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, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-18279
------------------------------
TRI-COUNTY FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1652138
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(301) 843-0854
--------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
As of August 2, 2002 registrant had outstanding 768,442 shares of Common
Stock.
1
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q INDEX
-----
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2002
and December 31, 2001 3
Consolidated Statements of Income and Comprehensive Income -
Three And Six Months Ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2001 5 - 6
Notes to Consolidated Financial Statements 7
Item 2- Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 12
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 12
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to Vote of Security Holders 13
Item 6 - Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND DECEMBER 31, 2001
ASSETS
June 30, 2002 December 31, 2001
Cash and due from banks $ 4,462,642 $ 693,439
Interest-bearing deposits with banks 8,290,165 7,678,158
Investment securities available for sale - at fair value 43,408,248 41,673,742
Investment securities held to maturity - at amortized cost 2,651,475 2,289,354
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost 3,035,550 3,035,550
Loans held for sale -- 2,354,315
Loans receivable - net of allowance for loan losses
of $2,278,393 and $2,281,581, respectively 197,084,743 193,450,011
Premises and equipment, net 6,137,109 5,432,848
Foreclosed real estate 740,452 1,800,569
Accrued interest receivable 1,179,219 1,049,401
Other assets 3,407,136 2,499,903
------------- -------------
Total assets $ 270,396,739 $ 261,957,290
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 24,100,981 $ 17,738,165
Interest-bearing deposits 169,484,639 165,378,369
------------- -------------
Total deposits 193,585,620 183,116,534
Short-term borrowings 695,893 1,813,317
Long-term debt 47,250,000 48,650,000
Accrued expenses and other liabilities 3,225,560 2,790,981
------------- -------------
Total liabilities 244,757,073 236,370,832
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
issued 762,541 and 756,805 shares, respectively 7,625 7,568
Surplus 7,595,614 7,545,590
Retained earnings 17,652,938 17,678,367
Accumulated other comprehensive income 533,085 555,513
Unearned ESOP shares (149,596) (200,580)
------------- -------------
Total stockholders' equity 25,639,666 25,586,458
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 270,396,739 $ 261,957,290
============= =============
See notes to consolidated financial statements
3
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2002 2001 2002 2001
INTEREST INCOME:
Interest and fees on loans $ 3,577,700 $ 3,819,797 $7,067,360 $ 7,630,070
Taxable interest and dividends on investment
securities 603,868 807,156 1,258,565 1,883,307
Interest on bank deposits 25,578 22,333 48,820 44,130
----------- ----------- ---------- -----------
Total interest revenues 4,207,146 4,649,286 8,374,745 9,557,507
----------- ----------- ---------- -----------
INTEREST EXPENSE:
Interest on deposits 865,181 1,603,996 1,774,904 3,298,258
Interest on long term debt 630,618 658,930 1,270,883 1,250,316
Interest on other borrowings -- 53,775 -- 255,346
----------- ----------- ---------- -----------
Total interest expenses 1,495,799 2,316,701 3,045,787 4,803,920
----------- ----------- ---------- -----------
NET INTEREST INCOME 2,711,347 2,332,585 5,328,958 4,753,587
PROVISION FOR LOAN LOSSES 30,000 90,000 100,000 180,000
----------- ----------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,681,347 2,242,585 5,228,958 4,573,587
----------- ----------- ---------- -----------
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges 16,560 61,940 88,348 96,899
Net gain on sale of loans held for sale 105,224 60,867 207,982 84,735
Service charges 267,027 224,540 485,369 496,693
Other 9,248 6,511 13,709 23,059
----------- ----------- ---------- -----------
Total noninterest income 398,059 353,858 795,408 701,386
----------- ----------- ---------- -----------
NONINTEREST EXPENSE:
Salary and employee benefits 1,035,309 879,437 2,098,178 1,839,732
Occupancy expense 224,141 160,430 391,668 304,806
Data processing expense 234,933 70,623 338,456 176,607
Loss on disposal of obsolete equipment 65,104 -- 65,104 --
Advertising 90,422 65,718 162,966 112,880
Equipment depreciation 177,197 63,301 221,196 116,686
Telephone communications 149,192 26,885 193,380 60,397
Valuation allowance on foreclosed real estate 1,044,070 -- 1,044,070 --
Other 436,694 342,710 871,338 679,745
----------- ----------- ---------- -----------
Total noninterest expenses 3,457,062 1,609,104 5,386,356 3,290,853
----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXE EXPENSE (BENEFIT) (377,656) 987,339 638,010 1,984,120
INCOME TAX EXPENSE (BENEFIT) (134,600) 335,700 230,000 683,700
----------- ----------- ---------- -----------
NET INCOME (LOSS) (243,056) 651,639 408,010 1,300,420
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized holding gains (losses) arising
during the period 135,220 (42,181) (22,428) 409,047
----------- ----------- ---------- -----------
4
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
SIX MONTHS ENDED
JUNE 30,
----------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 408,010 $ 1,300,420
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Valuation allowance on foreclosed real estate 1,044,070 --
Provision for loan losses 100,000 180,000
Depreciation and amortization 246,092 165,100
Loss on disposal of obsolete equipment 65,104 --
Net amortization of premium/discount on investment securities 7,401 24,553
Deferred income tax benefit (90,000) (109,000)
(Increase) decrease in accrued interest receivable (129,818) 34,406
Increase (decrease) in deferred loan fees 16,173 (22,498)
Decrease in accounts payable, accrued expenses,
and other liabilities 434,579 23,894
Increase in other assets (1,099,337) (457,134)
Gain on disposal of premises and equipment (4,458) (8,386)
Origination of loans held for sale (9,908,946) (4,582,681)
Gain on sales of loans held for sale (207,982) (84,735)
Proceeds from sale of loans held for sale 8,485,893 5,292,265
----------- -----------
Net cash (used) provided by operating activities (633,219) 1,756,204
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits with banks (612,007) (129,834)
Purchase of investment securities available for sale (26,341,167) (11,504,288)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 24,565,938 18,526,965
Purchase of investment securities held to maturity (1,201,212) (100,000)
Proceeds from maturities or principal payments
of investment securities held to maturity 839,091 414,200
Loans originated or acquired (42,594,970) (43,938,943)
Principal collected on loans 42,829,415 29,052,799
Proceeds from disposal of premises and equipment 13,000 8,963
Purchase of premises and equipment (1,023,999) (299,077)
Proceeds from foreclosed real estate 309,046 --
----------- -----------
Net cash provided (used) in investing activities (3,216,865) (7,969,215)
----------- -----------
5
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
SIX MONTHS ENDED
JUNE 30,
------------------------------
2002 2001
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits $ 10,469,086 $ 10,550,232
Proceeds from long-term borrowings -- 10,250,000
Payments of long-term borrowings (1,400,000) (5,000,000)
Net decrease in other borrowed funds (1,117,424) (8,391,087)
Exercise of stock options 39,629 31,817
Net change in unearned ESOP shares 61,452 49,967
Dividends paid (385,129) (309,204)
Redemption of common stock (48,327) (446,217)
----------- -----------
Net cash provided by financing activities 7,619,287 6,735,508
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 3,769,203 522,497
CASH AND CASH EQUIVALENTS - JANUARY 1 693,439 645,817
CASH AND CASH EQUIVALENTS - JUNE 30 $ 4,462,642 $ 1,168,314
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the six months for:
Interest $ 3,241,936 $ 4,827,084
=========== ===========
Income taxes $ 1,040,000 $ 896,000
=========== ===========
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.
The results of operations for the three and six months ended June 30, 2002
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 2002 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, 2001.
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 THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------
2002 2001 2002 2001
Basic 760,790 775,317 762,721 771,994
Diluted 792,699 806,309 762,721 802,202
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.
In the last several quarters, the national economy has recovered slowly 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.
In the current quarter, the Bank has established a valuation allowance on
certain foreclosed real estate based on indications that the market value was
below carrying value. This valuation allowance approximately $1.0 million pretax
and $670 thousand after taxes. The effect of these write downs was to decrease
basic and fully diluted earnings per share for the six months ending June 30,
2002 by $.88 and $.84 respectively. For a discussion of the Bank's accounting
policies regarding the accounting for foreclosed real estate, see Note 1 to the
Company's Consolidated Financial Statements for the year ended December 31,
2001.
In the current quarter, the Bank also incurred significant costs related to its
conversion to a new provider of data processing services. These costs included
payments made to the previous vendor for conversion related work including
facilitating the transfer of customer data to the new system, costs for the
production of certain reports and other items. Other conversion related expenses
included employee training, system installation, and the write off of certain
incompatible equipment. Total
8
costs related to the data conversion in the quarter were approximately $805
thousand. Of this amount, approximately $415 thousand was expensed in the first
six months of 2002. These additional costs reduced earnings per share by $.35
and $.33 per share on a basic and fully diluted basis respectively. For a
summary of costs incurred and results affected by the write downs and other
additional expenses see the table below:
Effect of Pro-forma
Income Effect write down income from
as reported of systems of foreclosed continuing
under GAAP conversion real estate operations
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES $5,228,958 $ - $ - $5,228,958
NONINTEREST INCOME: 795,408 - - 795,408
NONINTEREST EXPENSE:
Salary and employee benefits 2,098,178 - - 2,098,178
Occupancy expense 391,668 - - 391,668
Data processing expense 338,456 142,553 - 195,903
Loss on disposal of obsolete equipment 65,104 65,104 - -
Advertising 162,966 - - 162,966
Equipment depreciation 221,196 60,000 - 161,196
Telephone communications 193,380 101,365 - 92,015
Valuation allowance on foreclosed real estate 1,044,070 - 1,044,070 -
Other 871,338 46,034 - 825,304
----------- ---------- ----------- ----------
Total noninterest expenses 5,386,356 415,056 1,044,070 3,927,230
INCOME (LOSS) BEFORE INCOME TAXES 638,010 (415,056) (1,044,070) 2,097,136
INCOME TAX EXPENSE (BENEFIT) 230,000 (149,626) (376,383) 756,009
NET INCOME (LOSS) 408,010 (265,430) (667,687) 1,341,127
EARNINGS (LOSS) PER SHARE
Basic $ 0.54 $ (0.35) $ (0.88) $ 1.77
Diluted $ 0.51 $ (0.33) $ (0.84) $ 1.69
Equipment and software acquired - 310,519 - -
On April 28, 2002, a tornado caused damages to property in our market area. The
Company `s facilities suffered no damage, and we are not aware of any customer
who suffered material losses which would affect their ability to meet
obligations to repay loans. We do not believe that the storm will cause material
long term economic damage to our market area.
In the last several years, the Bank has increased its sources of noninterest
income through fees gathered on transactional accounts, the sale of non-deposit
products including investments, and continued operation of our residential
mortgage operation. These fees have continued to grow over the last several
quarters, while the Bank's fee income from the residential mortgage lending
business has decreased due to the Bank's shift in lending emphasis. Management
believes that the Bank's strong local focus and responsiveness to customers will
enable it to increase its fee income over time.
9
SELECTED FINANCIAL DATA
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
Condensed Income Statement
Interest Income $ 8,374,745 $ 9,557,507
Interest Expense 3,045,787 4,803,920
Net Interest Income 5,328,958 4,753,587
Provision for Loan Loss 100,000 180,000
Noninterest Income 795,408 701,386
Noninterest Expense 5,386,356 3,290,853
Income Before Income Taxes 638,010 1,984,120
Income Taxes 230,000 683,700
Net Income 408,010 1,300,420
Per Common Share
Basic Earnings $ 0.54 $ 1.68
Diluted Earnings 0.51 1.61
Book Value 33.62 31.90
RESULTS OF OPERATIONS
Net income for the six month period ended June 30, 2002 totaled $408,010 ($.54
basic and $.51 fully diluted earnings per share) compared with a total of
$1,300,420 ($1.68 basic and $1.61 fully diluted earnings per share) for the same
period in the prior year. This decrease of $892 thousand or 68.7% was caused
primarily by additional expenses incurred by the Company in the current quarter
relating to the systems conversion and the valuation allowance established for
certain foreclosed real estate as noted previously. The combined effect of these
events was to decrease pretax income in the current quarter by $1.5 million and
after tax income by approximately $1 million.
For the six month period ended June 30, 2002, interest income declined by $1.2
million or 12.4% to $8.4 million. This decline was caused by the continued
decline in interest rates particularly the declines in the Prime, and one,
three, and five year treasury rates. Many of the Bank's lending products'
pricing are based on these rates. This decline in interest rates was partially
offset by higher average asset balances.
Interest expense also decreased to $3.0 million in the period ending June 30,
2002 as compared to $4.8 million in the same period in the prior year a decrease
of $1.8 million or 36.6%. As with the change in interest income, 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 interest expense declined
faster than its interest income because the Bank was able to aggressively cut
funding costs by repricing certain of its deposit products. Further declines in
interest rates would probably not lead to similar results as the Bank has
decreased interest rates on certain products to extremely low levels. The Bank
is attempting to protect its interest rate position in the event of increases in
interest rates by lengthening, to the extent possible, average maturities on
liabilities and adding interest rate sensitive loans.
Provision for loan losses declined from prior year levels to $100 thousand from
$180 thousand for the periods ending June 30, 2002 and 2001, respectively.
Management will continue to periodically review its allowance for loan losses
and the related provision and adjust as deemed necessary. This review will
include a review of economic conditions nationally and locally, as well as a
review of the performance of significant major loans and the overall portfolio.
Noninterest income increased to $795 thousand for the six month period ending
June 30, 2002, an increase of $94 thousand or 13.4% over the prior year total of
$701 thousand. Increased income was primarily the result of a large increase in
gains on selling mortgage loans, which increased by $123 thousand or 145.5% to
$208 thousand in the current period. This large gain offset small declines in
other areas of noninterest income.
Noninterest expense for the six month period increased by $2.1 million or 63.7%
to $5.4 million from $3.3 million in the same period for the prior year. Salary
and employee benefits increased by 14.1% to $2.1 million from $1.8 for the same
10
period in the prior year. The increase was attributable to an increase in
employees and to increases in average salary costs per employee. The increase in
occupancy expense was caused by larger amounts of repairs and maintenance at the
Bank's branch locations as well as the opening of the Bank's permanent facility
at Charlotte Hall. Data processing expense increased by $162 thousand to $338
thousand or an increase of 91.6%. This increase was the result of fees paid to
the former data processing provider for conversion related services, fees paid
to the new provider for system installation, configuration, and training, and
for payments to both providers for a short period (about 6 weeks) where both
providers provided basic monthly services. In 2002, the Bank also disposed of
certain computer equipment which was incompatible with the new data processing
system. Advertising expense increased by $50 thousand or 44.4% primarily due to
increased marketing efforts related to various transaction based accounts.
Depreciation increased to $221 thousand increasing by 89.6% over the prior year
level of $117 thousand. The increase was primarily due to the obsolescence of
computer and other equipment incompatible with the new data processing system.
Expenses related to telephone communications also increased to $193 thousand for
the six months ended June 30, 2002 from $60 thousand in the same period in the
prior year, an increase of 220%. This increase was primarily related to the data
conversion. As noted above, for the six months ended June 30, 2002, the Bank
established a valuation allowance on foreclosed assets in the amount of $1.0
million. In 2001, there were no expenses in this category. Other expenses
increased by $191 thousand to $871 thousand from the prior year total of $679
thousand, an increase of 28.2%.
Income taxes decreased to $230 thousand or 36.1% of pretax income in the current
year compared to $684 thousand or 34.5% of pretax income in the prior year. The
increase in the tax rate was primarily attributable to an increase in the state
income tax burden. In the prior period, 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
and a reduction in the overall yield on invested assets have reduced the amount
of income sheltered from state income tax, increasing the effective tax rate.
RESULTS OF OPERATIONS -- SECOND QUARTER
The Company recorded a net loss for the second quarter of 2002 of $243 thousand
compared to net income for the second quarter of 2001 of $652 thousand. This
decline was the result of the factors noted above, particularly the write down
of foreclosed properties and the expenses incurred as the result of the data
processing conversion. These costs offset higher net interest and noninterest
income. Interest income declined by 9.5% to $4.2 million in the current quarter
from $4.6 million in the prior year. Interest expense also declined to $1.5
million from $2.3 million in the prior year, a decline of 35.4%. The factors
noted in the declines for the six month period ending June 30, 2002 were also
present including a decline in the overall rate environment, increased levels of
non interest bearing deposits, and aggressive repricing of certain deposits by
the Bank.
Net interest income increased by $379 thousand or 16.2%. Non-interest income
increased by $44 thousand or 12.5% in the second quarter of 2002, compared to
the second quarter of 2001. This increase was the result of increases in income
from service charges, increased gains on selling residential mortgage loans and
was offset by declines in loan service charges. Total non-interest expense
increased by $1.8 million or 114.8% for the second quarter compared to the same
period last year primarily due to an increase in costs related to the write down
of real estate values noted above and the conversion related costs incurred in
the current quarter. Salary and benefits expense increased by 17.7% due to an
increased number of employees and higher benefits costs. Occupancy expense
increased due to the opening of a permanent full service branch. Advertising
expenses also increased due to a higher level of advertising activity in the
second quarter, primarily related to efforts to increase the amount of
transaction account balances. Depreciation increased due to the write off of
computer equipment incompatible with the new data processing system. Other
expenses increased primarily due to the write offs noted above. The Company
recorded a net basic and fully diluted net loss per share of $.32 in the current
quarter as opposed to net basic earnings per share of $.84 and a fully diluted
earnings per share of $.81 in the prior year.
FINANCIAL CONDITION
Assets
Total assets as of June 30, 2002 increased by $8.4 million to $270.4 million
from the December 31, 2001 level of $262 million. Cash and due from banks
increased by $3.8 million, or 544% from December 31, 2001's total.
Interest-bearing deposits with banks increased by $612 thousand or 8.0% during
the quarter to $8.3 million at June 30, 2002. Investment securities, including
both the available for sale and held to maturity portfolios, increased from
$44.0 million to $46.1 million an increase of $2.1 million or 4.8%. Increases
were primarily the result of additional purchases of investments using the
proceeds of loan prepayments. The Bank's loan portfolio increased by $3.6
million or 1.9% during the six month period ending June 30, 2002 to $197 million
from December 2001's total of $193 million. The increase was primarily the
result of increases in the Commercial, Commercial Real Estate, and Consumer
portfolios which offset declines in the Residential First Mortgage portfolio. At
June 30, 2002 the Bank's allowance for loan losses totals $2.3 million or 1.16%
of loan balances as
11
compared to $2.3 million or 1.18% of loan balances at December 31, 2001.
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 decline to $0 from $2.3 million at December 31, 2001. Premises and
equipment increased due to equipment replacement needed for the data processing
conversion as well as construction costs related to the permanent Charlotte Hall
facility. Foreclosed real estate declined due to the establishment of the
valuation allowance noted above.
Liabilities
Deposit balances increased by $10.5 million or 5.7% for the six months ended
June 30, 2002. This increase was primarily in noninterest bearing deposits.
Management believes that the recent stock market volatility may help marketing
efforts. Short term borrowings remain at very low levels, $695 thousand. Long
term debt declined slightly to $47.2 million at June 30, 2002 from $48.7 million
at December 31, 2001. Other liabilities increased to $3.2 million at June 30,
2002 from $2.8 million at December 31, 2001, an increase of 15.6%.
Stockholders' Equity
Stockholders' equity increased $53 thousand or .2% to $25.6 million at June 30,
2002 compared to $25.6 million at December 31, 2001. This reflects the net
income of $408,010 for the six month period partially offset by the $385,129 in
cash dividends. Accumulated other comprehensive income decreased by $22,428.
Other changes in equity occurred as a result of using $48,328 to purchase shares
in the open market and retire them, the exercise of stock options of $39,629,
and a change in unearned ESOP shares of $61,452. Book value on a per share
basis, $33.62 at June 30, 2002, as compared to $33.80 at December 31, 2001,
reflects a .5% decrease, reflecting the slight increase in outstanding shares.
As noted on Form 8K filed on July 25, 2002 the Board has approved of the
purchase of up to 38,000 shares of the Company's stock, for retirement. For the
six months ended June 30, 2002, the Company purchased 1,665 shares for $48,310.
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 40% of consolidated Bank assets on a line available
from the FHLB. As of June 30, 2002, the maximum available under this line would
be $109 million, while current outstanding advances totaled $48.7 million. In
order to draw on this line the Bank must have sufficient collateral. Qualifying
collateral includes residential 1-4 family first mortgage loans and various
investment securities.
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as
statutory capital requirements imposed under Maryland law. At June 30, 2002, the
Bank's tangible, leverage and risk-based capital ratios were 8.71%, 9.96% and
12.68%, 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.
12
TRI-COUNTY FINANCIAL CORPORATION
--------------------------------
PART II - OTHER INFORMATION
---------------------------
Item 4 - Submission of Matters to a Vote of Security Holders
On May 8, 2002, the Company held its Annual Meeting of Shareholders. The only
matter voted on was the election of two directors. Set forth below are the
results of the voting in the election of directors.
Nominee For Against
------- --- -------
W. Edelen Gough 509,861 1,116
H. Beaman Smith 488,856 22,121
There were no broker non-votes. The terms of directors Catherine A. Askey,
Michael L. Middleton, C. Marie Brown, Louis P. Jenkins, Jr. and Herbert N.
Redmond continued after the meeting.
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
B. During the quarter for which this Form 10-Q is being filed, the
registrant did not file any reports on Form 8-K.
13
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 13, 2002 By: /s/ Michael L. Middleton
--------------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: August 13, 2002 By: /s/ William J. Pasenelli
--------------------------------------
William J. Pasenelli, Executive
Vice President and Chief
Financial Officer
14