TRI-COUNTY FINANCIAL CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2008
OR
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o |
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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)
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Maryland
(State of other jurisdiction of
incorporation or organization)
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52-1652138
(I.R.S. Employer
Identification No.) |
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3035 Leonardtown Road, Waldorf, Maryland
(Address of principal executive offices)
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20601
(Zip Code) |
(301) 645-5601
(Registrants telephone number, including area code)
Not applicable
(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 þ No o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act. (Check one):
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Large Accelerated Filer o
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Accelerated Filer o |
Non-accelerated Filer o
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Smaller Reporting Company þ |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of July 22, 2008 the registrant had 2,960,633 shares of common stock outstanding.
TRI-COUNTY FINANCIAL CORPORATION
FORM 10-Q
INDEX
2
PART I FINANCIAL STATEMENTS
ITEM I FINANCIAL STATEMENTS
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, 2008 AND DECEMBER 31, 2007
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June 30, 2008 |
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December 31, 2007 |
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ASSETS |
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Cash and due from banks |
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$ |
2,880,382 |
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$ |
3,267,920 |
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Federal Funds sold |
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1,322,494 |
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885,056 |
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Interest-bearing deposits with banks |
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4,485,163 |
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7,273,661 |
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Securities available for sale, at fair value |
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13,820,157 |
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9,144,069 |
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Securities held to maturity, at amortized cost |
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92,325,851 |
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92,687,603 |
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Federal Home Loan Bank and Federal Reserve Bank stock at cost |
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6,608,700 |
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5,354,500 |
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Loans receivable net of allowance for loan losses of $4,602,295
and $4,482,483, respectively |
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495,037,292 |
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453,614,133 |
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Premises and equipment, net |
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11,020,436 |
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9,423,302 |
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Accrued interest receivable |
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3,016,068 |
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3,147,569 |
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Investment in bank owned life insurance |
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10,321,639 |
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10,124,288 |
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Other assets |
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4,065,460 |
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3,483,733 |
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TOTAL ASSETS |
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$ |
644,903,642 |
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$ |
598,405,834 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
LIABILITIES: |
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Deposits: |
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Non-interest-bearing deposits |
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$ |
44,510,740 |
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$ |
48,041,571 |
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Interest-bearing deposits |
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419,869,915 |
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396,952,444 |
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Total deposits |
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464,380,655 |
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444,994,015 |
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Short-term borrowings |
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8,937,172 |
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1,555,323 |
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Long-term debt |
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104,984,679 |
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86,005,508 |
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Guaranteed preferred beneficial interest in junior subordinated debentures |
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12,000,000 |
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12,000,000 |
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Accrued expenses and other liabilities |
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4,861,186 |
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5,003,912 |
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Total liabilities |
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595,163,692 |
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549,558,758 |
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STOCKHOLDERS EQUITY: |
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Common stock par value $.01; authorized - 15,000,000 shares; issued
2,943,699 and 2,909,974 shares, respectively |
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29,437 |
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29,100 |
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Additional paid in capital |
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17,064,603 |
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16,914,373 |
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Retained earnings |
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33,052,870 |
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32,303,353 |
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Accumulated other comprehensive loss |
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(146,685 |
) |
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(73,097 |
) |
Unearned ESOP shares |
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(260,275 |
) |
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(326,653 |
) |
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Total stockholders equity |
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49,739,950 |
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48,847,076 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
644,903,642 |
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$ |
598,405,834 |
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See notes to consolidated financial statements
3
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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INTEREST INCOME: |
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Interest and fees on loans |
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$ |
7,827,081 |
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$ |
8,330,061 |
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$ |
15,904,247 |
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$ |
16,389,202 |
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Taxable interest and dividends on investment
securities |
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1,368,011 |
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1,372,704 |
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2,762,535 |
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2,801,245 |
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Interest on deposits with banks |
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24,179 |
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35,122 |
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60,272 |
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71,632 |
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Total interest income |
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9,219,271 |
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9,737,887 |
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18,727,054 |
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19,262,079 |
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INTEREST EXPENSE: |
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Interest on deposits |
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3,195,461 |
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3,708,633 |
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6,525,701 |
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7,354,736 |
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Interest on short-term borrowings |
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33,393 |
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54,342 |
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114,427 |
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82,622 |
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Interest on long-term borrowings |
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1,172,032 |
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1,176,072 |
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2,412,247 |
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2,482,721 |
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Total interest expenses |
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4,400,886 |
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4,939,047 |
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9,052,375 |
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9,920,079 |
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NET INTEREST INCOME |
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4,818,385 |
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4,798,840 |
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9,674,679 |
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9,342,000 |
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PROVISION (REVERSAL) FOR LOAN LOSSES |
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(5,479 |
) |
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97,917 |
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154,745 |
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354,443 |
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NET INTEREST INCOME AFTER PROVISION
(REVERSAL) FOR LOAN LOSSES |
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4,823,864 |
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4,700,923 |
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9,519,934 |
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8,987,557 |
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4
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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NONINTEREST INCOME: |
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Loan appraisal, credit, and miscellaneous charges |
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124,288 |
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109,088 |
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234,551 |
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172,676 |
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Gain on asset sale |
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2,041 |
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Net gain on the sale of foreclosed property |
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66,428 |
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Income from bank owned life insurance |
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189,271 |
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83,179 |
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286,489 |
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165,696 |
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Gain on sale of investment securities |
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16,912 |
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Service charges |
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445,029 |
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360,180 |
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822,958 |
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681,428 |
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Total noninterest income |
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758,588 |
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552,447 |
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1,346,039 |
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1,103,140 |
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NONINTEREST EXPENSE: |
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Salary and employee benefits |
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2,111,805 |
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1,796,606 |
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4,122,015 |
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3,680,092 |
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Occupancy |
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434,453 |
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345,495 |
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797,629 |
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656,925 |
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Advertising |
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100,929 |
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66,646 |
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271,372 |
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227,769 |
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Data processing |
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215,101 |
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163,257 |
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260,991 |
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350,848 |
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Legal and professional fees |
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224,309 |
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160,617 |
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338,476 |
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277,222 |
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Depreciation of furniture, fixtures, and
equipment |
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138,878 |
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165,039 |
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271,280 |
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284,297 |
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Telephone communications |
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18,846 |
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21,672 |
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42,477 |
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44,583 |
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ATM expenses |
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79,687 |
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76,751 |
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163,452 |
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143,768 |
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Office supplies |
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34,991 |
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31,616 |
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74,475 |
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78,077 |
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Office equipment |
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1,024 |
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14,491 |
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26,237 |
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25,701 |
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Other |
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434,197 |
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300,723 |
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777,359 |
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634,781 |
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Total noninterest expenses |
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3,794,220 |
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3,142,913 |
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7,145,763 |
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6,404,063 |
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INCOME BEFORE INCOME TAXES |
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1,788,232 |
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2,110,457 |
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3,720,210 |
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3,686,634 |
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Income tax expense |
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661,698 |
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768,341 |
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1,277,435 |
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1,334,899 |
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NET INCOME |
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1,126,534 |
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1,342,116 |
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2,442,775 |
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2,351,735 |
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Other comprehensive income: |
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Unrealized losses on securities
available for sale net of taxes |
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(368,108 |
) |
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(141,916 |
) |
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(73,588 |
) |
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(119,752 |
) |
Less: Reclassification adjustment for gain net
of taxes of $6,122 included in income |
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(10,790 |
) |
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COMPREHENSIVE INCOME |
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$ |
758,426 |
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$ |
1,200,200 |
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$ |
2,369,187 |
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$ |
2,221,193 |
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EARNINGS PER COMMON SHARE |
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Basic |
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$ |
0.38 |
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$ |
0.51 |
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$ |
0.83 |
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$ |
0.89 |
|
Diluted |
|
$ |
0.37 |
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|
$ |
0.47 |
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|
$ |
0.79 |
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|
$ |
0.83 |
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DIVIDENDS PER COMMON SHARE |
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$ |
0.40 |
|
|
$ |
0.40 |
|
|
$ |
0.40 |
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|
$ |
0.40 |
|
See notes to consolidated financial statements
5
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
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Six Months Ended June 30, |
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|
2008 |
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|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
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|
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|
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|
Net income |
|
$ |
2,442,775 |
|
|
$ |
2,351,735 |
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
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|
|
|
|
|
|
Provision for loan losses |
|
|
154,745 |
|
|
|
354,443 |
|
Gain on foreclosed real estate |
|
|
|
|
|
|
(66,428 |
) |
Gain on sale of assets |
|
|
(2,041 |
) |
|
|
|
|
Gain on sales of investment securities |
|
|
|
|
|
|
(16,912 |
) |
Depreciation and amortization |
|
|
516,762 |
|
|
|
511,130 |
|
Net (accretion) amortization of
premium/discount on investment securities |
|
|
(33,123 |
) |
|
|
23,461 |
|
Increase in cash surrender of bank owned life insurance |
|
|
(197,351 |
) |
|
|
(165,696 |
) |
Deferred income tax benefit |
|
|
(408,351 |
) |
|
|
(269,500 |
) |
Excess tax benefits on stock-based compensation |
|
|
(4,250 |
) |
|
|
|
|
Decrease (increase) in accrued interest receivable |
|
|
131,501 |
|
|
|
(227,049 |
) |
(Increase) decrease in deferred loan fees |
|
|
(82,219 |
) |
|
|
13,516 |
|
Decrease in accounts payable,
accrued expenses and other liabilities |
|
|
(457,573 |
) |
|
|
(225,944 |
) |
Increase in other assets |
|
|
(131,220 |
) |
|
|
(227,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,929,655 |
|
|
|
2,054,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of investment securities available for sale |
|
|
(4,931,155 |
) |
|
|
(72,835 |
) |
Proceeds from sale, redemption or principal payments
of investment securities available for sale |
|
|
139,483 |
|
|
|
322,913 |
|
Purchase of investment securities held to maturity |
|
|
(4,048,450 |
) |
|
|
(800,000 |
) |
Proceeds from maturities or principal payments
of investment securities held to maturity |
|
|
4,447,413 |
|
|
|
8,273,048 |
|
Net (increase) decrease of FHLB and Federal Reserve stock |
|
|
(1,254,200 |
) |
|
|
520,000 |
|
Loans originated |
|
|
(116,109,162 |
) |
|
|
(98,872,942 |
) |
Principal collected on loans |
|
|
74,613,477 |
|
|
|
80,013,448 |
|
Purchase of bank owned life insurance |
|
|
|
|
|
|
(1,000,000 |
) |
Proceeds from disposal of premises and equipment |
|
|
2,041 |
|
|
|
|
|
Purchase of premises and equipment |
|
|
(2,113,896 |
) |
|
|
(1,834,231 |
) |
Proceeds from foreclosed real estate |
|
|
|
|
|
|
66,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(49,254,449 |
) |
|
|
(13,384,171 |
) |
|
|
|
|
|
|
|
6
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
19,386,640 |
|
|
|
15,432,767 |
|
Proceeds from long-term borrowings |
|
|
24,000,000 |
|
|
|
|
|
Payments of long-term borrowings |
|
|
(5,020,829 |
) |
|
|
(10,020,012 |
) |
Net increase (decrease) in short-term borrowings |
|
|
7,381,849 |
|
|
|
(1,013,081 |
) |
Proceeds from exercise of stock options |
|
|
725,905 |
|
|
|
38,183 |
|
Excess tax benefits on stock-based compensation |
|
|
4,250 |
|
|
|
|
|
Net change in unearned ESOP shares |
|
|
156,373 |
|
|
|
66,068 |
|
Dividends paid |
|
|
(1,184,324 |
) |
|
|
(1,062,064 |
) |
Redemption of common stock |
|
|
(863,668 |
) |
|
|
(76,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
44,586,196 |
|
|
|
3,365,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
$ |
(2,738,598 |
) |
|
$ |
(7,963,714 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS JANUARY 1 |
|
|
11,426,637 |
|
|
|
18,190,506 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS JUNE 30 |
|
$ |
8,688,039 |
|
|
$ |
10,226,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid during the six months for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
9,068,586 |
|
|
$ |
9,632,110 |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
1,676,000 |
|
|
$ |
1,782,600 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2008
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 Companys financial condition, results of operations, and cash flows 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, 2007 have been derived from audited financial statements. There have been no
significant changes to the Companys accounting policies as disclosed in the 2007 Annual
Report. The results of operations for the six months ended June 30, 2008 are not
necessarily indicative of the results of operations to be expected for the remainder of the
year or any other period. Certain previously reported amounts have been restated to conform
to the 2008 presentation.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Companys Annual Report for the
year ended December 31, 2007.
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. |
|
FAIR VALUE MEASUREMENTS |
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements
(SFAS 157) which provides a framework for measuring and disclosing fair value under
generally accepted accounting principles. SFAS 157 requires disclosures about the fair value
of assets and liabilities recognized in the balance sheet in periods subsequent to initial
recognition, whether the measurements are made on a recurring basis (for example, available
for sale investment securities) or on a nonrecurring basis (for example, impaired loans).
SFAS 157 defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes a fair value hierarchy, which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures. Securities available for sale are recorded
at fair value on a recurring basis. Additionally, from time to time, the Company may be
required to record at fair value other assets on a nonrecurring basis, such as loans held
for sale, loans held for investment and certain other assets. These nonrecurring fair value
adjustments typically involve application of lower of cost or market accounting or
write-downs of individual assets.
8
Under SFAS 157, the company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine the fair value. These hierachy levels are:
Level 1 inputs Unadjusted quoted process in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement date.
Level 2 inputs Inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These might include quoted prices for
similar assets and liabilities in active markets, and inputs other than quoted prices that
are observable for the asset or liability, such as interest rates and yield curves that are
observable at commonly quoted intervals.
Level 3 inputs Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities.
Following is a description of valuation methodologies used for assets and liabilities
recorded at fair value:
Investment Securities Available for Sale
Investment securities available for sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted prices are not
available, fair values are measured using independent pricing models or other model-based
valuation techniques such as the present value of future cash flows, adjusted for the
securitys credit rating, prepayment assumptions and other factors such as credit loss
assumptions. Level 1 securities include those traded on an active exchange such as the New
York Stock Exchange, Treasury securities that are traded by dealers or brokers in active
over- the counter markets and money market funds. Level 2 securities include mortgage backed
securities issued by government sponsored entities, municipal bonds and corporate debt
securities. Securities classified as Level 3 include asset-backed securities in less liquid
markets.
Loans
The Company does not record loans at fair value on a recurring basis, however, from time to
time, a loan is considered impaired and an allowance for loan loss is established. Loans for
which it is probable that payment of interest and principle will not be made in accordance
with the contractual terms of the loan are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS 114,
Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair value of impaired
loans is estimated using one of several methods, including the collateral value, market
value of similar debt, enterprise value, liquidation value and discounted cash flows. Those
impaired loans not requiring a specific allowance represents loans for which the fair value
of expected repayments or collateral exceed the recorded investment in such loans. At June
30, 2008, substantially all of the totally impaired loans were evaluated based upon the fair
value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is
established based on the fair value of collateral require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observerable market price or
a current appraised value, the Company records the loan as nonrecurring Level 2. When an
appraised value is not available or management determines the fair value of the collateral
is further impaired below the appraised value and there is no observable market price, the
Company records the loan as nonrecurring Level 3.
Foreclosed Assets
Foreclosed assets are adjusted for fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at the lower of carrying value and fair
value. Fair value is based upon independent market prices, appraised value of the collateral
or managements estimation of the value of the value of the collateral. When the fair value
of the collateral is based on an observable market price or a current appraised value, the
Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further impaired
below the appraised value and there is no observable market price, the Company records the
foreclosed asset at nonrecurring Level 3.
9
Assets and Liabilities Recorded as Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured at fair
value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
Fair Value |
|
Assets |
|
Inputs |
|
Inputs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Asset |
|
June 30,2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Available-for-sale securities |
|
$ |
13,820,157 |
|
|
$ |
|
|
|
$ |
13,820,157 |
|
|
$ |
|
|
Assets and Liabilities Recorded as Fair Value on a Nonrecurring Basis
The company may be required from time to time, to measure certain assets at fair value on a
non- recurring basis in accordance with U.S. generally accepted accounting principles. These
include assets that are measured at the lower of cost or market that were recognized at fair
value below cost at the end of the period. Assets measured at fair value on a nonrecurring
basis are included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
Fair Value |
|
Assets |
|
Inputs |
|
Inputs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
June 30, 2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Impaired loans |
|
$ |
1,062,524 |
|
|
$ |
|
|
|
$ |
1,062,524 |
|
|
$ |
|
|
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.
The Company also adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) on January 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109,
Accounting for Income Taxes, and seeks to reduce the diversity in practice associated with
certain aspects of measurement and recognition in accounting for income taxes. In addition,
FIN 48 provides guidance on de-recognition, classification, interest and penalties, and
accounting in interim periods and requires expanded disclosure with respect to the
uncertainty in income taxes. There was no cumulative effect as a result of applying FIN 48.
No adjustment was made to our opening balance of retained earnings.
10
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 June 30, 2008, there were 21,811 shares excluded from the diluted net income
per share computation because inclusion of these options would be anti-dilutive. There were
no shares excluded at the quarter ended June 30, 2007. Basic and diluted earnings per share,
have been computed based on weighted-average common and common equivalent shares outstanding
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Basic |
|
|
2,944,890 |
|
|
|
2,647,558 |
|
|
|
2,938,794 |
|
|
|
2,645,764 |
|
Diluted |
|
|
3,082,697 |
|
|
|
2,843,404 |
|
|
|
3,078,227 |
|
|
|
2,836,748 |
|
6. |
|
STOCK-BASED COMPENSATION |
The Company has stock option and incentive plans to attract and retain key personnel in
order to promote the success of the business. These plans are described in Note 12 to the
financial statements included in our Annual Report to Stockholders for the year ended
December 31, 2007. No compensation related expense associated with stock options was
recognized in the quarter ended June 30, 2008 or during 2007.
The Company and the Bank currently maintain incentive plans, which provide for payments to
be made in either cash, stock awards, or stock options. The Company has accrued the full
amounts due under these plans, but currently it is not possible to identify the portion that
will be paid out in the form of stock awards or options.
A summary of the options under the Companys stock option plans as of June 30, 2008, and
changes during the six-month period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
Contractual Life |
|
|
|
|
|
|
|
Exercise |
|
|
Intrinsic |
|
|
Remaining In |
|
|
|
Shares |
|
|
Price |
|
|
Value |
|
|
Years |
|
Outstanding at December 31, 2007 |
|
|
428,619 |
|
|
$ |
14.72 |
|
|
|
|
|
|
|
|
|
Granted at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(64,761 |
) |
|
|
11.21 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2,709 |
) |
|
|
19.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 |
|
|
361,149 |
|
|
$ |
15.32 |
|
|
$ |
3,216,462 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2008 |
|
|
361,149 |
|
|
$ |
15.32 |
|
|
$ |
3,216,462 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 25, 2008, the Board of Directors granted 5,837 shares of common stock to
employees. These shares had a total market value of $140,088 or $24 per share. Compensation
expense for these shares had previously been accrued and the award was in settlement of the
liability.
11
7. |
|
GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES |
On June 15, 2005, Tri-County Capital Trust II (Capital Trust II), a Delaware business
trust formed, funded and wholly owned by the Company, issued $5,000,000 of capital
securities with an interest rate based on the 90-day LIBOR rate plus 1.70%. The Trust used
the proceeds from this issuance to purchase $5.2 million of the Companys junior
subordinated debentures. The interest rate on the debentures and the trust preferred
securities is variable and adjusts quarterly. The Company has, through various contractual
arrangements, fully and unconditionally guaranteed all of Capital Trust IIs obligations
with respect to the capital securities. These capital securities qualify as Tier I capital
and are presented in the Consolidated Balance Sheets as Guaranteed Preferred Beneficial
Interests in Junior Subordinated Debentures. Both the capital securities of Capital Trust
II and the junior subordinated debentures are scheduled to mature on June 15, 2035, unless
called by the Company not earlier than June 15, 2010.
On July 22, 2004, Tri-County Capital Trust I (Capital Trust I), a Delaware business trust
formed, funded and wholly owned by the Company, issued $7,000,000 of capital securities with
an interest rate based on the 90-day LIBOR rate plus 2.60%. The Trust used the proceeds from
this issuance to purchase $7.2 million of the Companys junior subordinated debentures. The
interest rate on the debentures and the trust preferred securities is variable and adjusts
quarterly. The Company has, through various contractual arrangements, fully and
unconditionally guaranteed all of Capital Trust Is obligations with respect to the capital
securities. These capital securities qualify as Tier I capital and are presented in the
Consolidated Balance Sheets as Guaranteed Preferred Beneficial Interests in Junior
Subordinated Debentures. Both the capital securities of Capital Trust I and the junior
subordinated debentures are scheduled to mature on July 22, 2034, unless called by the
Company not earlier than July 22, 2009.
Costs associated with the issuance of the trust-preferred securities were less than $10,000
and were expensed as period costs.
8. |
|
CHANGE IN ACCOUNTING PRINCIPLE |
In September 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. EITF 06-4 requires the recognition of a liability
and related compensation costs for endorsement split-dollar life insurance policies that
provide a benefit to an employee that extends to postretirement periods as defined in SFAS
No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. The EITF
reached a consensus that Bank Owned Life Insurance policies purchased for this purpose do
not effectively settle the entitys obligation to the employee in this regard and thus
the entity must record compensation cost and the related liability. Entities
should recognize the effects of applying this Issue through either, (a) a change in
accounting principle through a cumulative effect adjustment to retained earnings or to other
components of equity or net assets in the balance sheet as of the beginning of the year of
adoption, or (b) a change in accounting principle through retrospective application to all
prior periods. This issue is effective for fiscal years beginning after December 15, 2007.
The effects of this guidance have been applied as a change in accounting principle through a
cumulative effect adjustment to retained earnings of $314,847.
9. |
|
NEW ACCOUNTING STANDARDS |
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines
fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and
12
expands disclosures about fair value measurements. SFAS 157
applies to existing accounting pronouncements that require or permit fair value measurements
in which FASB had previously concluded fair value is the most relevant measurement
attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157
is effective for financial statements issued for fiscal years beginning after November 15,
2007, with early adoption encouraged. The adoption of SFAS 157 on January 1, 2008 did not
significantly impact the Companys consolidated financial statements. The fair value option
was not elected for any financial instrument as of June 30, 2008.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement No. 115. SFAS 159 permits entities to
choose to measure eligible items at fair value at specified election dates. Unrealized gains
and losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. The fair value option (i) may be applied
instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new
election date occurs), and (iii) is applied only to entire instruments and not to portions
of instruments. The adoption of SFAS 159 on January 1, 2008 did not significantly impact the
Corporations financial statements.
SFAS 141(R), Business Combinations (Revised) SFAS 141R replaces SFAS 141, Business
Combinations, and applies to all transactions and other events in which one entity obtains
control over one or more other businesses. SFAS 141R requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities, and any
non-controlling interest in the acquiree at fair value as of the acquisition date.
Contingent consideration is required to be recognized and measured at fair value on the date
of acquisition rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under SFAS 141 whereby the cost of an acquisition was
allocated to the individual assets acquired and liabilities assumed based on their estimated
fair value. SFAS 141R requires acquirers to expense acquisition related costs as incurred
rather than allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under SFAS 12. Under SFAS 141R, the requirements of SFAS 146, accounting
for costs associated with exit or disposal contingencies are to be recognized at fair value
unless it is a non-contractual contingency that is likely to materialize, in which case,
nothing should be recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS 5, Accounting for
Contingencies. SFAS 141R will have a significant impact on the Companys accounting for any
future acquisitions closing on or after January 1, 2009.
SFAS No. 160, Non-controlling Interest in Consolidated Financial Statements, an Amendment
of ARB Statement No. 51. SFAS 160 amends Accounting Research Bulletin (ARB) No. 51,
Consolidated Financial Statements, to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS
160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred
to as minority interest, is an ownership interest in the consolidated entity that should be
reported as a component of equity in the consolidated financial statements. Among other
requirements, SFAS 160 requires consolidated net income to be reported at amounts that
include the amounts attributable to both parent and the non-controlling interest. SFAS 160
is effective for the Company on January 1, 2009 and is not expected to have a significant
impact on the Companys financial statements.
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB No. 133. This statement changes the disclosure requirements for
derivative instruments and hedging activities. SFAS No. 161 requires enhance disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, and is not expected to have a significant impact on the Companys
financial statements.
13
Staff Accounting Bulletin (SAB) No. 109 of the Securities and Exchange Commission (SEC),
Written Loan Commitments Recorded at Fair Value Through Earnings. SAB No. 109 supersedes
SAB 105, Application of Accounting Principles to Loan Commitments, and indicates that the
expected net future cash flows related to the associated servicing of the loan should be
included in the measurement of all written loan commitments that are accounted for at fair
value through earnings. The guidance in SAB 109 is applied on a prospective basis to
derivative loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The adoption of SAB 109 on January 1, 2008 did not significantly impact the Companys financial statements.
In May 2008, the Financial Accounting Standards Board (FASB) issued SFAS No.163,
Accounting for Financial Guarantee Insurance Contracts An interpretation of FASB
Statement No. 60 . SFAS 163 requires that an insurance enterprise recognize a claim
liability prior to an event of default when there is evidence that credit deterioration has
occurred in an insured financial obligation. It also clarifies how Statement 60 applies
to financial guarantee insurance contracts, including the recognition and measurement
to be used to account for premium revenue and claim liabilities, and requires expanded
disclosures about financial guarantee insurance contracts. It is effective for
financial statements issued for fiscal years beginning after December 15, 2008, except for
some disclosures about the insurance enterprises risk-management activities. SFAS 163
requires that disclosures about the risk-management activities of the insurance enterprise
be effective for the first period beginning after issuance. Except for those disclosures,
earlier application is not permitted. The adoption of this statement is not expected to have
a material effect on the Companys financial statements.
In May 2008, the FASB issued SFAS No.162, The Hierarchy of Generally Accepted Accounting
Principles". This Statement identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally accepted
accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is
effective 60 days following the SECs approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. SFAS 162 is not expected to have a material
impact on the Companys financial statements.
14
ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including discussions of Tri-County Financial Corporations (the
Company) goals, strategies and expected outcomes; estimates of risks and future costs; and
reports of the Companys ability to achieve its financial and other goals. Forward-looking
statements are generally preceded by terms such as expects, believes, anticipates, intends
and similar expressions. 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, demand for our
products and services, changes in laws and regulations applicable to the Company, changes in
accounting principles and various other matters. Additional factors that may affect our results
are discussed in Part I of the Companys Annual Report on Form 10-K for the year ended December 31,
2007 (the Form 10-K) and Part II of this Quarterly Report on Form 10-Q under Item 1A. Risk
Factors. 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. The Company
does not undertake and specifically disclaims any obligation to publicly release the result
of any revisions that may be made to any forward-looking statement to reflect events or
circumstances after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
GENERAL
The Company is a bank holding company organized in 1989 under the laws of the State of Maryland.
It owns all the outstanding shares of capital stock of 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, paying interest on its subordinated debt, and directing 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 nine branches located in
Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince Frederick, Lusby, 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 uses these funds along with borrowings from the
Federal Home Loan Bank (the FHLB), to fund loan originations to individuals, associations,
partnerships and corporations. The Bank offers real estate loans including residential first and
second mortgage loans, home equity lines of credit and commercial mortgage loans. The Bank also
offers commercial loans including secured and unsecured loans. The Bank is a member of the Federal
Reserve and FHLB Systems. The Federal Deposit Insurance Corporation 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 Banks percentage of assets invested in
residential first mortgage lending has declined since 1997. Conversely, targeted loan types have
increased. The Bank has also seen an increase in transactional deposit accounts while the
percentage of total liabilities represented by certificates of deposits has declined. Management
believes that these changes will enhance the Banks overall long-term financial performance.
Management recognizes that the shift in composition of the Banks loan portfolio away from
residential first mortgage lending will tend to increase its exposure to credit losses. The Bank
continues 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 managements expectations as to future interest rates, economic conditions in the Southern
Maryland area as well as individual borrowers circumstances. Management believes that its
allowance for loan losses is adequate to cover known and inherent losses in the loan portfolio.
For further information on the Banks allowance for loan losses, see the discussion in the sections
captioned Financial Condition and Critical Accounting Policies as well as the relevant
discussions in the Form 10-K and Annual Report for the year ended December 31, 2007.
15
The Federal Funds target rate increased for much of 2006 and 2007, hitting a multi-year peak on
June 29, 2007 of 5.25%. Shortly afterwards, it became clear that the US economy suffered from an
over-extension of credit in many sectors. This realization led to a sudden, dramatic decline in the
availability of credit to many borrowers including both corporations and consumers. These
disruptions deflated a housing price bubble and threatened to create a credit crisis. The Federal
Reserve reacted to the multi-faceted crisis by cutting the Federal Funds rate. Federal Funds rates
were cut by 50 basis points in September 2007, followed by accelerating rate cuts in the first
quarter of 2008. Currently, the Federal Funds target rate is 2.00% after a rate cut in April 2008.
Comments from individual Federal Reserve governors as well as minutes and other official statements
indicate that the Federal Reserve is increasingly worried about inflation and the value of US
currency. These concerns would tend to make the Federal Reserve less likely to further cut rates.
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Condensed income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
9,219,271 |
|
|
$ |
9,737,887 |
|
|
$ |
18,727,054 |
|
|
$ |
19,262,079 |
|
Interest expense |
|
|
4,400,886 |
|
|
|
4,939,047 |
|
|
|
9,052,375 |
|
|
|
9,920,079 |
|
Net interest income |
|
|
4,818,385 |
|
|
|
4,798,840 |
|
|
|
9,674,679 |
|
|
|
9,342,000 |
|
Provision (reversal) for loan losses |
|
|
(5,479 |
) |
|
|
97,917 |
|
|
|
154,745 |
|
|
|
354,443 |
|
Noninterest income |
|
|
758,588 |
|
|
|
552,447 |
|
|
|
1,346,039 |
|
|
|
1,103,140 |
|
Noninterest expense |
|
|
3,794,220 |
|
|
|
3,142,913 |
|
|
|
7,145,763 |
|
|
|
6,404,063 |
|
Income before income taxes |
|
|
1,788,232 |
|
|
|
2,110,457 |
|
|
|
3,720,210 |
|
|
|
3,686,634 |
|
Income taxes |
|
|
661,698 |
|
|
|
768,341 |
|
|
|
1,277,435 |
|
|
|
1,334,899 |
|
Net income |
|
$ |
1,126,534 |
|
|
$ |
1,342,116 |
|
|
$ |
2,442,775 |
|
|
$ |
2,351,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings |
|
$ |
0.38 |
|
|
$ |
0.51 |
|
|
$ |
0.83 |
|
|
$ |
0.89 |
|
Diluted earnings |
|
$ |
0.37 |
|
|
$ |
0.47 |
|
|
$ |
0.79 |
|
|
$ |
0.83 |
|
Book value |
|
$ |
16.90 |
|
|
$ |
14.70 |
|
|
$ |
16.90 |
|
|
$ |
14.70 |
|
RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2008
Net income for the six-month period ended June 30, 2008 totaled $2,442,775 ($0.83 basic and $0.79
diluted earnings per share) compared to $2,351,735 ($0.89 basic and $0.83 diluted earnings per
share) for the same period in the prior year. This increase of $91,040, or 3.87%, was caused by
increases in net interest income and noninterest income, and a decline in the provision for loan
losses partially offset by an increase in noninterest expense. Earnings per share decreased
because the increase in earnings was offset by an increase in the number of outstanding shares.
For the six-month period ended June 30, 2008, interest income declined by $535,025, or 2.78%, to
$18,727,054 from $19,262,079 for the same period in the prior year. The decrease was due to lower
rates earned on interest earning assets partially offset by higher average asset balances. The
lower rates earned on assets were primarily the result of lower rates earned on loans with
adjustable rates tied to indices such as the Prime rate or Treasury rates which decreased as the
Federal Reserve Board cut the Federal Funds rate. Interest expense also declined from $9,920,079
for the first six months of 2007 to $9,052,375, a decline of $867,704 or 8.75%. This decline was
caused by the decline in average interest rates paid on interest bearing liabilities partially
offset by higher average balances. The rates paid on deposits were affected by the decline in the
Federal Funds target rate and the related effects on other short-term interest rates. The lower
deposit rates were primarily for shorter-term interest bearing deposits such as short-term
certificates of deposit and money market deposit accounts. The rates on these accounts tend to
decrease when the Federal Funds target rate decreases.
16
Provision for loan losses decreased to $154,745 for the six months ended June 30, 2008 from
$354,443 for the six- month period ended June 30, 2007, a decrease of $199,368, or 56.34%. The
decrease in the provision was based on a decrease in charge-offs and non performing loans, a
negligible amount of delinquencies and the status of several large borrowers improving, leading to
declines in the specific reserves for them. The Banks net write-offs of loans declined from
$91,631 for the six months ended June 30, 2007 to $34,933 for the six months ended June 30, 2008.
In addition non-accrual loans declined from $414,005 at December 31, 2007 to $146,251 at June 30,
2008. These factors were partially offset by overall economic and market conditions as well as
higher loan growth. The loan portfolio growth in the first six months of 2008 was $41,423,159,
compared to $18,491,535 in the same period in 2007. Management will continue to periodically review
its allowance for loan losses and the related provision and make adjustments as deemed necessary.
Our reviews 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.
The following table shows the components of noninterest income and the dollar and percentage
changes for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
NONINTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan appraisal, credit, and miscellaneous
charges |
|
$ |
234,551 |
|
|
$ |
172,676 |
|
|
$ |
61,875 |
|
|
|
35.83 |
% |
Gain on asset sale |
|
|
2,041 |
|
|
|
|
|
|
|
2,041 |
|
|
|
|
|
Net gain on the sale of foreclosed property |
|
|
|
|
|
|
66,428 |
|
|
|
(66,428 |
) |
|
|
(100.00 |
)% |
Income from bank owned life insurance |
|
|
286,489 |
|
|
|
165,696 |
|
|
|
120,793 |
|
|
|
72.90 |
% |
Gain on sale of investment securities |
|
|
|
|
|
|
16,912 |
|
|
|
(16,912 |
) |
|
|
(100.00 |
)% |
Service charges |
|
|
822,958 |
|
|
|
681,428 |
|
|
|
141,530 |
|
|
|
20.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
1,346,039 |
|
|
$ |
1,103,140 |
|
|
$ |
242,899 |
|
|
|
22.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan appraisal, credit, and miscellaneous charges increased based upon changes in market
conditions and on an increase in loan originations. There were no sales of foreclosed property in
2008 as compared to one sale in 2007. The increase in income from bank-owned life insurance
reflects a higher average balance of bank-owned life insurance in the current year. The change in
gain on sale of investment securities reflects the sale of $233,743 in investment securities in
2007, compared to no investment sales in 2008. The increase in service charges reflects higher
transaction account balances as well as increased fees.
The following table shows the components of noninterest expense and the dollar and percentage
changes for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
NONINTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefits |
|
$ |
4,122,015 |
|
|
$ |
3,680,092 |
|
|
$ |
441,923 |
|
|
|
12.01 |
% |
Occupancy |
|
|
797,629 |
|
|
|
656,925 |
|
|
|
140,704 |
|
|
|
21.42 |
% |
Advertising |
|
|
271,372 |
|
|
|
227,769 |
|
|
|
43,603 |
|
|
|
19.14 |
% |
Data processing |
|
|
260,991 |
|
|
|
350,848 |
|
|
|
(89,857 |
) |
|
|
(25.61 |
)% |
Legal and professional fees |
|
|
338,476 |
|
|
|
277,222 |
|
|
|
61,254 |
|
|
|
22.10 |
% |
Depreciation of furniture, fixtures, and
equipment |
|
|
271,280 |
|
|
|
284,297 |
|
|
|
(13,017 |
) |
|
|
(4.58 |
)% |
Telephone communications |
|
|
42,477 |
|
|
|
44,583 |
|
|
|
(2,106 |
) |
|
|
(4.72 |
)% |
ATM expenses |
|
|
163,452 |
|
|
|
143,768 |
|
|
|
19,684 |
|
|
|
13.69 |
% |
Office supplies |
|
|
74,475 |
|
|
|
78,077 |
|
|
|
(3,602 |
) |
|
|
(4.61 |
)% |
Office equipment |
|
|
26,237 |
|
|
|
25,701 |
|
|
|
536 |
|
|
|
2.09 |
% |
Other |
|
|
777,359 |
|
|
|
634,781 |
|
|
|
142,578 |
|
|
|
22.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses |
|
$ |
7,145,763 |
|
|
$ |
6,404,063 |
|
|
$ |
741,700 |
|
|
|
11.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Salary and employee benefits costs increased because of increases in the number of personnel
employed by the Bank and increased benefits costs. Employees were added to staff some
administrative and sales positions as well as a new branch. In addition, the Banks average cost
per employee has increased in the last year due to tight labor markets and the need to add highly
skilled employees as the Bank grows in size and complexity. Occupancy expense increased as the Bank
opened an additional branch in 2008, rented temporary space in connection with the rebuilding of a
branch, paid higher utilities costs, and experienced increases in land rentals on certain
properties. The drop in data processing expense reflects improved pricing in this area from certain
vendors, as well as a credit from a vendor to settle previous pricing issues. Legal and
professional fees increased as the Bank has increased the scope of projects outsourced to its
internal audit provider. Depreciation expense declined as many assets have been fully depreciated
in the last year. ATM expenses reflect the replacement of older machines at some locations and
additional usage of existing machines. Other expenses increased as a result of the increases in the
Banks size in the last year.
Income tax expense decreased to $1,277,435, or 34.34%, of pretax income, in the current year, from
$1,334,899, or 36.21%, of pretax income in the prior year. The lower effective tax rate was caused
by a larger deferred tax asset triggered by an increase in Maryland tax rates as of January 1,
2008.
RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2008
Net income for the three-month period ended June 30, 2008 totaled $1,126,534 ($0.38 basic and $0.37
diluted earnings per share), compared to $1,342,116 ($0.51 basic and $0.47 diluted earnings per
share) for the same period in the prior year. This decrease of $215,582, or 16.06%, was caused by
an increase in noninterest expense partially offset by higher net interest income and noninterest
income and lower provision for loan losses and income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
9,219,271 |
|
|
$ |
9,737,887 |
|
|
|
(518,616 |
) |
|
|
(5.33 |
)% |
Interest expense |
|
|
4,400,886 |
|
|
|
4,939,047 |
|
|
|
(538,161 |
) |
|
|
(10.90 |
)% |
Net interest income |
|
|
4,818,385 |
|
|
|
4,798,840 |
|
|
|
19,545 |
|
|
|
0.41 |
% |
Provision (reversal) for loan losses |
|
|
(5,479 |
) |
|
|
97,917 |
|
|
|
(103,396 |
) |
|
|
(105.60 |
)% |
Interest income decreased due to declines in key interest rates including the LIBOR, Federal
Funds rate, and the Prime rate. Interest earned on the loans and investments tied to these key
rates similarly decreased. These decreases were partially offset by higher average balances in
loans and investments. Interest expense decreased due to changes in key rates partially offset by
higher average balances of deposits and borrowings for the period. As noted above, decreases in the
provision for loan losses were due to changes in the circumstances of particular loans,
improvements in the level of delinquency overall, and declines in write-offs and nonperforming
loans. These factors were partially offset by the negative effects of the economic environment that
the Bank operates in, including negative changes in the residential housing market. The Bank
continued to have strong loan portfolio growth in the second quarter of 2008.
The following table shows the components of noninterest income and the dollar and percentage
changes for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Loan appraisal, credit, and
miscellaneous charges |
|
$ |
124,288 |
|
|
$ |
109,088 |
|
|
|
15,200 |
|
|
|
13.93 |
% |
Income from bank owned life insurance |
|
|
189,271 |
|
|
|
83,179 |
|
|
|
106,092 |
|
|
|
127.55 |
% |
Service charges |
|
|
445,029 |
|
|
|
360,180 |
|
|
|
84,849 |
|
|
|
23.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
758,588 |
|
|
|
552,447 |
|
|
|
206,141 |
|
|
|
37.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Loan appraisal, credit, and miscellaneous charges increased due to increased loan closings and
additional fees charged. Service charges increased as the Bank has increased the number and
balances of customer checking accounts, while also increasing certain fees. Income from bank-owned
life insurance increased as these assets had higher average balances in the three months ended June
30, 2008 than in the same period in the prior year.
The following table shows the components of noninterest expense and the dollar percentage changes
for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
NONINTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefits |
|
$ |
2,111,805 |
|
|
$ |
1,796,606 |
|
|
$ |
315,199 |
|
|
|
17.54 |
% |
Occupancy |
|
|
434,453 |
|
|
|
345,495 |
|
|
|
88,958 |
|
|
|
25.75 |
% |
Advertising |
|
|
100,929 |
|
|
|
66,646 |
|
|
|
34,283 |
|
|
|
51.44 |
% |
Data processing |
|
|
215,101 |
|
|
|
163,257 |
|
|
|
51,844 |
|
|
|
31.76 |
% |
Legal and professional fees |
|
|
224,309 |
|
|
|
160,617 |
|
|
|
63,692 |
|
|
|
39.65 |
% |
Depreciation of furniture,
fixtures, and equipment |
|
|
138,878 |
|
|
|
165,039 |
|
|
|
(26,161 |
) |
|
|
(15.85 |
)% |
Telephone communications |
|
|
18,846 |
|
|
|
21,672 |
|
|
|
(2,826 |
) |
|
|
(13.04 |
)% |
ATM expenses |
|
|
79,687 |
|
|
|
76,751 |
|
|
|
2,936 |
|
|
|
3.83 |
% |
Office supplies |
|
|
34,991 |
|
|
|
31,616 |
|
|
|
3,375 |
|
|
|
10.67 |
% |
Office equipment |
|
|
1,024 |
|
|
|
14,491 |
|
|
|
(13,467 |
) |
|
|
(92.93 |
)% |
Other |
|
|
434,197 |
|
|
|
300,723 |
|
|
|
133,474 |
|
|
|
44.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,794,220 |
|
|
$ |
3,142,913 |
|
|
$ |
651,307 |
|
|
|
20.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefits increased as the Bank added more employees to staff the new
branch in Lusby and to handle a greater volume of business. Occupancy also increased as the Bank
had added expense for the new branch as well as the added expense of the temporary branch in
Leonardtown. Advertising expenses increased as the Bank continued its advertising efforts to
increase deposit and loan market share. Data processing expenses increased due to increased volume
in the current period and a restructuring of certain charges in the prior year. Legal and
professional fees increased as the scope of work outsourced for internal audit increased. Some of
the increase was also due to the timing of certain professional services compared to the prior
year. Depreciation expense decreased as some assets were fully depreciated in the prior quarter.
Other expenses increased due to increases in certain costs including stationery, printing, and the
increased use of background checks on prospective employees.
Income tax expenses decreased due to the decrease in pretax income and an increase in the amount of
tax exempt income at the state and federal levels.
FINANCIAL CONDITION
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
2,880,382 |
|
|
$ |
3,267,920 |
|
|
$ |
(387,538 |
) |
|
|
(11.86 |
)% |
Federal Funds sold |
|
|
1,322,494 |
|
|
|
885,056 |
|
|
|
437,438 |
|
|
|
49.42 |
% |
Interest-bearing deposits with banks |
|
|
4,485,163 |
|
|
|
7,273,661 |
|
|
|
(2,788,498 |
) |
|
|
(38.34 |
)% |
Securities available for sale |
|
|
13,820,157 |
|
|
|
9,144,069 |
|
|
|
4,676,088 |
|
|
|
51.14 |
% |
Securities held to maturity at amortized cost |
|
|
92,325,851 |
|
|
|
92,687,603 |
|
|
|
(361,752 |
) |
|
|
(0.39 |
)% |
Federal Home
Loan Bank and Federal Reserve Bank stock at cost |
|
|
6,608,700 |
|
|
|
5,354,500 |
|
|
|
1,254,200 |
|
|
|
23.42 |
% |
Loans receivable net of allowance for loan
losses of $4,602,295 and $4,482,483, respectively |
|
|
495,037,292 |
|
|
|
453,614,133 |
|
|
|
41,423,159 |
|
|
|
9.13 |
% |
Premises and equipment, net |
|
|
11,020,436 |
|
|
|
9,423,302 |
|
|
|
1,597,134 |
|
|
|
16.95 |
% |
Accrued interest receivable |
|
|
3,016,068 |
|
|
|
3,147,569 |
|
|
|
(131,501 |
) |
|
|
(4.18 |
)% |
Investment in bank-owned life insurance |
|
|
10,321,639 |
|
|
|
10,124,288 |
|
|
|
197,351 |
|
|
|
1.95 |
% |
Other assets |
|
|
4,065,460 |
|
|
|
3,483,733 |
|
|
|
581,727 |
|
|
|
16.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
644,903,642 |
|
|
$ |
598,405,834 |
|
|
$ |
46,497,808 |
|
|
|
7.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Cash and due from banks and interest-bearing deposits with banks decreased as funds were used
to fund loan growth. The increase in Federal Funds sold is expected to be temporary. The increase
in available for sale investment securities was the result of additional securities purchased to
collateralize certain deposits. The Banks holdings of Federal Reserve and Federal Home Loan Bank
stock increased because the Bank has increased its borrowings from the Federal Home Loan Bank
system, which increased its stock ownership requirements. The loan portfolio increased as a result
of increases in the Banks portfolio of commercial real estate loans, residential mortgage and
construction loans, and commercial lines of credit due to continued marketing activity. Details of
the Banks loan portfolio are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
214,943,870 |
|
|
|
42.99 |
% |
|
$ |
190,483,998 |
|
|
|
41.55 |
% |
Residential first
mortgages |
|
|
99,429,313 |
|
|
|
19.89 |
% |
|
|
90,931,572 |
|
|
|
19.83 |
% |
Residential construction |
|
|
52,520,483 |
|
|
|
10.51 |
% |
|
|
50,577,491 |
|
|
|
11.03 |
% |
Second mortgage loans |
|
|
24,415,060 |
|
|
|
4.88 |
% |
|
|
24,649,581 |
|
|
|
5.38 |
% |
Commercial lines of credit |
|
|
84,012,404 |
|
|
|
16.80 |
% |
|
|
75,247,410 |
|
|
|
16.41 |
% |
Consumer loans |
|
|
2,303,386 |
|
|
|
0.46 |
% |
|
|
2,464,594 |
|
|
|
0.54 |
% |
Commercial equipment |
|
|
22,304,104 |
|
|
|
4.46 |
% |
|
|
24,113,223 |
|
|
|
5.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,928,620 |
|
|
|
100.00 |
% |
|
|
458,467,869 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees |
|
|
289,033 |
|
|
|
0.06 |
% |
|
|
371,253 |
|
|
|
0.08 |
% |
Allowance for loan loss |
|
|
4,602,295 |
|
|
|
0.92 |
% |
|
|
4,482,483 |
|
|
|
0.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,891,328 |
|
|
|
|
|
|
|
4,853,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
495,037,292 |
|
|
|
|
|
|
$ |
453,614,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008, the Banks allowance for loan losses totaled $4,602,295, or 0.92% of loan
balances, as compared to $4,482,483, or 0.98% of loan balances, at December 31, 2007. Management
believes that the allowance is adequate to cover known and inherent losses in the loan portfolio.
Managements 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 managements judgment, warrant recognition in providing an adequate
allowance. Additional loan information for prior years is presented in the Companys Form 10-K.
The following table summarizes changes in the allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2008 |
|
|
June 30, 2007 |
|
Beginning balance |
|
$ |
4,482,483 |
|
|
$ |
3,783,721 |
|
Charge-offs |
|
|
36,400 |
|
|
|
91,825 |
|
Recoveries |
|
|
1,467 |
|
|
|
194 |
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
34,933 |
|
|
|
91,631 |
|
Additions charged to operations |
|
|
154,745 |
|
|
|
354,444 |
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
4,602,295 |
|
|
$ |
4,046,534 |
|
|
|
|
|
|
|
|
20
The following table provides information with respect to our nonperforming loans at the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
Balances as of |
|
|
Balances as of |
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
Restructured loans |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Accruing loans which are contractually
past due 90 days or more: |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Loans accounted for on a nonaccrual basis |
|
$ |
146,251 |
|
|
$ |
414,005 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
146,251 |
|
|
$ |
414,005 |
|
Nonperforming loans to total loans |
|
|
0.03 |
% |
|
|
0.09 |
% |
|
|
|
|
|
|
|
Allowance for loan losses to
non performing loans |
|
|
3,146.85 |
% |
|
|
1,082.71 |
% |
|
|
|
|
|
|
|
As of June 30, 2008 and December 31, 2007, $1,465,444 and $754,700, respectively, in loans
were considered impaired under SFAS 114.
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
44,510,740 |
|
|
$ |
48,041,571 |
|
|
$ |
(3,530,831 |
) |
|
|
(7.35 |
)% |
Interest-bearing deposits |
|
|
419,869,915 |
|
|
|
396,952,444 |
|
|
|
22,917,471 |
|
|
|
5.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
464,380,655 |
|
|
|
444,994,015 |
|
|
|
19,386,640 |
|
|
|
4.36 |
% |
Short-term borrowings |
|
|
8,937,172 |
|
|
|
1,555,323 |
|
|
|
7,381,849 |
|
|
|
474.62 |
% |
Long-term debt |
|
|
104,984,679 |
|
|
|
86,005,508 |
|
|
|
18,979,171 |
|
|
|
22.07 |
% |
Guaranteed preferred beneficial
interest in junior subordinated
debentures |
|
|
12,000,000 |
|
|
|
12,000,000 |
|
|
|
|
|
|
|
0.00 |
% |
Accrued expenses and other liabilities |
|
|
4,861,186 |
|
|
|
5,003,912 |
|
|
|
(142,726 |
) |
|
|
(2.85 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
595,163,692 |
|
|
$ |
549,558,758 |
|
|
$ |
45,604,934 |
|
|
|
8.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit balances increased due to the Banks continuing efforts to increase its market share
through advertising, branch improvements, and other marketing efforts. Non-interest bearing
deposits decreased during the six-month period. The Bank also chose to increase its long-term debt
due to favorable rates and terms currently offered. Short-term debt was also increased primarily to
continue funding the Banks loan growth.
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
29,437 |
|
|
$ |
29,100 |
|
|
$ |
337 |
|
|
|
1.16 |
% |
Additional paid in capital |
|
|
17,064,603 |
|
|
|
16,914,373 |
|
|
|
150,230 |
|
|
|
0.89 |
% |
Retained earnings |
|
|
33,052,870 |
|
|
|
32,303,353 |
|
|
|
749,517 |
|
|
|
2.32 |
% |
Accumulated other comprehensive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss |
|
|
(146,685 |
) |
|
|
(73,097 |
) |
|
|
(73,588 |
) |
|
|
100.67 |
% |
Unearned ESOP shares |
|
|
(260,275 |
) |
|
|
(326,653 |
) |
|
|
66,378 |
|
|
|
(20.32 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
49,739,950 |
|
|
$ |
48,847,076 |
|
|
$ |
892,874 |
|
|
|
1.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and additional paid in capital increased due to the exercise of options partially
offset by stock repurchased during the quarter. Retained earnings increased because of earnings,
partially offset by the repurchase of 8,352 shares at a cost of $194,168 and a dividend of $0.40
per share. Book value per share slightly increased from $16.79 per share to $16.90 reflecting the
change in overall equity offset by the increase in the number of outstanding shares.
21
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no business other than holding the stock of the Bank and paying interest
on its subordinated debentures. Its primary uses of funds are for the payment of dividends, the
payment of interest and principal on debentures, and the repurchase of common shares. The
Companys 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 Banks 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 sale and maturity of investment securities. Its principal funding
commitments are for the origination or purchase of loans, the purchase of investment securities and
the payment of maturing deposits. Deposits are considered a primary source of funds supporting the
Banks lending and investment activities. The Bank also uses various wholesale funding instruments
including FHLB advances and reverse repurchase agreements. The Bank may borrow up to 40% of
consolidated Bank assets on a line of credit available from the FHLB. As of June 30, 2008, the
maximum available under this line was $257,208,866, while outstanding advances totaled
$112,984,679. In order to draw on this line, the Bank must have sufficient collateral. Qualifying
collateral includes residential one-to-four family first mortgage loans, certain second mortgage
loans, certain commercial real estate loans, and various investment securities. At June 30, 2008,
the Bank had pledged collateral sufficient to draw $185,000,000 under the line. In addition, the
Bank has established other lines of credit totaling $18,545,563.
The Banks 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 Banks 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.
Cash, cash equivalents, and interest-bearing deposits with banks as of June 30, 2008 totaled
$8,688,039, a decrease of $2,738,598 or 23.97%, from the December 31, 2007 total of $11,426,637.
This decrease was due to funds being used to support the increase in the loan portfolio and, to a
lesser extent, the increase in the amount of premises and equipment. These increases were also
partially funded by increases in deposits and long- and short-term debt. The Banks principal
sources of cash flows are its financing activities including deposits and borrowings. During the
first six months of 2008, all financing activities provided $44,586,196 in cash compared to
$3,365,640 for the first six months of 2007. The increase in cash flows from financing activities
during the most recent period was principally due to increases in net long- and short-term
borrowings and deposits. In the first six months of 2007, the Company made principal payments on
long-term debt of $10,020,012 with no proceeds of long-term borrowings. In the first six months of
2008, the Company had proceeds of long-term debt of $24,000,000 offset by payments of $5,020,829.
In the first six months of 2008, the Company increased short-term debt by $7,381,849 compared to a
decrease of $1,013,081 for the same period in the prior year. During the first two quarters of
2008, net deposit growth was $19,386,640 compared to $15,432,767 in 2007. Operating activities
provided cash of $1,929,655 in the first two quarters of 2008
compared to $2,054,817 in the first
two quarters of 2007.
The Banks principal use of cash has been in investments in loans, investment securities and other
assets. During the six-month period ended June 30, 2008, the Bank invested a total of $49,254,449
compared to $13,384,171 in 2007. The principal reasons for the increase in cash used in investing
activities was an increase in the amount of loan originations, a decline in principal collected on
loans and an increase in investment securities purchased.
In 2007, the Bank began constructing a regional facility that will house a retail bank branch,
certain loan support staff, and other administrative, support and sales personnel. The total cost
of construction of the facility is estimated to be $4.5 million, and it is expected to open in the
third quarter of 2008. Through June 30, 2008, a total of $2.7 million has been expended on this project.
22
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, 2008, the Banks tangible, leverage and
risk-based capital ratios were 9.46%, 11.60% and 12.49%, respectively. These levels are in excess
of the required 4.0%, 4.0% and 8.0% ratios required by the Federal Reserve Board as well as the
5.0%, 6.0%, and 10% ratios required to be considered well capitalized. The Company is also
subject to capital requirements of the Federal Reserve Board. At June 30, 2008, the Companys
tangible, leverage and risk-based capital ratios were 9.76%, 11.94% and 12.84%, respectively.
These levels are also in excess of the 4.0%, 4.0% and 8.0% ratios required by the Federal Reserve
Board as well as the 5.0%, 6.0%, and 10% ratios required to be considered well capitalized.
CRITICAL ACCOUNTING POLICIES
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and the general practices of the
United States banking industry. Application of these principles requires management to make
estimates, assumptions and judgments that affect the amounts reported in the financial statements
and accompanying notes. These estimates, assumptions and judgments are based on information
available as of the date of the financial statements. Accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions and judgments. Certain policies
inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such,
have a greater possibility of producing results that could be materially different than originally
reported. The Company considers its determination of the allowance for loan losses and the
valuation allowance on its foreclosed real estate to be critical accounting policies. Estimates,
assumptions, and judgments are necessary when assets and liabilities are required to be recorded at
fair value, when a decline in the value of an asset not carried on the financial statements at fair
value warrants an impairment write-down or valuation reserve to be established, or when an asset or
liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at
fair value inherently results in more financial statement volatility. The fair values and the
information used to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources, when available. When
these sources are not available, management makes estimates based upon what it considers to be the
best available information.
The allowance for loan losses is an estimate of the losses that may be sustained in the loan
portfolio. The allowance is based on two principles of accounting: (a) Statement on Financial
Accounting Standards (SFAS) No. 5, Accounting for Contingencies", which requires that losses be
accrued when they are probable of occurring and are estimable and (b) SFAS No. 114, Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued when it is probable that
the Company will not collect all principal and interest payments according to the contractual terms
of the loan. The loss, if any, is determined by the difference between the loan balance and the
value of collateral, the present value of expected future cash flows, or values observable in the
secondary markets.
The loan loss allowance balance is an estimate based upon managements evaluation of the loan
portfolio. Generally, the allowance is comprised of a specific and a general component. The
specific component consists of managements evaluation of certain criticized, classified, or
impaired loans and their underlying collateral. Loans are examined to determine the specific
allowance based upon the borrowers payment history, economic conditions specific to the loan or
borrower, or other factors that would impact the borrowers ability to repay the loan on its
contractual basis. Management assesses the ability of the borrower to repay the loan based upon
any information available. Depending on the assessment of the borrowers ability to pay the loan
as well as the type, condition, and amount of collateral, management will establish an allowance
amount specific to the loan.
In establishing the general component of the allowance, management analyzes non-classified and
non-impaired loans in the portfolio including changes in the amount and type of loans. Management
also examines the Banks history of write-offs and recoveries within each loan category. The state
of the local and national economy is also considered. Based upon these factors the Banks loan
portfolio is categorized and a loss factor is applied to each category. These loss factors may be
higher or lower than the Banks actual recent average losses in any particular loan category,
particularly in loan categories where the Bank is rapidly increasing the size of its portfolio.
Based upon these factors, the Bank will adjust the loan loss allowance by increasing or decreasing
the provision for loan losses.
23
Management has significant discretion in making the judgments inherent in the determination of the
provision and allowance for loan losses, including the valuation of collateral, a borrowers
likelihood of repayment, and in establishing allowance factors on the general component of the
allowance. Changes in allowance factors will have a direct impact on the amount of the provision,
and a corresponding effect on net income. Errors in managements 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 charge-offs. For
additional information regarding the allowance for loan losses, refer to Notes 1 and 4 to the
Consolidated Financial Statements as presented in the Companys Form 10-K.
In addition to the loan loss allowance, the Company also maintains a valuation allowance on its
foreclosed real estate. As with the allowance for loan losses, the valuation allowance on
foreclosed real estate is based on SFAS No. 5, Accounting for Contingencies, as well as SFAS No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets. These statements require that
the Company establish a valuation allowance when it has determined that the carrying amount of a
foreclosed asset exceeds its fair value. Fair value of a foreclosed asset is measured by the cash
flows expected to be realized from its subsequent disposition. These cash flows should be reduced
for the costs of selling or otherwise disposing of the asset.
In estimating the cash flows from the sale of foreclosed real estate, management must make
significant assumptions regarding the timing and amount of cash flows. In cases where the real
estate acquired is undeveloped land, management must gather the best available evidence regarding
the market value of the property, including appraisals, cost estimates of development, and broker
opinions. Due to the highly subjective nature of this evidence, as well as the limited market,
long time periods involved, and substantial risks, cash flow estimates are highly subjective and
subject to change. Errors regarding any aspect of the costs or proceeds of developing, selling, or
otherwise disposing of foreclosed real estate could result in the allowance being inadequate to
reduce carrying costs to fair value and may require an additional provision for valuation
allowances.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
Not applicable as the Company is a smaller reporting company.
|
|
|
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 Companys principal executive
officer and principal financial officer, of the effectiveness of the Companys disclosure
controls and procedures. Based on this evaluation, the Companys principal executive officer and
principal financial officer concluded that the Companys 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, (1) is recorded,
processed, summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and (2) is accumulated and communicated to the Companys
management, including its principal executive and financial officers as appropriate to allow
timely decisions regarding required disclosure. It should be noted that the design of the
Companys disclosure controls and procedures is based, in part, upon certain reasonable
assumptions about the likelihood of future events, and there can be no assurance that any design
of disclosure controls and procedures will succeed in achieving its stated goals under all future
conditions. However, the Companys principal executive and financial officers have concluded
that the Companys disclosure controls and procedures are, in fact, effective at a reasonable
assurance level.
There were no changes in the Companys internal control over financial reporting during the six
months ended June 30, 2008 that have materially affected, or are reasonable likely to materially
affect, the Companys internal control over financial reporting.
24
PART II OTHER INFORMATION
|
|
|
ITEM 1 |
|
LEGAL PROCEEDINGS |
The Company is not involved in any pending legal proceedings. The Bank is not involved in any
pending legal proceedings other than routine legal proceedings occurring in the ordinary course of
business. Such routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the financial condition and results of operations of the company.
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in the Form 10-K, which could materially
affect our business, financial condition or future results. The risks described in the Form 10-K
are not the only risks that we face. Additional risks and uncertainties not currently know to us
or that we currently deem to be immaterial also may materially adversely affect our business,
financial condition and/or operating results.
|
|
|
ITEM 2 |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
|
(a) |
|
Not applicable |
|
|
(b) |
|
Not applicable |
|
|
(c) |
|
The following table sets forth information regarding the Companys repurchases of
its common stock during the quarter ended June 30, 2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
April 1-30,2008 |
|
|
2,162 |
|
|
$ |
23.00 |
|
|
|
2,162 |
|
|
|
28,607 |
|
May 1-31,2008 |
|
|
1,720 |
|
|
|
23.25 |
|
|
|
1,720 |
|
|
|
26,887 |
|
June 1-30,2008 |
|
|
1,966 |
|
|
|
22.00 |
|
|
|
1,966 |
|
|
|
24,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,848 |
|
|
|
22.74 |
|
|
|
5,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 25, 2004, Tri-County Financial Corporation announced a repurchase program under which it
would repurchase up to 127,500 shares of its common stock (as adjusted for the three-for-two stock
splits declared in October 2004, December 2005 and October 2006). The program will continue until
it is completed or terminated by the Board of Directors.
25
|
|
|
ITEM 3 |
|
DEFAULT UPON SENIOR SECURITIES |
None
|
|
|
ITEM 4 |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The Annual Meeting of the Stockholders of the Company was held on May 12, 2008. The results of the
vote were as follows:
1. The following individuals were elected as directors, each for a three-year term:
|
|
|
|
|
|
|
|
|
|
|
VOTES FOR |
|
|
VOTES WITHHELD |
|
|
|
|
|
|
|
|
|
|
Philip T. Goldstein |
|
|
1,993,695 |
|
|
|
4,473 |
|
|
|
|
|
|
|
|
|
|
James R. Shepherd |
|
|
1,994,639 |
|
|
|
3,529 |
|
|
|
|
|
|
|
|
|
|
H. Beaman Smith |
|
|
1,990,237 |
|
|
|
7,931 |
|
2. The appointment of Stegman & Company as independent auditors of the Company for the year
ending December 31, 2008 was ratified by the stockholders by the following vote:
|
|
|
|
|
FOR |
|
AGAINST |
|
ABSTAIN |
1,991,391
|
|
0
|
|
6,777 |
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS
Exhibit 31 Rule 13a-14(a) Certifications
Exhibit 32 Section 1350 Certifications
26
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 14, 2008 |
|
By: |
/s/ Michael L. Middleton
|
|
|
|
|
|
Michael L. Middleton, President, Chief |
|
|
|
|
|
Executive Officer and Chairman of the
Board |
|
|
|
|
|
|
|
|
|
Date: |
August 14, 2008 |
|
By: |
/s/ William J. Pasenelli
|
|
|
|
|
|
William J. Pasenelli, Executive Vice |
|
|
|
|
|
President and Chief Financial Officer |
|
|
|
|
27