-----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, KrJDdh1zICAvbuVPfRY4WWX/fu2E6fhCgtkfaRVbRsTesAqAe3Aab3CKeFvmfT1A 8q2BYyDgimFvwxRQv+cYZg== 0000904280-03-000274.txt : 20031112 0000904280-03-000274.hdr.sgml : 20031111 20031112114216 ACCESSION NUMBER: 0000904280-03-000274 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031112 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: 03991935 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 f10q10-1494.txt QUARTERLY FILING 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 September 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 check mark 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 October 10, 2003 registrant had outstanding 756,460 shares of Common Stock. TRI-COUNTY FINANCIAL CORPORATION FORM 10-Q INDEX - ----- PART I - FINANCIAL INFORMATION PAGE ---- Item 1 - Financial Statements Consolidated Balance Sheets - September 30, 2003 (Unaudited) and December 31, 2002 3 Consolidated Statements of Income and Comprehensive Income - Three and Nine Months Ended September 30, 2003 (Unaudited) and 2002 4-5 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2003 (Unaudited) and 2002 (Unaudited) 6-7 Notes to Consolidated Financial Statements 8-10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 18 Item 4 - Controls and Procedures 18 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 19 Item 2 - Change in Securities and Use of Proceeds 19 Item 3 - Default upon Senior Securities 19 Item 4 - Submission of Matters to a Vote of Security Holders 19 Item 5 - Other Information 19 Item 6 - Exhibits and Reports on Form 8-K 19 SIGNATURES 20 2 ITEM I. FINANCIAL STATEMENTS TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
ASSETS September 30, 2003 December 31, 2002 Cash and due from banks $ 11,213,506 $ 10,356,932 Interest-bearing deposits with banks 6,646,826 15,179,851 Investment securities available for sale - at fair value 45,420,912 41,826,113 Investment securities held to maturity - at amortized cost 45,929,159 2,841,807 Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 4,602,250 2,736,750 Loans held for sale 616,250 1,262,667 Loans receivable - net of allowance for loan losses of $2,408,910 and $2,314,074, respectively 206,123,174 197,449,282 Premises and equipment, net 5,498,501 5,736,395 Foreclosed real estate 706,764 716,014 Accrued interest receivable 1,325,120 1,042,453 Bank owned life insurance 5,847,696 -- Other assets 9,074,507 3,025,431 --------------- ------------- Total assets $ 337,156,969 $ 282,173,695 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Noninterest-bearing deposits $ 29,754,430 $ 33,045,310 Interest-bearing deposits 187,427,155 169,979,802 --------------- ------------- Total deposits 217,181,585 203,025,112 Short-term borrowings 27,671,430 752,298 Long-term debt 63,058,996 48,170,000 Accrued expenses and other liabilities 2,162,065 3,353,520 --------------- ------------- Total liabilities 310,074,076 255,300,930 --------------- ------------- STOCKHOLDERS' EQUITY: Common stock - par value $.01; authorized - 15,000,000 shares; issued - 752,240 and 759,778 shares, respectively 7,522 7,598 Additional paid in capital 7,810,776 7,716,906 Retained earnings 19,604,356 18,817,615 Accumulated other comprehensive (loss) income (229,618) 493,691 Unearned ESOP shares (110,143) (163,045) --------------- ------------- Total stockholders' equity 27,082,893 26,872,765 --------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 337,156,969 $ 282,173,695 =============== =============
See notes to consolidated financial statements 3 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ---------------------- 2003 2002 2003 2002 INTEREST INCOME: Interest and fees on loans $3,361,521 $3,604,299 $10,016,346 $10,671,659 Taxable interest and dividends on investment securities 843,200 662,707 1,978,374 1,921,272 Interest on bank deposits 5,903 14,928 58,084 63,748 ---------- ---------- ----------- ----------- Total interest income 4,210,624 4,281,934 12,052,804 12,656,679 ---------- ---------- ----------- ----------- INTEREST EXPENSE: Interest on deposits 696,914 865,583 2,167,049 2,640,487 Interest on long term debt 725,273 617,390 1,993,929 1,884,127 Interest on short term debt and other borrowings 9,637 1,403 10,884 5,549 ---------- ---------- ----------- ----------- Total interest expense 1,431,824 1,484,376 4,171,862 4,530,163 ---------- ---------- ----------- ----------- NET INTEREST INCOME 2,778,800 2,797,558 7,880,942 8,126,516 PROVISION FOR LOAN LOSSES 31,013 30,000 145,340 130,000 ---------- ---------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,747,787 2,767,558 7,735,602 7,996,516 ---------- ---------- ----------- ----------- NONINTEREST INCOME: Loan appraisal, credit, and miscellaneous charges 76,151 57,921 206,130 146,269 Net gain on sale of loans held for sale 135,036 81,557 499,726 289,539 Service charges 120,756 242,534 459,580 727,903 Other income 819 4,901 9,073 18,610 ---------- ---------- ----------- ----------- Total noninterest income 332,762 386,913 1,174,509 1,182,321 ---------- ---------- ----------- ----------- NONINTEREST EXPENSE: Salary and employee benefits 1,305,584 1,031,744 3,530,637 3,129,922 Occupancy expense 175,459 200,914 547,306 592,582 Advertising 89,140 91,675 224,066 254,641 Loss on disposal of obsolete equipment -- -- -- 65,104 Data processing expense 103,042 94,102 297,075 432,558 Depreciation of furniture, fixtures, and equipment 132,022 58,380 361,761 279,576 Telephone communications 33,407 74,794 136,139 268,174 ATM expenses 71,153 51,686 197,622 123,638 Office supplies 28,582 32,572 104,420 136,292 Valuation allowance on foreclosed real estate -- -- -- 1,044,070 Office equipment expense 29,629 34,537 109,602 114,510 Other expenses 222,146 363,342 755,577 979,035 ---------- ---------- ----------- ----------- Total noninterest expense 2,190,164 2,033,746 6,264,205 7,420,102 ---------- ---------- ----------- -----------
4 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (CONTINUED)
INCOME BEFORE INCOME TAXES 890,385 1,120,725 2,645,906 1,758,735 INCOME TAX EXPENSE 293,550 391,000 898,765 621,000 ---------- ---------- ---------- ----------- NET INCOME 596,835 729,725 1,747,141 1,137,735 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Net unrealized holding gains (losses) arising during the period (475,055) (10,628) (723,309) (33,056) ---------- ---------- ---------- ----------- COMPREHENSIVE INCOME $ 121,780 $ 719,097 $1,023,832 $ 1,104,679 ========== ========== ========== =========== EARNINGS PER SHARE Basic $ 0.79 $ 0.96 $ 2.32 $ 1.49 Diluted 0.75 0.91 2.20 1.41
See notes to consolidated financial statements 5 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,747,141 $ 1,137,735 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 145,340 130,000 Depreciation and amortization 474,900 339,392 Loss on disposal of obsolete equipment -- 65,104 Net amortization of premium/discount on investment securities 367,646 21,869 Deferred income tax benefit (29,000) (477,000) Increase in accrued interest receivable (282,667) (82,492) Increase in deferred loan fees (43,588) (41,248) Increase in accounts payable, accrued expenses, and other liabilities (1,191,455) 1,856,145 Decrease (Increase) in other assets 213,052 (1,220,565) Gain on disposal of premises and equipment -- (4,458) Origination of loans held for sale (16,246,950) (13,860,196) Gain on sales of loans held for sale (499,725) (289,540) Proceeds from sale of loans held for sale 17,393,092 12,518,971 ------------ ------------ Net cash provided by operating activities 2,047,786 1,137,787 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in interest-bearing deposits with banks 8,533,025 4,619,965 Purchase of investment securities available for sale (63,963,745) (43,041,197) Proceeds from sale, redemption or principal payments of investment securities available for sale 58,892,560 36,394,570 Purchase of investment securities held to maturity (45,833,440) (1,201,212) Proceeds from maturities or principal payments of investment securities held to maturity 2,746,088 1,201,946 Net purchase of FHLB and FRB stock (1,865,500) -- Loans originated or acquired (132,967,284) (67,672,186) Principal collected on loans 124,191,640 66,716,172 Proceeds from disposal of premises and equipment -- 13,000 Purchase of bank owned life insurance policies (5,847,696) -- Purchase of foreclosed real estate -- (29,562) Purchase of premises and equipment (237,006) (1,142,287) Proceeds from foreclosed real estate 9,250 309,046 ------------- ------------ Net cash used in investing activities (56,342,108) (3,831,745) ------------- ------------
6 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 2003 2002 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits $14,156,473 $9,262,695 Proceeds from long-term borrowings 15,000,000 -- Payments of long-term borrowings (111,004) (1,400,000) Net increase (decrease) in other borrowed funds 26,919,132 (1,078,569) Exercise of stock options 54,375 141,906 Net change in unearned ESOP shares 92,459 47,999 Dividends paid (422,361) (385,129) Redemption of common stock (538,178) (280,090) ----------- ---------- Net cash provided by financing activities 55,150,896 6,308,812 ----------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 856,574 3,614,854 CASH AND CASH EQUIVALENTS - JANUARY 1 10,356,932 693,439 CASH AND CASH EQUIVALENTS - SEPTEMBER 30 $11,213,506 $4,308,293 =========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the nine months for: Interest $ 2,697,029 $4,773,641 =========== ========== Income taxes $ 1,422,869 $1,130,000 =========== ========== Noncash transfers from loans to other assets $ -- $1,040,000 =========== ==========
7 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 nine months ended September 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 September 30, 2003, 7,916 shares were 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. Basic and diluted earnings per share, have been computed based on weighted-average common and common equivalent shares outstanding as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------ 2003 2002 2003 2002 Basic 751,633 763,084 752,334 761,563 Diluted 793,649 806,291 794,556 804,971 8 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 nine months ended September 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 nine months ended September 30. 2003 2002 ---- ---- Net Income as reported $1,747,141 $1,137,735 Less pro forma stock based compensation expense determined under the fair value method, net of tax effects. 173,261 109,390 ---------- ---------- Pro forma net income $1,573,880 $1,028,345 ========== ========== Net income per share Basic - as reported $ 2.32 $ 1.49 Basic - pro forma $ 2.09 $ 1.35 Diluted - as reported $ 2.20 $ 1.41 Diluted - pro forma $ 1.98 $ 1.28 6. NEW ACCOUNTING STANDARDS In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). The requirements of SFAS No. 146 are effective prospectively for qualifying activities initiated after December 31, 2002. SFAS No. 146 applies to costs associated with an exit activity, including restructuring, or with a disposal of long-lived assets. The Statement has had no effect on the Company's financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation No. 45"). Beginning in 2003, Interpretation No. 45 requires recognition of liabilities as their fair value for newly issued guarantees. The adoption of Interpretation No. 45 did not have a material effect on the Company's financial statements. 9 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based compensation and required disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company has adopted the disclosure provisions of SFAS No. 148. The Company has not changed to the fair value-based method of accounting for stock-based compensation. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("Interpretation No. 46"), which explains identification of variable interest entities and the assessment of whether to consolidate those entities. Interpretation No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the involved parties. The provisions of Interpretation No. 46 are effective for all financial statements issued after January 1, 2003. The Company holds no significant variable interest entities that would require disclosure or consolidation. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with some exceptions. The Company does not believe that SFAS No. 149 will have a material impact on its financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No. 150"), effective for financial instruments entered into or modified after May 31, 2003. This statement established standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of the statement as a liability rather than as an equity, such as obligations that a reporting entity can or must settle by issuing its own equity shares. SFAS No. 150 did not have an impact on the Company's earnings, financial condition or equity. 10 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 expects to open an additional branch in Calvert County in 2004. 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. In the fourth quarter of 2003, the Bank expects to offer Internet banking to its commercial and consumer customers. Management believes that the introduction of an internet banking capability will enable it to compete for a larger share of customers in its market area. 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 reflects the losses inherent in the loan portfolio as of the balance sheet date. 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 to date period, 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 economy experience a prolonged period of economic decline. In addition, any Federal Reserve action on interest rates may affect the Bank's financial performance. 11 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. In order to offset the effects of the narrowing interest rate spread, the Bank increased its assets in the third quarter of 2003 by increasing its holdings of certain held to maturity investments. This increase was primarily funded by increases in short and long term borrowings in 2003. The effect of these transactions was to increase the size of the Bank's assets, as well as increasing its net interest income. The transactions decreased the Bank's capital ratios. The Bank remains well capitalized under all applicable regulations. 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
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 2003 2002 --------------- ------------ Condensed Income Statement Interest Income $12,052,804 $12,656,679 Interest Expense 4,171,862 4,530,163 Net Interest Income 7,880,942 8,126,516 Provision for Loan Loss 145,340 130,000 Noninterest Income 1,174,509 1,182,321 Noninterest Expense 6,264,205 7,420,102 Income Before Income Taxes 2,645,906 1,758,735 Income Taxes 898,765 621,000 Net Income $ 1,747,141 $ 1,137,735 Per Common Share Basic Earnings $ 2.32 $ 1.49 Diluted Earnings 2.20 1.41 Book Value $ 36.00 $ 33.62
12 RESULTS OF OPERATIONS Net income for the nine month period ended September 30, 2003 totaled $1,747,141 ($2.32 basic and $2.20 diluted earnings per share) compared with a total of $1,137,735 ($1.49 basic and $1.41 diluted earnings per share) for the same period in the prior year. This increase of $609,406 or 53.6% was caused primarily by the reduction in noninterest expense, this reduction was partially offset by the decrease in net interest and noninterest income and an increase in provision for loan losses. For the nine month period ended September 30, 2003, interest income declined by $603,875 or 4.8% to $12,052,804. 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, including the increase in investments noted above. Interest expense also decreased to $4,171,862 in the nine month period ending September 30, 2003 as compared to $4,530,163 in the same period in the prior year a decrease of $358,301 or 7.9%. This decrease was a reflection of the declining interest rate environment experienced during the last year. These lower interest rates more than offset the increases in liabilities including the increased borrowing noted above. 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. Net interest income declined due to the Bank's inability to cut interest expense due to 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 $145,340 from $130,000 for the nine month period ending September 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. 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 decreased to $1,174,509 for the nine month period ending September 30, 2003, a decrease of $7,812 or .7% over the prior year total of $1,182,321. Loan appraisal, credit, and miscellaneous charges increased by $59,861 to $206,130. Net gain on sale of loans also increased to $499,726 from the prior year total of $289,539, an increase of $210,187 or 72.6%. 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 $459,580 from the prior year total of $727,903 a decline of $268,323 or 36.9%. This decline was caused by a write off of certain originated mortgage servicing rights ("OMSR") and by an increased rate of amortization of these OMSR's 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 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 $195,000 in reductions in OMSR balances and a corresponding reduction in mortgage servicing income. In addition average lives for all OMSR's were shortened resulting in higher amortization expense related to these rights. The higher amortization is reflected in a lower servicing income. Other noninterest income decreased due to reductions in rental and other noninterest income. Noninterest expense for the six month period decreased by $1,155,897 or 15.6% to $6,264,205 from $7,420,102 in the same period for the prior year. Salary and employee benefits expense increased by 12.8% or 400,715, to $3,530,637 from $3,129,922 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 $592,582, to $547,306, a decrease of 7.6% attributable to certain nonrecurring expenses in 2002. Advertising declined to $224,066 from $254,641, a decline of $30,575 or 12.0%. Advertising declined due to a reduction in certain sales efforts in anticipation of being increased in the fourth quarter. In 2002, the Bank recorded a nonrecurring loss on certain obsolete equipment of $65,104. Data processing expense also declined to $297,075 from a prior year total of $432,558 a decline of $135,483 or 31.3%. In 2002, additional expenses were incurred related to the systems conversion in May 2002. Depreciation of furniture fixtures and equipment increased to $361,761 from the prior year total of $279,576 an increase of $82,185 or 29.4%. 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 to $136,139 from $268,174 in the prior year, a decline of $132,035 or 49.2%. In 2002, extensive testing of the systems for conversion required the use of phone lines increasing costs. Also in 2003 cost control and efficiency 13 efforts by the Bank helped to reduce costs. ATM expenses increased to $197,622 from $123,638, an increase of $73,984 or 59.8%. This increase was the result of additional branches and ATM activity in 2003. Office supplies expense decreased to $104,420 from the prior year amount of $136,292, a decline of $31,872 or 23.4%. 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 September 30, 2003 to zero in 2003 as no further increases to the valuation allowance were necessary. Office equipment expenses decreased to $109,602 from 2002's level of $114,510, a decrease of $4,908 or 4.3%. This decrease was caused by the retirement of certain equipment due to the systems conversion in 2002. Other expenses declined to $755,577 from $979,035 a decline of $223,458 or 22.8%. These expenses were lower based on certain cost control measures in 2003. Income taxes increased to $898,765 or 34.0% of pretax income in the current year compared to $621,000 or 35.3% 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 - THIRD QUARTER The Company recorded net income for the third quarter of 2003 of $596,835 compared to $729,725 for the same period in 2002. The decrease was the result of a decline in net interest and noninterest income combined with an increase in noninterest expense compared to the same period in 2002. Net interest income declined by 0.7% to $2,778,800 in 2003 from $2,797,558 as a result of the continued decline in interest rates noted above. The provision for loan losses increased by 3.4% to $31,013 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 31.5% and 65.6%, to 76,151 and $53,479 respectively as a result of the lower interest rate environment noted earlier. Service charges declined to $120,756 from $242,534, a decline of $121,778 or 50.2%, as a result of the write off and higher amortization related to the lower interest rates and shorter lives of the servicing assets as discussed earlier. Other income amounts declined due to a decline in rental income. Salary and employee expense increased to $1,305,584 from $1,031,744, an increase of $273,840 or 26.5% due to an increased average salary per employee and a slightly higher number of employees. Occupancy expense declined by $25,455 to $175,459 from the prior year's total of $200,914 a decline of 12.7% due to the nonrecurring costs of 2002 noted above. Advertising expenses also declined by $2,535 or 2.8% to $89,140, this decline was the result of delaying certain advertising expenses in 2003. Data processing expense increased to $103,042, an increase of $8,940 or 9.5% over the prior year total of $94,102. The increase reflects the addition of certain capabilities such as internet banking in the current quarter. Depreciation of furniture, fixtures and equipment also increased due to the large amounts of equipment purchased in the prior year. These expenses increased by $73,642 or 126.1%. Telephone communications also decreased to $33,407 or by 55.3% under the prior year total of $74,794 due to expenses in testing and installing the core data system in 2002. ATM expenses increased by $19,467 or 37.7% to $71,153 in the current year due to changes in ATM operations. Office supplies expense decreased to $28,582 from $32,572 a decrease of $3,990 or 12.3% as prior year expenses were increased by the need to change some supplies prior to conversion. Office equipment and other expense was similarly reduced by the absence of conversion related items in 2003. FINANCIAL CONDITION Assets Total assets as of September 30, 2003 increased by $54,983,274 to $337,156,969 from the December 31, 2002 level of $282,173,695. Cash and due from banks increased by $856,574, or 8.3% from December 31, 2002's total. Interest-bearing deposits with banks decreased by $8,533,025 or 56.2% during the period to $6,646,826 at September 30, 2003. Investment securities, including both the available for sale and held to maturity portfolios, increased from $44,667,920 to $91,350,071 an increase of $46,682,151 or 104.5%. 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. Stock in the Federal Home Loan and Federal Reserve Banks increased due to additional borrowings related to the leverage strategy mentioned above. Loans held for sale decreased to $616,250 from $1,262,667 at December 31, 2002. The Bank's loan portfolio increased by $8,673,892 or 4.4% during the nine month period ending September 30, 2003 to $206,123,174 from December 2002's total of $197,449,282. The increase was primarily the result of increases in the Bank's portfolio of commercial real estate loans in the nine month period ending September 30, 2003, these increases were partially offset by decreases in other parts of the loan portfolio. At September 30, 2003 the Bank's allowance for loan losses totals $2,408,910 or 1.15% of loan balances as compared to $2,314,074 or 1.15% of loan balances at December 31, 2002. 14 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. Loan information for the current quarter is presented below. Additional loan information for prior years is presented in the Form 10-K for the year ended December 31, 2002.
LOAN PORTFOLIO September 30, December 31, 2003 2002 -------------------------------------- ------------------------------- Amount % Amount % ------ - ------ - Real Estate Loans Commercial $ 86,562,279 41.39% $ 74,291,593 37.07% Residential first mortgage 41,854,081 20.01% 48,975,989 24.44% Construction and land development 15,474,655 7.40% 14,578,702 7.27% Home equity and second mortgage 18,520,426 8.85% 19,007,265 9.48% Commercial loans 42,195,561 20.17% 38,953,965 19.44% Consumer loans 4,549,099 2.17% 4,623,447 2.31% ------------ ------ ------------ ------ Total loans 209,156,101 100.00% 200,430,961 100.00% Less: Deferred loan fees 624,017 0.30% 667,605 0.33% Allowance for loan losses 2,408,910 1.15% 2,314,074 1.15% ------------ ------ ------------ ------ Loans receivable net 206,123,174 197,449,282 ------------ ------------ Loan Loss Allowance 9 Months Ended 9 Months Ended September 30, 2003 September 30, 2002 ------------------ ------------------ Beginning Balance $ 2,314,074 $ 2,281,581 Charge Offs (51,233) (119,188) Recoveries 729 2,795 ----------- ----------- Net Charge offs (50,504) (116,393) Additions charged to operations 145,340 130,000 ----------- ----------- Balance at end of period $ 2,408,910 $ 2,295,188 =========== =========== Ratio of net charge-offs during the period to loans 0.02% 0.05% ===== =====
15
Balances as of Balances as of September 30, 2003 December 31, 2002 --------------------- ------------------ Restructured Loans $ -- $ -- --------------------- ------------------ Accruing loans which are contracturally past due 90 days or more: $ -- $ 596,579 --------------------- ------------------ Loans accounted for on a nonaccrual basis $ 479,559 $ -- --------------------- ------------------ Total non- performing loans $ 479,559 $ 596,579 Non -performing loans to total loans 0.23% 0.30% ======= ======= Allowance for loan losses to non performing loans 502.32% 381.91% ======= =======
Premises and equipment decreased due to depreciation in the current period. Foreclosed real estate declined to $706,014 at September 30, 2003 from $706,764 at December 31, 2002 due to partial settlement of one property. Other assets increased to $3,226,811 from $3,025,431 at December 31, 2002. This increase was primarily in deferred tax benefits relating to the investment portfolio. The Bank invested $5,700,000 in certain life insurance instruments which will provide supplemental benefits to certain key executives and provide additional noninterest income to the Bank. Liabilities Deposit balances increased by $14,156,473 or 7.0% compared to December 31, 2002 balances of $203,025,112. This increase was primarily in interest bearing deposits. The increase in interest bearing deposit accounts offset a decline in noninterest bearing deposits. Management believes that ongoing stock market volatility has made bank deposits more attractive to the general public. Short term borrowings increased to $27,671,430, an increase of $26,919,132, while long term borrowings increased by $14,888,996. Proceeds of these borrowings were used to purchase investment securities. Stockholders' Equity Stockholders' equity increased $210,128 or .8% to $27,082,893 at September 30, 2003 compared to $26,872,765 at December 31, 2002. This reflects the net income of $1,747,141 for the nine month period partially offset by the $723,309 decline in accumulated other comprehensive income, and $422,361 in cash dividends. Other changes in equity occurred as a result of using $538,178 for the purchase and retirement of shares, the exercise of stock options of $54,375, and activity related to the ESOP shares of $92,459. Book value on a per share basis, $36.00 at September 30, 2003, as compared to $35.37 at December 31, 2002, reflects a 1.8% increase, with a decrease in outstanding shares combined with 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 16 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 35% of consolidated Bank assets on a line of credit available from the FHLB. As of September 30, 2003, the maximum available under this line would be $118 million, while current outstanding advances totaled $91 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 September 30, 2003, the Bank's tangible, leverage and risk-based capital ratios were 7.70%, 7.69% and 11.85%, 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. The Company uses historical loss factors as one in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors used. In addition GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company's transactions would be the same, the timing of events that would impact the Company's 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. 17 ITEM 3 Quantitative and qualitative Disclosure about Market Risk Not applicable. ITEM 4 CONTROLS AND PROCEDURES 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. 18 TRI-COUNTY FINANCIAL CORPORATION -------------------------------- PART II - OTHER INFORMATION --------------------------- Item 1 - Legal Proceedings -- None Item 2 - Change in Securities and Use of Proceeds -- None Item 3 - Default Upon Senior Securities -- None Item 4 - Submission of Matters to a Vote of Security Holders -- None Item 5 - Other Information -- None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits - The following exhibits are being filed with this Form 10-Q: Exhibit 31 - Rule 13a-14(a) Certifications Exhibit 32 - Section 1350 Certifications (b) During the quarter for which this Form 10-Q is being filed, the registrant did not file any reports on Form 8-K. 19 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: November 12, 2003 By:/s/ Michael L. Middleton ------------------------------------- Michael L. Middleton, President and Chairman of the Board Date: November 12, 2003 By:/s/ William J. Pasenelli ------------------------------------- William J. Pasenelli, Executive Vice President and Chief Financial Officer EX-31 3 e3110q10-1494.txt CERTIFICATION 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: November 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: November 12, 2003 /s/ William J. Pasenelli ------------------------------------- William J. Pasenelli Executive Vice President and Chief Financial Officer (Principal Accounting Officer) EX-32 4 e3210q10-1494.txt CERTIFICATION SECTION 1350 CERTIFICATION To my knowledge, this report on Form 10-Q (the "Report") for Tri-County Financial Corporation (the "Company") for the period ended September 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: November 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----