FORM 10-Q
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 September 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
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52-1652138 |
(State of other jurisdiction of
incorporation or organization)
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(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):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
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 October 28, 2008 the registrant had 2,959,702 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 SEPTEMBER 30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
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September 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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$ |
1,905,111 |
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$ |
3,267,920 |
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Federal Funds sold |
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1,055,967 |
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885,056 |
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Interest-bearing deposits with banks |
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19,635,037 |
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7,273,661 |
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Securities available for sale, at fair value |
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13,915,687 |
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9,144,069 |
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Securities held to maturity, at amortized cost |
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91,053,022 |
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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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6,248,300 |
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5,354,500 |
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Loans receivable net of allowance for loan losses of $5,043,949
and $4,482,483, respectively |
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513,955,660 |
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453,614,133 |
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Premises and equipment, net |
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12,149,741 |
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9,423,302 |
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Accrued interest receivable |
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3,091,366 |
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3,147,569 |
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Investment in bank owned life insurance |
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10,423,633 |
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10,124,288 |
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Other assets |
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4,014,398 |
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3,483,733 |
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Total Assets |
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$ |
677,447,922 |
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$ |
598,405,834 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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LIABILITIES: |
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Deposits: |
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Non-interest-bearing deposits |
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$ |
43,514,650 |
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$ |
48,041,571 |
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Interest-bearing deposits |
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459,248,223 |
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396,952,444 |
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Total deposits |
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502,762,873 |
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444,994,015 |
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Short-term borrowings |
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816,241 |
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1,555,323 |
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Long-term debt |
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104,974,107 |
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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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5,996,656 |
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5,003,912 |
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Total Liabilities |
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626,549,877 |
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549,558,758 |
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STOCKHOLDERS EQUITY: |
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Common stock par value $.01; authorized 15,000,000 shares;
issued 2,948,705 and 2,909,974 shares, respectively |
|
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29,487 |
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29,100 |
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Additional paid in capital |
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|
17,254,950 |
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16,914,373 |
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Retained earnings |
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|
33,911,068 |
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32,303,353 |
|
Accumulated other comprehensive loss |
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|
(37,185 |
) |
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(73,097 |
) |
Unearned ESOP shares |
|
|
(260,275 |
) |
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(326,653 |
) |
|
|
|
|
|
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|
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Total Stockholders Equity |
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50,898,045 |
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48,847,076 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
677,447,922 |
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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 NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
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Three Months Ended September 30, |
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Nine Months Ended September 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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$ |
7,990,645 |
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$ |
8,425,082 |
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$ |
23,894,892 |
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$ |
24,814,284 |
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Taxable interest and
dividends on investment securities |
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|
1,318,151 |
|
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|
1,383,242 |
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4,080,686 |
|
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4,184,487 |
|
Interest on deposits with banks |
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|
13,291 |
|
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|
133,514 |
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73,563 |
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|
|
205,146 |
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|
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|
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Total interest income |
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9,322,087 |
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|
9,941,838 |
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28,049,141 |
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29,203,917 |
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INTEREST EXPENSE: |
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Interest on deposits |
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3,233,917 |
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3,890,082 |
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9,759,618 |
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11,244,818 |
|
Interest on short-term borrowings |
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|
19,917 |
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|
14,908 |
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134,344 |
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|
97,530 |
|
Interest on long-term borrowings |
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1,239,381 |
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1,213,114 |
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3,651,628 |
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3,695,835 |
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Total interest expenses |
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4,493,215 |
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5,118,104 |
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13,545,590 |
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15,038,183 |
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NET INTEREST INCOME |
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4,828,872 |
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4,823,734 |
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14,503,551 |
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14,165,734 |
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|
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PROVISION FOR LOAN LOSSES |
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462,622 |
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|
|
304,845 |
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|
617,367 |
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|
659,288 |
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES |
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4,366,250 |
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4,518,889 |
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13,886,184 |
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13,506,446 |
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4
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
|
NONINTEREST INCOME: |
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Loan appraisal, credit, and miscellaneous
charges |
|
$ |
129,107 |
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|
$ |
83,520 |
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$ |
363,658 |
|
|
$ |
256,196 |
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Gain on asset sale |
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|
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|
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2,041 |
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|
Net gain on the sale of foreclosed property |
|
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|
1,205,733 |
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|
|
|
|
|
|
1,272,161 |
|
Income from bank owned life insurance |
|
|
101,994 |
|
|
|
97,430 |
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|
|
388,483 |
|
|
|
263,126 |
|
Gain on sale of investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
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|
16,912 |
|
Service charges |
|
|
401,204 |
|
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|
374,365 |
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|
|
1,224,162 |
|
|
|
1,055,793 |
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Total noninterest income |
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|
632,305 |
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|
|
1,761,048 |
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1,978,344 |
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|
2,864,188 |
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NONINTEREST EXPENSE: |
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Salary and employee benefits |
|
|
2,052,810 |
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1,846,398 |
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|
|
6,174,825 |
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|
|
5,526,490 |
|
Occupancy |
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|
416,723 |
|
|
|
320,712 |
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|
1,214,352 |
|
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|
977,637 |
|
Advertising |
|
|
160,281 |
|
|
|
83,573 |
|
|
|
431,653 |
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|
|
311,342 |
|
Data processing |
|
|
216,283 |
|
|
|
148,006 |
|
|
|
477,274 |
|
|
|
498,854 |
|
Legal and professional fees |
|
|
98,978 |
|
|
|
185,267 |
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|
|
437,454 |
|
|
|
462,489 |
|
Depreciation of furniture, fixtures, and
equipment |
|
|
141,859 |
|
|
|
190,076 |
|
|
|
413,139 |
|
|
|
474,373 |
|
Telephone communications |
|
|
16,898 |
|
|
|
26,422 |
|
|
|
59,375 |
|
|
|
71,005 |
|
ATM expenses |
|
|
83,685 |
|
|
|
81,598 |
|
|
|
247,137 |
|
|
|
225,366 |
|
Office supplies |
|
|
32,140 |
|
|
|
39,969 |
|
|
|
106,615 |
|
|
|
118,046 |
|
Office equipment |
|
|
15,297 |
|
|
|
12,209 |
|
|
|
41,534 |
|
|
|
37,910 |
|
Other |
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|
389,196 |
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|
|
294,177 |
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|
|
1,166,555 |
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|
928,958 |
|
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|
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|
|
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|
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|
|
Total noninterest expenses |
|
|
3,624,150 |
|
|
|
3,228,407 |
|
|
|
10,769,913 |
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|
9,632,470 |
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|
INCOME BEFORE INCOME TAXES |
|
|
1,374,405 |
|
|
|
3,051,530 |
|
|
|
5,094,615 |
|
|
|
6,738,164 |
|
Income tax expense |
|
|
490,236 |
|
|
|
1,165,891 |
|
|
|
1,767,671 |
|
|
|
2,500,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
884,169 |
|
|
|
1,885,639 |
|
|
|
3,326,944 |
|
|
|
4,237,374 |
|
|
|
|
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|
|
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|
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|
|
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|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (losses) on securities
available for sale net of taxes |
|
|
109,500 |
|
|
|
81,470 |
|
|
|
35,912 |
|
|
|
(38,282 |
) |
Less: Reclassification adjustment for gain
net of taxes of $6,122 included in
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
993,669 |
|
|
$ |
1,967,109 |
|
|
$ |
3,362,856 |
|
|
$ |
4,188,302 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
|
|
|
|
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|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Basic |
|
$ |
0.30 |
|
|
$ |
0.71 |
|
|
$ |
1.13 |
|
|
$ |
1.60 |
|
Diluted |
|
|
0.29 |
|
|
|
0.67 |
|
|
|
1.09 |
|
|
|
1.49 |
|
Dividends paid per common share |
|
|
|
|
|
|
|
|
|
|
0.40 |
|
|
|
0.40 |
|
See notes to consolidated financial statements
5
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
|
|
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|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,326,944 |
|
|
$ |
4,237,374 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
617,367 |
|
|
|
659,288 |
|
Gain on foreclosed real estate |
|
|
|
|
|
|
(1,272,161 |
) |
Gain on sale of assets |
|
|
(2,041 |
) |
|
|
|
|
Gain on sales of investment securities |
|
|
|
|
|
|
(16,912 |
) |
Depreciation and amortization |
|
|
789,628 |
|
|
|
814,435 |
|
Net (accretion) amortization of premium/discount on investment securities |
|
|
(41,014 |
) |
|
|
33,886 |
|
Increase in cash surrender of bank owned life insurance |
|
|
(299,345 |
) |
|
|
(263,126 |
) |
Deferred income tax benefit |
|
|
(627,033 |
) |
|
|
(235,907 |
) |
Excess tax benefits on stock based compensation |
|
|
(51,880 |
) |
|
|
(28,192 |
) |
Stock based compensation expense |
|
|
|
|
|
|
264,786 |
|
Decrease (increase) in accrued interest receivable |
|
|
56,203 |
|
|
|
(308,703 |
) |
Increase in deferred loan fees |
|
|
(78,784 |
) |
|
|
(63,783 |
) |
Decrease in accounts payable, accrued expenses, other liabilities |
|
|
677,897 |
|
|
|
103,014 |
|
Increase in other assets |
|
|
129,745 |
|
|
|
148,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,497,687 |
|
|
|
4,072,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of investment securities available for sale |
|
|
(4,973,823 |
) |
|
|
(272,415 |
) |
Proceeds from sale, redemption or principal payments of investment
securities
available for sale |
|
|
253,765 |
|
|
|
327,965 |
|
Purchase of investment securities held to maturity |
|
|
(5,644,733 |
) |
|
|
(1,600,000 |
) |
Proceeds from maturities or principal payments of investment securities held
to maturity |
|
|
7,323,180 |
|
|
|
13,410,583 |
|
Net (increase) decrease of FHLB and Federal Reserve stock |
|
|
(893,800 |
) |
|
|
970,400 |
|
Loans originated or acquired |
|
|
(174,963,324 |
) |
|
|
(137,308,880 |
) |
Principal collected on loans |
|
|
114,083,214 |
|
|
|
118,447,387 |
|
Purchase of bank owned life insurance |
|
|
|
|
|
|
(1,000,000 |
) |
Proceeds from disposal of premises and equipment |
|
|
2,041 |
|
|
|
|
|
Purchase of premises and equipment |
|
|
(3,516,067 |
) |
|
|
(2,418,841 |
) |
Proceeds from foreclosed real estate |
|
|
|
|
|
|
1,733,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(68,329,547 |
) |
|
|
(7,710,756 |
) |
|
|
|
|
|
|
|
6
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
57,768,858 |
|
|
|
38,969,588 |
|
Proceeds from long-term borrowings |
|
|
24,000,000 |
|
|
|
|
|
Payments of long-term borrowings |
|
|
(5,031,401 |
) |
|
|
(15,030,169 |
) |
Net decrease in short-term borrowings |
|
|
(739,082 |
) |
|
|
(5,017,126 |
) |
Exercise of stock options |
|
|
868,684 |
|
|
|
43,179 |
|
Excess tax benefits on stock-based compensation |
|
|
51,880 |
|
|
|
28,192 |
|
Net change in unearned ESOP shares |
|
|
156,373 |
|
|
|
(192,810 |
) |
Dividends paid |
|
|
(1,184,324 |
) |
|
|
(1,062,064 |
) |
Redemption of common stock |
|
|
(889,650 |
) |
|
|
(94,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
75,001,338 |
|
|
|
17,644,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
11,169,478 |
|
|
|
14,006,583 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS JANUARY 1 |
|
|
11,426,637 |
|
|
|
18,190,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS SEPTEMBER 30 |
|
$ |
22,596,115 |
|
|
$ |
32,197,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid during the nine months for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
13,069,941 |
|
|
$ |
14,680,664 |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
2,223,625 |
|
|
$ |
2,595,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Issuance of common stock for payment of compensation |
|
$ |
140,088 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 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 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.
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 hierarchy levels are:
8
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 principal 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
September 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 observable 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 At Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities, as of September 30,
2008, measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
Fair Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Description of Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
$ |
13,915,687 |
|
|
$ |
|
|
|
$ |
13,915,687 |
|
|
$ |
|
|
Assets and Liabilities Measured at 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 as of September 30, 2008 are included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
Fair Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Description of Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
1,061,059 |
|
|
$ |
|
|
|
$ |
1,061,059 |
|
|
$ |
|
|
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 basis 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.
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. For the nine
10
months ended September 30, 2008, there were 21,711 shares excluded from the diluted earnings
per share computation because inclusion of these options would be anti-dilutive. There were
21,811 shares excluded for the nine months ended September 30, 2007. For the three months
ended September 30, 2008 there were 102,524 shares excluded from the diluted earnings per
share computation because inclusion of these options would be anti-dilutive. There were
21,811 shares excluded for the three months ended September 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 |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Basic |
|
|
2,948,727 |
|
|
|
2,639,333 |
|
|
|
2,942,129 |
|
|
|
2,643,597 |
|
Diluted |
|
|
3,061,223 |
|
|
|
2,833,367 |
|
|
|
3,066,034 |
|
|
|
2,836,440 |
|
6. |
|
STOCK-BASED COMPENSATION |
The Company maintains 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 has been
recognized in the nine months ended September 30, 2008. $264,786 of compensation related
expense was recognized in the nine months ended September 30, 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 September 30, 2008,
and changes during the nine-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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(65,111 |
) |
|
|
11.19 |
|
|
|
884,230 |
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2,809 |
) |
|
|
20.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
360,699 |
|
|
$ |
15.32 |
|
|
$ |
1,484,697 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008 |
|
|
360,699 |
|
|
$ |
15.32 |
|
|
$ |
1,484,697 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 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. Based on the previously mentioned interest
rate calculation the current interest rate for the debentures and trust preferred securities
is 4.52%. 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. Based on the previously mentioned interest rate calculation the current interest
rate for the debentures and trust preferred securities is 5.41% 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 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.
12
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 fair value option was not elected for any financial instrument as of
September 30, 2008. The adoption of SFAS 159 on January 1, 2008 did not significantly impact
the Companys 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.
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.
13
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 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 the composition of the Banks loan portfolio away from
residential first mortgage lending will 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 subjective 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
During 2006 and 2007, the Federal Reserve increased its Federal Funds target rate to a multi-year
peak on June 29, 2007. Since that time, it has become apparent that significant portions of the
U.S. and world economies had large amounts of excessive leverage in multiple asset classes. In the
U.S., housing, equity, and commodity markets have experienced significant devaluation. Also in the
U.S., several of the leading investment banks and other financial institutions have been
restructured, placed in government control, merged into stronger institutions or allowed to seek
bankruptcy. The U.S. economy shrank during the third quarter of 2008. In response to the turmoil,
the Federal Reserve, acting in concert with other central banks has aggressively cut rates, opened
the discount window to non-traditional participants, made direct investments in companies and
guaranteed debt of counter-parties and money funds. Currently interest rates on Federal Funds and
Treasury Bills are both at extremely low levels but the difference or spread between treasury
rates and other debt has increased dramatically. Retail deposit rates in particular have not
declined in concert with the decline in Treasury rates. The relatively high rates paid on retail
bank deposits have helped to decrease net interest margins at many banks.
The changes in interest rates and spreads have helped to create a challenging environment for the
Company and the Bank. Depositors are demanding a significantly higher premium over comparable
treasury interest rates. As a result the Banks use of deposit funding as a significant source of
funding for its operations, this negatively impacts interest expense relative to interest income.
In response to the profound challenges in the U.S. financial sector, the United States Treasury
Department has started a Troubled Asset Repurchase Program or TARP. When it was originally
announced, many observers believed that the TARP would primarily purchase illiquid assets of banks
at prices that would reflect a longer-term economic value in excess of market prices. Shortly
after the announcement of the program, it evolved into a program of direct investment into U.S.
banks. Based upon published guidelines, funds from TARP will be used by the Treasury Department to
purchase preferred stock in qualifying financial institutions. These preferred shares will have an
initial dividend rate of 5% for five years. After this period, the dividend rate will increase to
9%. An award of warrants to buy the financial institutions common stock would also accompany the
investment. The amount of the warrants to be issued would be based upon 15% of the amount of the
preferred stock issued to the Treasury. Acceptance of an investment under the TARP program would
also place limits on certain compensation, dividend, and other practices. Based on preliminary
estimates participation in the TARP could lead to the investment of between $5 and $15 million of
capital to the Company and Bank. Management and the Board of the Company are evaluating
participation in the TARP program.
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Income Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
$ |
9,322,087 |
|
|
$ |
9,941,838 |
|
|
$ |
28,049,141 |
|
|
$ |
29,203,917 |
|
Interest Expense |
|
|
4,493,215 |
|
|
|
5,118,104 |
|
|
|
13,545,590 |
|
|
|
15,038,183 |
|
Net Interest Income |
|
|
4,828,872 |
|
|
|
4,823,734 |
|
|
|
14,503,551 |
|
|
|
14,165,734 |
|
Provision for Loan Loss |
|
|
462,622 |
|
|
|
304,845 |
|
|
|
617,367 |
|
|
|
659,288 |
|
Noninterest Income |
|
|
632,305 |
|
|
|
1,761,048 |
|
|
|
1,978,344 |
|
|
|
2,864,188 |
|
Noninterest Expense |
|
|
3,624,150 |
|
|
|
3,228,407 |
|
|
|
10,769,913 |
|
|
|
9,632,470 |
|
Income Before Income Taxes |
|
|
1,374,405 |
|
|
|
3,051,530 |
|
|
|
5,094,615 |
|
|
|
6,738,164 |
|
Income Taxes |
|
|
490,236 |
|
|
|
1,165,891 |
|
|
|
1,767,671 |
|
|
|
2,500,790 |
|
Net Income |
|
|
884,169 |
|
|
|
1,885,639 |
|
|
|
3,326,944 |
|
|
|
4,237,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings |
|
$ |
0.30 |
|
|
$ |
0.71 |
|
|
$ |
1.13 |
|
|
$ |
1.60 |
|
Diluted Earnings |
|
$ |
0.29 |
|
|
$ |
0.67 |
|
|
$ |
1.09 |
|
|
$ |
1.49 |
|
Book Value |
|
$ |
17.26 |
|
|
$ |
15.50 |
|
|
$ |
17.26 |
|
|
$ |
15.50 |
|
RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2007
16
Net income for the nine-month period ended September 30, 2008 totaled $3,326,944 ($1.13 basic and
$1.09 diluted earnings per share) compared to $4,237,374 ($1.60 basic and $1.49 diluted earnings per share) for
the same period in the prior year. This decrease of $910,430, or 21.49%, was caused by a decrease
in net gain on the sale of foreclosed assets and an increase in noninterest expenses. These factors
were partially offset by an increases in net interest income and noninterest income other than the
gain on sale of foreclosed assets and a decline in provision for loan losses. Earnings per share
decreased at a slightly higher level as the decline in net income combined with an increase in
average common shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
%Change |
|
Interest income |
|
$ |
28,049,141 |
|
|
$ |
29,203,917 |
|
|
|
(1,154,776 |
) |
|
|
(3.95 |
)% |
Interest expense |
|
|
13,545,590 |
|
|
|
15,038,183 |
|
|
|
(1,492,593 |
) |
|
|
(9.93 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
14,503,551 |
|
|
|
14,165,734 |
|
|
|
337,817 |
|
|
|
2.38 |
% |
Provision for loan losses |
|
|
617,367 |
|
|
|
659,288 |
|
|
|
(41,921 |
) |
|
|
(6.36 |
)% |
For the nine-month period ended September 30, 2008, interest income declined 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 declined because of the decline in
average interest rates paid on interest bearing liabilities. This decline was 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. Other deposits such as longer-term time deposits experienced
smaller rate declines due to competitive pressures in the market.
Provision for loan losses decreased slightly for the nine months ended September 30, 2008. The
decrease in the provision was based on a reduction in charge-offs and nonperforming loans, a
negligible amount of delinquencies and the improved status of several large borrowers, leading to
declines in the specific reserves for them. The Banks net charge-offs of loans declined from
$149,627 for the nine months ended September 30, 2007 to $55,901 for the nine months ended
September 30, 2008. In addition, non-accrual loans declined from $414,005 at December 31, 2007 to
$84,070 at September 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 nine months of
2008 was $60,341,527, compared to $18,265,987 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 will include a review of economic conditions nationally and
locally, as well as a review of the performance of significant major loans and the overall
portfolio.
The following table shows the components of noninterest income and the dollar and percentage
changes for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
%Change |
|
NONINTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan appraisal, credit, and miscellaneous charges |
|
$ |
363,658 |
|
|
$ |
256,196 |
|
|
$ |
107,462 |
|
|
|
41.95 |
% |
Gain on asset sale |
|
|
2,041 |
|
|
|
|
|
|
|
2,041 |
|
|
|
N/A |
|
Net gain on the sale of foreclosed property |
|
|
|
|
|
|
1,272,161 |
|
|
|
(1,272,161 |
) |
|
|
(100.00 |
)% |
Income from bank owned life insurance |
|
|
388,483 |
|
|
|
263,126 |
|
|
|
125,357 |
|
|
|
47.64 |
% |
Gain on sale of investment securities |
|
|
|
|
|
|
16,912 |
|
|
|
(16,912 |
) |
|
|
(100.00 |
)% |
Service charges |
|
|
1,224,162 |
|
|
|
1,055,793 |
|
|
|
168,369 |
|
|
|
15.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
1,978,344 |
|
|
$ |
2,864,188 |
|
|
$ |
(885,844 |
) |
|
|
(30.93 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan appraisal, credit, and miscellaneous charges increased based upon changes in market conditions
and an
17
increase in loan originations. There were no sales of foreclosed property in 2008 as
compared to two sales 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
NONINTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefits |
|
$ |
6,174,825 |
|
|
$ |
5,526,490 |
|
|
$ |
648,335 |
|
|
|
11.73 |
% |
Occupancy |
|
|
1,214,352 |
|
|
|
977,637 |
|
|
|
236,715 |
|
|
|
24.21 |
% |
Advertising |
|
|
431,653 |
|
|
|
311,342 |
|
|
|
120,311 |
|
|
|
38.64 |
% |
Data processing |
|
|
477,274 |
|
|
|
498,854 |
|
|
|
(21,580 |
) |
|
|
(4.33 |
)% |
Legal and professional fees |
|
|
437,454 |
|
|
|
462,489 |
|
|
|
(25,035 |
) |
|
|
(5.41 |
)% |
Depreciation of furniture,
fixtures, and equipment |
|
|
413,139 |
|
|
|
474,373 |
|
|
|
(61,234 |
) |
|
|
(12.91 |
)% |
Telephone communications |
|
|
59,375 |
|
|
|
71,005 |
|
|
|
(11,630 |
) |
|
|
(16.38 |
)% |
ATM expenses |
|
|
247,137 |
|
|
|
225,366 |
|
|
|
21,771 |
|
|
|
9.66 |
% |
Office supplies |
|
|
106,615 |
|
|
|
118,046 |
|
|
|
(11,431 |
) |
|
|
(9.68 |
)% |
Office equipment |
|
|
41,534 |
|
|
|
37,910 |
|
|
|
3,624 |
|
|
|
9.56 |
% |
|
Other |
|
|
1,166,555 |
|
|
|
928,958 |
|
|
|
237,597 |
|
|
|
25.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses |
|
$ |
10,769,913 |
|
|
$ |
9,632,470 |
|
|
$ |
1,137,443 |
|
|
|
11.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 utility costs, and experienced increases in rental expenses on certain
properties. Advertising expenses increased as the Bank continued to build its market share. The
decrease 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. Depreciation expense declined as
many assets have been fully depreciated over 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 $1,767,671, or 34.70% of pretax income, in the current year, from
$2,500,790, or 37.11% 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 SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2007
Net income for the three-month period ended September 30, 2008 totaled $884,169 ($0.30 basic and
$0.29 diluted earnings per share), compared to $1,885,639 ($0.71 basic and $0.67 diluted earnings
per share) for the same period in the prior year. This decrease of $1,001,470, or 53.11%, was
caused by a decrease in noninterest income related to the sale of foreclosed assets in 2007, an
increase in noninterest expense and provision for loan losses, partially offset by higher
noninterest income and a decrease in income tax expense.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
9,322,087 |
|
|
$ |
9,941,838 |
|
|
|
(619,751 |
) |
|
|
(6.23 |
)% |
Interest expense |
|
|
4,493,215 |
|
|
|
5,118,104 |
|
|
|
(624,889 |
) |
|
|
(12.21 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
4,828,872 |
|
|
|
4,823,734 |
|
|
|
5,138 |
|
|
|
0.11 |
% |
Provision for loan losses |
|
|
462,622 |
|
|
|
304,845 |
|
|
|
157,777 |
|
|
|
51.76 |
% |
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. Interest
expense decreased due to changes in key rates partially offset by higher average balances of
deposits and borrowings for the period. Increases in the provision for loan losses were caused by
the increasing risk in the loan portfolio due to general economic factors and increases in the
average loan balances.
The following table shows the components of noninterest income and the dollar and percentage
changes for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
%Change |
|
NONINTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan appraisal, credit, and miscellaneous
charges |
|
$ |
129,107 |
|
|
$ |
83,520 |
|
|
$ |
45,587 |
|
|
|
54.58 |
% |
Net gain on the sale of foreclosed property |
|
|
|
|
|
|
1,205,733 |
|
|
|
(1,205,733 |
) |
|
|
|
|
Income from bank owned life insurance |
|
|
101,994 |
|
|
|
97,430 |
|
|
|
4,564 |
|
|
|
4.68 |
% |
Service charges |
|
|
401,204 |
|
|
|
374,365 |
|
|
|
26,839 |
|
|
|
7.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
632,305 |
|
|
$ |
1,761,048 |
|
|
$ |
(1,128,743 |
) |
|
|
(64.09 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan appraisal, credit, and miscellaneous charges increased due to increased loan closings and
additional fees charged. The decrease in the sale of foreclosed property was due to a major
property sale of foreclosed property in 2007 that was not repeated in 2008. 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 September 30, 2008 than in the same period in the
prior year.
The following table shows the components of noninterest expense and the dollar and percentage
changes for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
NONINTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefits |
|
$ |
2,052,810 |
|
|
$ |
1,846,398 |
|
|
$ |
206,412 |
|
|
|
11.18 |
% |
Occupancy |
|
|
416,723 |
|
|
|
320,712 |
|
|
|
96,011 |
|
|
|
29.94 |
% |
Advertising |
|
|
160,281 |
|
|
|
83,573 |
|
|
|
76,708 |
|
|
|
91.79 |
% |
Data processing |
|
|
216,283 |
|
|
|
148,006 |
|
|
|
68,277 |
|
|
|
46.13 |
% |
Legal and professional fees |
|
|
98,978 |
|
|
|
185,267 |
|
|
|
(86,289 |
) |
|
|
(46.58 |
)% |
Depreciation of furniture,
fixtures, and equipment |
|
|
141,859 |
|
|
|
190,076 |
|
|
|
(48,217 |
) |
|
|
(25.37 |
)% |
Telephone communications |
|
|
16,898 |
|
|
|
26,422 |
|
|
|
(9,524 |
) |
|
|
(36.05 |
)% |
ATM expenses |
|
|
83,685 |
|
|
|
81,598 |
|
|
|
2,087 |
|
|
|
2.56 |
% |
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Office supplies |
|
|
32,140 |
|
|
|
39,969 |
|
|
|
(7,829 |
) |
|
|
(19.59 |
)% |
Office equipment |
|
|
15,297 |
|
|
|
12,209 |
|
|
|
3,088 |
|
|
|
25.29 |
% |
Other |
|
|
389,196 |
|
|
|
294,177 |
|
|
|
95,019 |
|
|
|
32.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses |
|
$ |
3,624,150 |
|
|
$ |
3,228,407 |
|
|
$ |
395,743 |
|
|
|
12.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefits increased as the Bank added more employees to staff the new branch in
Lusby, the new regional sales facility, and to handle a greater volume of business. Occupancy also
increased as the Bank had added expenses 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 decreased as the
volume of work for certain professional services temporarily declined. We expect that the scope of
services will return to normal levels in the fourth quarter. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Cash and due from banks |
|
$ |
1,905,111 |
|
|
$ |
3,267,920 |
|
|
$ |
(1,362,809 |
) |
|
|
(41.70 |
)% |
Federal Funds sold |
|
|
1,055,967 |
|
|
|
885,056 |
|
|
|
170,911 |
|
|
|
19.31 |
% |
Interest-bearing deposits with banks |
|
|
19,635,037 |
|
|
|
7,273,661 |
|
|
|
12,361,376 |
|
|
|
169.95 |
% |
Securities available for sale |
|
|
13,915,687 |
|
|
|
9,144,069 |
|
|
|
4,771,618 |
|
|
|
52.18 |
% |
Securities held to maturity |
|
|
91,053,022 |
|
|
|
92,687,603 |
|
|
|
(1,634,581 |
) |
|
|
(1.76 |
)% |
Federal Home Loan Bank and Federal
Reserve Bank stock at cost |
|
|
6,248,300 |
|
|
|
5,354,500 |
|
|
|
893,800 |
|
|
|
16.69 |
% |
Loans receivable net of allowance
for loan losses of $5,043,949 and
$4,482,483,
respectively. |
|
|
513,955,660 |
|
|
|
453,614,133 |
|
|
|
60,341,527 |
|
|
|
13.30 |
% |
Premises and equipment, net |
|
|
12,149,741 |
|
|
|
9,423,302 |
|
|
|
2,726,439 |
|
|
|
28.93 |
% |
Accrued interest receivable |
|
|
3,091,366 |
|
|
|
3,147,569 |
|
|
|
(56,203 |
) |
|
|
(1.79 |
)% |
Investment in bank owned life insurance |
|
|
10,423,633 |
|
|
|
10,124,288 |
|
|
|
299,345 |
|
|
|
2.96 |
% |
Other assets |
|
|
4,014,398 |
|
|
|
3,483,733 |
|
|
|
530,665 |
|
|
|
15.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
677,447,922 |
|
|
$ |
598,405,834 |
|
|
$ |
79,042,088 |
|
|
|
13.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks declined as the Bank kept larger balances in Federal Funds and interest
bearing deposits with banks. Federal Funds sold and interest-bearing deposits with banks increased
due to seasonal fluctuations in certain large customer deposit accounts. This increase 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 due to 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.
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
224,249,179 |
|
|
|
43.18 |
% |
|
$ |
190,483,998 |
|
|
|
41.55 |
% |
Residential first mortgages |
|
|
102,281,964 |
|
|
|
19.70 |
% |
|
|
90,931,572 |
|
|
|
19.83 |
% |
Residential construction |
|
|
55,079,926 |
|
|
|
10.61 |
% |
|
|
50,577,491 |
|
|
|
11.03 |
% |
Second mortgage loans |
|
|
25,273,277 |
|
|
|
4.87 |
% |
|
|
24,649,581 |
|
|
|
5.38 |
% |
Commercial lines of credit |
|
|
88,724,764 |
|
|
|
17.09 |
% |
|
|
75,247,410 |
|
|
|
16.41 |
% |
Consumer loans |
|
|
2,260,240 |
|
|
|
0.44 |
% |
|
|
2,464,594 |
|
|
|
0.54 |
% |
Commercial equipment |
|
|
21,422,729 |
|
|
|
4.13 |
% |
|
|
24,113,223 |
|
|
|
5.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519,292,079 |
|
|
|
100.00 |
% |
|
|
458,467,869 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees |
|
|
292,470 |
|
|
|
0.06 |
% |
|
|
371,253 |
|
|
|
0.08 |
% |
Allowance for loan losses |
|
|
5,043,949 |
|
|
|
0.97 |
% |
|
|
4,482,483 |
|
|
|
0.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,336,419 |
|
|
|
|
|
|
|
4,853,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
513,955,660 |
|
|
|
|
|
|
$ |
453,614,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, the Banks allowance for loan losses totaled $5,043,949, or 0.97% 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.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2008 |
|
|
September 30, 2007 |
|
Beginning Balance |
|
$ |
4,482,483 |
|
|
$ |
3,783,721 |
|
Charge Offs |
|
|
57,368 |
|
|
|
149,821 |
|
Recoveries |
|
|
1,467 |
|
|
|
194 |
|
|
|
|
|
|
|
|
Net Charge Offs |
|
|
55,901 |
|
|
|
149,627 |
|
Additions Charged to
operations |
|
|
617,367 |
|
|
|
659,288 |
|
|
|
|
|
|
|
|
Balance at the end of the
period |
|
$ |
5,043,949 |
|
|
$ |
4,293,382 |
|
|
|
|
|
|
|
|
21
The following table provides information with respect to our nonperforming loans at the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
Balances as of |
|
|
Balances as of |
|
|
|
September 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 |
|
$ |
84,070 |
|
|
$ |
414,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
$ |
84,070 |
|
|
$ |
414,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans |
|
|
0.02 |
% |
|
|
0.09 |
% |
|
|
|
|
|
|
|
Allowance for loan losses to non-
performing loans |
|
|
5,999.70 |
% |
|
|
1,082.71 |
% |
|
|
|
|
|
|
|
As of September 30, 2008 and December 31, 2007, $1,463,979 and $754,700, respectively, in loans
were considered impaired under SFAS 114. Loans on which the recognition of interest has been
discontinued, which were not included within the scope of SFAS 114, amounted to approximately
$84,070 and $414,005 as of September 30, 2008 and December 31, 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
$ Change |
|
|
%Change |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
43,514,650 |
|
|
$ |
48,041,571 |
|
|
$ |
(4,526,921 |
) |
|
|
(9.42 |
)% |
Interest-bearing deposits |
|
|
459,248,223 |
|
|
|
396,952,444 |
|
|
|
62,295,779 |
|
|
|
15.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
502,762,873 |
|
|
|
444,994,015 |
|
|
|
57,768,858 |
|
|
|
12.98 |
% |
Short-term borrowings |
|
|
816,241 |
|
|
|
1,555,323 |
|
|
|
(739,082 |
) |
|
|
(47.52 |
)% |
Long-term debt |
|
|
104,974,107 |
|
|
|
86,005,508 |
|
|
|
18,968,599 |
|
|
|
22.06 |
% |
Guaranteed preferred beneficial
interest in junior subordinated
debentures |
|
|
12,000,000 |
|
|
|
12,000,000 |
|
|
|
|
|
|
|
0.00 |
% |
Accrued expenses and other
liabilities |
|
|
5,996,656 |
|
|
|
5,003,912 |
|
|
|
992,744 |
|
|
|
19.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
626,549,877 |
|
|
$ |
549,558,758 |
|
|
$ |
76,991,119 |
|
|
|
14.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine-month period ended September 30, 2008. The Bank also chose to
increase its long-term debt due to favorable rates and terms offered.
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
$ Change |
|
|
% Change |
|
Common stock |
|
$ |
29,487 |
|
|
$ |
29,100 |
|
|
$ |
387 |
|
|
|
1.33 |
% |
Additional paid in capital |
|
|
17,254,950 |
|
|
|
16,914,373 |
|
|
|
340,577 |
|
|
|
2.01 |
% |
Retained earnings |
|
|
33,911,068 |
|
|
|
32,303,353 |
|
|
|
1,607,715 |
|
|
|
4.98 |
% |
Accumulated other comprehensive
loss |
|
|
(37,185 |
) |
|
|
(73,097 |
) |
|
|
35,912 |
|
|
|
(49.13 |
)% |
Unearned ESOP shares |
|
|
(260,275 |
) |
|
|
(326,653 |
) |
|
|
66,378 |
|
|
|
(20.32 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
50,898,045 |
|
|
$ |
48,847,076 |
|
|
$ |
2,050,969 |
|
|
|
4.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 9,533 shares at a cost of $220,150 and a dividend of $0.40
per share. Book value per share slightly increased from $16.79 per share to $17.26 reflecting the
change in overall equity offset by the increase in the number of outstanding shares.
22
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 September 30, 2008,
the maximum available under this line was $236,036,028, while outstanding advances totaled
$104,974,107. 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 September 30,
2008, the Bank had pledged collateral sufficient to draw $166,347,000 under the line. In addition,
the Bank has established other lines of credit totaling $18,313,252. In addition to these lines of
credit, the Bank has available, additional securities which are currently unpledged. The Federal
Home Loan Bank established that the pledging of these securities would increase its available line
of credit by $12.3 million.
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 September 30, 2008 totaled
$22,596,115, an increase of $11,169,478 or 97.75%, from the December 31, 2007 total of $11,426,637.
This increase was due to seasonal increases in certain customers deposit accounts. We expect that
total cash will return to levels more consistent with December 31, 2007 level. The Banks principal
sources of cash flows are its financing activities including deposits and borrowings. During the
first nine months of 2008, all financing activities provided $75,001,338 in cash compared to
$17,644,743 for the first nine months of 2007. The increase in cash flows from financing activities
during the most recent period was principally due to increases in net long-term borrowings and
deposits. In the first nine months of 2007, the Company made principal payments on long-term debt
of $15,030,169 with no proceeds from long-term borrowings. In the first nine months of 2008, the
Company had proceeds from long-term debt of $24,000,000 offset by payments of $5,031,401. In the
first nine months of 2008, the Company decreased short-term debt by $739,082 compared to a decrease
of $5,017,126 for the same period in the prior year. During the first three quarters of 2008, net
deposit growth was $57,768,858 compared to $38,969,588 in 2007. Operating activities provided cash
of $4,497,687 in the first three quarters of 2008 compared to $4,072,596 in the first three
quarters of 2007.
The Banks principal use of cash has been in investments in loans, investment securities and other
assets. During the nine-month period ended September 30, 2008, the Bank invested a total of
$68,329,547 compared to $7,710,756 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, an increase in investment securities purchased and a decrease in the proceeds
from maturities and principal payments of investment securities.
In 2007, the Bank began constructing a regional facility that houses a retail bank branch, certain
loan support staff, information technology facilities, and other administrative, support and sales
personnel. The total cost of construction of the facility was $4.5 million. The retail branch
opened in September of 2008.
23
REGULATORY MATTERS
The Bank is subject to Federal Reserve Board capital requirements as well as statutory capital
requirements imposed under Maryland law. At September 30, 2008, the Banks tangible, leverage and
risk-based capital ratios were 9.19%, 11.28% and 12.23%, 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 September 30, 2008, the Companys
tangible, leverage and risk-based capital ratios were 9.48%, 11.62% and 12.56%, 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
24
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.
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 nine
months ended September 30, 2008 that have materially affected, or are reasonable likely to
materially affect, the Companys internal control over financial reporting.
25
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.
ITEM 1A RISK FACTORS
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 September 30, 2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
Maximum |
|
|
|
(a) |
|
|
|
|
|
|
Total Number of |
|
|
Number of Shares |
|
|
|
Total |
|
|
(b) |
|
|
Shares Purchased |
|
|
that May Yet Be |
|
|
|
Number of |
|
|
Average |
|
|
as Part of Publicly |
|
|
Purchased Under the |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced Plan or |
|
|
Plans or |
|
Period |
|
Purchased |
|
|
per Share |
|
|
Programs |
|
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1-31, 2008 |
|
|
1,207 |
|
|
$ |
21.98 |
|
|
|
1,207 |
|
|
|
23,714 |
|
August 1-31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,714 |
|
September 1-30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,207 |
|
|
$ |
21.98 |
|
|
|
1,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 25, 2008, Tri-County Financial Corporation announced a repurchase program under which
it would repurchase up to 5% of its outstanding common stock or approximately 147,435 shares. The
previous program announced on October 25, 2004, which had 23,714 shares remaining, was terminated,
on September 25, 2008.
ITEM 3 DEFAULT UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
26
ITEM 6 EXHIBITS
Exhibit 31 Rule 13a-14(a) Certifications
Exhibit 32 Section 1350 Certifications
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
TRI-COUNTY FINANCIAL CORPORATION
|
|
Date: November 12, 2008 |
By: |
/s/ Michael L. Middleton |
|
|
|
Michael L. Middleton, President, Chief |
|
|
|
Executive Officer and Chairman of the
Board |
|
|
|
|
|
Date: November 12, 2008 |
By: |
/s/ William J. Pasenelli |
|
|
|
William J. Pasenelli, Executive Vice |
|
|
|
President and Chief Financial Officer |
|
28