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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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TRI-COUNTY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-1652138
- -------------------------------------- ------------------
(State 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
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(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
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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
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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