UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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
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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
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(Registrant's telephone number, including area code)
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(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 July 31, 2001 registrant had outstanding 765,182 shares of Common
Stock.
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q
INDEX
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PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2001
and December 31, 2000 2
Consolidated Statements of Income and Comprehensive Income -
Three and Six Months Ended June 30, 2001 and 2000 3
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2001 and 2000 4 - 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 11
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 11
Item 4 - Submission of Matters to Vote of Security Holders 12
PART II - OTHER INFORMATION 12
Item 4 - Submission of Matters to Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 AND DECEMBER 31, 2000
ASSETS
JUNE 30, DECEMBER 31,
2001 2000
Cash and due from banks $ 1,168,314 $ 645,817
Interest-bearing deposits with banks 6,105,148 5,975,314
Investment securities available for sale - at fair value 50,434,118 56,860,996
Investment securities held to maturity - at amortized cost 1,400,167 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 979,849 355,000
Loans receivable - net of allowance for loan losses
of $2,109,889 and $1,929,531, respectively 185,569,032 172,090,088
Premises and equipment, net 4,628,832 4,495,431
Foreclosed real estate 176,626 176,626
Accrued interest receivable 1,319,252 1,353,658
Other assets 1,991,437 1,636,609
------------ ------------
$256,808,325 $248,339,456
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 14,543,901 $ 12,537,649
Interest-bearing deposits 163,543,901 155,268,350
------------ ------------
Total deposits 178,356,231 167,805,999
Short-term borrowings 5,159,816 13,550,903
Long-term debt 46,650,000 41,400,000
Accrued expenses and other liabilities 2,176,626 2,152,732
------------ ------------
Total liabilities 232,342,673 224,909,634
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 766,956 and 777,680 shares, respectively 7,670 7,777
Surplus 7,545,603 7,500,865
Retained earnings 16,720,876 16,175,708
Accumulated other comprehensive income 294,118 (114,929)
Unearned ESOP shares (102,615) (139,599)
------------ ------------
Total stockholders' equity 24,465,652 23,429,822
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $256,808,325 $248,339,456
============ ============
See notes to consolidated financial statements
2
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
2001 2000 2001 2000
INTEREST INCOME:
Interest and fees on loans $ 3,819,797 $ 3,426,817 $ 7,630,070 $ 6,691,722
Taxable interest and dividends on investment securites 807,156 1,031,033 1,883,307 2,081,082
Interest on bank deposits 22,333 29,625 44,130 49,919
----------- ----------- ----------- -----------
Total interest revenues 4,649,286 4,487,475 9,557,507 8,822,723
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 1,603,996 1,512,282 3,298,258 2,922,908
Interest on long term debt 658,930 465,428 1,250,316 765,140
Interest on other borrowings 53,775 311,654 255,346 649,437
----------- ----------- ----------- -----------
Total interest expenses 2,316,701 2,289,364 4,803,920 4,337,485
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,332,585 2,198,111 4,753,587 4,485,238
PROVISION FOR LOAN LOSSES 90,000 90,000 180,000 180,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,242,585 2,108,111 4,573,587 4,305,238
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges 61,940 23,436 96,899 39,128
Net gain on sale of loans held for sale 60,867 19,406 84,735 58,548
Service charges 224,540 258,116 496,693 487,058
Other 6,511 8,317 23,059 16,660
----------- ----------- ----------- -----------
Total noninterest income 353,858 309,275 701,386 601,394
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salary and employee benefits 879,437 916,539 1,839,732 1,804,379
Occupancy expense 160,430 145,259 304,806 303,932
Deposit insurance and surety bond premiums 23,586 25,596 59,469 48,318
Data processing expense 70,623 65,276 176,607 156,660
Advertising 65,718 87,220 112,880 130,972
Depreciation 63,301 54,562 116,686 108,017
Other 346,009 337,539 680,673 645,177
----------- ----------- ----------- -----------
Total noninterest expenses 1,609,104 1,631,991 3,290,853 3,197,455
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 987,339 785,395 1,984,120 1,709,177
INCOME TAXES 335,700 276,000 683,700 576,000
----------- ----------- ----------- -----------
NET INCOME 651,639 509,395 1,300,420 1,133,177
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized holding gains (losses) arising during the period (42,181) 22,021 409,047 (181,112)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 609,458 $ 531,416 $ 1,709,467 $ 952,065
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic .84 .65 1.68 1.44
Diluted .81 .62 1.61 1.38
See notes to consolidated financial statements
3
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
SIX MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,300,420 $ 1,133,177
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 180,000 180,000
Depreciation and amortization 165,100 156,750
Net amortization of premium/discount on
investment securities 24,553 (12,409)
Deferred income tax benefit (109,000) (49,000)
Decrease (increase) in accrued interest receivable 34,406 (133,060)
Decrease in deferred loan fees (22,498) (58,241)
Increase in accounts payable, accrued expenses,
and other liabilities 23,894 14,948
Decrease (Increase) in other assets (457,134) 164,264
Gain on disposal of premises and equipment (8,386) -
Origination of loans held for sale (4,582,681) (1,605,274)
Gain on sales of loans held for sale (84,735) (58,548)
Proceeds from sale of loans held for sale 5,292,265 2,219,421
----------- -----------
Net cash provided by operating activities 1,756,204 1,952,028
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits with banks (129,834) (2,212,094)
Purchase of investment securities available for sale (11,504,288) (8,586,841)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 18,526,965 8,807,902
Purchase of investment securities held to maturity (100,000) (200,000)
Proceeds from maturities or principal payments
of investment securities held to maturity 414,200 726,269
Loans originated or acquired (43,938,943) (33,736,415)
Principal collected on loans 29,052,799 19,266,682
Proceeds from disposal of premises and equipment 8,963
Purchase of premises and equipment (299,077) (160,364)
Acquisition of foreclosed real estate - (55,777)
Purchase of FHLB and Federal Reserve stock - (391,550)
----------- -----------
Net cash used in investing activities (7,969,215) (16,542,188)
----------- -----------
See notes to consolidated financial statements.
4
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
SIX MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $10,550,232 $ 4,125,304
Proceeds from long-term borrowings 10,250,000 -
Payments of long-term borrowings (5,000,000) (15,000,000)
Net increase (decrease) in other borrowed funds (8,391,087) 22,764,319
Exercise of stock options 31,817 36,402
Net change in unearned ESOP shares 49,967 36,984
Dividends paid (309,204) (236,595)
Redemption of common stock (446,217) (144,122)
----------- -----------
Net cash provided by financing activities 6,735,508 11,582,292
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 522,497 (3,007,868)
CASH AND CASH EQUIVALENTS - JANUARY 1 645,817 3,469,304
----------- -----------
CASH AND CASH EQUIVALENTS - JUNE 30 $ 1,168,314 $ 461,436
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest $ 4,827,084 $ 4,185,240
=========== ===========
Income taxes $ 896,000 $ 475,000
=========== ===========
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 six months ended June 30, 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:
SIX MONTHS ENDED
JUNE 30,
---------------------------
2001 2000
Basic 775,317 787,597
Diluted 806,309 822,707
6
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 or 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 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 reviews certain loans individually as well
as assesses the overall trends and payment patterns of certain groups of loans.
Based upon this review, management believes that its allowance for loan losses
is adequate.
During the first six months of 2001, due to changes in local zoning ordinances
severely restraining building permits, one borrower could not meet the financial
obligations of his $1.2 million loan. The Bank negotiated with this borrower and
agreed to accept a deed in lieu of foreclosure on July 12, 2001. The property
was transferred to Community Mortgage Corporation of Tri-County, (a wholly owned
subsidiary of the Bank) on this date. As of June 30, 2001, the loan is reflected
in the assets of the Bank as a loan. Management has reviewed the value of the
property received and related costs and accrued interest, approximately $1.3
million, and has concluded that no write down of the property value is required.
The value of the property will be reviewed periodically, and any necessary
reduction in the carrying value of the property will be reflected in the results
of operations. Other than the loan mentioned above, no significant deterioration
in the timeliness of payments received from borrowers has been noted.
In the last several months, growth in the national and local economy has slowed
dramatically. While the local economy remains strong, any sustained further
slowing of economic activity or a 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
7
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 non-interest 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. The Bank also originates and sells residential mortgages to
earn fee income, although this source of fee income varies as the interest rate
environment changes. Management believes that the Bank's strong local focus and
responsiveness to customers will enable it to increase its fee income over time.
The Bank currently operates eight full service and one micro branch offices in
its market area consisting of Charles, St. Mary's, and Calvert counties in
Maryland. The Bank intends to close one micro branch and open one full service
branch in the third quarter of 2001 . The full service branch will open in
temporary quarters while the branch's permanent building is being constructed.
The addition of the new branch will require additional personnel and other
resources which will result in increased expenses. The Bank will continue to
seek opportunities to expand its branch network.
SELECTED FINANCIAL DATA
SIX MONTHS ENDED
JUNE 30,
------------------------
2001 2000
Condensed Income Statement
Interest Income $9,557,507 $8,822,723
Interest Expense 4,803,920 4,337,485
Net Interest Income 4,753,587 4,485,238
Provision for Loan Losses 180,000 180,000
Non-interest Income 701,386 601,394
Non-interest Expenses 3,290,853 3,197,455
Income Before Income Taxes 1,984,120 1,709,177
Income Tax Expense 683,700 576,000
Net Income 1,300,420 1,133,177
Per Common Share
Basic Earnings $1.68 $1.44
Diluted Earnings 1.61 1.38
Book Value 31.90 27.61
RESULTS OF OPERATIONS
Net income for the six month period ended June 30, 2001 totaled $1,300,420
($1.68 basic and $1.61 fully diluted earnings per share) compared with a total
of $1,133,177 ($1.44 basic and $1.38 fully diluted earnings per share) for the
same period in the prior year. This increase of $167 thousand or 14.8% 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 non-interest
income; this was partially offset by an increase in non-interest expenses and
income tax expense.
Interest income increased to $9.6 million in the current period compared to $8.8
million for the same period in the prior year. This increase of $735 thousand or
8.3% 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 $4.8 million in the period ending June 30, 2001 as
compared to $4.3 million for the same period in the prior year an increase of
$466 thousand or 10.8%. This increase was due to higher balances of deposits and
8
long and short- term borrowings partially offset by a decrease in average rates
paid on these balances. Net interest income before provision for credit losses
increased by $268 thousand or 6.0% due to the factors noted above. As a result
of these changes, the Bank's interest rate spread narrowed to 3.58% for the six
months ended June 30, 2001 compared to 3.80% for the prior year period. Net
interest margin fell to 3.88% from 4.08% between the periods
Provision for loan losses was comparable to the prior year with provision
expense of $180 thousand for the periods ending June 30, 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.
Non-interest income increased to $701 thousand for the six month period ending
June 30, 2001, an increase of $100 thousand or 16.6% over the prior year total
of $601 thousand. Increases in service charges on deposit accounts and certain
loan service fees were supplemented by an increase 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. Gain on sales
of mortgage loansand loan appraisal, credit, and miscellaneous charges increased
because a decrease in mortgage interest rates has led to a more active mortgage
refinance market as well as increased production of fixed rate mortgages.
Generally the Bank prefers to sell fixed rate mortgages to generate current
income rather than holding them in its loan portfolio. The volume of refinancing
activity is driven by the direction and level of interest rates and may be
expected to decline if interest rates stabilize or increase.
Non-interest expense for the six month period increased by $93 thousand or 2.9%
to $3.3 million from $3.2 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. The Bank
anticipates that the new branch will increase its non-interest expense inthe
third quarter.
Income taxes increased to $684 thousand or 34.5% of pretax income in the current
year compared to $576 thousand or 33.7% 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.
Earnings Per Share
Primary earnings per share for the six months were $1.68 per share or $.24
higher than for the corresponding period in 2000. This is reflective of the
changes in net income and the retirement of certain shares as noted below.
Diluted earnings per share for the period was $1.61 as compared to $1.38 an
increase of $.23, which is reflective of the factors noted above.
RESULTS OF OPERATIONS -- SECOND QUARTER
The Company's net income for the second quarter of 2001 as compared to the same
period for the prior year increased to $652 thousand from $509 thousand for the
second quarter of 2000, an increase of 27.9%. This increase was the result of
the same factors noted in the change for the results of the first six months,
continued increases in net interest income caused by higher assets, a slight
decrease in non-interest expense, and increasing non-interest income related to
residential first mortgage production and higher deposit balances. Interest
income increased by $162 thousand or 3.6% from the same quarter in the prior
year. During the same period, interest expense increased by $27 thousand or
1.2%. Net interest income increased slightly by $134 thousand or 6.1%.
Non-interest income increased by $45 thousand or 14.4% in the second quarter of
2001, compared to the second quarter of 2000. This increase was the result of
increases in income from loan service charges as well as by increased gains on
selling residential mortgage loans was offset by declines in service charges on
customer accounts. Total non-interest expense decreased by $23 thousand or 1.4%
for the second quarter compared to the same period lastyear primarily due to a
decrease in certain personnel related costs including accruals for benefits
costs. Advertising expenses also decreased due to a lower level of advertising
activity in the second quarter. Management expects that advertising costs will
increase in the third quarter to levels comparable to the prior year. Other
expenses increased based upon the increases in asset size, branch networks,
level of deposits, and other factors. Basic earnings per share increased from
$.65 to $.84 based on the lower number of shares outstanding and higher
earnings. Fully diluted earnings per share increased from $.65 to $.81 based on
the same factors.
9
FINANCIAL CONDITION
Assets
Total assets as of June 30, 2001 grew $8.5 million or 3.4% to $256.8 million
from the December 31, 2000 level of $248.3 million. The Bank's loan portfolio
grew by $13.5 million or 7.8% during the six month period ending June 30, 2001.
The growth in the loan portfolio was partially offset by decreases in certain
other asset types (primarily investments) 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 June
30, 2001 the Bank's allowance for loan losses totals $2.1 million or 1.15% 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 $51.8 million a decrease of
$6.8 million or 11.6%. Reductions in the investment portfolio were primarily the
result of certain callable bonds being redeemed as well as increases in the rate
of principal repayment on certain mortgage backed securities. 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 $522 thousand, or 81% from December 31, 2000's
total. Interest-bearing deposits with banks increased by $130 thousand or 2.2%
during the quarter to $6.1 million at June 30, 2001. The level of property and
equipment balances increased $133 thousand primarily due to upgrades of computer
equipment and premises.
Liabilities
Deposit balances increased by $10.6 million or 6.3% for the six months ended
June 30, 2001. The Bank continues to aggressively market its deposit products in
the Southern Maryland area. The recent declines in certain segments of the
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 decreased by a total of
$3.1 million or 5.7% from December 2000 balances. Other liabilities also
increased by $24 thousand or 1.1%.
Stockholders' Equity
Stockholders' equity increased $1.0 million or 4.4% to $24.5 million at June 30,
2001 compared to $23.4 million at December 31, 2000. This reflects the net
income of $1.3 million for the six month period and a $409 thousand increase in
accumulated other comprehensive income. Reductions in equity occurred as a
result of using $446 thousand to purchase shares in the open market and retire
them. Dividends paid during the first six months of the year totaled $309
thousand also reduced equity. Book value on a per share basis, $31.90 at June
30, 2001, as compared to $30.13 at December 31, 2000, reflects a 5.9% increase.
Book value was increased by the increase in equity value as well as by the
Company's purchase and retirement of outstanding shares for amounts less than
book value.
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 six months ended June 30, 2001, the Company purchased 16,871 shares for $446
thousand. Additional stock acquisitions and retirements may be considered in the
future. The Company has $600 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
10
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 June 30, 2001, the maximum
available under this line would be $90 million, while current outstanding
advances totaled $50.7 million. In order to draw on this line the Bank must have
sufficient collateral. Qualifying collateral includes residential 1-4 family
first mortgage loans, certain commercial real estate loans, and various
investment securities. REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as
statutory capital requirements imposed under Maryland law. At June 30, 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.
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TRI-COUNTY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On May 9, 2001, the Company held its Annual Meeting of Stockholders. The only
matter voted on was the election of four directors. Set forth below are the
results of the voting in the election of directors.
Nominee For Withheld
Catherine A. Askey 503,134 2,788
Michael L. Middleton 479,486 26,436
C. Marie Brown 503,134 2,788
Louis P. Jenkins, Jr. 503,134 2,788
There were no broker non-votes. The terms of directors W. Edelen Gough, Jr., H.
Beaman Smith and Herbert N. Redmond, Jr. continued after the meeting.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRI-COUNTY FINANCIAL CORPORATION:
Date: August 9, 2001 By: /s/ Michael L. Middleton
------------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: August 9, 2001 By: /s/ William J. Pasenelli
------------------------------------
William J. Pasenelli
Chief Financial Officer
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