10-Q 1 tri10qmay.txt 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 March 31, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ______ Commission File Number 0-18279 ------- Tri-County Financial Corporation ------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 52-1652138 ------------------------------ ---------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3035 Leonardtown Road, Waldorf, Maryland 20601 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (301) 843-0854 ---------------------------------------------------- (Registrant's telephone number, including area code) N/A -------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of April 28, 2004, registrant had outstanding 771,946 shares of Common Stock. 1 TRI-COUNTY FINANCIAL CORPORATION FORM 10-Q INDEX ----- PART I - FINANCIAL INFORMATION Page Item 1 - Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 2004 and December 31, 2003 (Audited) 3 Consolidated Statements of Income and Comprehensive Income - Three Months Ended March 31, 2004 and 2003 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003 5 - 6 Notes to Consolidated Financial Statements 7 - 8 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 14 Item 4 - Controls and Procedures 14 PART II - OTHER INFORMATION Item 1 - Legal Proceedings Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Item 3 - Defaults Upon Senior Securities Item 4 - Submission of Matters to a Vote of Security Holders Item 5 - Other Information Item 6 - Exhibits and Reports on Form 8-K 14 - 15 SIGNATURES 16 2 PART I FINANCIAL STATEMENTS ITEM I. FINANCIAL STATEMENTS TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, 2004 AND DECEMBER 31, 2003
ASSETS March 31, 2004 December 31, 2003 -------------- ----------------- (Unaudited) (Audited) Cash and due from banks $ 2,738,727 $ 2,319,300 Interest-bearing deposits with banks 6,913,642 8,912,332 Federal Funds sold 228,166 938,166 Investment securities available for sale - at fair value 36,791,090 38,290,074 Investment securities held to maturity - at amortized cost 65,646,806 61,605,175 Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 5,097,050 4,776,850 Loans held for sale -- 474,880 Loans receivable - net of allowance for loan losses of $2,650,924 and $2,572,799, respectively 237,508,100 217,740,153 Premises and equipment, net 5,657,023 5,580,189 Foreclosed real estate 567,937 706,764 Accrued interest receivable 1,337,871 1,318,318 Investment in bank owned life insurance 5,939,427 5,921,544 Other assets 2,839,812 3,146,247 ------------- -------------- TOTAL ASSETS $ 371,265,651 $ 351,729,992 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Noninterest-bearing deposits $ 32,504,104 $ 29,270,007 Interest-bearing deposits 207,587,722 198,284,561 ------------- -------------- Total deposits 240,091,826 227,554,568 Short-term borrowings 27,620,302 31,191,285 Long-term debt 72,955,278 63,051,176 Accrued expenses and other liabilities 1,612,378 2,021,053 ------------- -------------- Total liabilities 342,279,784 323,818,082 ------------- -------------- STOCKHOLDERS' EQUITY: Common stock - par value $.01; authorized - 15,000,000 shares; issued 769,332 and 753,278 shares, respectively 7,693 7,533 Additional paid in capital 8,200,682 7,975,036 Retained earnings 20,808,307 20,071,630 Accumulated other comprehensive income (loss) 63,021 (3,130) Unearned ESOP shares (93,836) (139,159) ------------- -------------- Total stockholders' equity 28,985,867 27,911,910 ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 371,265,651 $ 351,729,992 ============= ==============
See notes to consolidated financial statements 3 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003 ---- ---- INTEREST INCOME: Interest and fees on loans $3,546,545 $ 3,350,974 Taxable interest and dividends on investment securities 1,042,650 530,773 Interest on deposits with banks 4,616 36,637 ---------- ----------- Total interest income 4,593,811 3,918,384 ---------- ----------- INTEREST EXPENSE: Interest on deposits 700,170 747,427 Interest on short term borrowings 78,622 766 Interest on long term debt 785,497 613,101 ---------- ----------- Total interest expenses 1,564,289 1,361,294 ---------- ----------- NET INTEREST INCOME 3,029,522 2,557,090 PROVISION FOR LOAN LOSSES 70,202 5,386 ---------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,959,320 2,551,704 ---------- ----------- NONINTEREST INCOME: Loan appraisal, credit, and miscellaneous charges 66,204 27,396 Net gain on sale of loans held for sale 21,404 127,095 Income from bank owned life insurance 73,848 -- Service charges 234,772 228,335 Other -- 5,128 ---------- ----------- Total noninterest income 396,228 387,954 ---------- ----------- NONINTEREST EXPENSE: Salary and employee benefits 1,298,380 1,129,326 Occupancy expense 181,873 168,317 Advertising 142,539 63,734 Data processing expense 151,998 85,305 Depreciation of furniture, fixtures, and equipment 87,200 114,900 Telephone communications 37,975 39,076 Valuation allowance on foreclosed real estate 113,827 -- ATM expenses 80,098 68,513 Office supplies 39,419 23,465 Office equipment expenses 26,391 35,309 Other 236,023 220,602 ---------- ----------- Total noninterest expenses 2,395,723 1,948,547 ---------- ----------- INCOME BEFORE INCOME TAXES 959,825 991,111 Income tax expense 70,627 350,000 ---------- ----------- NET INCOME 889,198 641,111 OTHER COMPREHENSIVE INCOME NET OF TAX Net unrealized holding gains (losses) arising during period. 66,152 (359,053) ---------- ----------- COMPREHENSIVE INCOME $ 955,350 $ 282,058 ========== =========== INCOME PER COMMON SHARE Basic $1.18 $0.84 Diluted 1.12 0.80
See notes to consolidated financial statements 4 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Three Months Ended March 31, ---------------------- 2004 2003 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 889,198 $ 641,111 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 70,202 5,386 Depreciation and amortization 143,049 150,300 Net amortization of premium/discount on investment securities 19,478 55,599 Decrease (Increase) in federal funds sold 710,000 (664,813) Deferred income tax benefit -- (29,000) Increase in accrued interest receivable (19,553) (16,354) Decrease in deferred loan fees (36,970) (58,237) Decrease in accounts payable, accrued expenses, other liabilities (408,674) (1,090,740) Decrease in other assets 254,476 21,094 Origination of loans held for sale -- (5,980,350) Gain on sales of loans held for sale (21,404) (127,095) Proceeds from sale of loans held for sale 496,284 4,686,432 --------- ----------- Net cash provided (used) by operating activities 2,196,086 (2,406,667) --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in interest-bearing deposits with banks 1,998,690 (4,685,540) Purchase of investment securities available for sale (7,503,838) (19,288,524) Proceeds from sale, redemption or principal payments of investment securities available for sale 8,857,505 13,570,852 Purchase of investment securities held to maturity (7,969,601) -- Proceeds from maturities or principal payments of investment securities held to maturity 4,054,035 393,600 Net purchase of FHLB and federal Reserve stock (320,200) -- Loans originated or acquired (44,183,877) (27,514,040) Principal collected on loans 24,382,698 34,055,115 Purchase of premises and equipment (219,883) (4,028) Purchase of Bank owned life insurance -- (5,700,000) Valuation allowance on foreclosed real estate 113,827 -- Proceeds from foreclosed real estate 25,000 10,000 ----------- ----------- Net cash used in investing activities (20,765,644) (9,162,565) ----------- -----------
5 TRI-COUNTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Three Months Ended March 31, ---------------------- 2004 2003 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 12,537,258 8,115,947 Proceeds from long-term borrowings 20,000,000 5,000,000 Payments of long-term borrowings (10,095,898) (95,592) Net decrease in short term borrowings (3,570,983) (596,651) Exercise of stock options 197,155 31,158 Net change in unearned ESOP shares 74,011 92,459 Redemption of common stock (152,558) (108,593) ------------ ----------- Net cash provided by financing activities 18,988,985 12,438,728 ------------ ----------- INCREASE IN CASH AND CASH EQUIVALENTS 419,427 869,496 CASH AND CASH EQUIVALENTS - JANUARY 1 2,319,300 9,993,426 ------------ ----------- CASH AND CASH EQUIVALENTS - MARCH 31 2,738,727 10,862,922 ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the three months for: Interest $ 1,669,753 $ 1,376,832 ============ =========== Income taxes -- 387,869 ============ ===========
See notes to consolidated financial statements 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. BASIS OF PRESENTATION General - The consolidated financial statements of Tri-County Financial Corporation (the "Company") and its wholly owned subsidiary, Community Bank of Tri-County (the "Bank") included herein are unaudited; however, they reflect all adjustments consisting only of normal recurring accruals that, in the opinion of Management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. The balances as of December 31, 2003 have been derived from audited financial statements. There have been no significant changes to the Company's accounting policies as disclosed in the 2003 Annual Report. The results of operations for the three months ended March 31, 2004 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 2004 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, 2003. 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 March 31, 2004, there were no 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. Basic and diluted earnings per share, have been computed based on weighted-average common and common equivalent shares outstanding as follows: Three Months Ended March 31, -------------------------- 2004 2003 Basic 756,378 758,954 Diluted 794,664 802,348 7 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 three months ended March 31, 2004 and 2003. 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 three months ended March 31.
2004 2003 ---- ---- Net Income as reported $ 889,198 $ 641,111 Less pro forma stock based compensation expense determined under the fair value method, net of tax effects. 60,000 0 --------- --------- Pro forma net income $ 829,198 $ 641,111 ========= ========= Net income per share Basic - as reported $ 1.18 $ .84 Basic - pro forma $ 1.10 $ .84 Diluted - as reported $ 1.12 $ .80 Diluted - pro forma $ 1.04 $ .80
6. NEW ACCOUNTING STANDARDS 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 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. 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 and investment securities has declined since 1997. Conversely, targeted loan types have increased. The Bank has also seen an increase in transactional deposit accounts while the percentage of total liabilities represented by certificates of deposits has also declined. Management believes that these changes will enhance the Bank's overall long-term financial performance. Management recognizes that the shift in composition of the Bank's loan portfolio will tend to increase its exposure to credit losses. The Bank has continued to evaluate its allowance for loan losses and the associated provision to compensate for the increased risk. Any evaluation of the allowance for loan losses is inherently inexact and reflects management's expectations as to future economic conditions in the Southern Maryland area as well as individual borrower's circumstances. Management believes that its allowance for loan losses is adequate. For further information on the Bank's allowance for loan losses see the discussion in the financial condition section of this form, as well as the relevant discussions in the Form 10-K and annual report for the year ended December 31, 2003. 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. In the current quarter, this recovery is gaining strength and appears to be solidly under way. Locally, the housing market has appreciated strongly in the last several months in reaction to continued lower interest rates and a strong local job market. National job markets also appear to be strengthening. The improvement in the economy has led to some concerns about interest rates. In the last several months rates have increased, particularly mid and long term rates. The Federal Reserve has not moved the discount rate but has signaled a possibility of an increase. A sustained period of sharply higher interest rates would have an adverse effect on the Company's performance. This effect would be exacerbated if the increased rates substantially affected the housing market. During the last two years, loan customers have reacted to lower interest rates by continuing to refinance higher rate loans. This refinance activity has decreased the interest rates earned on loans. In the last quarter longer term rates have increased slightly. These increases will have the effect of decreasing refinance activity. If rates continue to rise, the Bank may also see an increase in the popularity of adjustable rate mortgages in the residential housing market. Loan growth in the current quarter continues to be concentrated in the commercial real estate and commercial areas. The increase in our loan portfolio was reflected in higher provision expense in the current period. Higher rates will also decrease prepayments from our investment 9 portfolio. The Bank has been able to increase net interest income from the prior year through growth in its balance sheet which offset a lower interest margin. Noninterest income increased slightly during the period, primarily through income from Bank Owned Life Insurance. Noninterest expenses also increased primarily from increases in the Bank's size. An increase in the valuation allowance on foreclosed real estate also increased expenses. Finally, the effective tax rate paid by the Company decreased due to the donation of certain foreclosed property. SELECTED FINANCIAL DATA
Three Months Ended March 31, ------------------------------- 2004 2003 ---- ---- Condensed Income Statement Interest Income $ 4,593,811 $ 3,918,384 Interest Expense 1,564,289 1,361,294 Net Interest Income 3,029,522 2,557,090 Provision for Loan Loss 70,202 5,386 Noninterest Income 396,228 387,954 Noninterest Expense 2,395,723 1,948,547 Income Before Income Taxes 959,825 991,111 Income Taxes 70,627 350,000 Net Income 889,198 641,111 Per Common Share Basic Earnings $ 1.18 $ 0.84 Diluted Earnings 1.12 0.80 Book Value 37.68 37.05
RESULTS OF OPERATIONS Net income for the three month period ended March 31, 2004 totaled $889,198 ($1.18 basic and $1.12 diluted earnings per share) compared with a total of $641,111 ($.84 basic and $.80 diluted earnings per share) for the same period in the prior year. This increase of $248,087 or 38.7% was caused by an increase in net interest income, and a reduction in income tax expense, both of which was partially offset by an increase in the provision for loan losses. For the three month period ended March 31, 2004, interest income increased by $675,427 or 17.2% to $4,593,811. The increase was due to higher average interest earning asset balances, including investments and loans which was partially offset by lower average rates on loans. Interest expense also increased to $1,564,289 in the three month period ending March 31, 2004 as compared to $1,361,294 in the same period in the prior year an increase of $202,995 or 14.9%. The increase was the result of higher average balances which more than offset lower average rates paid on advances and deposits. The changes in interest income and expense reflected the declining interest rate environment experienced during the last year. Provision for loan losses increased from prior year levels to $70,202 from $5,386 for the three month period ending March 31, 2004 and 2003, 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 increased to $396,228 for the three month period ending March 31, 2004, an increase of $8,274 or 2.1% over the prior year total of $387,954. Loan appraisal, credit, and miscellaneous charges increased by $38,808 to $66,204. This increase was offset by a decrease in gains from selling loans which decreased to $21,404 from $127,095, a decrease of $105,691 or 83.2%. This change reflects the Bank's preference to keep a higher proportion of loans in its portfolio. The Bank also recorded $73,848 in income from Bank Owned Life Insurance during the period due to the purchase of Bank Owned Life Insurance at the end of the first quarter of 2003. Other noninterest income items were comparable from year to year. Noninterest expense for the three month period increased by $447,176 or 22.9% to $2,395,723 from $1,948,547 in the same period 10 for the prior year. Salary and employee benefits increased by 15% to $1,298,380 from $1,129,326 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 increased from $168,317 to $181,873, an increase of 8.1% due to additional locations and increased costs at certain locations. Advertising increased to $142,539 from $63,734, an increase of $78,805 or 123.6%. Advertising increased due to an increase in certain sales efforts. Data processing expense increased to $151,998 from a prior year total of $85,305 an increase of $66,693 or 78.2%. This increase was due to certain nonrecurring expenses. Depreciation of furniture fixtures and equipment decreased to $87,200 from the prior year total of $114,900 a decrease of $27,700 or 24.1%. This decrease was the result of certain assets being fully depreciated at the end of 2003. Telephone communications declined slightly to $37,975 from $39,076 in the prior year, a decline of $1,101 or 2.8%. This decline reflected a change in service providers which offset higher usage. The provision for valuation allowances on foreclosed real estate increased to $113,827 as of March 31, 2004 from nothing in 2003 as further increases to the valuation allowance were considered necessary. ATM related expenses increased by $11,585 to $80,098 for the period ending March 31, 2004, an increase of 16.91% due to higher levels of activity, more ATM's, and certain price increases by ATM service providers. Office supplies expense increased to $39,419 from the prior year amount of $23,465, an increase of $15,954 or 68%. These expenses related to increased marketing efforts in the current year. Office equipment expenses decreased to $26,391 from 2003's level of $35,309, a decrease of $8,918 or 25.3%. This decrease was caused by the retirement of certain equipment. Other expenses increased to $236,023 from $220,602 an increase of $15,421 or 7.0%, reflecting larger asset size and increased activity. Income taxes decreased to $70,627 or 7.36% of pretax income in the current year compared to $350,000 or 35.3% of pretax income in the prior year. The decrease in the tax rate was primarily attributable to the contribution of a foreclosed property to an environmental organization which generated a current income tax deduction. FINANCIAL CONDITION Assets Total assets as of March 31, 2004 increased by $19,535,659 to $371,265,651 from the December 31, 2003 level of $351,729,992. Cash and due from banks increased by $419,427 or 18.1% from December 31, 2003's total. Interest-bearing deposits with banks decreased by $1,998,690 or 22.4% during the period to $6,913,642 at March 31, 2004. Investment securities, including both the available for sale and held to maturity portfolios, increased from $99,895,249 to $102,437,896 an increase of $2,542,647 or 2.5%. Increases were primarily the result of additional purchases of investments and the conversion of interest bearing deposits to investments. The Bank's loan portfolio increased by $19,767,947 or 9.1% during the three months period ending March 31, 2004 to $237,508,100 from December 2003's total of $217,740,153. The increase was primarily the result of an increase in its portfolio of commercial real estate loans. The increase in commercial real estate lending is a reflection of the strong local economy and continuing sales efforts by the Bank in this area. At March 31, 2004 the Bank's allowance for loan losses totals $2,650,924 or 1.10% of loan balances as compared to $2,572,799 or 1.16% of loan balances at December 31, 2003. Management's determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to the overall loss experience; current economic conditions; volume, growth and composition of the loan portfolio; financial condition of the borrowers; and other relevant factors that, in management's judgment, warrant recognition in providing an adequate allowance. Management believes that the allowance is adequate. Loans held for sale decreased to zero from $474,880 at December 31, 2003. Additional loan information for prior years is presented in the Form 10-K for the year ended December 31, 2003:
LOAN PORTFOLIO March 31, December 31, 2004 2003 ------------------------------------- -------------------------------- Amount % Amount % ------ --- ------ --- Real Estate Loans Commercial $104,551,947 43.42% $ 94,425,451 42.5% Residential first mortgage 45,987,010 19.10% 43,445,956 19.6% Construction and land evelopment 20,908,895 8.68% 19,601,874 8.8% Home equity and second mortgage 21,080,568 8.76% 19,561,772 8.8% Commercial loans 44,128,332 18.33% 40,901,589 18.4% Consumer loans 4,115,058 1.71% 4,094,234 1.8% ------------ ------ ------------ ------ Total loans 240,771,810 100.00% 222,030,876 100.00% Less: Deferred loan fees 612,787 0.25% 649,756 0.3% Allowance for loan losses 2,650,924 1.10% 2,572,799 1.16% ------------ ------ ------------ ------ Loans receivable net $237,508,099 $218,808,321 ------------ ------------
11
LOAN LOSS ALLOWANCE 3 Months Ended 3 Months Ended March 31, 2004 March 31, 2003 -------------- -------------- Beginning Balance $ 2,572,799 $ 2,314,074 Charge Offs -- -- Recoveries 7,923 -- -------------- ---------------- Net Charge offs 7,923 -- Additions charged to operations 70,202 5,386 -------------- ---------------- Balance at end of period $ 2,650,924 $ 2,319,460 ============== ================ Ratio of net charge-offs during the period to loans 0.00% 0.00% ============== ================
Balances as of Balances as of March 31, 2004 December 31, 2003 Restructured Loans $ -- $ -- ------------ ------------ Accruing loans which are contractually past due 90 days or more: $ -- $ -- ------------ ------------ Loans accounted for on a nonaccrual basis $ 517,601 $ 379,544 ------------ ------------ Total non-performing loans $ 517,601 $ 379,544 Non-performing loans to total loans 0.22% 0.17% ============ ============ Allowance for loan losses to non-performing loans 512.16% 677.87% ============ ============
Premises and equipment increased due to the renovation of parts of the home office building these improvements were partially offset by depreciation. Foreclosed real estate declined to $567,937 at March 31, 2004 from $706,764 at December 31, 2003 due to the donation of one property and an increase in the valuation allowance. Other assets decreased to $3,079,239 from $3,146,247 at December 31, 2003. Liabilities Deposit balances increased by $12,537,258 or 5.51% for the three months ended March 31, 2004. This increase was primarily in interest bearing deposits. Management believes that ongoing stock market volatility combined with questions about certain Mutual Fund operations has made bank deposits more attractive to the general public. The Bank has also increased marketing efforts for all deposit products in the current quarter. Short term borrowings decreased to $27,620,302, a decrease of $3,570,983, in part due to the Bank's decision to convert certain short term borrowings into longer term liabilities. Long term debt increased to $72,955,278 at March 31, 2004, from $63,051,176 at December 31, 2003, due to the extension of certain short term borrowings as noted above. Management has increased long term borrowing because additional long term borrowing would help to stabilize interest expense if interest rates were to increase dramatically. Other liabilities decreased to $1,612,378 at March 31, 2004, from $2,021,053 at December 31, 2003, a decrease of 20.2%. 12 Stockholders' Equity Stockholders' equity increased $1,073,957 or 3.85% to $28,985,867 at March 31, 2004 compared to $27,911,910 at December 31, 2003. This reflects the net income of $889,198 for the three months period. Other changes in equity occurred as a result of using $152,558 to purchase shares in the open market and retire them, the exercise of stock options of $197,155, and activity related to the ESOP shares of $74,011. Book value on a per share basis, $37.68 at March 31, 2004, as compared to $37.05 at December 31, 2003, reflects a 1.7% 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 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 March 31, 2004, the maximum available under this line would be $129 million, while current outstanding advances totaled $101 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 March 31, 2004, the Bank's tangible, leverage and risk-based capital ratios were 7.55%, 10.19% and 11.17%, 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 13 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. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. The Company qualifies as a "small business issuer." 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 - Change in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (a) Not applicable (b) Not applicable (c) Not applicable (d) Not applicable 14 (e) The following table sets forth information regarding the Company's repurchases of its Common Stock during the quarter ended March 31, 2004.
(c) Total Number of Shares (d) Purchased Maximum (a) as Part of Number of Shares Total (b) Publicly that May Yet Be Number of Average Announced Plans Purchased Under Shares Price Paid or the Plans or Period Purchased per Share Programs Programs ------ --------- ---------- -------- -------- January 2004 Beginning Date: January 4 Ending Date: January 20 883 $ 42.74 883 8,584 February 2004 Beginning Date: February 11 Ending Date: February 26 2,672 41.98 2,672 5,912 March 2004 Beginning Date: March 25 Ending Date: March 25 63 42.00 63 5,849 ----- ------- ----- ----- Total 3,618 $ 42.17 3,618 5,849 ===== ======= ====== =====
In an 8-K dated July 25, 2002, and in a press release dated July 23, 2002; the Company announced a plan to buy up to 38,000 shares of its stock through open market purchases. This offer was contingent upon market conditions and had no time limit. There were 8,236 shares purchased under this plan in 2002 and 20,297 in 2003. The Company intends to continue to purchase shares under this plan. 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 31.1 Rule 13a-14(a) Certification of Chief Executive Officer Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer Exhibit 32 Section 1350 Certifications (b)The registrant filed a report on Form 8-K with the SEC on February 25, 2004 announcing an annual cash dividend. 15 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: May 12, 2004 By: /s/ Michael L. Middleton ---------------------------------- Michael L. Middleton, President and Chairman of the Board Date: May 12, 2004 By: /s/ William J. Pasenelli ---------------------------------- William J. Pasenelli, Executive Vice President and Chief Financial Officer