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, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 0-18279
------------------------------
TRI-COUNTY FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1652138
- ------------------------------- --------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(301) 843-0854
----------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of April 25, 2003 registrant had outstanding 766,374 shares of Common
Stock.
1
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 - March 31, 2003
and December 31, 2002 3
Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2003 and 2002 5 - 6
Notes to Consolidated Financial Statements 7
Item 2- Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 13
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 14
Item 4 - Controls and Procedures 14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS MARCH 31, 2003 (UNAUDITED) AND DECEMBER 31, 2002
ASSETS
March 31, 2003 December 31, 2002
Cash and due from banks $ 11,891,241 $ 10,356,932
Interest-bearing deposits with banks 19,865,391 15,179,851
Investment securities available for sale - at fair value 46,941,211 41,826,113
Investment securities held to maturity - at amortized cost 2,448,207 2,841,807
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 2,736,750 2,736,750
Loans held for sale 2,683,680 1,262,667
Loans receivable - net of allowance for loan losses
of $2,319,460 and $2,314,074, respectively 190,961,058 197,449,282
Premises and equipment, net 5,590,123 5,736,395
Foreclosed real estate 706,014 716,014
Accrued interest receivable 1,058,807 1,042,453
Other assets 8,921,260 3,025,431
------------- -------------
Total assets $ 293,803,742 $ 282,173,695
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 33,215,713 $ 33,045,310
Interest-bearing deposits 177,925,346 169,979,802
------------- -------------
Total deposits 211,141,059 203,025,112
Short-term borrowings 155,647 752,298
Long-term debt 53,074,408 48,170,000
Accrued expenses and other liabilities 2,262,780 3,353,520
------------- -------------
Total liabilities 266,633,894 255,300,930
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued - 762,411 and 759,778 shares, respectively 7,624 7,598
Additional Paid in Capital 7,787,567 7,716,906
Retained earnings 19,350,162 18,817,615
Accumulated other comprehensive income 134,638 493,691
Unearned ESOP shares (110,143) (163,045)
------------- -------------
Total stockholders' equity 27,169,848 26,872,765
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 293,803,742 $ 282,173,695
============= =============
See notes to consolidated financial statements
3
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
INTEREST INCOME:
Interest and fees on loans $ 3,350,974 $ 3,489,660
Taxable interest and dividends on investment securites 530,773 654,697
Interest on bank deposits 36,637 23,242
----------- -----------
Total interest income 3,918,384 4,167,599
----------- -----------
INTEREST EXPENSE:
Interest on deposits 747,427 909,723
Interest on long term debt 613,101 639,905
Interest on other borrowings 766 360
----------- -----------
Total interest expense 1,361,294 1,549,988
----------- -----------
NET INTEREST INCOME 2,557,090 2,617,611
PROVISION FOR LOAN LOSSES 5,386 70,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,551,704 2,547,611
----------- -----------
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges 27,396 71,788
Net gain on sale of loans held for sale 127,095 102,758
Service charges 228,335 218,342
Other income 5,128 4,461
----------- -----------
Total noninterest income 387,954 397,349
----------- -----------
NONINTEREST EXPENSE:
Salary and employee benefits 1,129,326 1,062,869
Occupancy expense 168,317 167,527
Advertising 63,734 72,544
Data processing expense 85,305 103,523
Depreciation of furniture, fixtures, and equipment 114,900 43,999
Telephone communications 39,076 44,188
ATM expenses 58,480 50,511
Office supplies 23,465 36,221
Office equipment expense 45,342 59,662
Other 220,602 288,250
----------- -----------
Total noninterest expense 1,948,547 1,929,294
----------- -----------
INCOME BEFORE INCOME TAXES 991,111 1,015,666
INCOME TAXES 350,000 364,600
----------- -----------
NET INCOME 641,111 651,066
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized holding losses arising during the period (359,053) (157,648)
----------- -----------
COMPREHENSIVE INCOME $ 282,058 $ 493,418
=========== ===========
EARNINGS PER SHARE
Basic $ .84 $ .86
Diluted .80 .82
See notes to consolidated financial statements
4
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 641,111 $ 651,066
Adjustments to reconcile net income to net
cash used by operating activities:
Valuation allowance on foreclosed real estate -- 20,000
Provision for loan losses 5,386 70,000
Depreciation and amortization 150,300 119,499
Net amortization of premium/discount on investment securities 55,599 (109)
Deferred income tax benefit (29,000) --
Increase in accrued interest receivable (16,354) (65,391)
Decrease in deferred loan fees (58,237) (7,164)
Decrease in accounts payable, accrued expenses,
and other liabilities (1,090,740) (82,439)
Increase in other assets (5,678,906) (446,895)
Origination of loans held for sale (5,980,350) (6,376,035)
Gain on sales of loans held for sale (127,095) (102,758)
Proceeds from sale of loans held for sale 4,686,432 4,847,758
------------ ------------
Net cash used by operating activities (7,441,854) (1,372,468)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits with banks (4,685,540) 727,010
Purchase of investment securities available for sale (19,288,524) (18,653,097)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 13,570,852 17,717,374
Purchase of investment securities held to maturity -- (1,201,212)
Proceeds from maturities or principal payments
of investment securities held to maturity 393,600 509,762
Loans originated or acquired (27,514,040) (15,228,719)
Principal collected on loans 34,055,115 21,473,078
Purchase of premises and equipment (4,028) (353,250)
Proceeds from foreclosed real estate 10,000 --
------------ ------------
Net cash (used) provided in investing activities (3,462,565) 4,990,946
------------ ------------
5
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (CONTINUED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 8,115,947 $(2,124,962)
Proceeds from long-term borrowings 5,000,000 -
Payments of long-term borrowings (95,592) -
Net decrease in other borrowed funds (596,651) (1,097,934)
Exercise of stock options 31,158 37,830
Net change in unearned ESOP shares 92,459 61,452
Redemption of common stock (108,593) (28,500)
----------- -----------
Net cash provided (used) by financing activities 12,438,728 (3,152,114)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,534,309 466,364
CASH AND CASH EQUIVALENTS - JANUARY 1 10,356,932 693,439
----------- -----------
CASH AND CASH EQUIVALENTS - MARCH 31 $11,891,241 $ 1,159,803
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest $ 1,376,832 $ 1,670,605
=========== ===========
Income taxes $ 387,869 $ 275,000
=========== ===========
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 of America
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The Company believes that the
disclosures are adequate to make the information presented not misleading.
There have been no significant changes to the Company's Accounting Policies
as disclosed in the 2002 Annual Report. The results of operations for the
three months ended March 31, 2003 are not necessarily indicative of the
results of operations to be expected for the remainder of the year. Certain
previously reported amounts have been restated to conform to the 2003
presentation.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes included
in the Company's Annual Report for the year ended December 31, 2002.
2. 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,
------------------
2003 2002
Basic 758,954 758,760
Diluted 802,348 791,100
3. STOCK OPTION AND INCENTIVE PLAN
The Company has a stock option and incentive plan. During the three months
ended March 31, 2003 and 2002, no awards under stock option plans were made
and no options awards vested during these periods. For further information
on the Company's stock based compensation plans see the Company's 2002
Annual Report and Report on Form 10-K dated December 31, 2002.
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,
Charlotte Hall, and California, Maryland. The Bank is engaged in the commercial
and retail banking business as authorized by the banking statutes of the State
of Maryland and applicable Federal regulations. The Bank accepts demand and time
deposits, and originates loans to individuals, associations, partnerships and
corporations. The Bank makes real estate loans including residential first and
second mortgage loans, home equity lines of credit and commercial mortgage
loans. The Bank makes commercial loans including secured and unsecured loans.
The Bank is a member of the Federal Reserve and Federal Home Loan Bank ("FHLB")
Systems. The Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC") provides deposit insurance coverage up to
applicable limits.
Since its conversion to a state chartered commercial bank in 1997, the Bank has
sought to increase its commercial, commercial real estate, construction, second
mortgage, home equity, and consumer lending business as well as the level of
transactional deposits to levels consistent with similarly sized commercial
banks. As a result of this emphasis, the Bank's percentage of assets invested in
residential first mortgage lending and investment securities has declined since
1997. Conversely, targeted loan types have increased. The Bank has also seen an
increase in transactional deposit accounts while the percentage of total
liabilities represented by certificates of deposits has also declined.
Management believes that these changes will enhance the Bank's overall long-term
financial performance.
Management recognizes that the shift in composition of the Bank's loan portfolio
will tend to increase its exposure to credit losses. The Bank has continued to
evaluate its allowance for loan losses and the associated provision to
compensate for the increased risk. Any evaluation of the allowance for loan
losses is inherently inexact and reflects management's expectations as to future
economic conditions in the Southern Maryland area as well as individual
borrower's circumstances. Management believes that its allowance for loan losses
is adequate. For further information on the Bank's allowance for loan losses see
the discussion in the financial condition section of this form, as well as the
relevant discussions in the Form 10-K and annual report for the year ended
December 31, 2002.
In the last several quarters, the national economy has recovered fitfully from a
mild recession while our local economy has remained strong in relation to the
national and statewide economy. Prospects for growth appear to be steady, and
local employment remains strong. The Bank remains exposed to asset deterioration
should the local economy experience a prolonged period of economic decline. In
addition, any Federal Reserve action on interest rates may affect the Bank's
financial performance.
Loan customers have reacted to lower interest rates by continuing to refinance
higher rate loans. Because the Bank does not wish to keep low rate, long term,
fixed rate residential first mortgages in its portfolio, these loans are than
sold to third parties with the Bank retaining servicing. These transactions have
led to a reduction in loan balances with a concomitant reduction in provision
for loan losses, a continuing buildup of cash and short term investments, and a
continued flow of income from selling these loans. Although the Bank continues
to generate a high level of non-interest income, its net interest income has
dropped from the same period in the prior year despite an increase in asset
size. This is the result of the lower interest income earned on cash and short
term investments compared to the same period in the prior year. Noninterest
expense and income tax rates were comparable to the prior year.
8
SELECTED FINANCIAL DATA
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
Condensed Income Statement
Interest Income $3,918,384 $4,167,599
Interest Expense 1,361,294 1,549,988
Net Interest Income 2,557,090 2,617,611
Provision for Loan Loss 5,386 70,000
Noninterest Income 387,954 397,349
Noninterest Expense 1,948,547 1,929,294
Income Before Income Taxes 991,111 1,015,666
Income Taxes 350,000 364,600
Net Income 641,111 651,066
Per Common Share
Basic Earnings $ 0.84 $ 0.86
Diluted Earnings 0.80 0.82
Book Value 35.64 34.27
RESULTS OF OPERATIONS
Net income for the three month period ended March 31, 2003 totaled $641,111
($.84 basic and $.80 diluted earnings per share) compared with a total of
$651,066 ($.86 basic and $.82 diluted earnings per share) for the same period in
the prior year. This decrease of $9,955 or 1.5% was caused by a decrease in net
interest income which was partially offset by a decrease in the provision for
loan losses.
For the three month period ended March 31, 2003, interest income declined by
$249,215 or 6.0% to $3,918,384. This decline was caused by the continued decline
in interest rates particularly the declines in the Prime Rate, and one, three,
and five year U.S. Treasury rates. Many loan products are priced based on these
rates. This decline in interest rates was partially offset by higher average
asset balances.
Interest expense also decreased to $1,361,294 in the three month period ending
March 31, 2003 as compared to $1,549,988 in the same period in the prior year a
decrease of $188,694 or 12.2%. This decrease was a reflection of the declining
interest rate environment experienced during the last year. Interest expense
also declined as a result of the Bank's increase in noninterest bearing deposit
accounts. The Bank's ability to cut interest expense was inhibited by the
historically low rates paid on deposits prior to the current quarter. As
interest rates have continued to fall on loans and investments, the Bank was
unable to reduce interest expense by the same amount as interest income fell.
Provision for loan losses declined from prior year levels to $5,386 from $70,000
for the three month period ending March 31, 2003 and 2002, respectively. The
decline in provision expense was caused in part, by a reduction in the size of
the Bank's loan portfolio. Management will continue to periodically review its
allowance for loan losses and the related provision and adjust as deemed
necessary. This review will include a review of economic conditions nationally
and locally, as well as a review of the performance of significant major loans
and the overall portfolio.
Noninterest income decreased slightly to $387,954 for the three month period
ending March 31, 2003, a decrease of $9,395 or 2.4% under the prior year total
of $397,349. Loan appraisal, credit, and miscellaneous charges decreased by
$44,392 to $27,396. This decrease was offset by an increase in gains from
selling loans which increased to $127,095 from $102,758, an increase of $24,337
or 23.7%. Other noninterest income items were comparable from year to year.
Noninterest expense for the three month period increased by $19,253 or 1.0% to
$1,948,547 from $1,929,294 in the same period for the prior year. Salary and
employee benefits increased by 6.3% to $1,129,326 from $1,062,869 for the same
period in the prior year. The increase was attributable to an increase in
employees and to increases in average salary costs per employee. Occupancy
expense increased slightly from $167,527 to $168,317, an increase of .5%.
Advertising declined to
9
$63,734 from $72,544, a decline of $8,810 or 12.1%. Advertising declined due to
a reduction in certain sales efforts. Data processing expense also declined to
$85,305 from a prior year total of $103,523 a decline of $18,218 or 17.6%. In
2002, certain additional expenses were incurred related to the planned systems
conversion in June 2002. Depreciation of furniture fixtures and equipment
increased to $114,900 from the prior year total of $43,999 an increase of
$70,901 or 161.1%. This increase was due to large investments in equipment added
during the prior year, mostly related to the addition of new branches and new
equipment added for the 2002 system conversion. Telephone communications
declined to $39,076 from $44,188 in the prior year, a decline of $5,112 or
11.6%. This decline was caused by cost control and efficiency efforts by the
Bank. The provision for valuation allowances on foreclosed real estate declined
from $20,000 as of March 31, 2002 to nothing in 2003 as no further increases to
the valuation allowance were considered necessarry. ATM related expenses
increased by $7,969 to $58,480 for the period ending March 31, 2003, an increase
of 15.8% due to higher levels of activity, more ATM's, and certain price
increases by ATM service providers. Office supplies expense decreased to $23,465
from the prior year amount of $36,221, a decline of $12,756 or 35.2%. This
decline was caused by delays in the ordering of some types of supplies and
increased activity in the prior year due to conversion preparations. Office
equipment expenses also decreased to $45,342 from 2002's level of $59,662, a
decrease of $14,320 or 24.0%. This decrease was caused by the retirement of
certain equipment due to the systems conversion in 2002. Other expenses declined
to $220,602 from $288,250 a decline of $67,648 or 23.5%. These expenses were
lower based on certain cost control measures in 2003. Income taxes decreased to
$350,000 or 35.3% of pretax income in the current year compared to $364,600 or
35.9% of pretax income in the prior year. The slight decrease in the tax rate
was primarily attributable to an increase in certain tax exempt interest.
FINANCIAL CONDITION
Assets
Total assets as of March 31, 2003 increased by $11,630,047 to $293,803,742 from
the December 31, 2002 level of $282,173,695. Cash and due from banks increased
by $1,534,309, or 14.8% from December 31, 2002's total. Interest-bearing
deposits with banks increased by $4,685,540 or 30.9% during the period to
$19,865,391 at March 31, 2003. Investment securities, including both the
available for sale and held to maturity portfolios, increased from $44,667,920
to $49,389,418 an increase of $4,721,498 or 10.6%. Increases were primarily the
result of additional purchases of investments using the proceeds of loan
prepayments and the conversion of certain interest bearing deposits to
investments.
The Bank's loan portfolio decreased by $6,488,224 or 3.3% during the three month
period ending March 31, 2003 to $190,961,058 from December 2002's total of
$197,449,282. The decrease was primarily the result of large amounts of loan
prepayments on the Bank's existing residential first mortgage portfolio. The
Bank did increase its portfolio of commercial real estate loans in the three
month period ending March 31, 2003, but these increases were smaller than the
decreases in other parts of the loan portfolio. At March 31, 2003 the Bank's
allowance for loan losses totals $2,319,460 or 1.20% of loan balances as
compared to $2,314,074 or 1.15% of loan balances at December 31, 2002.
Management's determination of the adequacy of the allowance is based on a
periodic evaluation of the portfolio with consideration given to the overall
loss experience; current economic conditions; volume, growth and composition of
the loan portfolio; financial condition of the borrowers; and other relevant
factors that, in management's judgment, warrant recognition in providing an
adequate allowance. Management believes that the allowance is adequate. Loans
held for sale increased to $2,683,680 from $1,262,667 at December 31, 2001.
Additional loan information for prior years is presented in the Form 10-k for
the year ended December 31, 2002:
10
LOAN PORTFOLIO March 31, December 31,
2003 2002
--------------------------- ---------------------------
Amount % Amount %
Real Estate Loans
Commercial $ 77,609,375 40.03% $ 74,291,593 37.07%
Residential first mortgage 41,961,436 21.64% 48,975,989 24.44%
Construction and land development 13,670,041 7.05% 14,578,702 7.27%
Home equity and second mortgage 19,245,247 9.93% 19,007,265 9.48%
Commercial loans 36,902,643 19.03% 38,953,965 19.44%
Consumer loans 4,501,144 2.32% 4,623,447 2.31%
------------ ------ ------------ ------
Total loans 193,889,886 100.00% 200,430,961 100.00%
Less: Deferred loan fees 609,368 0.31% 667,605 0.33%
Allowance for loan losses 2,319,460 1.20% 2,314,074 1.15%
------------ ------ ------------ ------
Loans receivable net $190,961,058 $197,449,282
------------ ------------
LOAN LOSS ALLOWANCE
3 Months Ended 3 Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Beginning Balance $ 2,314,074 $ 2,281,581
Charge Offs -- (24,922)
Recoveries -- 600
----------- -----------
Net Charge offs -- (24,322)
Additions charged to operations 5,386 70,000
----------- -----------
Balance at end of period $ 2,319,460 $ 2,327,259
=========== ===========
Ratio of net charge-offs during the period to
loans 0.00% 0.01%
==== ====
Balances as of Balances as of
March 31, 2003 December 31, 2002
Restructured Loans $ -- $ --
--------- ---------
Accruing loans which are contracturally
past due 90 days or more: $ 573,207 $ 596,579
--------- ---------
Loans accounted for on a nonaccrual basis $ -- $ --
--------- ---------
Total non- performing loans $ 573,207 $ 596,579
Non -performing loans to total loans 0.30% 0.30%
==== ====
Allowance for loan losses to non performing loans 404.65% 387.76%
====== ======
11
Premises and equipment decreased due to depreciation in the current quarter.
Foreclosed real estate declined to $706,014 at March 31, 2003 from $716,014 at
December 31, 2002 due to partial settlement of one property. Other assets
increased to $8,921,260 from $3,025,431 at December 31, 2002. This increase was
primarily the result of the Bank investing $5,000,000 in certain life insurance
instruments which will provide supplemental benefits to certain key executives
and provide additional interest income to the Bank.
Liabilities
Deposit balances increased by $8,115,947 or 4.0% for the three months ended
March 31, 2003. This increase was primarily in interest bearing deposits.
Management believes that ongoing stock market volatility has made bank deposits
more attractive to the general public. Short term borrowings remain at very low
levels, $155,647. Long term debt increased to $53,074,408 at March 31 2003 from
$48,170,000 at December 31, 2002. Management has increased long term borrowing
because additional long term borrowing would help to stabilize interest expense
if interest rates were to increase dramatically. Other liabilities decreased to
$2,262,780 at March 31, 2003 from $3,353,520 at December 31, 2002, a decrease of
32.5%.
Stockholders' Equity
Stockholders' equity increased $297,083 or 1.11% to $27,169,848 at March 31,
2003 compared to $26,872,765 at December 31, 2002. This reflects the net income
of $641,111 for the three month period partially offset by the $359,053 decline
in accumulated other comprehensive income. Other changes in equity occurred as a
result of using $108,593 to purchase shares in the open market and retire them,
the exercise of stock options of $31,158, and activity related to the ESOP
shares of $92,459. Book value on a per share basis, $35.64 at March 31, 2003, as
compared to $35.37 at December 31, 2002, reflects a .8% increase, with a slight
increase in outstanding shares, partially offsetting the gains noted previously.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no business other than that of the Bank and does not
currently have any material funding commitments. The Company's principal sources
of liquidity are cash on hand and dividends received from the Bank. The Bank is
subject to various regulatory restrictions on the payment of dividends.
The Bank's principal sources of funds for investments and operations are net
income, deposits from its primary market area, principal and interest payments
on loans, interest received on investment securities and proceeds from maturing
investment securities. Its principal funding commitments are for the origination
or purchase of loans and the payment of maturing deposits. Deposits are
considered a primary source of funds supporting the Bank's lending and
investment activities.
The Bank's most liquid assets are cash and cash equivalents, which are cash on
hand, amounts due from financial institutions, federal funds sold, and money
market mutual funds. The levels of such assets are dependent on the Bank's
operating financing and investment activities at any given time. The variations
in levels of cash and cash equivalents are influenced by deposit flows and
anticipated future deposit flows.
The Bank may borrow up to 45% of consolidated Bank assets on a line available
from the FHLB. As of March 31,2003 , the maximum available under this line would
be $132 million, while current outstanding advances totaled $53 million. In
order to draw on this line the Bank must have sufficient collateral. Qualifying
collateral includes residential 1-4 family first mortgage loans, certain second
mortgage loans, certain commercial real estate loans, and various investment
securities.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as
statutory capital requirements imposed under Maryland law. At March 31, 2003,
the Bank's tangible, leverage and risk-based capital ratios were 9.08%, 9.08%
and 13.11%, respectively. These levels are well in excess of the required 4.0%,
4.0% and 8.0% ratios required by the Federal Reserve Board.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The
financial information contained within the financial statements is, to a
significant extent, financial information that is based on measures of financial
effects of transactions and events that have already occurred. A variety of
factors could affect the ultimate value that is obtained when earning of income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one in determining the inherent loss that may be
present in
12
our loan portfolio. Actual losses could differ significantly from the historical
factors that we use. In addition GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could
change.
The Company considers the allowance for loan losses to be a critical accounting
policy. The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting : (1) SFAS 5, "Accounting for Contingencies", which requires that
losses be accrued when they are probable of occurring and estimable and (2) SFAS
114, "Accounting by Creditors for Impairment of a Loan", which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Management has significant discretion in making the judgments inherent in the
determination of the provision and allowance for loan losses, including in
connection with the valuation of collateral, a borrower's prospects of
repayment, and in establishing allowance factors on the formula allowance. The
establishment of allowance factors is a continuing exercise, based on
management's continuing assessment of the global factors such as delinquencies,
loss history, trends in the volume and term of loans, national and local
economic trends, concentration of credit, loan classification, and other
factors. Changes in allowance factors will have a direct impact on the amount of
the provision and a corresponding effect on net income. Errors in management's
perception and assessment of the global factors and their impact on the
portfolio could result in the allowance not being adequate to cover losses in
the portfolio, and may result in additional provisions or chargeoffs.
13
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 4 CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures (as such term is
defined in Rule 13a-14(c) under the Exchange Act) as of a date within 90 days of
the date of filing of this Form 10-Q. Based upon such evaluation, the Company's
Chief Executive Officer and Chief Financial Officer have concluded that such
controls and procedures are effective to ensure that the information required to
be disclosed by the Company in the reports it files under the Exchange Act is
gathered, analyzed and disclosed with adequate timeliness.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of the evaluation described above.
14
TRI-COUNTY FINANCIAL CORPORATION
--------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and reports on Form 8-K
A. Exhibits- The following exhibits are being filed with this Form 10-Q
99.1 Certification pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tri-County Financial Corporation:
Date:May 15, 2003 By:/s/ Michael L. Middleton
-------------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date:May 15, 2003 By:/s/ William J. Pasenelli
-------------------------------------
William J. Pasenelli, Executive
Vice President and Chief
Financial Officer
16
CERTIFICATION
I, Michael L. Middleton, President and Chief Executive Officer of Tri-County
Financial Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tri-County Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Michael L. Middleton
-------------------------------------
Michael L. Middleton
President and Chief Executive Officer
17
CERTIFICATION
I, William J. Pasenelli, Executive Vice President, Treasurer and Chief Financial
Officer of Tri-County Financial Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tri-County Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ William J. Pasenelli
----------------------------------------------------
William J. Pasenelli
Executive Vice President and Chief Financial Officer
18