-----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, POzeVElWFLpEZF0rMrsoCTc9JQgN3boHbZcOqPAlAU20cPPIZSs5Z4l9/d6k2hND hXgXE+iPJ/hq5A/gX17ODQ== 0000904280-02-000186.txt : 20020814 0000904280-02-000186.hdr.sgml : 20020814 20020814121635 ACCESSION NUMBER: 0000904280-02-000186 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18279 FILM NUMBER: 02733048 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-Q 1 fm10q63002-1494.txt FORM 10-Q (6-30-02) - TRI-COUNTY FINANCIAL UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 0-18279 ------------------------------ TRI-COUNTY FINANCIAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 52-1652138 - ------------------------------- ------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3035 Leonardtown Road, Waldorf, Maryland 20601 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (301) 843-0854 -------------- (Registrant's telephone number, including area code) N/A ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of August 2, 2002 registrant had outstanding 768,442 shares of Common Stock. 1 TRI-COUNTY FINANCIAL CORPORATION FORM 10-Q INDEX ----- PART I - FINANCIAL INFORMATION PAGE Item 1 - Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 3 Consolidated Statements of Income and Comprehensive Income - Three And Six Months Ended June 30, 2002 and 2001 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 5 - 6 Notes to Consolidated Financial Statements 7 Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 12 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 12 PART II - OTHER INFORMATION Item 4 - Submission of Matters to Vote of Security Holders 13 Item 6 - Exhibits and Reports on Form 8-K 13 SIGNATURES 14 2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND DECEMBER 31, 2001
ASSETS June 30, 2002 December 31, 2001 Cash and due from banks $ 4,462,642 $ 693,439 Interest-bearing deposits with banks 8,290,165 7,678,158 Investment securities available for sale - at fair value 43,408,248 41,673,742 Investment securities held to maturity - at amortized cost 2,651,475 2,289,354 Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 3,035,550 3,035,550 Loans held for sale -- 2,354,315 Loans receivable - net of allowance for loan losses of $2,278,393 and $2,281,581, respectively 197,084,743 193,450,011 Premises and equipment, net 6,137,109 5,432,848 Foreclosed real estate 740,452 1,800,569 Accrued interest receivable 1,179,219 1,049,401 Other assets 3,407,136 2,499,903 ------------- ------------- Total assets $ 270,396,739 $ 261,957,290 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Noninterest-bearing deposits $ 24,100,981 $ 17,738,165 Interest-bearing deposits 169,484,639 165,378,369 ------------- ------------- Total deposits 193,585,620 183,116,534 Short-term borrowings 695,893 1,813,317 Long-term debt 47,250,000 48,650,000 Accrued expenses and other liabilities 3,225,560 2,790,981 ------------- ------------- Total liabilities 244,757,073 236,370,832 ------------- ------------- STOCKHOLDERS' EQUITY: Common stock - par value $.01; authorized - 15,000,000 shares; issued 762,541 and 756,805 shares, respectively 7,625 7,568 Surplus 7,595,614 7,545,590 Retained earnings 17,652,938 17,678,367 Accumulated other comprehensive income 533,085 555,513 Unearned ESOP shares (149,596) (200,580) ------------- ------------- Total stockholders' equity 25,639,666 25,586,458 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 270,396,739 $ 261,957,290 ============= =============
See notes to consolidated financial statements 3 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2002 2001 2002 2001 INTEREST INCOME: Interest and fees on loans $ 3,577,700 $ 3,819,797 $7,067,360 $ 7,630,070 Taxable interest and dividends on investment securities 603,868 807,156 1,258,565 1,883,307 Interest on bank deposits 25,578 22,333 48,820 44,130 ----------- ----------- ---------- ----------- Total interest revenues 4,207,146 4,649,286 8,374,745 9,557,507 ----------- ----------- ---------- ----------- INTEREST EXPENSE: Interest on deposits 865,181 1,603,996 1,774,904 3,298,258 Interest on long term debt 630,618 658,930 1,270,883 1,250,316 Interest on other borrowings -- 53,775 -- 255,346 ----------- ----------- ---------- ----------- Total interest expenses 1,495,799 2,316,701 3,045,787 4,803,920 ----------- ----------- ---------- ----------- NET INTEREST INCOME 2,711,347 2,332,585 5,328,958 4,753,587 PROVISION FOR LOAN LOSSES 30,000 90,000 100,000 180,000 ----------- ----------- ---------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,681,347 2,242,585 5,228,958 4,573,587 ----------- ----------- ---------- ----------- NONINTEREST INCOME: Loan appraisal, credit, and miscellaneous charges 16,560 61,940 88,348 96,899 Net gain on sale of loans held for sale 105,224 60,867 207,982 84,735 Service charges 267,027 224,540 485,369 496,693 Other 9,248 6,511 13,709 23,059 ----------- ----------- ---------- ----------- Total noninterest income 398,059 353,858 795,408 701,386 ----------- ----------- ---------- ----------- NONINTEREST EXPENSE: Salary and employee benefits 1,035,309 879,437 2,098,178 1,839,732 Occupancy expense 224,141 160,430 391,668 304,806 Data processing expense 234,933 70,623 338,456 176,607 Loss on disposal of obsolete equipment 65,104 -- 65,104 -- Advertising 90,422 65,718 162,966 112,880 Equipment depreciation 177,197 63,301 221,196 116,686 Telephone communications 149,192 26,885 193,380 60,397 Valuation allowance on foreclosed real estate 1,044,070 -- 1,044,070 -- Other 436,694 342,710 871,338 679,745 ----------- ----------- ---------- ----------- Total noninterest expenses 3,457,062 1,609,104 5,386,356 3,290,853 ----------- ----------- ---------- ----------- INCOME (LOSS) BEFORE INCOME TAXE EXPENSE (BENEFIT) (377,656) 987,339 638,010 1,984,120 INCOME TAX EXPENSE (BENEFIT) (134,600) 335,700 230,000 683,700 ----------- ----------- ---------- ----------- NET INCOME (LOSS) (243,056) 651,639 408,010 1,300,420 OTHER COMPREHENSIVE INCOME, NET OF TAX Net unrealized holding gains (losses) arising during the period 135,220 (42,181) (22,428) 409,047 ----------- ----------- ---------- -----------
4 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2002 AND 2001
SIX MONTHS ENDED JUNE 30, ---------------------------- 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 408,010 $ 1,300,420 Adjustments to reconcile net income to net cash (used) provided by operating activities: Valuation allowance on foreclosed real estate 1,044,070 -- Provision for loan losses 100,000 180,000 Depreciation and amortization 246,092 165,100 Loss on disposal of obsolete equipment 65,104 -- Net amortization of premium/discount on investment securities 7,401 24,553 Deferred income tax benefit (90,000) (109,000) (Increase) decrease in accrued interest receivable (129,818) 34,406 Increase (decrease) in deferred loan fees 16,173 (22,498) Decrease in accounts payable, accrued expenses, and other liabilities 434,579 23,894 Increase in other assets (1,099,337) (457,134) Gain on disposal of premises and equipment (4,458) (8,386) Origination of loans held for sale (9,908,946) (4,582,681) Gain on sales of loans held for sale (207,982) (84,735) Proceeds from sale of loans held for sale 8,485,893 5,292,265 ----------- ----------- Net cash (used) provided by operating activities (633,219) 1,756,204 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in interest-bearing deposits with banks (612,007) (129,834) Purchase of investment securities available for sale (26,341,167) (11,504,288) Proceeds from sale, redemption or principal payments of investment securities available for sale 24,565,938 18,526,965 Purchase of investment securities held to maturity (1,201,212) (100,000) Proceeds from maturities or principal payments of investment securities held to maturity 839,091 414,200 Loans originated or acquired (42,594,970) (43,938,943) Principal collected on loans 42,829,415 29,052,799 Proceeds from disposal of premises and equipment 13,000 8,963 Purchase of premises and equipment (1,023,999) (299,077) Proceeds from foreclosed real estate 309,046 -- ----------- ----------- Net cash provided (used) in investing activities (3,216,865) (7,969,215) ----------- -----------
5 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2002 AND 2001
SIX MONTHS ENDED JUNE 30, ------------------------------ 2002 2001 CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits $ 10,469,086 $ 10,550,232 Proceeds from long-term borrowings -- 10,250,000 Payments of long-term borrowings (1,400,000) (5,000,000) Net decrease in other borrowed funds (1,117,424) (8,391,087) Exercise of stock options 39,629 31,817 Net change in unearned ESOP shares 61,452 49,967 Dividends paid (385,129) (309,204) Redemption of common stock (48,327) (446,217) ----------- ----------- Net cash provided by financing activities 7,619,287 6,735,508 ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS 3,769,203 522,497 CASH AND CASH EQUIVALENTS - JANUARY 1 693,439 645,817 CASH AND CASH EQUIVALENTS - JUNE 30 $ 4,462,642 $ 1,168,314 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the six months for: Interest $ 3,241,936 $ 4,827,084 =========== =========== Income taxes $ 1,040,000 $ 896,000 =========== ===========
See notes to consolidated financial statements 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ 1. BASIS OF PRESENTATION General - The consolidated financial statements of Tri-County Financial Corporation (the "Company") and its wholly owned subsidiary, Community Bank of Tri-County (the "Bank") included herein are unaudited; however, they reflect all adjustments consisting only of normal recurring accruals that, in the opinion of Management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results of operations to be expected for the remainder of the year. Certain previously reported amounts have been restated to conform to the 2002 presentation. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report for the year ended December 31, 2001. 2. EARNINGS PER SHARE Basic and diluted earnings per share, have been computed based on weighted-average common and common equivalent shares outstanding as follows:
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------------------- 2002 2001 2002 2001 Basic 760,790 775,317 762,721 771,994 Diluted 792,699 806,309 762,721 802,202
7 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including discussions of Tri-County Financial Corporation's (the "Company's") goals, strategies and expected outcomes; estimates of risks and future costs; and reports of the Company's ability to achieve its financial and other goals. These forward-looking statements are subject to significant known and unknown risks and uncertainties because they are based upon future economic conditions, particularly interest rates, competition within and without the banking industry, changes in laws and regulations applicable to the Company and various other matters. Because of these uncertainties, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. GENERAL The Company is a bank holding company organized in 1989 under the laws of the State of Maryland. It presently owns all the outstanding shares of capital stock of the Community Bank of Tri-County (the "Bank"), a Maryland-chartered commercial bank. The Company engages in no significant activity other than holding the stock of the Bank and operating the business of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries. The Bank serves the southern Maryland area through its main office and eight branches located in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, and California, Maryland. The Bank is engaged in the commercial and retail banking business as authorized by the banking statutes of the State of Maryland and applicable Federal regulations. The Bank accepts demand and time deposits, and originates loans to individuals, associations, partnerships and corporations. The Bank makes real estate loans including residential first and second mortgage loans, home equity lines of credit and commercial mortgage loans. The Bank makes commercial loans including secured and unsecured loans. The Bank is a member of the Federal Reserve and Federal Home Loan Bank ("FHLB") Systems. The Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") provides deposit insurance coverage up to applicable limits. Since its conversion to a state chartered commercial bank in 1997, the Bank has sought to increase its commercial, commercial real estate, construction, second mortgage, home equity, and consumer lending business as well as the level of transactional deposits to levels consistent with similarly sized commercial banks. As a result of this emphasis, the Bank's percentage of assets invested in residential first mortgage lending and investment securities has declined since 1997. Conversely, targeted loan types have increased. The Bank has also seen an increase in transactional deposit accounts while the percentage of total liabilities represented by certificates of deposits has also declined. Management believes that these changes will enhance the Bank's overall long-term financial performance. Management recognizes that the shift in composition of the Bank's loan portfolio will tend to increase its exposure to credit losses. The Bank has continued to evaluate its allowance for loan losses and the associated provision to compensate for the increased risk. Any evaluation of the allowance for loan losses is inherently inexact and reflects management's expectations as to future economic conditions in the Southern Maryland area as well as individual borrower's circumstances. Management believes that its allowance for loan losses is adequate. In the last several quarters, the national economy has recovered slowly from a mild recession while our local economy has remained strong in relation to the national and statewide economy. Prospects for growth appear to be steady, and local employment remains strong. The Bank remains exposed to asset deterioration should the local economy experience a prolonged period of economic decline. In addition, any Federal Reserve action on interest rates may affect the Bank's financial performance. In the current quarter, the Bank has established a valuation allowance on certain foreclosed real estate based on indications that the market value was below carrying value. This valuation allowance approximately $1.0 million pretax and $670 thousand after taxes. The effect of these write downs was to decrease basic and fully diluted earnings per share for the six months ending June 30, 2002 by $.88 and $.84 respectively. For a discussion of the Bank's accounting policies regarding the accounting for foreclosed real estate, see Note 1 to the Company's Consolidated Financial Statements for the year ended December 31, 2001. In the current quarter, the Bank also incurred significant costs related to its conversion to a new provider of data processing services. These costs included payments made to the previous vendor for conversion related work including facilitating the transfer of customer data to the new system, costs for the production of certain reports and other items. Other conversion related expenses included employee training, system installation, and the write off of certain incompatible equipment. Total 8 costs related to the data conversion in the quarter were approximately $805 thousand. Of this amount, approximately $415 thousand was expensed in the first six months of 2002. These additional costs reduced earnings per share by $.35 and $.33 per share on a basic and fully diluted basis respectively. For a summary of costs incurred and results affected by the write downs and other additional expenses see the table below:
Effect of Pro-forma Income Effect write down income from as reported of systems of foreclosed continuing under GAAP conversion real estate operations NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $5,228,958 $ - $ - $5,228,958 NONINTEREST INCOME: 795,408 - - 795,408 NONINTEREST EXPENSE: Salary and employee benefits 2,098,178 - - 2,098,178 Occupancy expense 391,668 - - 391,668 Data processing expense 338,456 142,553 - 195,903 Loss on disposal of obsolete equipment 65,104 65,104 - - Advertising 162,966 - - 162,966 Equipment depreciation 221,196 60,000 - 161,196 Telephone communications 193,380 101,365 - 92,015 Valuation allowance on foreclosed real estate 1,044,070 - 1,044,070 - Other 871,338 46,034 - 825,304 ----------- ---------- ----------- ---------- Total noninterest expenses 5,386,356 415,056 1,044,070 3,927,230 INCOME (LOSS) BEFORE INCOME TAXES 638,010 (415,056) (1,044,070) 2,097,136 INCOME TAX EXPENSE (BENEFIT) 230,000 (149,626) (376,383) 756,009 NET INCOME (LOSS) 408,010 (265,430) (667,687) 1,341,127 EARNINGS (LOSS) PER SHARE Basic $ 0.54 $ (0.35) $ (0.88) $ 1.77 Diluted $ 0.51 $ (0.33) $ (0.84) $ 1.69 Equipment and software acquired - 310,519 - -
On April 28, 2002, a tornado caused damages to property in our market area. The Company `s facilities suffered no damage, and we are not aware of any customer who suffered material losses which would affect their ability to meet obligations to repay loans. We do not believe that the storm will cause material long term economic damage to our market area. In the last several years, the Bank has increased its sources of noninterest income through fees gathered on transactional accounts, the sale of non-deposit products including investments, and continued operation of our residential mortgage operation. These fees have continued to grow over the last several quarters, while the Bank's fee income from the residential mortgage lending business has decreased due to the Bank's shift in lending emphasis. Management believes that the Bank's strong local focus and responsiveness to customers will enable it to increase its fee income over time. 9 SELECTED FINANCIAL DATA
SIX MONTHS ENDED JUNE 30, -------------------------- 2002 2001 Condensed Income Statement Interest Income $ 8,374,745 $ 9,557,507 Interest Expense 3,045,787 4,803,920 Net Interest Income 5,328,958 4,753,587 Provision for Loan Loss 100,000 180,000 Noninterest Income 795,408 701,386 Noninterest Expense 5,386,356 3,290,853 Income Before Income Taxes 638,010 1,984,120 Income Taxes 230,000 683,700 Net Income 408,010 1,300,420 Per Common Share Basic Earnings $ 0.54 $ 1.68 Diluted Earnings 0.51 1.61 Book Value 33.62 31.90
RESULTS OF OPERATIONS Net income for the six month period ended June 30, 2002 totaled $408,010 ($.54 basic and $.51 fully diluted earnings per share) compared with a total of $1,300,420 ($1.68 basic and $1.61 fully diluted earnings per share) for the same period in the prior year. This decrease of $892 thousand or 68.7% was caused primarily by additional expenses incurred by the Company in the current quarter relating to the systems conversion and the valuation allowance established for certain foreclosed real estate as noted previously. The combined effect of these events was to decrease pretax income in the current quarter by $1.5 million and after tax income by approximately $1 million. For the six month period ended June 30, 2002, interest income declined by $1.2 million or 12.4% to $8.4 million. This decline was caused by the continued decline in interest rates particularly the declines in the Prime, and one, three, and five year treasury rates. Many of the Bank's lending products' pricing are based on these rates. This decline in interest rates was partially offset by higher average asset balances. Interest expense also decreased to $3.0 million in the period ending June 30, 2002 as compared to $4.8 million in the same period in the prior year a decrease of $1.8 million or 36.6%. As with the change in interest income, this decrease was a reflection of the declining interest rate environment experienced during the last year. Interest expense also declined as a result of the Bank's increase in noninterest bearing deposit accounts. The Bank's interest expense declined faster than its interest income because the Bank was able to aggressively cut funding costs by repricing certain of its deposit products. Further declines in interest rates would probably not lead to similar results as the Bank has decreased interest rates on certain products to extremely low levels. The Bank is attempting to protect its interest rate position in the event of increases in interest rates by lengthening, to the extent possible, average maturities on liabilities and adding interest rate sensitive loans. Provision for loan losses declined from prior year levels to $100 thousand from $180 thousand for the periods ending June 30, 2002 and 2001, respectively. Management will continue to periodically review its allowance for loan losses and the related provision and adjust as deemed necessary. This review will include a review of economic conditions nationally and locally, as well as a review of the performance of significant major loans and the overall portfolio. Noninterest income increased to $795 thousand for the six month period ending June 30, 2002, an increase of $94 thousand or 13.4% over the prior year total of $701 thousand. Increased income was primarily the result of a large increase in gains on selling mortgage loans, which increased by $123 thousand or 145.5% to $208 thousand in the current period. This large gain offset small declines in other areas of noninterest income. Noninterest expense for the six month period increased by $2.1 million or 63.7% to $5.4 million from $3.3 million in the same period for the prior year. Salary and employee benefits increased by 14.1% to $2.1 million from $1.8 for the same 10 period in the prior year. The increase was attributable to an increase in employees and to increases in average salary costs per employee. The increase in occupancy expense was caused by larger amounts of repairs and maintenance at the Bank's branch locations as well as the opening of the Bank's permanent facility at Charlotte Hall. Data processing expense increased by $162 thousand to $338 thousand or an increase of 91.6%. This increase was the result of fees paid to the former data processing provider for conversion related services, fees paid to the new provider for system installation, configuration, and training, and for payments to both providers for a short period (about 6 weeks) where both providers provided basic monthly services. In 2002, the Bank also disposed of certain computer equipment which was incompatible with the new data processing system. Advertising expense increased by $50 thousand or 44.4% primarily due to increased marketing efforts related to various transaction based accounts. Depreciation increased to $221 thousand increasing by 89.6% over the prior year level of $117 thousand. The increase was primarily due to the obsolescence of computer and other equipment incompatible with the new data processing system. Expenses related to telephone communications also increased to $193 thousand for the six months ended June 30, 2002 from $60 thousand in the same period in the prior year, an increase of 220%. This increase was primarily related to the data conversion. As noted above, for the six months ended June 30, 2002, the Bank established a valuation allowance on foreclosed assets in the amount of $1.0 million. In 2001, there were no expenses in this category. Other expenses increased by $191 thousand to $871 thousand from the prior year total of $679 thousand, an increase of 28.2%. Income taxes decreased to $230 thousand or 36.1% of pretax income in the current year compared to $684 thousand or 34.5% of pretax income in the prior year. The increase in the tax rate was primarily attributable to an increase in the state income tax burden. In the prior period, taxes were substantially reduced because income earned on investment securities held by the Bank's investment corporation subsidiary, Tri-County Investment Corporation ("TCIC") was not subject to the state income tax. In the current year, reductions in the assets invested in TCIC and a reduction in the overall yield on invested assets have reduced the amount of income sheltered from state income tax, increasing the effective tax rate. RESULTS OF OPERATIONS -- SECOND QUARTER The Company recorded a net loss for the second quarter of 2002 of $243 thousand compared to net income for the second quarter of 2001 of $652 thousand. This decline was the result of the factors noted above, particularly the write down of foreclosed properties and the expenses incurred as the result of the data processing conversion. These costs offset higher net interest and noninterest income. Interest income declined by 9.5% to $4.2 million in the current quarter from $4.6 million in the prior year. Interest expense also declined to $1.5 million from $2.3 million in the prior year, a decline of 35.4%. The factors noted in the declines for the six month period ending June 30, 2002 were also present including a decline in the overall rate environment, increased levels of non interest bearing deposits, and aggressive repricing of certain deposits by the Bank. Net interest income increased by $379 thousand or 16.2%. Non-interest income increased by $44 thousand or 12.5% in the second quarter of 2002, compared to the second quarter of 2001. This increase was the result of increases in income from service charges, increased gains on selling residential mortgage loans and was offset by declines in loan service charges. Total non-interest expense increased by $1.8 million or 114.8% for the second quarter compared to the same period last year primarily due to an increase in costs related to the write down of real estate values noted above and the conversion related costs incurred in the current quarter. Salary and benefits expense increased by 17.7% due to an increased number of employees and higher benefits costs. Occupancy expense increased due to the opening of a permanent full service branch. Advertising expenses also increased due to a higher level of advertising activity in the second quarter, primarily related to efforts to increase the amount of transaction account balances. Depreciation increased due to the write off of computer equipment incompatible with the new data processing system. Other expenses increased primarily due to the write offs noted above. The Company recorded a net basic and fully diluted net loss per share of $.32 in the current quarter as opposed to net basic earnings per share of $.84 and a fully diluted earnings per share of $.81 in the prior year. FINANCIAL CONDITION Assets Total assets as of June 30, 2002 increased by $8.4 million to $270.4 million from the December 31, 2001 level of $262 million. Cash and due from banks increased by $3.8 million, or 544% from December 31, 2001's total. Interest-bearing deposits with banks increased by $612 thousand or 8.0% during the quarter to $8.3 million at June 30, 2002. Investment securities, including both the available for sale and held to maturity portfolios, increased from $44.0 million to $46.1 million an increase of $2.1 million or 4.8%. Increases were primarily the result of additional purchases of investments using the proceeds of loan prepayments. The Bank's loan portfolio increased by $3.6 million or 1.9% during the six month period ending June 30, 2002 to $197 million from December 2001's total of $193 million. The increase was primarily the result of increases in the Commercial, Commercial Real Estate, and Consumer portfolios which offset declines in the Residential First Mortgage portfolio. At June 30, 2002 the Bank's allowance for loan losses totals $2.3 million or 1.16% of loan balances as 11 compared to $2.3 million or 1.18% of loan balances at December 31, 2001. 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. Management believes that the allowance is adequate. Loans held for sale decline to $0 from $2.3 million at December 31, 2001. Premises and equipment increased due to equipment replacement needed for the data processing conversion as well as construction costs related to the permanent Charlotte Hall facility. Foreclosed real estate declined due to the establishment of the valuation allowance noted above. Liabilities Deposit balances increased by $10.5 million or 5.7% for the six months ended June 30, 2002. This increase was primarily in noninterest bearing deposits. Management believes that the recent stock market volatility may help marketing efforts. Short term borrowings remain at very low levels, $695 thousand. Long term debt declined slightly to $47.2 million at June 30, 2002 from $48.7 million at December 31, 2001. Other liabilities increased to $3.2 million at June 30, 2002 from $2.8 million at December 31, 2001, an increase of 15.6%. Stockholders' Equity Stockholders' equity increased $53 thousand or .2% to $25.6 million at June 30, 2002 compared to $25.6 million at December 31, 2001. This reflects the net income of $408,010 for the six month period partially offset by the $385,129 in cash dividends. Accumulated other comprehensive income decreased by $22,428. Other changes in equity occurred as a result of using $48,328 to purchase shares in the open market and retire them, the exercise of stock options of $39,629, and a change in unearned ESOP shares of $61,452. Book value on a per share basis, $33.62 at June 30, 2002, as compared to $33.80 at December 31, 2001, reflects a .5% decrease, reflecting the slight increase in outstanding shares. As noted on Form 8K filed on July 25, 2002 the Board has approved of the purchase of up to 38,000 shares of the Company's stock, for retirement. For the six months ended June 30, 2002, the Company purchased 1,665 shares for $48,310. LIQUIDITY AND CAPITAL RESOURCES The Company currently has no business other than that of the Bank and does not currently have any material funding commitments. The Company's principal sources of liquidity are cash on hand and dividends received from the Bank. The Bank is subject to various regulatory restrictions on the payment of dividends. The Bank's principal sources of funds for investments and operations are net income, deposits from its primary market area, principal and interest payments on loans, interest received on investment securities and proceeds from maturing investment securities. Its principal funding commitments are for the origination or purchase of loans and the payment of maturing deposits. Deposits are considered a primary source of funds supporting the Bank's lending and investment activities. The Bank's most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, federal funds sold, and money market mutual funds. The levels of such assets are dependent on the Bank's operating financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. The Bank may borrow up to 40% of consolidated Bank assets on a line available from the FHLB. As of June 30, 2002, the maximum available under this line would be $109 million, while current outstanding advances totaled $48.7 million. In order to draw on this line the Bank must have sufficient collateral. Qualifying collateral includes residential 1-4 family first mortgage loans and various investment securities. REGULATORY MATTERS The Bank is subject to Federal Reserve Board capital requirements as well as statutory capital requirements imposed under Maryland law. At June 30, 2002, the Bank's tangible, leverage and risk-based capital ratios were 8.71%, 9.96% and 12.68%, respectively. These levels are well in excess of the required 4.0%, 4.0% and 8.0% ratios required by the Federal Reserve Board. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. 12 TRI-COUNTY FINANCIAL CORPORATION -------------------------------- PART II - OTHER INFORMATION --------------------------- Item 4 - Submission of Matters to a Vote of Security Holders On May 8, 2002, the Company held its Annual Meeting of Shareholders. The only matter voted on was the election of two directors. Set forth below are the results of the voting in the election of directors. Nominee For Against ------- --- ------- W. Edelen Gough 509,861 1,116 H. Beaman Smith 488,856 22,121 There were no broker non-votes. The terms of directors Catherine A. Askey, Michael L. Middleton, C. Marie Brown, Louis P. Jenkins, Jr. and Herbert N. Redmond continued after the meeting. Item 6 - Exhibits and reports on Form 8-K A. Exhibits- The following exhibits are being filed with this Form 10-Q 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 B. During the quarter for which this Form 10-Q is being filed, the registrant did not file any reports on Form 8-K. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRI-COUNTY FINANCIAL CORPORATION: Date: August 13, 2002 By: /s/ Michael L. Middleton -------------------------------------- Michael L. Middleton, President and Chairman of the Board Date: August 13, 2002 By: /s/ William J. Pasenelli -------------------------------------- William J. Pasenelli, Executive Vice President and Chief Financial Officer 14 EX-99 3 fm10q63002ex99-1494.txt EXHIBIT 99 TO FORM 10-Q 6-30-02 EXHIBIT 99.1 CERTIFICATION To my knowledge, this Report on Form 10-Q for the quarter ended June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of Tri-County Financial Corporation. By: /s/ Michael L. Middleton --------------------------------------------- Michael L. Middleton President and Chief Executive Officer By: /s/ William J. Pasenelli --------------------------------------------- William J. Pasenelli Executive Vice President and Chief Financial Officer Date: August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----