C. Cockerham 7 EX-13 5 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 effect on 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 $764,284 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 $5,466,000 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 COMPLIANCE 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 $473,000 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 and the total outstanding shares was . 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 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 EX-21 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent - ------ Tri-County Financial Corporation Percentage State of Subsidiaries Owned Incorporation - ------------ ----- ------------- Community Bank of Tri-County 100% Maryland Community Mortgage Corporation of Tri-County (1) 100% Maryland Tri-County Federal Finance One (1) 100% Maryland - ----------------- (1) Wholly-owned subsidiary of Community Bank of Tri-County. EX-23 7 CONSENT OF STEGMAN & COMPANY CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of Tri-County Financial Corporation for the year ended December 31, 1998 of our report dated February 26, 1999 relating to the consolidated financial statements of Tri-County Financial Corporation. /s/ Stegman & Company Baltimore, Maryland March 26, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 906,658 4,152,816 0 0 55,976,606 2,139,069 2,159,035 132,645,936 1,540,551 207,019,790 151,815,364 16,937,882 638,128 16,496,450 0 0 7,893 21,537,839 207,019,790 11,642,029 3,941,744 142,259 15,726,032 5,693,385 7,596,727 8,129,305 240,000 (391) 5,466,637 3,843,204 3,843,204 0 0 2,386,204 3.00 2.80 4.21 269,000 196,000 0 0 1,310,365 9,814 0 1,540,551 1,540,551 0 0
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