UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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
------------------------------------------------------
(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)
----------------------------------------------------
(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 October 31, 2001 registrant had outstanding 755,523 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 - September 30, 2001
and December 31, 2000 2
Consolidated Statements of Income and Comprehensive Income -
Three and Nine Months Ended September 30, 2001 and 2000 3
Consolidated Statements of Cash Flows - Nine Months
Ended September 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 Disclosures About Market Risk 11
PART II - OTHER INFORMATION
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 SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
ASSETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
Cash and due from banks $ 1,018,965 $ 645,817
Interest-bearing deposits with banks 5,683,925 5,975,314
Investment securities available for sale - at fair value 42,539,932 56,860,996
Investment securities held to maturity - at amortized cost 1,207,870 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 451,000 355,000
Loans receivable - net of allowance for loan losses
of $2,225,738 and $1,929,531, respectively 188,889,385 172,090,088
Premises and equipment, net 5,105,402 4,495,431
Foreclosed real estate 182,323 176,626
Accrued interest receivable 1,177,472 1,353,658
Other assets 3,437,082 1,636,609
------------ ------------
$252,728,906 $248,339,456
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 12,204,371 $ 12,537,649
Interest-bearing deposits 165,311,170 155,268,350
------------ ------------
Total deposits 177,515,541 167,805,999
Short-term borrowings 637,829 13,550,903
Long-term debt 46,650,000 41,400,000
Accrued expenses and other liabilities $2,767,205 2,152,732
------------ ------------
Total liabilities 227,570,575 224,909,634
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 755,523 and 777,680 shares, respectively 7,555 7,777
Surplus 7,545,603 7,500,865
Retained earnings 17,060,310 16,175,708
Accumulated other comprehensive income 745,443 (114,929)
Unearned ESOP shares (200,580) (139,599)
------------ ------------
Total stockholders' equity 25,158,331 23,429,822
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $252,728,906 $248,339,456
============ ============
See notes to consolidated financial statements
2
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2001 2000 2001 2000
INTEREST INCOME:
Interest and fees on loans $3,863,424 $3,555,423 $11,493,494 $10,247,145
Taxable interest and dividends on investment securites 746,375 1,057,890 2,629,682 3,138,972
Interest on bank deposits 20,561 24,126 64,691 74,045
---------- ---------- ----------- -----------
Total interest revenues 4,630,360 4,637,439 14,187,867 13,460,162
---------- ---------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 1,484,060 1,666,387 4,782,318 4,589,295
Interest on long term debt 646,736 523,235 1,897,052 1,288,375
Interest on other borrowings 2,008 280,881 257,354 930,318
---------- ---------- ----------- -----------
Total interest expenses 2,132,804 2,470,503 6,936,724 6,807,988
---------- ---------- ----------- -----------
NET INTEREST INCOME 2,497,556 2,166,936 7,251,143 6,652,174
PROVISION FOR LOAN LOSSES 90,000 90,000 270,000 270,000
---------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,407,556 2,076,936 6,981,143 6,382,174
---------- ---------- ----------- -----------
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges 64,193 23,888 161,092 63,016
Net gain on sale of loans held for sale 43,158 20,661 127,893 79,209
Service charges 230,495 249,872 727,188 736,930
Other 6,560 6,237 29,619 22,897
---------- ---------- ----------- -----------
Total noninterest income 344,406 300,658 1,045,792 902,052
---------- ---------- ----------- -----------
NONINTEREST EXPENSE:
Salary and employee benefits 1,001,742 885,926 2,841,474 2,690,305
Occupancy expense 232,963 173,475 537,769 477,407
Deposit insurance and surety bond premiums 22,087 7,940 81,556 23,865
Data processing expense 63,967 60,884 240,574 217,544
Advertising 110,758 65,075 223,638 196,047
Depreciation 53,301 53,301 169,987 161,318
Other 378,086 307,377 1,058,759 984,947
---------- ---------- ----------- -----------
Total noninterest expenses 1,862,904 1,553,978 5,153,757 4,751,433
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 889,058 823,616 2,873,178 2,532,793
INCOME TAXES 322,000 279,000 1,005,700 855,000
---------- ---------- ----------- -----------
NET INCOME 567,058 544,616 1,867,478 1,677,793
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized holding gains (losses) arising during the period 451,325 41,344 860,372 (139,768)
---------- ---------- ----------- -----------
COMPREHENSIVE INCOME $1,018,383 $ 585,960 $ 2,727,850 $ 1,538,025
========== ========== =========== ===========
EARNINGS PER SHARE
Basic $0.71 $0.69 $2.42 $2.13
Diluted $0.68 $0.66 $2.33 $2.04
See notes to consolidated financial statements
3
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,867,478 $ 1,677,793
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 270,000 270,000
Depreciation and amortization 242,650 234,300
Net amortization of premium/discount on
investment securities 51,054 (86,055)
Deferred income tax benefit (110,000) (70,000)
Decrease (increase) in accrued interest receivable 176,186 (158,325)
Decrease in deferred loan fees 9,585 (65,682)
Increase in accounts payable, accrued expenses,
and other liabilities 614,473 366,063
(Increase) Decrease in other assets (864,271) 283,729
Gain on disposal of premises and equipment (8,386) --
Origination of loans held for sale (7,812,412) (1,611,775)
Gain on sales of loans held for sale (127,893) (79,209)
Proceeds from sale of loans held for sale 8,036,305 2,240,082
------------ ------------
Net cash provided by operating activities 2,344,770 3,000,921
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase (decrease) in interest-bearing deposits with banks 291,389 (1,191,908)
Purchase of investment securities available for sale (20,961,399) (14,991,734)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 36,538,900 14,139,816
Purchase of investment securities held to maturity (100,000) (200,000)
Proceeds from maturities or principal payments
of investment securities held to maturity 606,497 936,584
Loans originated or acquired (69,123,620) (50,091,738)
Principal collected on loans 50,579,419 31,818,648
Proceeds from disposal of premises and equipment 8,963 --
Purchase of premises and equipment (853,200) (270,844)
Acquisition of foreclosed real estate (5,697) --
Purchase of FHLB and Federal Reserve stock -- (391,550)
------------ ------------
Net cash used in investing activities (3,018,749) (20,242,726)
------------ ------------
See notes to consolidated financial statements.
4
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2001 2000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 9,709,542 $ 7,677,615
Proceeds from long-term borrowings 10,250,000 --
Payments of long-term borrowings (5,000,000) (15,000,000)
Net (decrease) increase in other borrowed funds (12,913,074) 21,946,483
Exercise of stock options 31,817 40,711
Net change in unearned ESOP shares (47,998) 36,984
Dividends paid (309,204) (236,595)
Redemption of common stock (673,956) (329,901)
------------ ------------
Net cash provided by financing activities 1,047,127 14,135,297
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 373,148 (3,106,508)
CASH AND CASH EQUIVALENTS - JANUARY 1 645,817 3,469,304
------------ ------------
CASH AND CASH EQUIVALENTS -SEPTEMBER 30 $ 1,018,965 $ 362,796
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest $ 6,959,887 $ 6,413,408
============ ============
Income taxes $ 1,017,000 $ 725,000
============ ============
Noncash transfer from loans to other assets $ 1,273,320 $ --
============ ============
See notes to consolidated financial statements.
5
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 nine months ended September 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:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
Basic 770,519 786,397
Diluted 803,099 824,072
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 assessments 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 nine 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 a wholly owned subsidiary of the Bank on this date. As of
September 30, 2001, this asset is reflected in the assets of the Bank under the
"other assets" category. 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.
Management intends to aggressively pursue its rights with regard to this asset
including possible legal action. Other than the loan mentioned above, no
significant deterioration in the timeliness of payments received from borrowers
has been noted.
Economic growth has slowed significantly in the last several months on both a
regional and a national basis. This slowing was readily apparent prior to
September 11, 2001. The terrorist attack and its related effects on the local
economy have
7
tended to further stifle economic activity regionally and nationally. While the
economy is not yet technically in a recession (usually defined as two
consecutive quarters of negative growth), there is a consensus of opinion that
we are in the beginning of a recession. These economic conditions are likely to
affect certain of the Bank's customers negatively and could lead to
deterioration in the Bank's loan quality. 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. 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 branch offices in its market area
consisting of Charles, St. Mary's, and Calvert counties in Maryland. The Bank
has closed one micro branch and opened one full service branch in the third
quarter of 2001. The full service branch has opened 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 closure of the micro-branch is not expected to
significantly affect expenses. In addition to these changes, the Bank is moving
an existing branch from a rented building to a newly constructed facility. The
new building is owned by the Bank. This facility will open in the fourth quarter
of 2001, at the same time the old branch is closed. The Bank will continue to
seek opportunities to expand its branch network.
SELECTED FINANCIAL DATA
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2001 2000
Condensed Income Statement
Interest Income $14,187,867 $13,460,162
Interest Expense 6,936,724 6,807,988
Net Interest Income 7,251,143 6,652,174
Provision for Loan Losses 270,000 270,000
Noninterest Income 1,045,792 902,052
Noninterest Expenses 5,153,757 4,751,433
Income Before Income Taxes 2,873,178 2,523,793
Income Tax Expense 1,005,700 855,000
Net Income 1,867,478 1,677,793
Per Common Share
Basic Earnings $2.42 $2.13
Diluted Earnings 2.33 2.04
Book Value 33.30 28.13
RESULTS OF OPERATIONS - YEAR TO DATE
Net income for the nine month period ended September 30, 2001 totaled $1,867,478
($2.42 basic and $2.33 fully diluted earnings per share) compared with a total
of $1,677,793 ($2.13 basic and $2.04 fully diluted earnings per share) for the
same period in the prior year. This increase of $190 thousand or 11.3% 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.
8
Interest income increased to $14.2 million in the current period compared to
$13.5 million for the same period in the prior year. This increase of $728
thousand or 5.4% 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 decrease in
interest yields on interest earning assets.
Interest expense increased to $6.9 million in the period ending September 30,
2001 as compared to $6.8 million for the same period in the prior year an
increase of $129 thousand or 1.9%. This increase was due to higher balances of
deposits and 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 $599 thousand or 9.0% due to the factors noted above.
The Bank's interest rate spread decreased slightly to 3.64% for the nine months
ended September 30, 2001 compared to 3.69% for the prior year period. Net
interest margin declined slightly to 3.94% from 3.98% between the periods.
Provision for loan losses was comparable to the prior year with provision
expense of $270 thousand for the periods ending September 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.
Noninterest income increased to $1.0 million for the nine month period ending
September 30, 2001, an increase of $144 thousand or 15.9% over the prior year
total of $902 thousand. A slight decrease in service charges was offset by
increases in loan service fees and gains on sales of loans. Gain on sales of
mortgage loans and 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.
Noninterest expense for the nine month period increased by $402 thousand or 8.5%
to $5.2 million from $4.8 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 noninterest expense in the
fourth quarter.
Income taxes increased to $1 million or 35% of pretax income in the current year
compared to $855 thousand or 33.8% 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 nine months were $2.42 per share or $.29
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 $2.33 as compared to $2.04 an
increase of $.29, which is reflective of the factors noted above.
RESULTS OF OPERATIONS -- THIRD QUARTER
The Company's net income for the third quarter of 2001 as compared to the same
period for the prior year increased to $567 thousand from $545 thousand for the
third quarter of 2000, an increase of 4.0%. This increase was the result of the
same factors noted in the change for the results of the first nine months,
continued increases in net interest income caused by higher assets and
increasing noninterest income related to residential first mortgage production
and higher deposit balances. These increases in income were offset by higher
levels of noninterest expenses. Interest income decreased by $7 thousand or .2%
from the same quarter in the prior year. During the same period, interest
expense decreased by $338 thousand or 13.7%. Net interest income increased by
$331 thousand or 15.9%. Noninterest income increased by $44 thousand or 14.6% in
the third quarter of 2001, compared to the third quarter of 2000. This increase
was the result of increases in gains on selling residential mortgage loans as
well as loan charges which were offset by declines in service charges on
customer accounts. Total noninterest expense increased by $309 thousand or 19.9%
for the third quarter compared to the same period last year primarily due to an
increase in certain personnel related costs including accruals for
9
benefits costs. Advertising expenses also increased due to an increase in
activity in the period. Other expenses increased based upon the increases in
asset size, branch networks, level of deposits, and other factors. Basic
earnings per share increased from $.69 to $.71 based on the lower number of
shares outstanding and higher earnings. Fully diluted earnings per share
increased from .66 to .68 based on the same factors.
FINANCIAL CONDITION
Assets
Total assets as of September 30, 2001 grew $4.4 million or 1.8% to $252.7
million from the December 31, 2000 level of $248.3 million. The Bank's loan
portfolio grew by $16.8 million or 9.8% during the nine month period ending
September 30, 2001. The bulk of the increase was attributable to the commercial
real estate loan portfolio which grew $14.7 million, or 37.5% during the year.
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
September 30, 2001 the Bank's allowance for loan losses totals $2.2 million or
1.16% 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 $43.7 million a decrease of
$14.8 million or 25.3%. 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 $373 thousand, or 57.8% from
December 31, 2000's total. Interest-bearing deposits with banks increased by
$291 thousand or 4.9% during the quarter to $5.7 million at September 30, 2001.
The level of property and equipment balances increased $610 thousand primarily
due to upgrades of computer equipment and premises, the opening of the
additional branch, and the movement of one branch to a company owned facility as
noted above.
Liabilities
Deposit balances increased by $9.7 million or 5.8% for the nine months ended
September 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
$7.7 million or 14.0% from December 2000 balances. Other liabilities also
increased by $614 thousand or 28.5%.
Stockholders' Equity
Stockholders' equity increased $1.7 million or 7.4% to $25.2 million at
September 30, 2001 compared to $23.4 million at December 31, 2000. This reflects
the net income of $1.9 million for the nine month period and a $860 thousand
increase in accumulated other comprehensive income. Reductions in equity
occurred as a result of using $674 thousand to purchase shares in the open
market and retire them. Dividends paid during the first nine months of the year
totaled $309 thousand also reduced equity. Other reductions included a loan to
finance the ESOP's purchase of additional shares which increased unearned ESOP
shares. Book value on a per share basis, $33.30 at September 30, 2001, as
compared to $30.13 at December 31, 2000, reflects a 8.9% 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 nine months ended September 30, 2001, the Company purchased 24,804 shares
for $674 thousand. Additional stock acquisitions and retirements may be
considered in the future. The Company has $200 thousand of cash available at the
holding company level available for such purchases or for other cash needs of
the holding company.
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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 FHLB. As of September 30, 2001, the maximum available under this line
would be $88 million, while current outstanding advances totaled $46.7 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 September 30,
2001, the Bank's tangible, leverage and risk-based capital ratios were 9.47%,
9.47% and 14.14%, respectively. These levels are well in excess of the 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 -- None
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: November 7, 2001 By:/s/ Michael L. Middleton
-------------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: November 7, 2001 By:/s/ William J. Pasenelli
-------------------------------------
William J. Pasenelli
Chief Financial Officer
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