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, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number 0-18279
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Tri-County Financial Corporation
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(Exact name of registrant as specified in its charter)
Maryland 52-1652138
------------------------------ ----------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3035 Leonardtown Road, Waldorf, Maryland 20601
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(Address of principal executive offices) (Zip Code)
(301) 843-0854
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(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 April 28, 2004, registrant had outstanding 771,946 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, 2004
and December 31, 2003 (Audited) 3
Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2004 and 2003 5 - 6
Notes to Consolidated Financial Statements 7 - 8
Item 2- Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 13
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 14
Item 4 - Controls and Procedures 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities, Use of Proceeds
and Issuer Purchases of Equity Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of
Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K 14 - 15
SIGNATURES 16
2
PART I FINANCIAL STATEMENTS
ITEM I. FINANCIAL STATEMENTS
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS MARCH 31, 2004 AND DECEMBER 31, 2003
ASSETS
March 31, 2004 December 31, 2003
-------------- -----------------
(Unaudited) (Audited)
Cash and due from banks $ 2,738,727 $ 2,319,300
Interest-bearing deposits with banks 6,913,642 8,912,332
Federal Funds sold 228,166 938,166
Investment securities available for sale - at fair value 36,791,090 38,290,074
Investment securities held to maturity - at amortized cost 65,646,806 61,605,175
Stock in Federal Home Loan Bank and Federal Reserve
Bank - at cost 5,097,050 4,776,850
Loans held for sale -- 474,880
Loans receivable - net of allowance for loan losses
of $2,650,924 and $2,572,799, respectively 237,508,100 217,740,153
Premises and equipment, net 5,657,023 5,580,189
Foreclosed real estate 567,937 706,764
Accrued interest receivable 1,337,871 1,318,318
Investment in bank owned life insurance 5,939,427 5,921,544
Other assets 2,839,812 3,146,247
------------- --------------
TOTAL ASSETS $ 371,265,651 $ 351,729,992
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 32,504,104 $ 29,270,007
Interest-bearing deposits 207,587,722 198,284,561
------------- --------------
Total deposits 240,091,826 227,554,568
Short-term borrowings 27,620,302 31,191,285
Long-term debt 72,955,278 63,051,176
Accrued expenses and other liabilities 1,612,378 2,021,053
------------- --------------
Total liabilities 342,279,784 323,818,082
------------- --------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000
shares; issued 769,332 and 753,278 shares, respectively 7,693 7,533
Additional paid in capital 8,200,682 7,975,036
Retained earnings 20,808,307 20,071,630
Accumulated other comprehensive income (loss) 63,021 (3,130)
Unearned ESOP shares (93,836) (139,159)
------------- --------------
Total stockholders' equity 28,985,867 27,911,910
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 371,265,651 $ 351,729,992
============= ==============
See notes to consolidated financial statements
3
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
---- ----
INTEREST INCOME:
Interest and fees on loans $3,546,545 $ 3,350,974
Taxable interest and dividends on investment securities 1,042,650 530,773
Interest on deposits with banks 4,616 36,637
---------- -----------
Total interest income 4,593,811 3,918,384
---------- -----------
INTEREST EXPENSE:
Interest on deposits 700,170 747,427
Interest on short term borrowings 78,622 766
Interest on long term debt 785,497 613,101
---------- -----------
Total interest expenses 1,564,289 1,361,294
---------- -----------
NET INTEREST INCOME 3,029,522 2,557,090
PROVISION FOR LOAN LOSSES 70,202 5,386
---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,959,320 2,551,704
---------- -----------
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges 66,204 27,396
Net gain on sale of loans held for sale 21,404 127,095
Income from bank owned life insurance 73,848 --
Service charges 234,772 228,335
Other -- 5,128
---------- -----------
Total noninterest income 396,228 387,954
---------- -----------
NONINTEREST EXPENSE:
Salary and employee benefits 1,298,380 1,129,326
Occupancy expense 181,873 168,317
Advertising 142,539 63,734
Data processing expense 151,998 85,305
Depreciation of furniture, fixtures, and equipment 87,200 114,900
Telephone communications 37,975 39,076
Valuation allowance on foreclosed real estate 113,827 --
ATM expenses 80,098 68,513
Office supplies 39,419 23,465
Office equipment expenses 26,391 35,309
Other 236,023 220,602
---------- -----------
Total noninterest expenses 2,395,723 1,948,547
---------- -----------
INCOME BEFORE INCOME TAXES 959,825 991,111
Income tax expense 70,627 350,000
---------- -----------
NET INCOME 889,198 641,111
OTHER COMPREHENSIVE INCOME NET OF TAX
Net unrealized holding gains (losses) arising during period. 66,152 (359,053)
---------- -----------
COMPREHENSIVE INCOME $ 955,350 $ 282,058
========== ===========
INCOME PER COMMON SHARE
Basic $1.18 $0.84
Diluted 1.12 0.80
See notes to consolidated financial statements
4
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Three Months Ended
March 31,
----------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 889,198 $ 641,111
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 70,202 5,386
Depreciation and amortization 143,049 150,300
Net amortization of premium/discount on investment securities 19,478 55,599
Decrease (Increase) in federal funds sold 710,000 (664,813)
Deferred income tax benefit -- (29,000)
Increase in accrued interest receivable (19,553) (16,354)
Decrease in deferred loan fees (36,970) (58,237)
Decrease in accounts payable, accrued expenses, other liabilities (408,674) (1,090,740)
Decrease in other assets 254,476 21,094
Origination of loans held for sale -- (5,980,350)
Gain on sales of loans held for sale (21,404) (127,095)
Proceeds from sale of loans held for sale 496,284 4,686,432
--------- -----------
Net cash provided (used) by operating activities 2,196,086 (2,406,667)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits with banks 1,998,690 (4,685,540)
Purchase of investment securities available for sale (7,503,838) (19,288,524)
Proceeds from sale, redemption or principal payments
of investment securities available for sale 8,857,505 13,570,852
Purchase of investment securities held to maturity (7,969,601) --
Proceeds from maturities or principal payments
of investment securities held to maturity 4,054,035 393,600
Net purchase of FHLB and federal Reserve stock (320,200) --
Loans originated or acquired (44,183,877) (27,514,040)
Principal collected on loans 24,382,698 34,055,115
Purchase of premises and equipment (219,883) (4,028)
Purchase of Bank owned life insurance -- (5,700,000)
Valuation allowance on foreclosed real estate 113,827 --
Proceeds from foreclosed real estate 25,000 10,000
----------- -----------
Net cash used in investing activities (20,765,644) (9,162,565)
----------- -----------
5
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Three Months Ended
March 31,
----------------------
2004 2003
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 12,537,258 8,115,947
Proceeds from long-term borrowings 20,000,000 5,000,000
Payments of long-term borrowings (10,095,898) (95,592)
Net decrease in short term borrowings (3,570,983) (596,651)
Exercise of stock options 197,155 31,158
Net change in unearned ESOP shares 74,011 92,459
Redemption of common stock (152,558) (108,593)
------------ -----------
Net cash provided by financing activities 18,988,985 12,438,728
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS 419,427 869,496
CASH AND CASH EQUIVALENTS - JANUARY 1 2,319,300 9,993,426
------------ -----------
CASH AND CASH EQUIVALENTS - MARCH 31 2,738,727 10,862,922
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest $ 1,669,753 $ 1,376,832
============ ===========
Income taxes -- 387,869
============ ===========
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 balances as of December 31, 2003 have been derived from audited
financial statements. There have been no significant changes to the
Company's accounting policies as disclosed in the 2003 Annual Report. The
results of operations for the three months ended March 31, 2004 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 2004 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, 2003.
2. NATURE OF BUSINESS
The Company, through its bank subsidiary, provides domestic financial
services primarily in southern Maryland. The primary financial services
include real estate, commercial and consumer lending, as well as
traditional demand deposits and savings products.
3. INCOME TAXES
The Company uses the liability method of accounting for income taxes as
required by SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred-tax assets and liabilities are determined based
on differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities (i.e., temporary differences) and
are measured at the enacted rates that will be in effect when these
differences reverse.
4. EARNINGS PER SHARE
Earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period,
including any potential dilutive common shares outstanding, such as options
and warrants. As of March 31, 2004, there were no shares excluded from the
diluted net income per share computation because the option price exceeded
the average market price and therefore, their effect would be
anti-dilutive. 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,
--------------------------
2004 2003
Basic 756,378 758,954
Diluted 794,664 802,348
7
5. STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for its Plan. No compensation expense related to the Plan was recorded
during the three months ended March 31, 2004 and 2003. If the Company had
elected to recognize compensation cost based on fair value at the grant
dates for awards under the Plan consistent with the method prescribed by
SFAS No. 123, net income and earnings per share would have been changed to
the pro forma amounts as follows for the three months ended March 31.
2004 2003
---- ----
Net Income as reported $ 889,198 $ 641,111
Less pro forma stock based compensation expense
determined under the fair value method, net of tax
effects. 60,000 0
--------- ---------
Pro forma net income $ 829,198 $ 641,111
========= =========
Net income per share
Basic - as reported $ 1.18 $ .84
Basic - pro forma $ 1.10 $ .84
Diluted - as reported $ 1.12 $ .80
Diluted - pro forma $ 1.04 $ .80
6. NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation No. 46"), which explains
identification of variable interest entities and the assessment of whether
to consolidate those entities. Interpretation No. 46 requires existing
unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks
among the involved parties. The provisions of Interpretation No. 46 are
effective for all financial statements issued after January 1, 2003. The
Company holds no significant variable interest entities that would require
disclosure or consolidation.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS No. 150"), effective for financial instruments entered into or
modified after May 31, 2003. This statement established standards for
classifying and measuring certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within the scope of the statement
as a liability rather than as an equity, such as obligations that a
reporting entity can or must settle by issuing its own equity shares. SFAS
No. 150 did not have an impact on the Company's earnings, financial
condition or equity.
8
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, 2003.
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. In the current quarter, this recovery is gaining
strength and appears to be solidly under way. Locally, the housing market has
appreciated strongly in the last several months in reaction to continued lower
interest rates and a strong local job market. National job markets also appear
to be strengthening. The improvement in the economy has led to some concerns
about interest rates. In the last several months rates have increased,
particularly mid and long term rates. The Federal Reserve has not moved the
discount rate but has signaled a possibility of an increase. A sustained period
of sharply higher interest rates would have an adverse effect on the Company's
performance. This effect would be exacerbated if the increased rates
substantially affected the housing market.
During the last two years, loan customers have reacted to lower interest rates
by continuing to refinance higher rate loans. This refinance activity has
decreased the interest rates earned on loans. In the last quarter longer term
rates have increased slightly. These increases will have the effect of
decreasing refinance activity. If rates continue to rise, the Bank may also see
an increase in the popularity of adjustable rate mortgages in the residential
housing market. Loan growth in the current quarter continues to be concentrated
in the commercial real estate and commercial areas. The increase in our loan
portfolio was reflected in higher provision expense in the current period.
Higher rates will also decrease prepayments from our investment
9
portfolio. The Bank has been able to increase net interest income from the prior
year through growth in its balance sheet which offset a lower interest margin.
Noninterest income increased slightly during the period, primarily through
income from Bank Owned Life Insurance. Noninterest expenses also increased
primarily from increases in the Bank's size. An increase in the valuation
allowance on foreclosed real estate also increased expenses. Finally, the
effective tax rate paid by the Company decreased due to the donation of certain
foreclosed property.
SELECTED FINANCIAL DATA
Three Months Ended
March 31,
-------------------------------
2004 2003
---- ----
Condensed Income Statement
Interest Income $ 4,593,811 $ 3,918,384
Interest Expense 1,564,289 1,361,294
Net Interest Income 3,029,522 2,557,090
Provision for Loan Loss 70,202 5,386
Noninterest Income 396,228 387,954
Noninterest Expense 2,395,723 1,948,547
Income Before Income Taxes 959,825 991,111
Income Taxes 70,627 350,000
Net Income 889,198 641,111
Per Common Share
Basic Earnings $ 1.18 $ 0.84
Diluted Earnings 1.12 0.80
Book Value 37.68 37.05
RESULTS OF OPERATIONS
Net income for the three month period ended March 31, 2004 totaled $889,198
($1.18 basic and $1.12 diluted earnings per share) compared with a total of
$641,111 ($.84 basic and $.80 diluted earnings per share) for the same period in
the prior year. This increase of $248,087 or 38.7% was caused by an increase in
net interest income, and a reduction in income tax expense, both of which was
partially offset by an increase in the provision for loan losses. For the three
month period ended March 31, 2004, interest income increased by $675,427 or
17.2% to $4,593,811. The increase was due to higher average interest earning
asset balances, including investments and loans which was partially offset by
lower average rates on loans. Interest expense also increased to $1,564,289 in
the three month period ending March 31, 2004 as compared to $1,361,294 in the
same period in the prior year an increase of $202,995 or 14.9%. The increase was
the result of higher average balances which more than offset lower average rates
paid on advances and deposits. The changes in interest income and expense
reflected the declining interest rate environment experienced during the last
year.
Provision for loan losses increased from prior year levels to $70,202 from
$5,386 for the three month period ending March 31, 2004 and 2003, respectively.
The increase in provision expense was caused by a continuing concentration of
the Bank's loan portfolio in commercial loan categories that have higher levels
of risk than residential mortgages. 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 $396,228 for the three month period ending March
31, 2004, an increase of $8,274 or 2.1% over the prior year total of $387,954.
Loan appraisal, credit, and miscellaneous charges increased by $38,808 to
$66,204. This increase was offset by a decrease in gains from selling loans
which decreased to $21,404 from $127,095, a decrease of $105,691 or 83.2%. This
change reflects the Bank's preference to keep a higher proportion of loans in
its portfolio. The Bank also recorded $73,848 in income from Bank Owned Life
Insurance during the period due to the purchase of Bank Owned Life Insurance at
the end of the first quarter of 2003. Other noninterest income items were
comparable from year to year.
Noninterest expense for the three month period increased by $447,176 or 22.9% to
$2,395,723 from $1,948,547 in the same period
10
for the prior year. Salary and employee benefits increased by 15% to $1,298,380
from $1,129,326 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 from $168,317 to $181,873, an
increase of 8.1% due to additional locations and increased costs at certain
locations. Advertising increased to $142,539 from $63,734, an increase of
$78,805 or 123.6%. Advertising increased due to an increase in certain sales
efforts. Data processing expense increased to $151,998 from a prior year total
of $85,305 an increase of $66,693 or 78.2%. This increase was due to certain
nonrecurring expenses. Depreciation of furniture fixtures and equipment
decreased to $87,200 from the prior year total of $114,900 a decrease of $27,700
or 24.1%. This decrease was the result of certain assets being fully depreciated
at the end of 2003. Telephone communications declined slightly to $37,975 from
$39,076 in the prior year, a decline of $1,101 or 2.8%. This decline reflected a
change in service providers which offset higher usage. The provision for
valuation allowances on foreclosed real estate increased to $113,827 as of March
31, 2004 from nothing in 2003 as further increases to the valuation allowance
were considered necessary. ATM related expenses increased by $11,585 to $80,098
for the period ending March 31, 2004, an increase of 16.91% due to higher levels
of activity, more ATM's, and certain price increases by ATM service providers.
Office supplies expense increased to $39,419 from the prior year amount of
$23,465, an increase of $15,954 or 68%. These expenses related to increased
marketing efforts in the current year. Office equipment expenses decreased to
$26,391 from 2003's level of $35,309, a decrease of $8,918 or 25.3%. This
decrease was caused by the retirement of certain equipment. Other expenses
increased to $236,023 from $220,602 an increase of $15,421 or 7.0%, reflecting
larger asset size and increased activity. Income taxes decreased to $70,627 or
7.36% of pretax income in the current year compared to $350,000 or 35.3% of
pretax income in the prior year. The decrease in the tax rate was primarily
attributable to the contribution of a foreclosed property to an environmental
organization which generated a current income tax deduction.
FINANCIAL CONDITION
Assets
Total assets as of March 31, 2004 increased by $19,535,659 to $371,265,651 from
the December 31, 2003 level of $351,729,992. Cash and due from banks increased
by $419,427 or 18.1% from December 31, 2003's total. Interest-bearing deposits
with banks decreased by $1,998,690 or 22.4% during the period to $6,913,642 at
March 31, 2004. Investment securities, including both the available for sale and
held to maturity portfolios, increased from $99,895,249 to $102,437,896 an
increase of $2,542,647 or 2.5%. Increases were primarily the result of
additional purchases of investments and the conversion of interest bearing
deposits to investments.
The Bank's loan portfolio increased by $19,767,947 or 9.1% during the three
months period ending March 31, 2004 to $237,508,100 from December 2003's total
of $217,740,153. The increase was primarily the result of an increase in its
portfolio of commercial real estate loans. The increase in commercial real
estate lending is a reflection of the strong local economy and continuing sales
efforts by the Bank in this area. At March 31, 2004 the Bank's allowance for
loan losses totals $2,650,924 or 1.10% of loan balances as compared to
$2,572,799 or 1.16% of loan balances at December 31, 2003. 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 decreased to zero from $474,880 at December 31, 2003. Additional loan
information for prior years is presented in the Form 10-K for the year ended
December 31, 2003:
LOAN PORTFOLIO March 31, December 31,
2004 2003
------------------------------------- --------------------------------
Amount % Amount %
------ --- ------ ---
Real Estate Loans
Commercial $104,551,947 43.42% $ 94,425,451 42.5%
Residential first mortgage 45,987,010 19.10% 43,445,956 19.6%
Construction and land evelopment 20,908,895 8.68% 19,601,874 8.8%
Home equity and second mortgage 21,080,568 8.76% 19,561,772 8.8%
Commercial loans 44,128,332 18.33% 40,901,589 18.4%
Consumer loans 4,115,058 1.71% 4,094,234 1.8%
------------ ------ ------------ ------
Total loans 240,771,810 100.00% 222,030,876 100.00%
Less: Deferred loan fees 612,787 0.25% 649,756 0.3%
Allowance for loan losses 2,650,924 1.10% 2,572,799 1.16%
------------ ------ ------------ ------
Loans receivable net $237,508,099 $218,808,321
------------ ------------
11
LOAN LOSS ALLOWANCE
3 Months Ended 3 Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Beginning Balance $ 2,572,799 $ 2,314,074
Charge Offs -- --
Recoveries 7,923 --
-------------- ----------------
Net Charge offs 7,923 --
Additions charged to operations 70,202 5,386
-------------- ----------------
Balance at end of period $ 2,650,924 $ 2,319,460
============== ================
Ratio of net charge-offs during the period to
loans 0.00% 0.00%
============== ================
Balances as of Balances as of
March 31, 2004 December 31, 2003
Restructured Loans $ -- $ --
------------ ------------
Accruing loans which are contractually
past due 90 days or more: $ -- $ --
------------ ------------
Loans accounted for on a nonaccrual basis $ 517,601 $ 379,544
------------ ------------
Total non-performing loans $ 517,601 $ 379,544
Non-performing loans to total loans 0.22% 0.17%
============ ============
Allowance for loan losses to non-performing
loans 512.16% 677.87%
============ ============
Premises and equipment increased due to the renovation of parts of the home
office building these improvements were partially offset by depreciation.
Foreclosed real estate declined to $567,937 at March 31, 2004 from $706,764 at
December 31, 2003 due to the donation of one property and an increase in the
valuation allowance. Other assets decreased to $3,079,239 from $3,146,247 at
December 31, 2003.
Liabilities
Deposit balances increased by $12,537,258 or 5.51% for the three months ended
March 31, 2004. This increase was primarily in interest bearing deposits.
Management believes that ongoing stock market volatility combined with questions
about certain Mutual Fund operations has made bank deposits more attractive to
the general public. The Bank has also increased marketing efforts for all
deposit products in the current quarter. Short term borrowings decreased to
$27,620,302, a decrease of $3,570,983, in part due to the Bank's decision to
convert certain short term borrowings into longer term liabilities. Long term
debt increased to $72,955,278 at March 31, 2004, from $63,051,176 at December
31, 2003, due to the extension of certain short term borrowings as noted above.
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 $1,612,378 at March 31,
2004, from $2,021,053 at December 31, 2003, a decrease of 20.2%.
12
Stockholders' Equity
Stockholders' equity increased $1,073,957 or 3.85% to $28,985,867 at March 31,
2004 compared to $27,911,910 at December 31, 2003. This reflects the net income
of $889,198 for the three months period. Other changes in equity occurred as a
result of using $152,558 to purchase shares in the open market and retire them,
the exercise of stock options of $197,155, and activity related to the ESOP
shares of $74,011. Book value on a per share basis, $37.68 at March 31, 2004, as
compared to $37.05 at December 31, 2003, reflects a 1.7% 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 35% of consolidated Bank assets on a line of credit
available from the FHLB. As of March 31, 2004, the maximum available under this
line would be $129 million, while current outstanding advances totaled $101
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, 2004,
the Bank's tangible, leverage and risk-based capital ratios were 7.55%, 10.19%
and 11.17%, 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 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
13
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.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable. The Company qualifies as a "small business issuer."
ITEM 4 CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the Company
carried out an evaluation, under the supervision and with the participation of
the Company's principal executive officer and principal financial officer, of
the effectiveness of the Company's disclosure controls and procedures. Based on
this evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules and
forms. It should be noted that the design of the Company's disclosure controls
and procedures is based in part upon certain reasonable assumptions about the
likelihood of future events, and there can be no reasonable assurance that any
design of disclosure controls and procedures will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote,
but the Company's principal executive and financial officers have concluded that
the Company's disclosure controls and procedures are, in fact, effective at a
reasonable assurance level.
In addition, there have been no changes in the Company's internal control over
financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings -- None
Item 2 - Change in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
14
(e) The following table sets forth information regarding the Company's
repurchases of its Common Stock during the quarter ended March 31, 2004.
(c)
Total Number
of Shares (d)
Purchased Maximum
(a) as Part of Number of Shares
Total (b) Publicly that May Yet Be
Number of Average Announced Plans Purchased Under
Shares Price Paid or the Plans or
Period Purchased per Share Programs Programs
------ --------- ---------- -------- --------
January 2004
Beginning Date: January 4
Ending Date: January 20 883 $ 42.74 883 8,584
February 2004
Beginning Date: February 11
Ending Date: February 26 2,672 41.98 2,672 5,912
March 2004
Beginning Date: March 25
Ending Date: March 25 63 42.00 63 5,849
----- ------- ----- -----
Total 3,618 $ 42.17 3,618 5,849
===== ======= ====== =====
In an 8-K dated July 25, 2002, and in a press release dated July 23, 2002; the
Company announced a plan to buy up to 38,000 shares of its stock through open
market purchases. This offer was contingent upon market conditions and had no
time limit. There were 8,236 shares purchased under this plan in 2002 and 20,297
in 2003. The Company intends to continue to purchase shares under this plan.
Item 3 - Default Upon Senior Securities -- None
Item 4 Submission of Matters to a Vote of Security Holders -- None
Item 5 - Other Information -- None
Item 6 - Exhibits and Reports on Form 8-K
(a)Exhibits - The following exhibits are being filed with this Form 10-Q:
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32 Section 1350 Certifications
(b)The registrant filed a report on Form 8-K with the SEC on February 25,
2004 announcing an annual cash dividend.
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 12, 2004 By: /s/ Michael L. Middleton
----------------------------------
Michael L. Middleton, President
and Chairman of the Board
Date: May 12, 2004 By: /s/ William J. Pasenelli
----------------------------------
William J. Pasenelli, Executive
Vice President and Chief
Financial Officer