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, 2001
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
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(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) 645-5601
---------------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(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 May 5, 2001 registrant had outstanding 772,756 shares of Common
Stock.
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q INDEX
- --------- -----
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001
and December 31, 2000 3
Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2001 and 2000 5-6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 11
PART II - OTHER INFORMATION 12
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES 13
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND DECEMBER 31, 2000
ASSETS
March 31, 2001 December 31, 2000
Cash and due from banks $ 1,188,423 $ 645,817
Interest-bearing deposits with banks 6,630,630 5,975,314
Investment securities available for sale - at fair value 54,974,320 56,860,996
Investment securities held to maturity - at amortized cost 1,497,509 1,714,367
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 3,035,550 3,035,550
Loans held for sale 349,550 355,000
Loans receivable - net of allowance for loan losses
of $2,022,460 and $1,929,531, respectively 181,850,964 172,090,088
Premises and equipment, net 4,576,490 4,495,431
Foreclosed real estate 176,626 176,626
Accrued interest receivable 1,251,374 1,353,658
Other assets 1,871,471 1,636,609
------------ ------------
$257,402,907 $248,339,456
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 13,094,880 $ 12,537,649
Interest-bearing deposits 159,704,221 155,268,350
------------ ------------
Total deposits 172,799,101 167,805,999
Short-term borrowings 10,774,595 13,550,903
Long-term debt 46,650,000 41,400,000
Accrued expenses and other liabilities 2,686,275 2,152,732
------------ ------------
Total liabilities 232,909,971 224,909,634
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 779,247 and 777,680 shares, respectively 7,792 7,777
Surplus 7,545,603 7,500,865
Retained earnings 16,705,857 16,175,708
Accumulated other comprehensive income (loss) 336,299 (114,929)
Unearned ESOP shares (102,615) (139,599)
------------ ------------
Total stockholders' equity 24,492,936 23,429,822
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $257,402,907 $248,339,456
============ ============
See notes to consolidated financial statements
3
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2001 2000
INTEREST INCOME:
Interest and fees on loans $ 3,810,273 $ 3,264,905
Taxable interest and dividends on investment securities 1,076,151 1,050,049
Interest on bank deposits 21,797 20,294
----------- -----------
Total interest revenues 4,908,221 4,335,248
----------- -----------
INTEREST EXPENSE:
Interest on deposits 1,694,262 1,410,626
Interest on long term debt 201,571 299,712
Interest on other borrowings 591,386 337,783
----------- -----------
Total interest expenses 2,487,219 2,048,121
----------- -----------
NET INTEREST INCOME 2,421,002 2,287,127
PROVISION FOR LOAN LOSSES 90,000 90,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,331,002 2,197,127
----------- -----------
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges 34,959 15,692
Net gain on sale of loans held for sale 23,868 39,142
Service charges 272,153 228,942
Other 16,548 8,343
----------- -----------
Total noninterest income 347,528 292,119
----------- -----------
NONINTEREST EXPENSE:
Salary and employee benefits 960,295 889,901
Occupancy expense 144,376 158,673
Deposit insurance and surety bond premiums 7,940 7,989
Data processing expense 105,984 91,384
Advertising 47,162 43,752
Depreciation 53,385 53,455
Other 362,607 322,371
----------- -----------
Total noninterest expenses 1,681,749 1,567,524
----------- -----------
INCOME BEFORE INCOME TAXES 996,781 921,722
INCOME TAXES 348,000 300,000
----------- -----------
NET INCOME 648,781 621,722
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized holding gains (losses) arising during the period 451,228 (203,133)
----------- -----------
COMPREHENSIVE INCOME $ 1,100,009 $ 418,589
=========== ===========
EARNINGS PER SHARE
Basic .83 .79
Diluted .80 .75
See notes to consolidated financial statements
4
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
THREE MONTHS ENDED
MARCH 31,
------------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 648,781 $ 621,722
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 90,000 90,000
Depreciation and amortization 77,550 77,350
Net amortization of premium/discount on
investment securities 10,485 (12,896)
Deferred income tax benefit (109,000) (27,000)
Decrease (increase) in accrued interest receivable 102,284 (7,385)
Decrease in deferred loan fees (4,734) (59,365)
Increase in accounts payable, accrued expenses,
and other liabilities 533,543 756,212
(Increase) Decrease in other assets (359,777) 264,265
Gain on disposal of premises and equipment (8,386) -
Origination of loans held for sale (840,450) (1,374,774)
Gain on sales of loans held for sale (23,869) (39,142)
Proceeds from sale of loans held for sale 858,869 1,850,865
------------ ------------
Net cash provided by operating activities 975,296 2,139,852
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits with banks (655,316) (1,467,348)
Purchase of investment securities available for sale (6,543,175) (3,181,024)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 9,104,510 4,269,615
Purchase of investment securities held to maturity - (200,000)
Proceeds from maturities or principal payments
of investment securities held to maturity 216,858 479,388
Loans originated or acquired (22,289,790) (17,802,236)
Principal collected on loans 12,454,548 11,724,776
Proceeds from disposal of premises and equipment 8,963 -
Purchase of premises and equipment (159,188) (126,987)
Acquisition of foreclosed real estate - (108,877)
Purchase of FHLB and Federal Reserve stock - (150,000)
------------ ------------
Net cash used in investing activities (7,862,590) (6,562,693)
------------ ------------
5
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2001 2000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 4,993,102 $ 821,259
Proceeds from long-term borrowings 10,250,000 -
Payments of long-term borrowings (5,000,000) (10,000,000)
Net (decrease) increase in short-term borrowings (2,776,308) 10,554,650
Exercise of stock options 31,817 35,980
Net change in unearned ESOP shares 49,967 36,984
Redemption of common stock (118,678) (137,752)
Net cash provided by financing activities
7,429,900 1,311,121
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 542,606 (3,111,720)
CASH AND CASH EQUIVALENTS - JANUARY 1 645,817 3,469,304
----------- ------------
CASH AND CASH EQUIVALENTS - MARCH 31 $ 1,188,423 $ 357,584
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest $ 2,507,816 $ 1,905,011
=========== ============
Income taxes $ 175,000 $ -
=========== ============
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
General - The consolidated financial statements of Tri-County
Financial Corporation (the "Company") and its wholly owned subsidiary,
Community Bank of Tri-County (the "Bank") included herein are
unaudited; however, they reflect all adjustments consisting only of
normal recurring accruals that, in the opinion of Management, are
necessary to present fairly the results for the periods presented.
Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company believes that the disclosures are adequate to
make the information presented not misleading. The results of
operations for the three months ended March 31, 2001 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 2001 presentation.
It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report for the year ended
December 31, 2000.
2. EARNINGS PER SHARE
Basic and diluted earnings per share, have been computed based on
weighted-average common and common equivalent shares outstanding as
follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
Basic 778,677 787,184
Diluted 809,893 828,903
7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including discussions of
Tri-County Financial Corporation's (the "Company's") goals, strategies and
expected outcomes; estimates of risks and future costs; and reports of the
Company's ability to achieve its financial and other goals. These
forward-looking statements are subject to significant known and unknown risks
and uncertainties because they are based upon future economic conditions,
particularly interest rates, competition within and without the banking
industry, changes in laws and regulations applicable to the Company and various
other matters. Because of these uncertainties, there can be no assurance that
actual results, performance or achievements of the Company will not differ
materially from any future results, performance or achievements expressed or
implied by these forward-looking statements.
GENERAL
The Company is a bank holding company organized in 1989 under the laws of the
State of Maryland. It presently owns all the outstanding shares of capital stock
of the Community Bank of Tri-County (the "Bank"), a Maryland-chartered
commercial bank. The Company engages in no significant activity other than
holding the stock of the Bank and operating the business of the Bank.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to the Bank and its subsidiaries.
The Bank serves the southern Maryland area through its main office and eight
branches located in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, 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, including the acceptance of demand and time
deposits, and the origination of loans to individuals, associations,
partnerships and corporations. The Bank's real estate financing consists of
residential first and second mortgage loans, home equity lines of credit and
commercial mortgage loans. Commercial lending consists of both 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
either residential first mortgage lending and investment securities has declined
since 1997. Conversely, targeted loan types have increased. The Bank has also
seen an increase in transactional deposit accounts while the percentage of total
liabilities represented by certificates of deposits has also declined.
Management believes that these changes will enhance the Bank's overall long-term
financial performance.
Management recognizes that the shift in composition of the Bank's loan portfolio
will tend to increase its exposure to credit losses. The Bank has continued to
evaluate its allowance for loan losses and the associated provision to
compensate for the increased risk. Any evaluation of the allowance for loan
losses is inherently inexact and reflects management's expectations as to future
economic conditions in the Southern Maryland area as well as individual
borrower's circumstances. Management believes that its allowance for loan losses
is adequate.
In the last several months, the national and local economy has slowed its rate
of growth. While the local economy remains strong, any sustained slowing of
economic activity or local or national recession would be likely to have an
impact on the Bank's operations. In addition, the continued cutting of certain
short term interest rates by the Federal Reserve in response to the slowing
economy may have a negative impact on the Bank's interest income, particularly
on the Bank's prime based lending products.
The Bank has also sought to increase its sources of noninterest income through
fees gathered on transactional accounts as well as by the sale of non-deposit
products including investments. These fees have continued to grow over the last
several quarters, while the Bank's fee income from the residential mortgage
lending business has decreased due to the Bank's shift in lending emphasis.
Management believes that the Bank's strong local focus and responsiveness to
customers will enable it to increase its fee income over time.
8
SELECTED FINANCIAL DATA
THREE MONTHS ENDED
MARCH 31,
---------
2001 2000
Condensed Income Statement
Interest Income $ 4,908,221 $ 4,335,248
Interest Expense 2,487,219 2,048,121
Net Interest Income 2,421,002 2,287,127
Provision for Loan Losses 90,000 90,000
Noninterest Income 347,528 292,119
Noninterest Expenses 1,681,749 1,567,524
Income Before Income Taxes 996,781 921,722
Income Tax Expense 348,000 300,000
Net Income 648,781 621,722
Per Common Share
Basic Earnings $ .83 $ .79
Diluted Earnings .80 .75
Book Value 31.43 26.94
RESULTS OF OPERATIONS
Net income for the three month period ended March 31, 2001 totaled $648,781
($.83 basic and $.80 fully diluted earnings per share) compared with a total of
$621,722 ($.79 basic and $.75 fully diluted earnings per share) for the same
period in the prior year. This increase of $27 thousand or 4.4% was caused by
several factors. Net income was positively affected by the growth in the Bank's
net interest income, as well as growth in the Bank's noninterest income; this
was partially offset by an increase in noninterest expenses and income tax
expense.
9
Interest income increased to $4.9 million in the current period compared to $4.3
million for the same period in the prior year. This increase of $573 thousand or
13.2% was caused primarily by an increase in loans receivable and other interest
earning assets over the same period in the prior year. This increase in interest
earning assets was partially offset by a slight decrease in interest yields on
interest earning assets.
Interest expense increased to $2.5 million in the period ending March 31, 2001
as compared to $2.1 million in the same period in the prior year an increase of
$439 thousand or 21.4%. This increase was due to higher balances of deposits and
long and short- term borrowings as well as an increase in average rates paid on
these balances. Net interest income before provision for credit losses increased
by $134 thousand or 5.9% due to the factors noted above.
Provision for loan losses was comparable to the prior year with provision
expense of $90 thousand for the periods ending March 31, 2001 and 2000.
Management will continue to periodically review its allowance for loan losses
and the related provision. 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 $348 thousand for the three month period ending
March 31, 2001, an increase of $55 thousand or 19% over the prior year total of
$292 thousand. Increases in service charges on deposit accounts and certain loan
service fees offset a decrease in gains on sales of loans. Service charges
increased because growth in deposits has been concentrated in demand deposit
type accounts which tend to generate higher fees.
Noninterest expense for the three month period increased by $114 thousand or
7.3% to $1.7 million from $1.6 million in the same period for the prior year.
Expense increases were primarily in personnel, data processing, and other
expenses and were needed to support increased levels of loans and deposits.
Occupancy costs declined as a result of decreases in required repairs and
maintenance at several branch locations.
Income taxes increased to $348 thousand or 34.9% or pretax income in the current
year compared to $300 thousand or 32.5% of pretax income in the prior year. The
increase in the tax rate was primarily attributable to an increase in the state
income tax burden. In the prior year, taxes were substantially reduced because
income earned on investment securities held by the Bank's investment corporation
subsidiary, Tri- County Investment Corporation ("TCIC") was not subject to the
state income tax . In the current year, reductions in the assets invested in
TCIC have reduced the amount of income sheltered from state income tax,
increasing the effective tax rate.
FINANCIAL CONDITION
Assets
Total assets as of March 31, 2001 grew $9.1 million to $257.4 million from the
December 31, 2000 level of $248.3 million. The Bank's loan portfolio grew by
$9.8 million or 5.7% during the three month period ending March 31, 2001. The
growth in the loan portfolio was partially offset by decreases in certain other
asset types during the same period. The allowance for loan losses was maintained
at a level believed by management to be adequate to absorb losses consistent
with the risk profile of the loan portfolio. At March 31, 2001 the Bank's
allowance for loan losses totals $2.0 million or 1.11% of loan balances as
compared to $1.9 million or 1.12% of loan balances at December 31, 2000.
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.
Investment securities, including both the available for sale and held to
maturity portfolios, decreased from $58.6 million to $56.5 million a decrease of
$2.1 million or 3.6%. Reductions in the investment portfolio were primarily the
result of certain callable bonds being redeemed. These reductions in principal
were partially offset by an increase in the market value of certain available
for sale securities. In general, the cash generated by the principal reductions
of the investment portfolio has been used to fund loan growth. Cash and due from
banks increased by $543 thousand, or 84% from December 31, 2000's total.
Interest-bearing deposits with banks increased by $655 thousand or 11.0% during
the quarter to $6.6 million at March 31, 2001. The level of property and
equipment balances increased $81,059 primarily due to upgrades of computer
equipment and premises.
Liabilities
Deposit balances increased by $5.0 million or 3.0% for the three months ended
March 31, 2000. The Bank continues to aggressively market its deposit products
in the Southern Maryland area. The recent declines in certain segments of the
10
equities markets as well as the apparent slowing of the economy may also have
contributed to the deposit increase as alternative investments became less
attractive. Funding demands in excess of deposit growth have been met by the use
of other borrowed funds. Long and short term borrowings increased by a total of
$2.5 million or 4.5% over December 2000 balances. Other liabilities also
increased by $500 thousand or 24.8%.
Stockholders' Equity
Stockholders' equity increased $1.1 million or 4.5% to $24.5 million at March
31, 2001 compared to $23.4 million at December 31, 2000. This reflects the net
income of $648,781 for the three month period and a $451,228 increase in
accumulated other comprehensive income. Reductions in equity occurred as a
result of using $118,678 to purchase shares in the open market and retire them.
Book value on a per share basis, $31.43 at March 31, 2001, as compared to $30.13
at December 31, 2000, reflects a 4.3% increase, in line with the change in
stockholder's equity.
As part of its capital management strategy, the Board has approved certain
purchases, for retirement, of shares offered for sale by its stockholders. For
the three months ended March 31, 2001, the Company purchased 4,580 shares for
$118,678. Additional stock acquisitions and retirements may be considered in the
future. The Company has $800 thousand of cash available at the holding company
level available for such purchases or for other cash needs of the holding
company.
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 available
from the Federal Home Loan Bank of Atlanta. As of March 31, 2001, the maximum
available under this line would be $90 million, while current outstanding
advances totaled $56.7 million. In order to draw on this line the Bank must have
sufficient collateral. Qualifying collateral includes residential 1-4 family
first mortgage loans and various investment securities.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as
statutory capital requirements imposed under Maryland law. At March 31, 2001,
the Bank's tangible, leverage and risk-based capital ratios were 8.99%, 8.91%
and 14.03%, respectively. These levels are well in excess of the required 4.0%,
4.0% and 8.0% ratios required by the Federal Reserve Board.
ITEM 3 Quantitative and qualitative Disclosure about Market Risk
Not applicable.
11
TRI-COUNTY FINANCIAL CORPORATION
--------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and reports on Form 8-K
A. Exhibits Not Applicable
B. During the quarter for which this Form 10-Q is being filed, the
registrant did not file any current reports on Form 8-K.
12
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 14, 2001 By: /s/ Michael L. Middleton
----------------------- ----------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: May 14, 2001 By: /s/ William J. Pasenelli
----------------------- ----------------------------------
William J. Pasenelli, Executive
Vice President and Chief
Financial Officer
13