-----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, FjMpJUBZazHc0lwCxxPlFuLuSjgUE9k48rXOOLLKZXQGF1oqUV09Ji2xiRuTs3dD /6sm5oMEVN8jARMqKcCB5Q== 0000904280-03-000177.txt : 20030813 0000904280-03-000177.hdr.sgml : 20030813 20030813151746 ACCESSION NUMBER: 0000904280-03-000177 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 03840902 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 tricounty10q063003.txt FORM 10-Q 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, 2003 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 by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of July 31, 2003 registrant had outstanding 756,636 shares of Common Stock. TRI-COUNTY FINANCIAL CORPORATION FORM 10-Q INDEX - ----- PART I - FINANCIAL INFORMATION PAGE Item 1 - Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 2003 and December 31, 2002 3 Consolidated Statements of Income and Comprehensive Income - Three and Six Months Ended June 30, 2003 and 2002 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2003 and 2002 5 - 6 Notes to Consolidated Financial Statements 7 Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 15 Item 4 - Controls and Procedures 15 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 15 Item 2 - Changes in Securities and Use of Proceeds 15 Item 3 - Default Upon Senior Securities 15 Item 4 - Submission of Matters to a Vote of Security Holders 15 Item 5 - Other Information 15 Item 6 - Exhibits and Reports on Form 8-K 16 SIGNATURES 17 2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
ASSETS June 30, 2003 December 31, 2002 Cash and due from banks $ 6,157,579 $ 10,356,932 Interest-bearing deposits with banks 8,419,298 15,179,851 Investment securities available for sale - at fair value 67,456,170 41,826,113 Investment securities held to maturity - at amortized cost 3,190,309 2,841,807 Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 3,127,650 2,736,750 Loans held for sale 1,658,000 1,262,667 Loans receivable - net of allowance for loan losses of $2,377,707 and $2,314,074, respectively 195,239,291 197,449,282 Premises and equipment, net 5,539,348 5,736,395 Foreclosed real estate 706,014 716,014 Accrued interest receivable 1,148,681 1,042,453 Other assets 8,550,133 3,025,431 ------------- ------------- Total assets $ 301,192,473 $ 282,173,695 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Noninterest-bearing deposits $ 30,507,800 $ 33,045,310 Interest-bearing deposits 182,732,778 169,979,802 ------------- ------------- Total deposits 213,240,578 203,025,112 Short-term borrowings 5,919,120 752,298 Long-term debt 53,066,740 48,170,000 Accrued expenses and other liabilities 2,000,253 3,353,520 ------------- ------------- Total liabilities 274,226,691 255,300,930 ------------- ------------- STOCKHOLDERS' EQUITY: Common stock - par value $.01; authorized - 15,000,000 shares; issued - 752,054 and 759,778 shares, respectively 7,521 7,598 Additional Paid in Capital 7,787,567 7,716,906 Retained earnings 19,035,399 18,817,615 Accumulated other comprehensive income 245,438 493,691 Unearned ESOP shares (110,143) (163,045) ------------- ------------- Total stockholders' equity 26,965,782 26,872,765 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 301,192,473 $ 282,173,695 ============= =============
See notes to consolidated financial statements 3 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2003 AND 2002
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- -------------------------- 2003 2002 2003 2002 INTEREST INCOME: Interest and fees on loans $ 3,303,851 $ 3,577,700 $ 6,654,825 $ 7,067,360 Taxable interest and dividends on investment securities 604,401 603,868 1,135,174 1,258,565 Interest on bank deposits 15,544 25,578 52,181 48,820 ----------- ----------- ----------- ----------- Total interest income 3,923,796 4,207,146 7,842,180 8,374,745 ----------- ----------- ----------- ----------- INTEREST EXPENSE: Interest on deposits 722,708 865,181 1,470,135 1,774,904 Interest on long-term debt 655,555 630,618 1,268,656 1,270,883 Interest on other borrowings 481 -- 1,247 -- ----------- ----------- ----------- ----------- Total interest expense 1,378,744 1,495,799 2,740,038 3,045,787 ----------- ----------- ----------- ----------- NET INTEREST INCOME 2,545,052 2,711,347 5,102,142 5,328,958 PROVISION FOR LOAN LOSSES 108,941 30,000 114,327 100,000 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,436,111 2,681,347 4,987,815 5,228,958 ----------- ----------- ----------- ----------- NONINTEREST INCOME: Loan appraisal, credit, and miscellaneous charges 102,583 16,560 129,979 88,348 Net gain on sale of loans held for sale 237,595 105,224 364,690 207,982 Service charges 110,489 267,027 338,824 485,369 Other income 3,126 9,248 8,254 13,709 ----------- ----------- ----------- ----------- Total noninterest income 453,793 398,059 841,747 795,408 ----------- ----------- ----------- ----------- NONINTEREST EXPENSE: Salary and employee benefits 1,095,727 1,035,309 2,225,053 2,098,178 Occupancy expense 203,530 224,141 371,847 391,668 Advertising 71,192 90,422 134,926 162,966 Data processing expense 108,728 234,933 194,033 338,456 Depreciation of furniture, fixtures, and equipment 114,839 177,197 229,739 221,196 Telephone communications 63,656 149,192 102,732 193,350 ATM expenses 67,989 73,127 126,469 123,638 Office supplies 52,373 58,150 75,838 94,371 Valuation allowance on foreclosed real estate -- 1,044,070 -- 1,044,070 Office equipment expense 34,631 64,882 79,973 124,544 Other 312,829 305,639 533,431 593,919 ----------- ----------- ----------- ----------- Total noninterest expense 2,125,494 3,457,062 4,074,041 5,386,356 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 764,410 (377,656) 1,755,521 638,010 INCOME TAX EXPENSE (BENEFIT) 255,215 (134,600) 605,215 230,000 ----------- ----------- ----------- ----------- NET INCOME (LOSS) 509,195 (243,056) 1,150,306 408,010 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Net unrealized holding gains (losses) arising during the period 110,800 135,220 (248,253) (22,428) ----------- ----------- ----------- ----------- COMPREHENSIVE INCOME (LOSS) $ 619,995 $ (107,836) $ 902,053 $ 385,582 =========== =========== =========== =========== EARNINGS (LOSS) PER SHARE Basic $ 0.68 $ (0.32) $ 1.53 $ 0.54 Diluted 0.65 (0.32) 1.45 0.51
See notes to consolidated financial statements 4 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2003 AND 2002
SIX MONTHS ENDED JUNE 30, -------- 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,150,306 $ 408,010 Adjustments to reconcile net income to net cash used by operating activities: Valuation allowance on foreclosed real estate -- 1,044,070 Provision for loan losses 114,327 100,000 Depreciation and amortization 300,600 246,092 Loss on disposal of obsolete equipment -- 65,104 Net amortization of premium/discount on investment securities 379,458 7,401 Deferred income tax benefit (29,000) (90,000) Increase in accrued interest receivable (106,228) (129,818) (Increase) decrease in deferred loan fees (20,485) 16,173 Decrease in accounts payable, accrued expenses, and other liabilities (1,353,267) 434,579 Decrease (Increase) in other assets 345,004 (1,099,337) Origination of loans held for sale (11,008,750) (9,908,946) Gain on sales of loans held for sale (364,690) (207,982) Gain on disposal of premises and equipment -- (4,458) Proceeds from sale of loans held for sale 10,978,107 8,485,893 ------------ ------------ Net cash used by operating activities 385,382 (633,219) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in interest-bearing deposits with banks 6,760,553 (612,007) Purchase of investment securities available for sale (63,958,171) (26,341,167) Proceeds from sale, redemption or principal payments of investment securities available for sale 37,559,698 24,565,938 Purchase of investment securities held to maturity (1,188,207) (1,201,212) Proceeds from maturities or principal payments of investment securities held to maturity 839,705 839,091 Net purchase of FHLB and FRB stock (390,900) -- Loans originated or acquired (76,227,936) (42,594,970) Principal collected on loans 78,344,085 42,829,415 Proceeds from disposal of premises and equipment -- 13,000 Purchase of Bank owned life insurance policies (5,700,000) Purchase of premises and equipment (103,553) (1,023,999) Proceeds from foreclosed real estate 10,000 309,046 ------------ ------------ Net cash used in investing activities (24,054,726) (3,216,865) ------------ ------------
5 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (Continued)
SIX MONTHS ENDED JUNE 30, -------- 2003 2002 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits $ 10,215,466 $ 10,469,086 Proceeds from long-term borrowings 5,000,000 -- Payments of long-term borrowings (103,260) (1,400,000) Net decrease in other borrowed funds 5,166,822 (1,117,424) Exercise of stock options 31,158 39,629 Net change in unearned ESOP shares 92,459 61,452 Dividends paid (422,361) (385,129) Redemption of common stock (510,293) (48,327) ------------ ------------ Net cash provided by financing activities 19,469,991 7,619,287 ------------ ------------ INCREASE IN CASH AND CASH EQUIVALENTS (4,199,353) 3,769,203 CASH AND CASH EQUIVALENTS - JANUARY 1 10,356,932 693,439 ------------ ------------ CASH AND CASH EQUIVALENTS - JUNE 30 $ 6,157,579 $ 4,462,642 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the three months for: Interest $ 2,721,647 $ 3,241,936 ============ ============ Income taxes $ 1,130,369 $ 1,040,000 ============ ============
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. There have been no significant changes to the Company's Accounting Policies as disclosed in the 2002 Annual Report. The results of operations for the six months ended June 30, 2003 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 2003 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, 2002. 2. NATURE OF BUSINESS The Company, through its bank subsidiary, provides domestic financial services primarily in southern Maryland. The primary financial services include real estate, commercial and consumer lending, as well as traditional demand deposits and savings products. 3. INCOME TAXES The Company uses the liability method of accounting for income taxes as required by SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred-tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse. 4. EARNINGS PER SHARE Earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period, including any potential dilutive common shares outstanding, such as options and warrants. As of June 30, 2003 there were 7,916 shares excluded from the diluted net income per share computation because the option price exceeded the average market price and therefore, their effect would be anti-dilutive. 5. STOCK-BASED COMPENSATION The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure", but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its Plan. No compensation expense related to the Plan was recorded during the six months ended June 30, 2003 and 2002. If the Company had elected to recognize compensation cost based on fair value at the grant dates for awards under the Plan consistent with the method prescribed by SFAS No. 123, net income and earnings per share would have been changed to the pro forma amounts as follows for the six months ended June 30. 7 2003 2002 ---- ---- Net Income as reported $1,150,306 $ 408,010 Less pro forma stock based compensation expense determined under the fair value method , net of related tax effects 173,261 109,390 ---------- ---------- Pro forma net income $ 977,045 $ 298,620 ========== ========== Net income per share Basic - as reported $ 1.53 $ 0.54 Basic - pro forma $ 1.30 $ 0.39 Diluted - as reported $ 1.45 $ 0.51 Diluted - pro forma $ 1.23 $ 0.38 6. EARNINGS PER SHARE Basic and diluted earnings per share, have been computed based on weighted-average common and common equivalent shares outstanding as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------- 2003 2002 2003 2002 Basic 745,267 762,721 752,690 760,760 Diluted 786,774 762,721 795,236 792,699 8 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 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 assessment of economic conditions in the Southern Maryland area as well as individual borrower's circumstances. Management believes that its allowance for loan losses is adequate. For further information on the Bank's allowance for loan losses see the discussion in the financial condition section of this form and in the section titled "Critical Accounting Policies," as well as the relevant discussions in the Form 10-K and annual report for the year ended December 31, 2002. During the second quarter of 2002, the Bank recorded a valuation allowance on certain foreclosed real estate. In addition the Bank incurred certain expenses related to its core data system conversion during the same period. These expenses did not recur in 2003,which had the effect of decreasing noninterest expense in the current year when compared to the same period in 2002. In the last several quarters, the national economy has recovered fitfully 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 9 economy experience a prolonged period of economic decline. In addition, any Federal Reserve action on interest rates may affect the Bank's financial performance. Residential first mortgage loan customers have reacted to lower interest rates by continuing to refinance higher rate loans. Because the Bank does not wish to keep low rate, long term, fixed rate residential first mortgages in its portfolio, these loans are then sold to third parties with the Bank retaining servicing. These transactions have led to a reduction in residential first mortgage loan balances. The Bank continues to generate a high level of noninterest income from these transactions. Other types of loans particularly commercial real estate and commercial lines of credit have increased. The Bank continues to generate a high level of non-interest income from the sale of loans. Although the Bank's net interest income had grown for several quarters due to increased assets and an increase in net interest margin, in the past quarter the Bank's net interest margin narrowed. This was caused by continuing decreases in short term interest rates. These decreases in short term rates were reflected in the Bank's interest rates on loans, however, because cost of funds has already approached a historical low point, the Bank was unable to reduce its cost of funds by an equal amount resulting in a lower net interest income. Income tax rates were comparable to the prior year. It is anticipated that any further reductions in interest rates will have a significant adverse effect on earnings as rates paid on interest bearing liabilities, which are as low as 0.10% on NOW accounts, cannot continue to decline at the same rate as yields on loans and investments. SELECTED FINANCIAL DATA SIX MONTHS ENDED JUNE 30, ------------------------ 2003 2002 Condensed Income Statement Interest Income $7,842,180 $8,374,745 Interest Expense 2,740,038 3,045,787 Net Interest Income 5,102,142 5,328,958 Provision for Loan Loss 114,327 100,000 Noninterest Income 841,747 795,408 Noninterest Expense 4,074,041 5,386,356 Income Before Income Taxes 1,755,521 638,010 Income Taxes 605,215 230,000 Net Income 1,150,306 408,010 Per Common Share Basic Earnings $ 1.53 $ 0.54 Diluted Earnings 1.45 0.51 Book Value 35.86 33.62 10 RESULTS OF OPERATIONS Net income for the six month period ended June 30, 2003 totaled $1,150,306 ($1.53 basic and $1.45 diluted earnings per share) compared with a total of $408,010 ($.54 basic and $.51 diluted earnings per share) for the same period in the prior year. This increase of $742,296 or 181.9% was caused primarily by the reduction in noninterest expense and increases in noninterest income, these positive changes were partially offset by the decrease in net interest income and an increase in provision for loan losses. For the six month period ended June 30, 2003, interest income declined by $532,565 or 6.4% to $7,842,180. This decline was caused by the continued decline in interest rates particularly the declines in the Prime Rate, and one, three, and five year U.S. Treasury rates. Many loan products are priced based on these rates. This decline in interest rates was partially offset by higher average asset balances. Interest expense also decreased to $2,740,038 in the six month period ending June 30, 2003 as compared to $3,045,787 in the same period in the prior year a decrease of $305,749 or 10.0%. 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 the average balances of noninterest bearing deposit accounts in the current period compared to the prior year. The Bank's ability to cut interest expense was inhibited by the historically low rates paid on deposits prior to the current quarter. As interest rates have continued to fall on loans and investments, the Bank was unable to reduce interest expense by the same amount as interest income fell. Provision for loan losses increased from prior year levels to $114,327 from $100,000 for the six month period ending June 30, 2003 and 2002, respectively. The increase in provision expense was caused by a continuing concentration of the Bank's loan portfolio in commercial loan categories that have higher levels of risk than residential mortgages, which more than offset a slight decline in total loan balances. 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 $841,747 for the six month period ending June 30, 2003, an increase of $46,339 or 5.8% over the prior year total of $795,408. Loan appraisal, credit, and miscellaneous charges increased by $41,631 to $129,979. Net gain on sale of loans also increased to $364,690 from the prior year total of $207,982, an increase of $156,708 or 75.4%. These increases were caused by the high volume of loan originations, caused by lower mortgage interest rates. Income from service charges declined from the prior year to $338,824 from the prior year total of $485,369 a decline of $146,545 or 30.2%. This decline was caused by a write off of certain originated mortgage servicing rights and by an increased rate of amortization of these rights in the current year. The write off and higher rate of amortization were the result of the effect of lower mortgage loan interest rates on our originated mortgage servicing right ("OMSR") balances. The lower rates had the effect of shortening the projected lives of the servicing assets, reducing their fair value. This reduction in fair value was recognized through a $95,000 reduction in OMSR balances and a corresponding reduction in mortgage servicing income. In addition average lives for all OMSR's were reduced resulting in higher amortization expense related to these rights. The higher amortization is reflected in a lower servicing income. Other noninterest income was comparable from year to year. Noninterest expense for the six month period decreased by $1,312,315 or 24.4% to $4,074,041 from $5,386,356 in the same period for the prior year. Salary and employee benefits expense increased by 6.1% or 126,875, to $2,225,053 from $2,098,178 for the same period in the prior year. The increase was attributable to an increase in employees and to increases in average salary costs per employee. Occupancy expense decreased slightly from $391,668, to $371,847, a decrease of 5.1% attributable to certain nonrecurring expenses in 2002. Advertising declined to $134,926 from $162,966, a decline of $28,040 or 17.2%. Advertising declined due to a reduction in certain sales efforts in anticipation of being increased in the third and fourth quarters. Data processing expense also declined to $194,033 from a prior year total of $338,456 a decline of $144,423 or 42.7%. In 2002, additional expenses were incurred related to the systems conversion in May 2002. Depreciation of furniture fixtures and equipment increased to $229,739 from the prior year total of $221,196 an increase of $8,543 or 3.9%. This increase was due to large investments in equipment added during the prior year, mostly related to the addition of new branches and new equipment added for the 2002 system conversion. Telephone communications expense declined 11 to $102,732 from $193,380 in the prior year, a decline of $90,648 or 46.9%. In 2002, extensive testing of the systems for conversion required the use of phone lines increasing costs. Also in 2003 cost control and efficiency efforts by the Bank helped to reduce costs. Office supplies expense decreased to $75,838 from the prior year amount of $94,371, a decline of $18,533 or 19.6%. This decline was caused by additional supplies expenses incurred in 2002 related to the systems conversion. The provision for valuation allowances on foreclosed real estate declined from $1,044,070 as of June 30, 2003 to zero in 2003 as no further increases to the valuation allowance were necessary. ATM related expenses increased by $2,831 to $126,469 for the period ending June 30, 2003, an increase of 2.3% due to higher levels of activity and additional offsite machines. Office equipment expenses decreased to $79,973 from 2002's level of $124,544, a decrease of $44,571 or 35.8%. This decrease was caused by the retirement of certain equipment due to the systems conversion in 2002. Other expenses declined to $533,431 from $593,919 a decline of $60,488 or 10.2%. These expenses were lower based on certain cost control measures in 2003. Income taxes increased to $605,215 or 34.5% of pretax income in the current year compared to $230,000 or 42.7% of pretax income in the prior year. The decrease in the tax rate was primarily attributable to an increase in certain tax exempt interest. RESULTS OF OPERATIONS - SECOND QUARTER The Company recorded net income for the second quarter of 2003 of $509,195 compared to a net loss for the same period in 2003 of $243,656. The increase was the result of the factors noted above especially the provision for valuation allowance in the prior year as well as certain data processing conversion costs in the prior year. In addition, noninterest income increased to $453,793 in 2003 an increase of $55,734 or 14.0% from the prior year total of $398,059. These items were partially offset by a decrease in net interest income to $2,545,052 in 2003, from $2,711,347, a decrease of $245,236 or 9.2%, and an increase in provision for loan losses to $108,941 from $30,000 an increase of 263.1%. Net interest income declined by 6.1% to $2,545,052 in 2003 from $2,711,347 as a result of the continued decline in interest rates noted above. The provision for loan losses increased by 263.1% to $108,941 in 2003 from $30,000 in 2002 primarily because of the continued concentration of lending in higher credit risk products. Loan appraisal, credit and miscellaneous charges and net gain on sale of loans held for sale increased by 519.5% and 125.8%, to $102,583 and $237,595 respectively as a result of the lower interest rate environment noted earlier. Service charges declined to $110,489 from $267,027, a decline of $156,538 or 58.6%, as a result of the write off and higher amortization related to the lower interest rates and shorter lives of the servicing assets as noted above. Other income amounts were comparable. Salary and employee expense increased to $1,095,727 from $1,035,309, an increase of $60,418 or 5.8% due to an increased average salary per employee and a slightly higher number of employees. Occupancy expense declined by $20,611 to $203,530 from the prior year's total of $224,141 a decline of 9.2% due to the nonrecurring costs of 2002 noted above. Advertising expenses also declined by $19,230 or 21.3% to $71,192, this decline was the result of delaying certain advertising expenses in 2003. Data processing expense decreased to $108,728, a decrease of $126,205 or 53.7% over the prior year total of $234,933. This decrease reflects conversion and other expenses in the prior year. Depreciation of furniture, fixtures and equipment also declined as many equipment items were written off in the prior year. These expenses decreased by $63,358 or 35.2%. Telephone communications also decreased to $63,656 or by 57.3% under the prior year total of $149,192 due to expenses in testing and installing the core data system in 2002. ATM expenses decreased by $5,138 or 7.0% to $67,989 in the current year due changes in ATM operations. Office supplies expense decreased to $52,331 from $58,150 a decrease of $5,777 or 9.9% as prior year expenses were increased by the need to change some supplies prior to conversion. As noted above, in 2002 the Bank established a valuation allowance on foreclosed real estate, no provision for this allowance was recorded in 2003. Office equipment expense was similarly reduced by the absence of conversion related items in 2003. Other expense amounts were comparable. FINANCIAL CONDITION Assets Total assets as of June 30, 2003 increased by $19,018,778 to $301,192,473 from the December 31, 2002 level of $282,173,695. Cash and due from banks decreased by $4,199,353, or 40.6% from December 31, 2002's total. 12 Interest-bearing deposits with banks decreased by $6,760,553 or 44.5% during the period to $8,419,298 at June 30, 2003. Investment securities, including both the available for sale and held to maturity portfolios, increased from $44,667,920 to $70,646,479 an increase of $25,978,559 or 58.2%. Increases were primarily the result of additional purchases of investments using the proceeds of loan prepayments, additional short and long term borrowings, and the conversion of interest bearing deposits to investments. Loans held for sale increased to $1,658,000 from $1,262,667 at December 31, 2001. Additional loan information for prior years is presented in the Form 10-K for the year ended December 31, 2002. The Bank's loan portfolio decreased by $2,209,991 or 1.1% during the six month period ending June 30, 2003 to $195,239,291 from December 2002's total of $197,449,282. The decrease was primarily the result of large amounts of loan prepayments on the Bank's existing residential first mortgage portfolio. The Bank did increase its portfolio of commercial real estate loans in the six month period ending June 30, 2003, but these increases were smaller than the decreases in other parts of the loan portfolio. At June 30, 2003 the Bank's allowance for loan losses totals $2,377,707 or 1.19% of loan balances as compared to $2,314,074 or 1.15% of loan balances at December 31, 2002. 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. Premises and equipment decreased due to depreciation in the current quarter. Foreclosed real estate declined to $706,014 at June 30, 2003 from $716,014 at December 31, 2002 due to partial settlement of one property. Other assets increased to $8,550,133 from $3,025,431 at December 31, 2002. This increase was primarily the result of the Bank investing $5,000,000 in certain life insurance instruments which will provide supplemental benefits to certain key executives and provide additional interest income to the Bank. Liabilities Deposit balances increased by $10,215,466 or 5.0% for the six months ended June 30, 2003. This increase was primarily in interest bearing deposits. Management believes that ongoing stock market volatility has made bank deposits more attractive to the general public. Short term borrowings increased to $5,919,120, an increase of $5,166,822, while long term borrowings increased by $4,896,740. Proceeds of these borrowings were used to purchase investment securities. Stockholders' Equity Stockholders' equity increased $93,017 or .35% to $26,965,782 at June 30, 2003 compared to $26,872,765 at December 31, 2002. This reflects the net income of $1,150,305 for the six month period partially offset by the $248,253 decline in accumulated other comprehensive income, and $422,361 in cash dividends. Other changes in equity occurred as a result of using $510,293 for the purchase and retirement of shares, the exercise of stock options of $31,158, and activity related to the ESOP shares of $92,459. Book value on a per share basis, $35.86 at June 30, 2003, as compared to $35.37 at December 31, 2002, reflects a .8% increase, with a slight increase in outstanding shares, partially offsetting the gains noted previously. 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 13 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 45% of consolidated Bank assets on a line of credit available from the FHLB. As of June 30, 2003, the maximum available under this line would be $136 million, while current outstanding advances totaled $53 million. In order to draw on this line the Bank must have sufficient collateral. Qualifying collateral includes residential 1-4 family first mortgage loans, certain second mortgage loans, certain commercial real estate 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, 2003, the Bank's tangible, leverage and risk-based capital ratios were 8.49%, 8.48% and 12.84%, respectively. These levels are well in excess of the required 4.0%, 4.0% and 8.0% ratios required by the Federal Reserve Board. CRITICAL ACCOUNTING POLICIES The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within the financial statements is, to a significant extent, financial information that is based on measures of financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning of income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. The Company considers the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting : (1) SFAS 5, "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS 114, "Accounting by Creditors for Impairment of a Loan", which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral, a borrower's prospects of repayment, and in establishing allowance factors on the formula allowance. The establishment of allowance factors is a continuing exercise, based on management's continuing assessment of the global factors such as delinquencies, loss history, trends in the volume and term of loans, national and local economic trends, concentration of credit, loan classification, and other factors. Changes in allowance factors will have a direct impact on the amount of the provision and a corresponding effect on net income. Errors in management's perception and assessment of the global factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or chargeoffs. 14 ITEM 3 Quantitative and qualitative Disclosure about Market Risk Not applicable. ITEM 4 CONTROLS AND PROCEDURES As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, of the effectiveness of the Company's disclosure controls and procedures. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. It should be noted that the design of the Company's disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company's principal executive and financial officers have concluded that the Company's disclosure controls and procedures are, in fact, effective at a reasonable assurance level. In addition, there have been no changes in the Company's internal control over financial reporting (to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures) identified in connection with the evaluation described in the above paragraph that occurred during the Company's last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION --------------------------- ITEM 1 - LEGAL PROCEEDINGS None. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 7, 2003, 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 ------- --- ------- Herbert N. Redmond 504,046 27,704 Joseph Slater 524,761 6,989 There were no broker non-votes. The terms of directors Michael L. Middleton, C. Marie Brown, Louis P. Jenkins, Jr. and H. Beaman Smith continued after the meeting. ITEM 5 - OTHER INFORMATION Not applicable. 15 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits- The following exhibits are being filed with this Form 10-Q Exhibit 31 Certifications pursuant to Rule 13a-14(a) of the Exchange Act Exhibit 32 Certifications pursuant to Section 1350 B. During the quarter for which this Form 10-Q is being filed, the registrant did not file any reports on Form 8-K. 16 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 12, 2003 By:/s/ Michael L. Middleton ------------------------------------- Michael L. Middleton, President and Chairman of the Board Date: August 12, 2003 By: /s/ William J. Pasenelli ------------------------------------- William J. Pasenelli, Executive Vice President and Chief Financial Officer 17 EX-31 3 tricounty10q063003ex31.txt EXHIBIT 31 EXHIBIT 31 RULE 13A-14(a) CERTIFICATIONS I, Michael L. Middleton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tri-County Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) N/A (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies in the design or operation of internal control which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 /s/ Michael L. Middleton ---------------------------------------- Michael L. Middleton President and Chief Executive Officer (Principal Executive Officer) I, William J. Pasenelli, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tri-County Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) N/A (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies in the design or operation of internal control which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 /s/ William J. Pasenelli ---------------------------------------- William J. Pasenelli Executive Vice President and Chief Financial Officer (Principal Accounting Officer) EX-32 4 tricounty10q063003ex32.txt EXHIBIT 32 EXHIBIT 32 SECTION 1350 CERTIFICATIONS To my knowledge, this report on Form 10-Q (the "Report") for Tri-County Financial Corporation (the "Company") for the period ended June 30, 2003, 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 consolidated financial condition and results of operations of the Company. 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 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----