UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
Fiscal Year Ended December 31, 2008
0-24169
Commission
File No.
PEOPLES BANCORP,
INC.
(Exact
name of registrant as specified in its charter)
|
Maryland
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52-2027776
|
|
(State
or Other Jurisdiction of
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(I.R.S. Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
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|
P.O. Box 210, 100 Spring Avenue,
Chestertown, Maryland
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21620
|
|
(Address
of Principal Executive Offices)
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(Zip
Code)
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(410)
778-3500
Registrant’s
Telephone Number, Including Area Code
Securities
Registered pursuant to Section 12(g) of the Act:
Common Stock, par value
$10.00 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 16(d) of the Act.
¨
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days Yes
x
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company
(check one): Large accelerated filer
¨
Accelerated
filer
¨
Non-accelerated
filer
¨
Smaller
reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes
¨
No
x
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter: $48,810,800.
The
number of shares outstanding of the registrant’s common stock as of March 1,
2009 was 779,512.
Documents
Incorporated by Reference
Portions of the definitive proxy
statement to be filed with the SEC in connection with the registrant’s 2009
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K.
PEOPLES
BANCORP, INC.
FORM
10-K
INDEX
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PART
I
|
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Item
1.
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Business
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2
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Item
1A.
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Risk
Factors
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8
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Item
1B.
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Unresolved
Staff Comments
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14
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Item
2.
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Properties
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14
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Item
3.
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Legal
Proceedings
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15
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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15
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and
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Issuer
Purchases of Equity Securities
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15
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Item
6.
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Selected
Financial Data
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16
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition
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|
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and
Results of Operations
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16
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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32
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Item
8.
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Financial
Statements and Supplementary Data
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33
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting
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|
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and
Financial Disclosure
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60
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Item
9A.
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Controls
and Procedures
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60
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Item
9B.
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Other
Information
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62
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporation Governance
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62
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Item
11.
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Executive
Compensation
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62
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management
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|
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and
Related Stockholder Matters
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62
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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62
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Item
14.
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Principal
Accountant Fees and Services
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62
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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62
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Signatures
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63
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Exhibit
Index
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65
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This Annual Report of Peoples Bancorp,
Inc. on Form 10-K may contain forward-looking statements within the meaning of
The Private Securities Litigation Reform Act of 1995. Readers of this
annual report should be aware of the speculative nature of “forward-looking
statements”. Statements that are not historical in nature, including
the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and
similar expressions, are based on current expectations, estimates and
projections about (among other things) the industry and the markets in which we
operate; they are not guarantees of future performance. Whether
actual results will conform to expectations and predictions is subject to known
and unknown risks and uncertainties, including risks and uncertainties discussed
in this Form 10-K, general economic, market or business conditions; changes in
interest rates, deposit flow, the cost of funds, and demand for loan products
and financial services; changes in our competitive position or competitive
actions by other companies; changes in the quality or composition of loan and
investment portfolios; the ability to mange growth; changes in laws or
regulations or policies of federal and state regulators and agencies; and other
circumstances beyond our control. These and other risks are discussed
in detail in Item 1A of Part I of this annual report. All of the
forward-looking statements made in this report are qualified by these cautionary
statements, and there can be no assurance that the actual results anticipated
will be realized, or if substantially realized, will have the expected
consequences on our business or operations. Except as required by
applicable laws, we do not intend to publish updates or revisions of any
forward-looking statements we make to reflect new information, future events or
otherwise.
Except as expressly provided otherwise,
the term “Company” as used in this annual report refers to Peoples Bancorp, Inc.
and the terms “we”, “us” and “our” refer collectively to Peoples Bancorp, Inc.
and its subsidiaries.
PART
I
Item
1. Business.
General
The Company was incorporated under the
laws of Maryland on December 10, 1996 and is a financial holding company
registered under the Bank Holding Company Act of 1956, as amended (the “BHC
Act”). The Company’s sole business is acting as the parent company to
The Peoples Bank, a Maryland-chartered bank (the “Bank”), and Fleetwood, Athey,
Macbeth & McCown, Inc., a Maryland insurance agency (the “Insurance
Subsidiary”).
On January 2, 2007, the Company
acquired the Insurance Subsidiary and began operating in the insurance products
and services business segment. Prior to that date, we operated in
only one business segment: community banking.
Location
and Service Area
We offer a variety of services to
consumer and commercial customers in our primary service area, which encompasses
all of Kent County, northern Queen Anne’s County, and southern Cecil County,
Maryland.
The principal components making up the
economy for our service area are agriculture and light industry. Kent
County is also growing as a tourist and retirement area. The tourist
business is centered primarily in Chestertown and Rock Hall. There is
a large retirement community, Heron Point, located in
Chestertown. The seafood business, once prominent, is in
decline. There are three health-care facilities located in
Chestertown. Agriculture and agricultural-related businesses are the
largest overall employers in the service area. There are several
light industry companies in Kent County.
Banking
Products and Services
Through the Bank’s five branches
located throughout Kent County, Maryland and two branches in Queen Anne’s
County, Maryland, we offer a full range of deposit services that are typically
offered by most depository institutions in our service area, including checking
accounts, NOW accounts, savings accounts and other time deposits of various
types, ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored
to our principal service area and have rates that are competitive with those
offered by other institutions in the area. In addition, we offer
certain retirement account services, such as Individual Retirements
Accounts. All deposits are insured by the Federal Deposit Insurance
Corporation (the “FDIC”) up to the maximum amount allowed by law. We
solicit these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
We also offer a full range of short- to
medium-term commercial and personal loans. Commercial loans include
both secured and unsecured loans for working capital (including inventory and
receivables), business expansion (including acquisition of real estate and
improvements), and purchase of equipment and machinery. Consumer
loans include secured and unsecured loans for financing automobiles, home
improvements, education, and personal investments. We also originate
mortgage loans and real estate construction and acquisition loans.
Other services include cash management
services, safe deposit boxes, travelers checks, internet banking, direct deposit
of payroll and social security checks, and automatic drafts for various
accounts. The Bank is associated with a regional network of automated
teller machines that may be used by our customers throughout Maryland and other
regions. We also offer credit card services through a correspondent
bank and non-deposit investment products, such as insurance and securities
products, through broker-dealer relationships.
Information about our revenues, net
income and assets derived from our operations in the community banking segment
for each of the years ended December 31, 2008 and 2007 may be found in our
Consolidated Financial Statements and Notes thereto, which are included in Item
8 of Part II of this annual report.
Investment
Activities
We maintain a portfolio of investment
securities to provide liquidity and income. The current portfolio
amounts to approximately 5.61% of our total assets and is invested primarily in
U.S. government agency and mortgage-backed securities.
A key objective of the investment
portfolio is to provide a balance in our asset mix of loans and investments
consistent with our liability structure, and to assist in management of interest
rate risk. The investments augment our capital positions, providing
the necessary liquidity to meet fluctuations in credit demand of the community
and fluctuations in deposit levels. In addition, the portfolio
provides collateral for pledging against public funds and repurchase agreements
and a reasonable allowance for control of tax liabilities. Finally,
the investment portfolio is designed as a source of income. In view
of the above objectives, management treats the portfolio conservatively and
generally only purchases securities that meet conservative investment
criteria.
Insurance
Activities
The Insurance Subsidiary is located in
Chestertown, Kent County, Maryland. The Insurance Subsidiary offers a
full range of property and casualty insurance products and services to customers
in our market area.
Seasonality
Management does not believe that our
business activities are seasonal in nature. Demand for our products
and services may vary depending on local and national economic conditions, but
management believes that any variation will not have a material impact on our
planning or policy-making strategies.
Employees
At March 1, 2009, we employed 80
persons, of which 68 were employed on a full-time basis.
COMPETITION
The banking business, in all of its
phases, is highly competitive. Within our service area and the
surrounding area, we compete with commercial banks (including local banks and
branches or affiliates of other larger banks), savings and loan associations and
credit unions for loans and deposits, with consumer finance companies for loans,
with money market mutual funds and other investment vehicles for deposits, with
insurance companies, agents and brokers for insurance products, and with other
financial institutions for various types of financial products and
services. There is also competition for commercial and retail banking
business from banks and financial institutions located outside of our market
area. Many of these financial institutions offer services, such as
trust services, that we do not offer and have greater financial resources or
have substantially higher lending limits than us.
The primary factors in competing for
deposits are interest rates, personalized services, the quality and range of
financial services, convenience of office locations and office
hours. The primary factors in competing for loans are interest rates,
loan origination fees, the quality and range of lending services and
personalized services.
To compete with other financial
services providers, we rely principally upon local promotional activities,
personal relationships established by officers, directors and employees with our
customers and specialized services tailored to meet our customers’
needs. In those instances in which we are unable to accommodate a
customer’s needs, we will arrange for those services to be provided by other
financial services providers with which we have a relationship. We
offer many personalized services and attract customers by being responsive and
sensitive to the needs of the community. We rely not only on the
goodwill and referrals of satisfied customers, as well as traditional media
advertising to attract new customers, but also on individuals who develop new
relationships to build our customer base. To enhance our image in the
community, we support and participate in many local events. Our
employees, officers and directors represent us on many boards and local civic
and charitable organizations.
The following table sets forth deposit
data for Kent County, Maryland as of June 30, 2008, the most recent date for
which comparative information is available (the Bank’s Sudlersville branch in
Queen Anne’s County was not operational on or prior to June 30,
2008:
|
Institution
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Offices
In Market Area
|
|
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Deposits
(in thousands)
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|
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Market Share
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PNC
Bank National Assn
|
|
|
5
|
|
|
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166,204
|
|
|
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33.48
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%
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|
Peoples
Bank of Kent County, Maryland
|
|
|
5
|
|
|
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165,548
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|
|
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33.34
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%
|
|
Chesapeake
Bank & Trust Co
|
|
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2
|
|
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62,942
|
|
|
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12.68
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%
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|
Branch
Banking & Trust Co
|
|
|
2
|
|
|
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43,590
|
|
|
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8.78
|
%
|
|
Centreville
National Bank of Maryland
|
|
|
2
|
|
|
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31,286
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|
|
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6.30
|
%
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|
SunTrust
Bank
|
|
|
1
|
|
|
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26,921
|
|
|
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5.42
|
%
|
Source: FDIC
Deposit Market Share Report
SUPERVISION
AND REGULATION
The following is a summary of the
material regulations and policies applicable to us and is not intended to be a
comprehensive discussion. Changes in applicable laws and regulations
may have a material effect on our business, financial condition and results of
operation.
General
The Company is a financial holding
company registered with the Board of Governors of the Federal Reserve System
(the “FRB”) under the BHC Act and, as such, is subject to the supervision,
examination and reporting requirements of the BHC Act and the regulations of the
FRB.
The Bank is a Maryland commercial bank
subject to the banking laws of Maryland and to regulation by the Commissioner of
Financial Regulation of Maryland, who is required by statute to make at least
one examination in each calendar year (or at 18-month intervals if the
Commissioner determines that an examination is unnecessary in a particular
calendar year).
The Insurance Subsidiary is subject to
examination by the FRB, and, as an affiliate of the Bank, may be subject to
examination by the Bank’s regulators from time to time. In addition,
the Insurance Subsidiary is subject to licensing and regulation by the insurance
authorities of the states in which it does business. Retail sales of
insurance products by the Insurance Subsidiary to customers of the Bank are also
subject to the requirements of the Interagency Statement on Retail Sales of
Nondeposit Investment Products promulgated in 1994, as amended, by the federal
banking regulators, including the FDIC and the FRB.
Regulation
of Financial Holding Companies
In November 1999, the federal
Gramm-Leach-Bliley Act (the “GLB Act”) was signed into law. Effective
in pertinent part on March 11, 2000, the GLB Act revised the BHC Act and
repealed the affiliation provisions of the Glass-Steagall Act of 1933, which,
taken together, limited the securities, insurance and other non-banking
activities of any company that controls an FDIC insured financial
institution. Under the GLB Act, a bank holding company can elect,
subject to certain qualifications, to become a “financial holding
company”. The GLB Act provides that a financial holding company may
engage in a full range of financial activities, including insurance and
securities sales and underwriting activities, and real estate development, with
new expedited notice procedures.
Under FRB policy, the Company is
expected to act as a source of strength to its subsidiary bank, and the FRB may
charge the Company with engaging in unsafe and unsound practices for failure to
commit resources to a subsidiary bank when required. In addition,
under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
(“FIRREA”), depository institutions insured by the FDIC can be held liable for
any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of
default. Accordingly, in the event that any insured subsidiary of the
Company causes a loss to the FDIC, other insured subsidiaries of the Company
could be required to compensate the FDIC by reimbursing it for the estimated
amount of such loss. Such cross guaranty liabilities generally are
superior in priority to obligations of a financial institution to its
stockholders and obligations to other affiliates.
Regulation
of the Bank
Federal and state banking regulators
may prohibit the institutions over which they have supervisory authority from
engaging in activities or investments that the agencies believe are unsafe or
unsound banking practices. These banking regulators have extensive
enforcement authority over the institutions they regulate to prohibit or correct
activities that violate law, regulation or a regulatory agreement or which are
deemed to be unsafe or unsound practices. Enforcement actions may
include the appointment of a conservator or receiver, the issuance of a cease
and desist order, the termination of deposit insurance, the imposition of civil
money penalties on the institution, its directors, officers, employees and
institution-affiliated parties, the issuance of directives to increase capital,
the issuance of formal and informal agreements, the removal of or restrictions
on directors, officers, employees and institution-affiliated parties, and the
enforcement of any such mechanisms through restraining orders or other court
actions.
The Bank is subject to the provisions
of Section 23A and Section 23B of the Federal Reserve Act. Section
23A limits the amount of loans or extensions of credit to, and investments in,
the Company and its nonbank affiliates by the Bank. Section 23B
requires that transactions between any of the Bank and the Company and its
nonbank affiliates be on terms and under circumstances that are substantially
the same as with non-affiliates.
The Bank is also subject to certain
restrictions on extensions of credit to executive officers, directors, and
principal stockholders or any related interest of such persons, which generally
require that such credit extensions be made on substantially the same terms as
are available to third parties dealing with the Bank and not involve more than
the normal risk of repayment. Other laws tie the maximum amount that
may be loaned to any one customer and its related interests to capital
levels.
As part of the Federal Deposit
Insurance Company Improvement Act of 1991 (“FDICIA”), each federal banking
regulator adopted non-capital safety and soundness standards for institutions
under its authority. These standards include internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. An institution that fails to meet those standards may be
required by the agency to develop a plan acceptable to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. We believe that the Bank meets
substantially all standards that have been adopted. FDICIA also
imposes new capital standards on insured depository institutions.
The Community Reinvestment Act (“CRA”)
requires that, in connection with the examination of financial institutions
within their jurisdictions, the federal banking regulators evaluate the record
of the financial institution in meeting the credit needs of their communities
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered by
all regulatory agencies in evaluating mergers, acquisitions and applications to
open a branch or facility. As of the date of its most recent
examination report, the Bank had a CRA rating of “Outstanding.”
On October 14, 2008, the FDIC announced
the creation of the Temporary Liquidity Guarantee Program (the “TLGP”) to
decrease the cost of bank funding and, hopefully, normalize
lending. This program is comprised of two components. The first
component guarantees senior unsecured debt issued between October 14, 2008 and
June 30, 2009. The guarantee will remain in effect until June 30,
2012 for such debts that mature beyond June 30, 2009. The second
component provides full coverage for non-interest bearing transaction deposit
accounts, IOLTAs, and NOW accounts with interest rates of 0.50 percent or less,
regardless of account balance, until December 31, 2009. We elected to
participate in both programs and expect FDIC premiums to increase in 2009 as a
result.
The GLB Act permits certain qualified
national banks to form “financial subsidiaries”, which have broad authority to
engage in all financial activities except insurance underwriting, insurance
investments, real estate investment or development, and merchant banking, and
expands the potential financial activities of subsidiaries of state banks,
subject to applicable state law. Maryland law generally permits
Maryland state-chartered banks, including the Bank, to engage in those
activities, directly or through an affiliate, in which a national bank may
engage.
Deposit
Insurance
The deposits at the Bank are insured to
a maximum of $100,000 per depositor through the Deposit Insurance Fund, which is
administered by the FDIC, and the Bank is required to pay semi-annual deposit
insurance premium assessments to the FDIC. The Deposit Insurance Fund
was created pursuant to the Federal Deposit Insurance Reform Act of 2005, which
was signed into law on February 8, 2006. Under this new law, (i) the
current $100,000 deposit insurance coverage will be indexed for inflation (with
adjustments every five years, commencing January 1, 2011), and (ii) deposit
insurance coverage for retirement accounts was increased to $250,000 per
participant subject to adjustment for inflation. In addition, the
FDIC will be given greater latitude in setting the assessment rates for insured
depository institutions which could be used to impose minimum
assessments. The law also allows “eligible insured depository
institutions” to share in a one-time assessment credit pool. The
Bank’s portion of the one time credit assessment was $132,329. This
credit was used up in 2008. Effective October 3, 2008, the Emergency
Economic Stabilization Act of 2008 (the “EESA”) was enacted to temporarily raise
the basic limit on federal deposit insurance coverage from $100,000 to $250,000
per depositor. The legislation states the limit will return to
$100,000 after December 31, 2009. The coverage for retirement
accounts did not change and remains at $250,000. The Bank expensed a
total of $100,907 in FDIC premiums during 2008. Further information
about deposit insurance premiums is provided in Item 7 of Part II of this report
under the heading “Recent Developments”.
Capital
Requirements
Under Maryland law, the Bank must meet
certain minimum capital stock and surplus requirements before it may establish a
new branch office. With each new branch located outside the municipal
area of the Bank’s principal banking office, these minimal levels are subject to
upward adjustment based on the population size of the municipal area in which
the branch will be located. Prior to establishment of the branch, the
Bank must obtain Maryland Commissioner and FDIC approval. If
establishment of the branch involves the purchase of a bank building or
furnishings, the total investment in bank buildings and furnishings cannot
exceed, with certain exceptions, 50% of the Bank’s unimpaired capital and
surplus.
FDICIA established a system of prompt
corrective action to resolve the problems of undercapitalized
institutions. Under this system, federal banking regulators are
required to rate supervised institutions on the basis of five capital
categories: “well -capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized,” and “critically undercapitalized;” and to take
certain mandatory actions, and are authorized to take other discretionary
actions, with respect to institutions in the three undercapitalized
categories. The severity of the actions will depend upon the category
in which the institution is placed. A depository institution is “well
capitalized” if it has a total risk based capital ratio of 10% or greater, a
Tier 1 risk based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater and is not subject to any order, regulatory agreement, or written
directive to meet and maintain a specific capital level for any capital
measure. An “adequately capitalized” institution is defined as one
that has a total risk based capital ratio of 8% or greater, a Tier 1 risk based
capital ratio of 4% or greater and a leverage ratio of 4% or greater (or 3% or
greater in the case of an institution with a composite CAMELS rating of
1). Tier 1 capital consists of common stockholders’ equity,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, less certain intangibles.
FDICIA generally prohibits a depository
institution from making any capital distribution, including the payment of cash
dividends, or paying a management fee to its holding company if the depository
institution would thereafter be undercapitalized. Undercapitalized
depository institutions are subject to growth limitations and are required to
submit capital restoration plans. For a capital restoration plan to
be acceptable, the depository institution’s parent holding company must
guarantee (subject to certain limitations) that the institution will comply with
such capital restoration plan.
Significantly undercapitalized
depository institutions may be subject to a number of other requirements and
restrictions, including orders to sell sufficient voting stock to become
adequately capitalized and requirements to reduce total assets and stop
accepting deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to the appointment of a
receiver or conservator, generally within 90 days of the date such institution
is determined to be critically undercapitalized.
As of December 31, 2008, the Company
and the Bank were deemed to be “well capitalized”. For more
information regarding the capital condition of the Company and the Bank, see
Item 7 of Part II of this annual report under the caption
“Capital”.
Limitations
on Dividends
Holders of shares of the Company’s
common stock are entitled to dividends if, when, and as declared by the
Company’s Board of Directors out of funds legally available for that purpose,
and the Board’s ability to declare dividends is subject to certain restrictions
imposed under federal banking law and state banking and corporate
law. These restrictions are discussed in more detail below in Item 1A
of Part I of this report under the caption “Our ability to pay dividends is
limited”.
USA
PATRIOT Act
Congress adopted the USA PATRIOT Act
(the “Patriot Act”) on October 26, 2001 in response to the terrorist attacks
that occurred on September 11, 2001. Under the Patriot Act, certain
financial institutions, including banks, are required to maintain and prepare
additional records and reports that are designed to assist the government’s
efforts to combat terrorism. The Patriot Act includes sweeping
anti-money laundering and financial transparency laws and required additional
regulations, including, among other things, standards for verifying client
identification when opening an account and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
Federal
Securities Laws
The shares of the Company’s common
stock are registered with the Securities and Exchange Commission (the “SEC”)
under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). The Company is subject to information reporting
requirements, proxy solicitation requirements, insider trading restrictions and
other requirements of the Exchange Act, including the requirements imposed under
the federal Sarbanes-Oxley Act of 2002. Among other things, loans to
and other transactions with insiders are subject to restrictions and heightened
disclosure, directors and certain committees of the Board must satisfy certain
independence requirements, and the Company is required to comply with certain
corporate governance requirements.
Governmental
Monetary and Credit Policies and Economic Controls
The earnings and growth of the banking
industry and ultimately of the Bank are affected by the monetary and credit
policies of governmental authorities, including the FRB. An important
function of the FRB is to regulate the national supply of bank credit in order
to control recessionary and inflationary pressures. Among the instruments of
monetary policy used by the FRB to implement these objectives are open market
operations in U.S. Government securities, changes in the federal funds rate,
changes in the discount rate of member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in
varying combinations to influence overall growth of bank loans, investments and
deposits and may also affect interest rates charged on loans or paid for
deposits. The monetary policies of the FRB authorities have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to have such an effect in the future. In
view of changing conditions in the national economy and in the money markets, as
well as the effect of actions by monetary and fiscal authorities, including the
FRB, no prediction can be made as to possible future changes in interest rates,
deposit levels, loan demand or their effect on the business and earnings of the
Company and its subsidiaries.
Item
1A. Risk Factors.
The
following factors should be considered carefully in evaluating an investment in
shares of common stock of the Company.
Risks
Relating to the Business of the Company and its Affiliates
The
Company’s future depends on the successful growth of its
Affiliates.
The Company’s primary business activity
for the foreseeable future will be to act as the holding company of the Bank and
the Insurance Subsidiary. Therefore, the Company’s future
profitability will depend on the success and growth of these
subsidiaries. In the future, part of the Company’s growth may come
from buying other banks and buying or establishing other
companies. Such entities may not be profitable after they are
purchased or established, and they may lose money, particularly at
first. A new bank or company may bring with it unexpected
liabilities, bad loans, or bad employee relations, or the new bank or company
may lose customers.
The
majority of our business is concentrated in Maryland; a significant amount of
our business is concentrated in real estate lending.
Because most of our loans are made to
customers who reside on Maryland’s upper Eastern Shore, a decline in local
economic conditions may have a greater effect on our earnings and capital than
on the earnings and capital of larger financial institutions whose loan
portfolios are geographically diverse. Further, we make many real
estate secured loans, including construction and land development loans, all of
which are in greater demand when interest rates are low and economic conditions
are good. The national and local economies have significantly
weakened during the past two years in part due to the widely-reported problems
in the sub-prime mortgage loan market. As a result, real estate
values across the country, including in our market areas, have decreased and the
general availability of credit, especially credit to be secured by real estate,
has also decreased. These conditions have made it more difficult for
real estate owners and owners of loans secured by real estate to sell their
assets at the times and at the prices they desire. In addition, these
conditions have increased the risk that the market values of the real estate
securing our loans may deteriorate, which could cause us to lose money in the
event a borrower fails to repay a loan and we are forced to foreclose on the
property. There can be no guarantee as to when or whether economic
conditions will improve.
Additionally, the FRB and the FDIC,
along with the other federal banking regulators, issued final guidance on
December 6, 2006 entitled “Concentrations in Commercial Real Estate Lending,
Sound Risk Management Practices” directed at institutions that have particularly
high concentrations of commercial real estate loans within their lending
portfolios. This guidance suggests that institutions whose commercial
real estate loans exceed certain percentages of capital should implement
heightened risk management practices appropriate to their concentration risk and
may be required to maintain higher capital ratios than institutions with lower
concentrations in commercial real estate lending. Based on our
commercial real estate concentration as of September 30, 2008, we may be subject
to further supervisory analysis during future examinations. We cannot
guarantee that any risk management practices we implement will be effective to
prevent losses relating to our commercial real estate
portfolio. Management cannot predict the extent to which this
guidance will impact our operations or capital requirements.
The
Bank may experience loan losses in excess of its allowance.
The risk of credit losses on loans
varies with, among other things, general economic conditions, the type of loan
being made, the creditworthiness of the borrower over the term of the loan and,
in the case of a collateralized loan, the value and marketability of the
collateral for the loan. Management maintains an allowance for loan
losses based upon, among other things, historical experience, an evaluation of
economic conditions and regular reviews of delinquencies and loan portfolio
quality. Based upon such factors, management makes various assumptions and
judgments about the ultimate collectability of the loan portfolio and provides
an allowance for loan losses based upon a percentage of the outstanding balances
and for specific loans when their ultimate collectability is considered
questionable. If management's assumptions and judgments prove to be
incorrect and the allowance for loan losses is inadequate to absorb future
losses, or if the bank regulatory authorities require us to increase the
allowance for loan losses as a part of its examination process, our earnings and
capital could be significantly and adversely affected. Although
management uses the best information available to make determinations with
respect to the allowance for loan losses, future adjustments may be necessary if
economic conditions differ substantially from the assumptions used or adverse
developments arise with respect to our non-performing or performing loans.
Material additions to the allowance for loan losses would result in a decrease
in our net income and capital, and could have a material adverse effect on our
financial condition.
Interest
rates and other economic conditions will impact our results of
operations.
Our results of operations may be
materially and adversely affected by changes in prevailing economic conditions,
including declines in real estate values, rapid changes in interest rates and
the monetary and fiscal policies of the federal government. Our
profitability is in part a function of the spread between the interest rates
earned on assets and the interest rates paid on deposits and other
interest-bearing liabilities (
i.e.
, net interest income),
including advances from the Federal Home Loan Bank (the
“FHLB”). Interest rate risk arises from mismatches (
i.e.
, the interest
sensitivity gap) between the dollar amount of repricing or maturing assets and
liabilities and is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. More assets repricing or maturing
than liabilities over a given time period is considered asset-sensitive and is
reflected as a positive gap, and more liabilities repricing or maturing than
assets over a given time period is considered liability-sensitive and is
reflected as negative gap. An asset-sensitive position (
i.e.
, a positive gap) could
enhance earnings in a rising interest rate environment and could negatively
impact earnings in a falling interest rate environment, while a
liability-sensitive position (
i.e.
, a negative gap) could
enhance earnings in a falling interest rate environment and negatively impact
earnings in a rising interest rate environment. Fluctuations in
interest rates are not predictable or controllable. We have attempted
to structure our asset and liability management strategies to mitigate the
impact on net interest income of changes in market interest rates, but there can
be no assurance that these attempts will be successful in the event of such
changes.
The
market value of our investments could decline.
As of December 31, 2008, we had
classified 28.85% of our investment securities as available-for-sale pursuant to
Statement of Financial Accounting Standards No. 115 (“SFAS 115”) relating to
accounting for investments. SFAS 115 requires that the
available-for-sale portfolio be “marked to market” and that unrealized gains and
losses be reflected as a separate item in stockholders’ equity (net of tax) as
accumulated other comprehensive income. The remaining investment
securities are classified as held-to-maturity in accordance with SFAS 115, and
are stated at amortized cost.
In the past, gains on sales of
investment securities have not been a significant source of income for
us. There can be no assurance that future market performance of
our investment portfolio will enable us to realize income from sales of
securities. Stockholders’ equity will continue to reflect the
unrealized gains and losses (net of tax) of these investments. There
can be no assurance that the market value of our investment portfolio will not
decline, causing a corresponding decline in stockholders’ equity.
The Bank is a member of the FHLB of
Atlanta. A member of the FHLB system is required to purchase stock
issued by the relevant FHLB bank based on how much it borrows from the FHLB and
the quality of the collateral pledged to secure that
borrowing. Accordingly, we maintain investments in stock issued by
the FHLB of Atlanta. In recent months, the banking industry has
become concerned about the financial strength of the banks in the FHLB system,
and some FHLB banks have stopped paying dividends on and redeeming FHLB
stock. On January 30, 2009, the FHLB of Atlanta announced that it was
deferring the declaration of a dividend on its stock for the quarter ended
December 31, 2008 until it completes its year-end analysis of
other-than-temporary impairment which is critical to its net income
determination. The FHLB of Atlanta stated that it anticipates a
decision regarding the dividend to be made in March
2009. Accordingly, there can be no guaranty that the FHLB of Atlanta
will declare future dividends. Moreover, accounting guidance
indicates that an investor in FHLB stock should recognize impairment if it
concludes that it is not probable that it will ultimately recover the par value
of its shares. The decision of whether impairment exists is a matter of judgment
that should reflect the investor's view of an FHLB’s long-term performance,
which includes factors such as its operating performance, the severity and
duration of declines in the market value of its net assets related to its
capital stock amount, its commitment to make payments required by law or
regulation and the level of such payments in relation to its operating
performance, the impact of legislation and regulatory changes on the FHLB, and
accordingly, on the members of the FHLB and its liquidity and funding position.
After evaluating all of these considerations, we believe the par value of our
FHLB stock will be recovered, but future evaluations of the above mentioned
factors could result in the Company recognizing an impairment
charge.
Management believes that several
factors will affect the market values of our investment
portfolio. These include, but are not limited to, changes in interest
rates or expectations of changes, the degree of volatility in the securities
markets, inflation rates or expectations of inflation and the slope of the
interest rate yield curve (the yield curve refers to the differences between
shorter-term and longer-term interest rates; a positively sloped yield curve
means shorter-term rates are lower than longer-term rates). Also, the
passage of time will affect the market values of our investment securities, in
that the closer they are to maturing, the closer the market price should be to
par value. These and other factors may impact specific categories of
the portfolio differently, and management cannot predict the effect these
factors may have on any specific category.
We
operate in a competitive environment.
We operate in a competitive
environment, competing for loans, deposits, insurance products and customers
with commercial banks, savings associations and other financial
entities. Competition for deposits comes primarily from other
commercial banks, savings associations, credit unions, money market and mutual
funds and other investment alternatives. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries. Competition
for other products, such as insurance and securities products, comes from other
banks, securities and brokerage companies, insurance companies, insurance agents
and brokers, and other nonbank financial service providers in our market
areas. Many of these competitors are much larger in terms of total
assets and capitalization, have greater access to capital markets, and/or offer
a broader range of financial services than those offered by us. In
addition, banks with a larger capitalization and financial intermediaries not
subject to bank regulatory restrictions have larger lending limits and are
thereby able to serve the needs of larger customers. Our growth and
profitability will depend upon our ability to attract and retain skilled
managerial, marketing and technical personnel. Competition for
qualified personnel in the financial services industry is intense, and there can
be no assurance that we will be successful in attracting and retaining such
personnel.
In
addition, current banking laws facilitate interstate branching, merger activity
among banks, and expanded activities in which banks, their holding companies and
their affiliates may engage. These laws may increase the competition
we face in our market areas in the future, although management cannot predict
the degree to which such competition will impact our financial condition or
results of operations.
The
banking industry is heavily regulated; significant regulatory changes could
adversely affect our operations.
Our operations will be impacted by
current and future legislation and by the policies established from time to time
by various federal and state regulatory authorities. The Company is
subject to supervision by the FRB and the Bank is subject to supervision and
periodic examination by the Maryland Commissioner and the
FDIC. Banking regulations, designed primarily for the safety of
depositors, may limit a financial institution's growth and the return to its
investors by restricting such activities as the payment of dividends, mergers
with or acquisitions by other institutions, investments, loans and interest
rates, interest rates paid on deposits, expansion of branch offices, and the
offering of securities or trust services. The Company and the Bank
are also subject to capitalization guidelines established by federal law and
could be subject to enforcement actions to the extent that either is found by
regulatory examiners to be undercapitalized. It is not possible to
predict what changes, if any, will be made to existing federal and state
legislation and regulations or the effect that such changes may have on our
future business and earnings prospects. Management also cannot
predict the nature or the extent of the effect on our business and earnings of
future fiscal or monetary policies, economic controls, or new federal or state
legislation. Further, the cost of compliance with regulatory
requirements may adversely affect our ability to operate
profitably.
Our
regulatory expenses will likely increase due to the enactment of the Emergency
Economic Stabilization Act and related government programs.
Among other things, the EESA included a
provision to increase the amount of deposits insured by FDIC to
$250,000. The TLGP provides, until December 31, 2009, unlimited
deposit insurance on funds in non-interest-bearing transaction deposit accounts
and certain IOLTAs and NOW accounts not otherwise covered by the existing
deposit insurance limit of $250,000, as well as a 100% guarantee of the newly
issued senior debt of all FDIC-insured institutions and their holding companies
issued between October 14, 2008 and June 30, 2009. All eligible
institutions were covered under the TLGP for the first 30 days without incurring
any costs. After the initial period, participating institutions will
be assessed a charge of 10 basis points per annum for the additional insured
deposits and a charge of 75 basis points per annum for guaranteed senior
unsecured debt. We elected to participate in both portions of the
TLGP, so we expect to incur additional regulatory fees associated with our
participation.
Customer
concern about deposit insurance may cause a decrease in deposits held at the
Bank.
With recent increased concerns about
bank failures, customers increasingly are concerned about the extent to which
their deposits are insured by the FDIC. Customers may withdraw
deposits from the Bank in an effort to ensure that the amount they have on
deposit with us is fully insured. Decreases in deposits may adversely
affect our funding costs and net income.
Our
funding sources may prove insufficient to replace deposits and support our
future growth.
We rely on customer deposits, advances
from the FHLB, and lines of credit at other financial institutions to fund our
operations. Although we have historically been able to replace
maturing deposits and advances if desired, no assurance can be given that we
would be able to replace such funds in the future if our financial condition or
the financial condition of the FHLB or market conditions were to
change. Our financial flexibility will be severely constrained and/or
our cost of funds will increase if we are unable to maintain our access to
funding or if financing necessary to accommodate future growth is not available
at favorable interest rates. Finally, if we are required to rely more
heavily on more expensive funding sources to support future growth, our revenues
may not increase proportionately to cover our costs. In this case,
our profitability would be adversely affected.
The
loss of key personnel could disrupt our operations and result in reduced
earnings.
Our growth and profitability will
depend upon our ability to attract and retain skilled managerial, marketing and
technical personnel. Competition for qualified personnel in the
financial services industry is intense, and there can be no assurance that we
will be successful in attracting and retaining such personnel. Our
current executive officers provide valuable services based on their many years
of experience and in-depth knowledge of the banking industry and our market
area. Due to the intense competition for financial professionals,
these key personnel would be difficult to replace and an unexpected loss of
their services could result in a disruption to the continuity of operations and
a possible reduction in earnings.
Our
lending activities subject us to the risk of environmental
liabilities.
A significant portion of our loan
portfolio is secured by real property. During the ordinary course of
business, we may foreclose on and take title to properties securing certain
loans. In doing so, there is a risk that hazardous or toxic
substances could be found on these properties. If hazardous or toxic
substances are found, we may be liable for remediation costs, as well as for
personal injury and property damage. Environmental laws may require
us to incur substantial expenses and may materially reduce the affected
property’s value or limit our ability to use or sell the affected
property. In addition, future laws or more stringent interpretations
or enforcement policies with respect to existing laws may increase our exposure
to environmental liability. Although we have policies and procedures
to perform an environmental review before initiating any foreclosure action on
real property, these reviews may not be sufficient to detect all potential
environmental hazards. The remediation costs and any other financial
liabilities associated with an environmental hazard could have a material
adverse effect on our financial condition and results of
operations.
We
may be subject to other claims and the costs of defensive actions.
Our customers may sue us for losses due
to alleged breaches of fiduciary duties, errors and omissions of employees,
officers and agents, incomplete documentation, our failure to comply with
applicable laws and regulations, or many other reasons. Also, our
employees may knowingly or unknowingly violate laws and
regulations. Management may not be aware of any violations until
after their occurrence. This lack of knowledge may not insulate us
from liability. Claims and legal actions may result in legal expenses
and liabilities that may reduce our profitability and hurt our financial
condition.
We
may be adversely affected by other recent legislation.
As discussed above, the GLB Act
repealed restrictions on banks affiliating with securities firms and permits
bank holding companies that become financial holding companies to engage in
additional financial activities, including insurance and securities underwriting
and agency activities, merchant banking, and insurance company portfolio
investment activities that are currently not permitted for bank holding
companies. Although the Company is a financial holding company, this
law may increase the competition we face from larger banks and other
companies. It is not possible to predict the full effect that this
law will have on us.
The
Sarbanes-Oxley Act of 2002 requires management of publicly-traded companies to
perform an annual assessment of their internal control over financial reporting
and to report on whether the system is effective as of the end of the Company’s
fiscal year. Disclosure of significant deficiencies or material
weaknesses in internal controls could cause an unfavorable impact to stockholder
value by affecting the market value of our stock.
The Patriot Act reinforced the
importance of implementing and following procedures required by the Bank Secrecy
Act and money laundering issues. Non-compliance with this act or
failure to file timely and accurate documentation could expose the Company to
adverse publicity as well as fines and penalties assessed by regulatory
agencies.
Periodically, the federal and state
legislatures consider bills with respect to the regulation of financial
institutions. Some of these proposals could significantly change the
regulation of banks and the financial services industry. We cannot
predict whether such proposals will be adopted or the impact on our business,
earnings or operations of such future legislation.
We
may not be able to keep pace with developments in technology.
We use various technologies in
conducting our businesses, including telecommunication, data processing,
computers, automation, internet-based banking, and debit
cards. Technology changes rapidly. Our ability to compete
successfully with other financial institutions may depend on whether we can
exploit technological changes. We may not be able to exploit
technological changes, and any investment we do make may not make us more
profitable.
Risks
Related to the Company’s Common Stock
Our
ability to pay dividends is limited.
The Company’s stockholders are entitled
to dividends on their shares of common stock if, when, and as declared by the
Company’s Board of Directors out of funds legally available for that
purpose. The Company’s ability to pay dividends to stockholders is
largely dependent upon the receipt of dividends from the Bank. Both
federal and state laws impose restrictions on the ability of the Bank to pay
dividends. Federal law prohibits the payment of a dividend by an
insured depository institution if the depository institution is considered
“undercapitalized” or if the payment of the dividend would make the institution
“undercapitalized”. For a Maryland state-chartered bank, dividends
may be paid out of undivided profits or, with the prior approval of the Maryland
Commissioner, from surplus in excess of 100% of required capital
stock. If, however, the surplus of a Maryland bank is less than 100%
of its required capital stock, then cash dividends may not be paid in excess of
90% of net earnings. In addition to these specific restrictions, bank regulatory
agencies also have the ability to prohibit proposed dividends by a financial
institution that would otherwise be permitted under applicable regulations if
the regulatory body determines that such distribution would constitute an unsafe
or unsound practice. Because of these limitations, there can be no
guarantee that the Company’s Board will declare dividends in any fiscal
quarter.
Shares
of the Company’s common stock are not insured.
Investments in shares of the Company’s
common stock are not deposits and are not insured against loss by the
government.
Shares
of the Company’s common stock are not heavily traded.
There is no established trading market
for the shares of common stock of the Company, and transactions are infrequent
and privately negotiated by the buyer and seller in each case. See
Item 5 of Part II of this annual report for further market
information. Management cannot predict the extent to which an active
public market for these securities will develop or be sustained in the
future. Securities that are not heavily traded can be more volatile
than stock trading in an active public market. Factors such as our
financial results, the introduction of new products and services by us or our
competitors, and various factors affecting the banking industry generally may
have a significant impact on the market price of our common stock. In
recent years, the stock market has experienced a high level of price and volume
volatility, and market prices for the securities of many companies have
experienced wide price fluctuations that have not necessarily been related to
their operating performance. Accordingly, the Company’s stockholders
may not be able to sell their shares at the volumes, prices, or times that they
desire.
The
Company’s Articles of Incorporation and Maryland law may discourage a corporate
takeover.
The Company’s Articles of
Incorporation, as amended, requires that any proposed merger, share exchange,
consolidation, reverse stock split, sale, exchange, lease of all or
substantially all of the assets of the Company or any similar transaction be
approved by the affirmative vote of 75% of the outstanding shares of the
Company’s common stock.
The Maryland Business Combination Act
generally prohibits, subject to certain limited exceptions, corporations from
being involved in any “business combination” (defined as a variety of
transactions, including a merger, consolidation, share exchange, asset transfer
or issuance or reclassification of equity securities) with any “interested
shareholder” for a period of five years following the most recent date on which
the interested shareholder became an interested shareholder. An
interested shareholder is defined generally as a person who is the beneficial
owner of 10% or more of the voting power of the outstanding voting stock of the
corporation after the date on which the corporation had 100 or more beneficial
owners of its stock or who is an affiliate or associate of the corporation and
was the beneficial owner, directly or indirectly, of 10% percent or more of the
voting power of the then outstanding stock of the corporation at any time within
the two-year period immediately prior to the date in question and after the date
on which the corporation had 100 or more beneficial owners of its
stock. The Maryland Control Share Acquisition Act applies to
acquisitions of “control shares”, which, subject to certain exceptions, are
shares the acquisition of which entitle the holder, directly or indirectly, to
exercise or direct the exercise of the voting power of shares of stock of the
corporation in the election of directors within any of the following ranges of
voting power: one-tenth or more, but less than one-third of all
voting power; one-third or more, but less than a majority of all voting power or
a majority or more of all voting power. Control shares have limited
voting rights.
Although these provisions do not
preclude a takeover, they may have the effect of discouraging, delaying or
deferring a tender offer or takeover attempt that a stockholder might consider
in his or her best interest, including those attempts that might result in a
premium over the market price for the common stock. These provisions
could potentially adversely affect the market price of the Company’s common
stock.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
Other than for our operating purposes,
we do not invest in real estate. We own and operate branches at the
following locations:
|
Location
|
|
Type of Office
|
|
Square Footage
|
|
100
Spring Avenue in Chestertown, Maryland 21620
|
|
Main
Office
|
|
16,000
|
|
600
Washington Avenue, Chestertown, Maryland 21620
|
|
Branch
|
|
3,500
|
|
166
North Main Street, Galena, Maryland 21635
|
|
Branch
|
|
2,000
|
|
21337
Rock Hall Avenue, Rock Hall, Maryland 21661
|
|
Branch
|
|
2,000
|
|
31905
River Road, Millington, Maryland 21651
|
|
Branch
|
|
2,584
|
|
1005
Sudlersville Road, Church Hill, Maryland 21623
|
|
Branch
|
|
2,584
|
|
223
East Main Street, Sudlersville, MD 21668
|
|
Branch
|
|
2,584
|
|
100
Talbot Boulevard, Chestertown, Maryland 21620
|
|
Insurance Agency
|
|
3,000
|
We also own property located off of
Route 544 in Chestertown, Maryland which is being held for possible future
expansion purposes.
Item
3. Legal
Proceedings
As previously reported, Edwin and
Rosalie Kuechler filed a complaint against the Bank in the Circuit Court for
Kent County, Maryland on or about June 26, 2008. The suit related to
a commercial loan made by the Bank that was guaranteed by the plaintiffs, which
guaranty is secured by an indemnity deed of trust on the plaintiffs’ personal
residence. The commercial loan is in default and the Bank is
attempting to seek recourse against the plaintiffs, as
guarantors. The plaintiffs alleged, among other things, various
violations by the Bank of the federal Truth-in-Lending Act and that the
plaintiffs are entitled to rescission of the guaranty, and to recover for
illegal banking practices arising from the Bank’s demands for payment,
intentional infliction of emotional distress arising from the Bank’s demands for
payment, and professional negligence and intentional and negligent
misrepresentation relating to alleged oral and written representations made to
the plaintiffs by the Bank outside the written transaction
documents. In addition to rescission, the plaintiffs requested
compensatory and punitive damages in the amount of $950,000. The Bank
removed this case to the United States District Court for the District of
Maryland on or about July 3, 2008. On March 9, 2009, the United
States District Court for the District of Maryland issued an order granting the
Bank’s motion for summary judgment and entered judgment in favor of the Bank and
against the plaintiffs on all counts. On March 18, 2009, the
plaintiffs filed a motion with the Court asking it to reconsider the
judgment.
Item
4. Submission of Matters to
a Vote of Security Holders.
None.
PART
II
Item
5. Market for Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
As of March 1, 2009, the Company had
632 stockholders of record. Although certain brokers make a market in
the shares of the Company’s common stock through the over-the-counter market,
which are reported on the Pink Sheets, LLC (symbol: “PEBC.PK”), we
believe there is no established trading market for the shares of common stock,
that transactions are infrequent, and that most transactions are privately
negotiated. Management cannot predict whether any market will develop
in the near future. The following table sets forth, to the best
knowledge of the Company, the high and low sales prices for the shares of the
Company’s common stock, along with the cash dividends paid, for each quarterly
period of 2007 and 2008. There may have been sales during these
periods of which the Company is not aware. These prices do not
include retail mark-ups, markdowns or commissions, and may not necessarily
represent actual transactions. The last sale known to the Company
occurred on March 17, 2009 and the price was reported on the Pink Sheets as
$54.00 per share.
|
|
|
2007
|
|
|
2008
|
|
|
|
|
Price Range
|
|
|
Price
Range
|
|
|
Price Range
|
|
|
Dividends
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
First
Quarter
|
|
$
|
76.00
|
|
|
$
|
65.00
|
|
|
$
|
0.41
|
|
|
$
|
80.00
|
|
|
$
|
80.00
|
|
|
$
|
0.43
|
|
|
Second
Quarter
|
|
|
78.00
|
|
|
|
65.00
|
|
|
|
0.41
|
|
|
|
88.00
|
|
|
|
58.00
|
|
|
|
0.44
|
|
|
Third
Quarter
|
|
|
77.00
|
|
|
|
55.00
|
|
|
|
0.42
|
|
|
|
80.00
|
|
|
|
61.00
|
|
|
|
0.44
|
|
|
Fourth
Quarter
|
|
|
80.00
|
|
|
|
50.00
|
|
|
|
0.43
|
|
|
|
80.00
|
|
|
|
46.00
|
|
|
|
0.44
|
|
In 2007 and 2008, the Company paid cash
dividends to stockholders totaling $1,314,674 and $1,639,366,
respectively. Cash dividends are typically declared on a quarterly
basis and are at the discretion of the Board of Directors, based upon such
factors as operating results, financial condition, capital adequacy, regulatory
requirements, and stockholder return. The Company’s ability to pay
dividends is limited by federal and Maryland law and is generally dependent on
the ability of the Bank to declare and pay dividends to the Company, which is
also limited by law. For more information regarding these
limitations, see Item 1A of Part I of this annual report under the caption, “Our
ability to pay dividends is limited”. There can be no assurance that
dividends will be declared in any fiscal quarter.
The transfer agent for the shares of
common stock of the Company is:
The Peoples Bank
100 Spring Ave
Chestertown, MD 21620
410-778-3500
The Company and its affiliates (as
defined by Exchange Act Rule 10b-18) did not purchase any shares of the
Company’s common stock during the three-month period ended December 31,
2008.
The Company has not adopted any
compensation plan or arrangement pursuant to which our executive officers may
receive shares of the Company’s common stock.
Item
6. Selected Financial
Data.
The Company is a smaller reporting
company and, as such, is not required to include the information required by
this item.
Item
7. Management’s Discussion
and Analysis of Financial Condition and Results of Operation.
The following discussion of our
consolidated financial condition and results of operations should be read in
conjunction with the our consolidated financial statements and related notes and
other statistical information included in Item 8 of Part II of this annual
report.
Recent
Developments
On February 27, 2009, the FDIC
announced a proposed rule outlining its plan to implement an emergency special
assessment of 20 basis points on all insured depository institutions in order to
restore the Deposit Insurance Fund to an acceptable level. The
assessment, which would be payable on September 30, 2009, would be in addition
to a planned increase in premiums and a change in the way regular premiums are
assessed which the FDIC also approved on February 27, 2009. In
addition, the proposed rule provides that, after June 30, 2009, if the reserve
ratio of the Deposit Insurance Fund is estimated to fall to a level that that
the FDIC believes would adversely affect public confidence or to a level which
is close to or less than zero at the end of a calendar quarter, then an
additional emergency special assessment of up to 10 basis points may be imposed
on all insured depository institutions. If this rule is adopted as
proposed, it will significantly increase the Bank’s FDIC premiums in
2009.
As discussed above, the FDIC recently
announced the TLGP that provides unlimited deposit insurance on funds in
noninterest-bearing transaction deposit accounts not otherwise covered by the
existing deposit insurance limit of $250,000, as well as a 100% guarantee of the
newly issued senior debt of all FDIC-insured institutions and their holding
companies. All eligible institutions were covered under the program for the
first 30 days without incurring any costs. After the initial period,
participating institutions will be assessed a charge of 10 basis points per
annum for the additional insured deposits and a charge of 75 basis points per
annum for guaranteed senior unsecured debt. We have elected to
participate in the TLGP, and we anticipate that our regulatory costs will
increase as a result.
Overview
We recorded a 44.53% decrease in net
income for 2008 over 2007. Basic net income per share for 2008 was
$2.77, compared to $4.96 for 2007, which represents a decrease of
44.15%.
Return on average assets decreased to
.85% for 2008 from 1.55% for 2007. Return on average stockholders’
equity for 2008 was 7.59%, compared to 14.74% for 2007. Average
assets increased to $254,748,849 in 2008, or a 1.19% increase over
2007. Average loans net of loan loss increased .76% in 2008 to
$215,730,819. During 2008, average deposits increased 4.02% to
$167,112,744 when compared to 2007. Average stockholders’ equity
increased 7.78% for the year ended December 31, 2008 totaling $28,504,565,
compared to 2007.
Critical
Accounting Policies
Our consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States of America and follow general practices within the industries in
which we operate. 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. 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.
The most significant accounting
policies that we follow are presented in Note 1 to the Consolidated Financial
Statements. These policies, along with the disclosures presented in
the other financial statement notes and in this financial review, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Based on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions, and estimates underlying those amounts, management
has identified the determination of the allowance for loan losses to be the
accounting area that requires the most subjective or complex judgments, and as
such could be most subject to revision as new information becomes
available.
The allowance for loan losses
represents management’s estimate of probable loan losses inherent in the loan
portfolio as of the balance sheet date. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The loan portfolio also represents
the largest asset type on the consolidated balance sheets. Note 1 to
Consolidated Financial Statements describes the methodology used to determine
the allowance for loan losses, and a discussion of the factors driving changes
in the amount of the allowance for loan losses is included below under the
caption “FINANCIAL CONDITION—Market Risk Management”.
RESULTS
OF OPERATIONS
We reported net income of $2,162,877,
or $2.77 per share, for the year ended December 31, 2008, compared to
$3,899,495, or $4.96 per share, for the year ended December 31,
2007. This represents a decrease for 2008 of $1,736,618 or 44.53%
when compared to 2007.
Net
Interest Income
The primary source of our income is net
interest income, which is the difference between revenue on interest-earning
assets, such as investment securities and loans, and interest incurred on
interest-bearing sources of funds, such as deposits and
borrowings. The level of net interest income is determined primarily
by the average balance of interest-earning assets and funding sources and the
various rate spreads between our interest-earning assets and our
interest-bearing funding sources. The table “Average Balances,
Interest, and Yields” that appears below shows our average volume of
interest-earning assets and interest-bearing liabilities for 2008 and 2007, and
related income/expense and yields. Changes in net interest income
from period to period result from increases or decreases in the volume of
interest-earning assets and interest-bearing liabilities, and increases or
decreases in the average rates earned and paid on such assets and
liabilities. The volume of interest-earning assets and
interest-bearing liabilities is affected by the ability to manage the
earning-asset portfolio (which includes loans), and the availability of
particular sources of funds, such as noninterest bearing
deposits. The table “Analysis of Changes in Net Interest Income”
shows the amount of net interest income change from rate changes and from volume
changes.
For the year ended December 31, 2008,
net interest income decreased $1,089,401, or 10.13%, to $9,665,277 from
$10,754,678 for the year ended December 31, 2007. The decrease in net
interest income in 2008 was the result of a $1,851,515 decrease in interest
income offset by a $762,114 decrease in interest expense. In 2008,
deposits decreased moderately and our borrowed funds decreased with loan
demand. Net income decreased because the yield earned on loans
declined faster than yields on deposits and borrowed funds. The yield
on interest-earning assets on a fully taxable equivalent basis was 7.37% in 2007
and 6.54% in 2008, with the combined effective rate on deposits and borrowed
funds following the same fluctuation by decreasing from 3.47% in 2007 to 3.09%
in 2008.
The key performance measure for net
interest income is the “net margin on interest-earning assets”, or net interest
income divided by average interest-earning assets. Our net interest
margin for 2008 on a fully taxable equivalent basis was 4.08%, compared to 4.57%
for 2007. Management attempts to maintain a net margin on
interest-earning assets of 4.50% or higher. The net margin may
decline, however, if competition increases, loan demand decreases, or the cost
of funds rises faster or declines slower than the return on loans and
securities. Although such expectations are based on management’s
judgment, actual results will depend on a number of factors that cannot be
predicted with certainty, and fulfillment of management’s expectations cannot be
assured.
Average
Balances, Interest, and Yields
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
4,054,833
|
|
|
$
|
92,497
|
|
|
|
2.28
|
%
|
|
$
|
2,331,261
|
|
|
$
|
122,213
|
|
|
|
5.24
|
%
|
|
Interest-bearing
deposits
|
|
|
606,756
|
|
|
|
15,319
|
|
|
|
2.52
|
%
|
|
|
173,848
|
|
|
|
9,826
|
|
|
|
5.65
|
%
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government
agency
|
|
|
16,577,158
|
|
|
|
794,095
|
|
|
|
4.79
|
%
|
|
|
18,514,279
|
|
|
|
900,919
|
|
|
|
4.87
|
%
|
|
Other
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
|
|
11,992
|
|
|
|
405
|
|
|
|
3.38
|
%
|
|
FHLB
of Atlanta stock
|
|
|
2,641,479
|
|
|
|
149,560
|
|
|
|
5.66
|
%
|
|
|
2,841,196
|
|
|
|
172,182
|
|
|
|
6.06
|
%
|
|
Total
investment securities
|
|
|
19,218,637
|
|
|
|
943,655
|
|
|
|
4.91
|
%
|
|
|
21,367,467
|
|
|
|
1,073,506
|
|
|
|
5.02
|
%
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
40,699,926
|
|
|
|
2,732,868
|
|
|
|
6.71
|
%
|
|
|
43,148,598
|
|
|
|
3,880,169
|
|
|
|
8.99
|
%
|
|
Real
estate
|
|
|
172,627,810
|
|
|
|
11,522,045
|
|
|
|
6.67
|
%
|
|
|
168,030,602
|
|
|
|
12,029,755
|
|
|
|
7.16
|
%
|
|
Consumer
|
|
|
4,453,285
|
|
|
|
368,602
|
|
|
|
8.28
|
%
|
|
|
4,799,881
|
|
|
|
411,913
|
|
|
|
8.58
|
%
|
|
Total
loans
|
|
|
217,781,021
|
|
|
|
14,623,515
|
|
|
|
6.71
|
%
|
|
|
215,979,081
|
|
|
|
16,321,837
|
|
|
|
7.56
|
%
|
|
Allowance
for loan losses
|
|
|
2,050,202
|
|
|
|
|
|
|
|
|
|
|
|
1,878,686
|
|
|
|
|
|
|
|
|
|
|
Total
loans, net of allowance
|
|
|
215,730,819
|
|
|
|
14,623,515
|
|
|
|
6.78
|
%
|
|
|
214,100,395
|
|
|
|
16,321,837
|
|
|
|
7.62
|
%
|
|
Total
interest-earning assets
|
|
|
239,611,045
|
|
|
|
15,674,986
|
|
|
|
6.54
|
%
|
|
|
237,972,971
|
|
|
|
17,527,382
|
|
|
|
7.37
|
%
|
|
Noninterest-bearing
cash
|
|
|
4,602,456
|
|
|
|
|
|
|
|
|
|
|
|
4,780,429
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
6,146,570
|
|
|
|
|
|
|
|
|
|
|
|
5,317,744
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
4,388,778
|
|
|
|
|
|
|
|
|
|
|
|
3,692,513
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
254,748,849
|
|
|
|
|
|
|
|
|
|
|
$
|
251,763,657
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and NOW deposits
|
|
$
|
35,298,361
|
|
|
|
98,691
|
|
|
|
0.28
|
%
|
|
$
|
36,517,815
|
|
|
|
197,973
|
|
|
|
0.54
|
%
|
|
Money
market and supernow
|
|
|
17,413,552
|
|
|
|
162,757
|
|
|
|
0.93
|
%
|
|
|
17,054,896
|
|
|
|
279,370
|
|
|
|
1.64
|
%
|
|
Other
time deposits
|
|
|
80,475,959
|
|
|
|
3,226,487
|
|
|
|
4.01
|
%
|
|
|
75,627,295
|
|
|
|
3,318,208
|
|
|
|
4.39
|
%
|
|
Total
interest-bearing deposits
|
|
|
133,187,872
|
|
|
|
3,487,935
|
|
|
|
2.62
|
%
|
|
|
129,200,006
|
|
|
|
3,795,551
|
|
|
|
2.94
|
%
|
|
Borrowed
funds
|
|
|
57,208,973
|
|
|
|
2,404,095
|
|
|
|
4.20
|
%
|
|
|
62,323,960
|
|
|
|
2,858,593
|
|
|
|
4.59
|
%
|
|
Total
interest-bearing liabilities
|
|
|
190,396,845
|
|
|
|
5,892,030
|
|
|
|
3.09
|
%
|
|
|
191,523,966
|
|
|
|
6,654,144
|
|
|
|
3.47
|
%
|
|
Noninterest-bearing
deposits
|
|
|
33,924,871
|
|
|
|
|
|
|
|
|
|
|
|
31,452,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,321,716
|
|
|
|
|
|
|
|
|
|
|
|
222,976,027
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
1,922,568
|
|
|
|
|
|
|
|
|
|
|
|
2,340,051
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
28,504,565
|
|
|
|
|
|
|
|
|
|
|
|
26,447,579
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
$
|
254,748,849
|
|
|
|
|
|
|
|
|
|
|
$
|
251,763,657
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.45
|
%
|
|
|
|
|
|
|
|
|
|
|
3.90
|
%
|
|
Net
interest income
|
|
|
|
|
|
$
|
9,782,956
|
|
|
|
|
|
|
|
|
|
|
$
|
10,873,238
|
|
|
|
|
|
|
Net
margin on interest-earning assets
|
|
|
|
|
|
|
|
4.08
|
%
|
|
|
|
|
|
|
|
|
|
|
4.57
|
%
|
Interest
on tax-exempt loans and investments are reported on a fully taxable equivalent
basis (a non GAAP financial measure).
Analysis
of Changes in Net Interest Income
|
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
|
|
2008 compared with 2007
|
|
|
2007 compared with 2006
|
|
|
|
|
variance due to
|
|
|
variance due to
|
|
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
(29,716
|
)
|
|
$
|
(91,139
|
)
|
|
$
|
61,423
|
|
|
$
|
27,502
|
|
|
$
|
6,978
|
|
|
$
|
20,524
|
|
|
Interest-bearing
deposits
|
|
|
5,493
|
|
|
|
(7,898
|
)
|
|
|
13,391
|
|
|
|
6,490
|
|
|
|
552
|
|
|
|
5,938
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government
agency
|
|
|
(106,824
|
)
|
|
|
(13,840
|
)
|
|
|
(92,984
|
)
|
|
|
14,757
|
|
|
|
67,457
|
|
|
|
(52,700
|
)
|
|
Other
|
|
|
(405
|
)
|
|
|
-
|
|
|
|
(405
|
)
|
|
|
405
|
|
|
|
203
|
|
|
|
202
|
|
|
FHLB
stock
|
|
|
(22,622
|
)
|
|
|
(10,930
|
)
|
|
|
(11,692
|
)
|
|
|
34,397
|
|
|
|
14,758
|
|
|
|
19,639
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
and time
|
|
|
(1,147,301
|
)
|
|
|
(937,311
|
)
|
|
|
(209,990
|
)
|
|
|
137,257
|
|
|
|
(23,030
|
)
|
|
|
160,287
|
|
|
Mortgage
|
|
|
(507,710
|
)
|
|
|
(830,423
|
)
|
|
|
322,713
|
|
|
|
1,097,434
|
|
|
|
541,189
|
|
|
|
556,245
|
|
|
Consumer
|
|
|
(43,311
|
)
|
|
|
(14,275
|
)
|
|
|
(29,036
|
)
|
|
|
2,461
|
|
|
|
19,014
|
|
|
|
(16,553
|
)
|
|
Total
interest revenue
|
|
|
(1,852,396
|
)
|
|
|
(1,905,816
|
)
|
|
|
53,420
|
|
|
|
1,320,703
|
|
|
|
627,121
|
|
|
|
693,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and NOW deposits
|
|
|
(99,282
|
)
|
|
|
(92,878
|
)
|
|
|
(6,404
|
)
|
|
|
(28,638
|
)
|
|
|
(11,195
|
)
|
|
|
(17,443
|
)
|
|
Money
market and supernow
|
|
|
(116,613
|
)
|
|
|
(122,370
|
)
|
|
|
5,757
|
|
|
|
61,420
|
|
|
|
59,467
|
|
|
|
1,953
|
|
|
Other
time deposits
|
|
|
(91,721
|
)
|
|
|
(296,637
|
)
|
|
|
204,916
|
|
|
|
600,331
|
|
|
|
422,415
|
|
|
|
177,916
|
|
|
Other
borrowed funds
|
|
|
(454,498
|
)
|
|
|
(229,618
|
)
|
|
|
(224,880
|
)
|
|
|
450,794
|
|
|
|
95,903
|
|
|
|
354,891
|
|
|
Total
interest expense
|
|
|
(762,114
|
)
|
|
|
(741,503
|
)
|
|
|
(20,611
|
)
|
|
|
1,083,907
|
|
|
|
566,590
|
|
|
|
517,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
(1,090,282
|
)
|
|
$
|
(1,164,313
|
)
|
|
$
|
74,031
|
|
|
$
|
236,796
|
|
|
$
|
60,531
|
|
|
$
|
176,265
|
|
Interest
on tax-exempt loans and investments are reported on fully taxable equivalent
basis (a non GAAP financial measure).
The
variance that is due both to rate and volume is divided proportionally between
the rate and volume variance.
Noninterest
Revenue
Noninterest revenue for the 12 months
ended December 31, 2008 was $2,531,167, compared to $2,444,800 in
2007. This increase resulted primarily from insurance commissions and
increases in service charge income and overdraft checking fees during 2008 when
compared to 2007. The Insurance Subsidiary’s insurance commissions
accounted for $66,414 of the increase when compared to 2007. A
significant portion of the service charges represented debit card fees, which
totaled $193,374 (a 5.43% increase over 2007). These cards are
gaining increased acceptance among our customer base.
The following table presents the
principal components of noninterest revenue for the years ended
December 31, 2008 and 2007:
Noninterest
Revenue
|
|
|
2008
|
|
|
2007
|
|
|
Service
charges on deposit accounts
|
|
$
|
997,133
|
|
|
$
|
986,299
|
|
|
Insurance
commissions
|
|
|
1,238,240
|
|
|
|
1,171,826
|
|
|
Other
noninterest revenue
|
|
|
295,794
|
|
|
|
286,675
|
|
|
Total
noninterest revenue
|
|
$
|
2,531,167
|
|
|
$
|
2,444,800
|
|
|
Noninterest
revenue as a percentage of average total assets
|
|
|
0.99
|
%
|
|
|
0.97
|
%
|
Noninterest
Expense
Noninterest expense for the 12-month
period ended December 31, 2008 increased by $641,820, or 10.02%, to $7,048,557,
from $6,406,737 in 2007. The largest components of these increases
were to the Bank’s regulatory assessment and to other expenses. We
recognized a $209,829, or 55.75%, increase in other expenses to $588,199 from
$376,371 in 2007, as a direct result of costs associated with the collection of
delinquent loans. Regulatory assessments increased $83,581, or
216.83%, as the result of increased FDIC insurance premiums. The
opening of the Bank’s new branches in Church Hill, Maryland and Sudlersville,
Maryland contributed to the 20.64% increase in occupancy expense to $443,281 and
the 11.26% increase in furniture and equipment expense to
$287,923. The Church Hill office opened in late August of 2007 and
the Suddlersville office opened December of 2008.
The following table presents the
principal components of noninterest expense for the years ended
December 31, 2008 and 2007:
Noninterest
Expense
|
|
|
2008
|
|
|
2007
|
|
|
Compensation
and related expenses
|
|
$
|
4,288,674
|
|
|
$
|
4,062,905
|
|
|
Occupancy
expense
|
|
|
443,281
|
|
|
|
367,453
|
|
|
Furniture
and equipment expense
|
|
|
287,923
|
|
|
|
258,795
|
|
|
Data
processing and correspondent bank costs
|
|
|
618,312
|
|
|
|
583,474
|
|
|
Director
fees
|
|
|
134,384
|
|
|
|
131,957
|
|
|
Postage
|
|
|
85,114
|
|
|
|
84,986
|
|
|
Office
supplies
|
|
|
78,276
|
|
|
|
79,323
|
|
|
Professional
fees
|
|
|
121,125
|
|
|
|
110,981
|
|
|
Printing
and stationery
|
|
|
46,596
|
|
|
|
41,746
|
|
|
Public
relations and contributions
|
|
|
69,346
|
|
|
|
82,993
|
|
|
Telephone
|
|
|
41,809
|
|
|
|
38,558
|
|
|
Regulatory
assessments
|
|
|
122,127
|
|
|
|
38,546
|
|
|
Loan
products
|
|
|
21,983
|
|
|
|
33,764
|
|
|
Advertising
|
|
|
73,020
|
|
|
|
85,578
|
|
|
Insurance
|
|
|
26,670
|
|
|
|
29,307
|
|
|
Other
|
|
|
589,917
|
|
|
|
376,371
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest expense
|
|
$
|
7,048,557
|
|
|
$
|
6,406,737
|
|
|
Noninterest
expense as a percentage of average total assets
|
|
|
2.77
|
%
|
|
|
2.54
|
%
|
Income
Taxes
Our effective income tax rate was
37.0% in 2008 and 37.2% in 2007.
Results
for the Fourth Quarter of 2008
Net income for the three months ended
December 31, 2008 was $182,669, compared to $614,258 for the corresponding
period in 2007. Earnings per share for the fourth quarters of 2008
and 2007 were $0.23 and $0.78, respectively. Decreases in gross
revenues combined with increases in noninterest expenses and a substantial
increase in the provisions for loan loss, offset by decreased income taxes,
contributed to the decline in net income for the fourth quarter of 2008 when
compared to the same period last year.
Before provisions for loan losses, the
net interest income decrease of $457,961, from $2,661,686 for the three months
ended December 31, 2007 to $2,203,725 for the three months ended December 31,
2008, was due primarily to loan revenues and interest expense reducing in direct
corralation to the reduction in loan and deposit account
balances. Comparing the fourth quarter of 2008 to the fourth quarter
of 2007, interest revenue decreased $858,735 while interest expense decreased
$400,774, with $199,857 of the decrease related to borrowed
funds. The provision for loan losses was increased by $135,000 to
$675,000 during the fourth quarter of 2008, compared to $540,000 in
2007.
Noninterest income for the fourth
quarter of 2008 increased $24,244 over the same period of 2007 to
$541,819. This increase was due primarily to an increase of insurance
commissions of $22,495 for the fourth quarter of 2008 over the fourth quarter of
2007.
Total noninterest expense increased
$96,739 to $1,774,109 for the quarter ended Decermber 31, 2008, from $1,677,370
for the corresponding quarter of 2007. This increase is primarily the
result of a $41,165 increase in our FDIC insurance premiums which is part of our
regulatory assessment to $45,738 for the fourth quarter of 2008 from $4,573 for
the fourth quarter of 2007. Other expense inceased $74,062 to
$234,207 for the fourth quarter of 2008 from $160,145 for the same period in
2007. This expense increased as a direct result of costs associated
with the collection of delinquent loans.
FINANCIAL
CONDITION
Assets
Total
assets decreased 3.79% to $251,894,235 at December 31, 2008 when compared to
assets at December 31, 2007. Average total assets for 2008 were
$254,748,849, an increase of 1.19% over 2007. The loan portfolio
represented 90.03% of average earning assets in 2008, compared to 89.97% in
2007, and was the primary source of income for the Company.
Funding for loans is provided primarily
by core deposits, fed funds, and FHLB borrowings. Total deposits
decreased 1.96% to $165,738,573 at December 31, 2008 when compared to
2007.
Composition
of Loan Portfolio
Because loans are expected to produce
higher yields than investment securities and other interest-earning assets
(assuming that loan losses are not excessive), the absolute volume of loans and
the volume as a percentage of total earning assets is an important determinant
of net interest margin. Average loans, net of the allowance for loan
losses, were $215,730,819 and $214,100,395 for 2008 and 2007, respectively,
which constituted 90.03% and 89.97% of average interest-earning assets for the
respective years. At December 31, 2008, our loan to deposit ratio was
129.53%, compared to 130.39% at December 31, 2007, while the ratio of
average loans to average deposits was 129.09 % and 133.27% for 2008 and 2007,
respectively. The securities sold under agreements to repurchase
function like deposits with the securities providing collateral in place of the
FDIC insurance. The Bank also borrows from correspondent banks and
the FHLB to fund loans. Our ratio of average loans to average
deposits plus borrowed funds was 96.17% for the year December 31, 2008, compared
to 96.02% for the year ended December 31, 2007. We extend loans
primarily to customers located in and near Kent County, Queen Anne’s County and
Cecil County in Maryland. There are no industry concentrations in our
loan portfolio. A substantial portion of our loans are, however,
secured by real estate and, accordingly, the real estate market in the region
will influence the performance of our loan portfolio.
The following table sets forth the
composition of our loan portfolio at December 31, 2008 and 2007:
|
Composition of Loan Portfolio
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
Amount
|
|
|
of total
|
|
|
Amount
|
|
|
of total
|
|
|
Commercial
|
|
$
|
36,754,882
|
|
|
|
16.97
|
%
|
|
$
|
40,822,119
|
|
|
|
18.34
|
%
|
|
Real
estate – residential
|
|
|
60,579,916
|
|
|
|
27.98
|
%
|
|
|
56,041,357
|
|
|
|
25.18
|
%
|
|
Real
estate - commercial
|
|
|
104,175,727
|
|
|
|
48.11
|
%
|
|
|
105,838,014
|
|
|
|
47.56
|
%
|
|
Construction
|
|
|
7,255,246
|
|
|
|
3.35
|
%
|
|
|
10,996,273
|
|
|
|
4.94
|
%
|
|
Consumer
|
|
|
7,767,095
|
|
|
|
3.59
|
%
|
|
|
8,827,512
|
|
|
|
3.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
216,532,866
|
|
|
|
100.00
|
%
|
|
|
222,525,275
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
costs, net of deferred fees
|
|
|
148,822
|
|
|
|
|
|
|
|
229,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(2,001,739
|
)
|
|
|
|
|
|
|
(2,328,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
$
|
214,679,949
|
|
|
|
|
|
|
$
|
220,425,725
|
|
|
|
|
|
The following table sets forth the
maturity distribution, classified according to sensitivity to changes in
interest rates, for selected components of our loan portfolio at December 31,
2008:
Loan
Maturity Schedule and Sensitivity to Changes in Interest
Rates
|
|
|
December 31, 2008
|
|
|
|
|
One year
|
|
|
Over one
|
|
|
Over five
|
|
|
|
|
|
|
|
or less
|
|
|
through five years
|
|
|
years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
35,344,561
|
|
|
$
|
1,362,946
|
|
|
$
|
47,375
|
|
|
$
|
36,754,882
|
|
|
Real
estate – residential
|
|
|
26,538,622
|
|
|
|
34,041,294
|
|
|
|
0
|
|
|
|
60,579,916
|
|
|
Real
estate - commercial
|
|
|
58,166,841
|
|
|
|
46,008,886
|
|
|
|
0
|
|
|
|
104,175,727
|
|
|
Construction
|
|
|
7,068,051
|
|
|
|
187,195
|
|
|
|
0
|
|
|
|
7,255,246
|
|
|
Consumer
|
|
|
5,160,401
|
|
|
|
2,531,922
|
|
|
|
74,772
|
|
|
|
7,767,095
|
|
|
Total
|
|
$
|
132,278,476
|
|
|
$
|
84,132,243
|
|
|
$
|
122,147
|
|
|
$
|
216,532,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
interest rate
|
|
$
|
40,929,210
|
|
|
$
|
37,668,219
|
|
|
$
|
74,772
|
|
|
$
|
78,672,201
|
|
|
Variable
interest rate
|
|
|
91,349,266
|
|
|
|
46,464,024
|
|
|
|
47,375
|
|
|
|
137,860,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
132,278,476
|
|
|
$
|
84,132,243
|
|
|
$
|
122,147
|
|
|
$
|
216,532,866
|
|
At December 31, 2008, $137,860,665,
or 63.67%, of the total loans were either variable-rate loans or loans written
on demand.
Off-Balance
Sheet Arrangements
In the normal course of business, to
meet the financing needs of our customers, we are a party to financial
instruments with off-balance sheet risk. These financial instruments
include commitments to extend credit and standby letters of
credit. Our exposure to credit loss in the event of nonperformance by
the other party to these financial instruments is represented by the contractual
amount of the instruments. We use the same credit policies in making
commitments and conditional obligations as we do for on-balance sheet
instruments. We generally require collateral or other security to
support the financial instruments with credit risk. The amount of
collateral or other security is determined based on management’s credit
evaluation of the counterparty. We evaluate each customer’s
creditworthiness on a case-by-case basis.
Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Letters of credit are
conditional commitments that we issue to guarantee the performance of a customer
to a third party. Letters of credit and other commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Because many of the letters of credit and commitments are
expected to expire without being drawn upon, the total commitment amount does
not necessarily represent future cash requirements. See Note 4 to the
Consolidated Financial Statements, which is included in Item 8 of Part II of
this annual report, for further information about these
commitments.
Loan
Quality
The allowance for loan losses
represents a reserve for probable losses in the loan portfolio. The
adequacy of the allowance for loan losses is evaluated monthly based on a review
of all significant loans, with a particular emphasis on non-accruing, past due,
and other loans that management believes require attention. The
determination of the reserve level rests upon management’s judgment about
factors affecting loan quality and assumptions about the
economy. Management considers the year-end allowance appropriate and
adequate to cover probable losses in the loan portfolio; however, management’s
judgment is based upon a number of assumptions about future events, which are
believed to be reasonable, but which may or may not prove
valid. Thus, there can be no assurance that charge-offs in future
periods will not exceed the allowance for loan losses or that additional
increases in the loan loss allowance will not be required.
For significant problem loans,
management’s review consists of evaluation of the financial strengths of the
borrowers and guarantors, the related collateral, and the effects of economic
conditions. The overall evaluation of the adequacy of the total
allowance for loan losses is based on an analysis of historical loan loss
ratios, loan charge-offs, delinquency trends, and previous collection
experience, along with an assessment of the effects of external economic
conditions.
Risk
Elements of Loan Portfolio
|
|
|
For the Years Ended December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Non-Accrual
Loans
|
|
$
|
3,670,657
|
|
|
$
|
2,877,002
|
|
|
Accruing
Loans Past Due 90 Days or More
|
|
|
1,491,878
|
|
|
|
2,572,836
|
|
The following table, “Allocation of
Allowance for Loan Losses”, shows the specific allowance applied by loan type
and also the general allowance included in the allowance for loan losses at
December 31, 2008 and 2007:
Allocation
of Allowance for Loan Losses
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Percentage (1)
|
|
|
Percentage (1)
|
|
|
Commercial
|
|
$
|
496,678
|
|
|
|
16.97
|
%
|
|
$
|
1,189,836
|
|
|
|
18.34
|
%
|
|
Real
estate
|
|
|
979,635
|
|
|
|
79.44
|
%
|
|
|
919,367
|
|
|
|
77.68
|
%
|
|
Consumer
|
|
|
92,570
|
|
|
|
3.59
|
%
|
|
|
132,350
|
|
|
|
3.98
|
%
|
|
Unallocated
|
|
|
432,856
|
|
|
|
|
|
|
|
87,239
|
|
|
|
|
|
|
Total
|
|
$
|
2,001,739
|
|
|
|
100.00
|
%
|
|
$
|
2,328,792
|
|
|
|
100.00
|
%
|
|
|
(1)
|
Percentage
of loans in category to total loans
|
The provision for loan losses is a
charge to earnings in the current period to replenish the allowance and maintain
it at a level management has determined to be adequate. The provision
for loan loss was $1,715,000 in 2008, which represents an increase
of $1,135,000 over the $580,000 that was funded in
2007. We added to our reserves in anticipation of potential losses in
connection with the higher than normal balances of nonaccrual loans and loans
accruing 90 days or more past due. The following table shows information about
the allowance for loan losses for each of the last two years:
Allowance
for Loan Losses
|
|
|
2008
|
|
|
2007
|
|
|
Balance
at beginning of year
|
|
$
|
2,328,792
|
|
|
$
|
1,860,283
|
|
|
Loan
losses:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,452,890
|
|
|
|
82,881
|
|
|
Mortgages
|
|
|
570,665
|
|
|
|
0
|
|
|
Consumer
|
|
|
66,142
|
|
|
|
31,882
|
|
|
Total
loan losses
|
|
|
2,089,697
|
|
|
|
114,763
|
|
|
Recoveries
on loans previously charged off
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
4,688
|
|
|
|
0
|
|
|
Mortgages
|
|
|
40,000
|
|
|
|
2,271
|
|
|
Consumer
|
|
|
2,956
|
|
|
|
1,001
|
|
|
Total
loan recoveries
|
|
|
47,644
|
|
|
|
3,272
|
|
|
Net
loan losses
|
|
|
2,042,053
|
|
|
|
111,491
|
|
|
Provision
for loan losses charged to expense
|
|
|
1,715,000
|
|
|
|
580,000
|
|
|
Balance
at end of year
|
|
$
|
2,001,739
|
|
|
$
|
2,328,792
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to loans outstanding at end of year
|
|
|
0.92
|
%
|
|
|
1.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs to average loans
|
|
|
0.94
|
%
|
|
|
0.05
|
%
|
As a result of management’s ongoing
review of the loan portfolio, loans are classified as nonaccrual when it is not
reasonable to expect collection of interest under the original
terms. These loans are classified as nonaccrual even though the
presence of collateral or the borrower’s financial strength may be sufficient to
provide for ultimate repayment. Interest on nonaccrual loans is
recognized only when received. A delinquent loan is generally placed
in nonaccrual status when it becomes 90 days or more past due. When a
loan is placed in nonaccrual status, all interest that had been accrued on the
loan but remains unpaid is reversed and deducted from earnings as a reduction of
reported interest income. No additional interest is accrued on the
loan balance until the collection of both principal and interest becomes
reasonably certain.
We had nonperforming loans of
$5,162,535 and $5,449,838 at December 31, 2008 and 2007,
respectively. As of December 31, 2008, we had $1,407,000 in
foreclosed other real estate, which is considered nonperforming
assets. Nonperforming asset totals at December 31, 2007 were the same
as nonperforming loan totals. Loans are classified as impaired when
the collection of contractual obligations, including principal and interest, is
doubtful. Management considers the nonaccrual loans as of December
31, 2008 to be impaired loans.
Investment
Securities
Our
security portfolio is categorized as available-for-sale and held to
maturity. Investment securities classified as available-for-sale are
held for an indefinite period of time and may be sold in response to changing
market and interest rate conditions or for liquidity purposes as part of our
overall asset/liability management strategy. Available-for-sale
securities are carried at market value, with unrealized gains and losses
excluded from earnings and reported as a separate component of other
comprehensive income included in stockholders’ equity, net of applicable income
taxes. We do not currently follow a strategy of making security
purchases with a view of near-term resales and, therefore, do not own any
securities classified as trading securities. Investment securities
classified as held-to-maturity are held until they mature. Held-to
maturity securities are held at amortized cost value. For additional information
about the investment portfolio, see Note 3 to Consolidated Financial Statements,
which is included in Item 8 of Part II of this annual report.
The following table sets forth the
maturities and weighted average yields of the investment portfolio as of
December
31, 2008.
|
|
|
3 Months or Less
|
|
|
Over 3 Months
to 1 Year
|
|
|
1 – 5 Years
|
|
|
5-10 Years
|
|
|
Over 10 Years
|
|
|
|
|
Carrying
Amount
|
|
|
Average
Yield
|
|
|
Carrying
Amount
|
|
|
Average
Yield
|
|
|
Carrying
Amount
|
|
|
Average
|
|
|
Carrying
Amount
|
|
|
Average
Yield
|
|
|
Carrying
Amount
|
|
|
Average
Yield
|
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
999,039
|
|
|
|
4.34
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
9,049,531
|
|
|
|
4.49
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Mortgage
backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,145
|
|
|
|
4.61
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Held to Maturity
|
|
$
|
999,039
|
|
|
|
4.34
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
9,056,676
|
|
|
|
4.49
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Available
for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
1,009,600
|
|
|
|
5.08
|
%
|
|
$
|
3,068,298
|
|
|
|
4.73
|
%
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Available for Sale
|
|
$
|
1,009,600
|
|
|
|
5.08
|
%
|
|
$
|
3,068,298
|
|
|
|
4.73
|
%
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Liquidity
Management
Liquidity describes our ability to meet
financial obligations that arise during the normal course of
business. Liquidity is primarily needed to meet the borrowing and
deposit withdrawal requirements of customers and to fund current and planned
expenditures. Liquidity is derived through increased customer
deposits, maturities in the investment portfolio, loan repayments and income
from earning assets. To the extent that deposits are not adequate to
fund customer loan demand, liquidity needs can be met in the short-term funds
markets. The funds invested in federal funds sold also provide
liquidity, as do lines of credit, overnight federal funds, and reverse
repurchase agreements available from correspondent banks. The
aggregate amount available from correspondent banks under all lines of credit at
December 31, 2008 was $21,500,000. Additionally, the Bank has a
partially funded line of credit from the FHLB of Atlanta. This line
is secured by the Bank’s residential mortgage loan portfolio.
Average liquid assets (cash and amounts
due from banks, interest bearing deposits in other banks, federal funds sold,
and investment securities) were 17.04% of average deposits for 2008, compared to
17.84% for 2007.
We have various financial obligations,
including contractual obligations and commitments, that may require future cash
payments. Management does not believe that any of the foregoing
arrangements have or are reasonably likely to have a current or future effect on
our financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors.
Market
Risk Management
Market risk is the risk of loss arising
from adverse changes in the fair value of financial instruments due to changes
in interest rates, exchange rates or equity pricing. Our principal
market risk is interest rate risk that arises from our lending, investing and
deposit taking activities. Our profitability is primarily dependent
on the Bank’s net interest income. Interest rate risk can
significantly affect net interest income to the degree that interest-bearing
liabilities mature or reprice at different intervals than interest-earning
assets. The degree to which these different assets mature or reprice
is known as interest rate sensitivity.
The primary objective of
asset/liability management is to ensure the steady growth of net interest
income. To lessen the impact of these margin swings, the balance
sheet should be structured so that repricing opportunities exist for both assets
and liabilities in roughly equivalent amounts at approximately the same time
intervals. Interest rate sensitivity may be controlled on either side
of the balance sheet. On the asset side, management can exercise some
control on maturities. Also, loans may be structured with rate floors
and ceilings on variable rate notes and by providing for repricing opportunities
on fixed rate notes. Our investment portfolio, including federal
funds sold, provides the most flexible and fastest control over rate sensitivity
since it can generally be restructured more quickly than the loan
portfolio. On the liability side, deposit products can be
restructured so as to offer incentives to attain the maturity distribution
desired. Competitive factors sometimes make control over deposits
more difficult and less effective.
The rate-sensitive position, or gap, is
the difference in the volume of rate-sensitive assets and liabilities at a given
time interval. The general objective of gap management is to actively
manage rate-sensitive assets and liabilities to reduce the impact of interest
rate fluctuations on the net interest margin. Management generally
attempts to maintain a balance between rate-sensitive assets and liabilities as
the exposure period is lengthened to minimize our overall interest rate
risk.
Several aspects of the asset mix of the
balance sheet are continually evaluated: yield; credit quality; appropriate
funding sources; and liquidity. Management of the liability mix of
the balance sheet focuses on expanding the various funding sources.
The interest rate sensitivity position
at December 31, 2008 is presented in the table “Interest Sensitivity
Analysis”. The difference between rate-sensitive assets and
rate-sensitive liabilities, or the interest rate sensitivity gap, is shown at
the bottom of the table. We were asset-sensitive for all time
horizons except for the after five year time frame in which we were
liability-sensitive. For asset-sensitive institutions, if interest
rates should decrease, the net interest margins should
decline. Because all interest rates and yields do not adjust at the
same velocity, the gap is only a general indicator of rate
sensitivity.
Interest
Sensitivity Analysis
|
|
|
December 31, 2008
|
|
|
|
|
Within
|
|
|
After three
|
|
|
After one
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
but within
|
|
|
but within
|
|
|
After
|
|
|
|
|
|
|
|
Months
|
|
|
twelve months
|
|
|
five years
|
|
|
five years
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$
|
13,230
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
13,230
|
|
|
Federal
funds sold
|
|
|
3,896,890
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,896,890
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
1,009,600
|
|
|
|
3,068,298
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4,077,898
|
|
|
Held
to maturity
|
|
|
999,039
|
|
|
|
0
|
|
|
|
9,056,676
|
|
|
|
0
|
|
|
|
10,055,715
|
|
|
Other
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,494,000
|
|
|
|
2,494,000
|
|
|
Loans
|
|
|
90,467,239
|
|
|
|
41,811,237
|
|
|
|
84,132,243
|
|
|
|
122,147
|
|
|
|
216,532,866
|
|
|
Total
earning assets
|
|
$
|
96,385,998
|
|
|
$
|
44,879,535
|
|
|
$
|
93,188,919
|
|
|
$
|
2,616,147
|
|
|
$
|
237,070,599
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market and Supernow
|
|
$
|
16,738,102
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
16,738,102
|
|
|
Savings
and NOW deposits
|
|
|
33,313,198
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33,313,198
|
|
|
Certificates
$100,000 and over
|
|
|
3,557,339
|
|
|
|
2,577,924
|
|
|
|
20,122,851
|
|
|
|
0
|
|
|
|
26,258,114
|
|
|
Certificates
under $100,000
|
|
|
4,919,718
|
|
|
|
10,367,360
|
|
|
|
39,754,477
|
|
|
|
0
|
|
|
|
55,041,555
|
|
Securities sold under repurchase agreements
& federal
funds purchased
|
|
|
11,126,647
|
|
|
|
602,892
|
|
|
|
400,000
|
|
|
|
0
|
|
|
|
12,129,539
|
|
|
Notes
payable
|
|
|
10,000,000
|
|
|
|
19,000,000
|
|
|
|
9,000,000
|
|
|
|
5,173,216
|
|
|
|
43,173 216
|
|
|
Total
interest-bearing liabilities
|
|
$
|
79,655,004
|
|
|
$
|
32,548,176
|
|
|
$
|
69,277,328
|
|
|
$
|
5,173,216
|
|
|
$
|
186,653,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
gap
|
|
$
|
16,730,994
|
|
|
$
|
12,331,359
|
|
|
$
|
23,911,591
|
|
|
$
|
(
2,557,069
|
)
|
|
$
|
50,416,875
|
|
|
Cumulative
gap
|
|
|
16,730,994
|
|
|
|
29,062,353
|
|
|
|
52,973,944
|
|
|
|
50,416,875
|
|
|
|
50,416,875
|
|
|
Ratio
of cumulative gap to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total
earning assets
|
|
|
7.06
|
%
|
|
|
12.26
|
%
|
|
|
22.35
|
%
|
|
|
21.27
|
%
|
|
|
21.27
|
%
|
In addition to gap analysis, we use
simulation models to quantify the effect a hypothetical immediate plus or minus
200 basis point change in rates would have on net interest income and the fair
value of capital. The model takes into consideration the effect of
call features of investments as well as prepayments of loans in periods of
declining rates. When actual changes in interest rates occur, the
changes in interest earning assets and interest bearing liabilities may differ
from the assumptions used in the model. As of December 31,
2008, the models produced higher sensitivity profiles than those for
net interest income and the fair value of capital in 2007. They are
provided below.
|
|
|
Immediate Change in Rates
|
|
|
|
|
|
|
|
+200
|
|
|
+100
|
|
|
-100
|
|
|
-200
|
|
|
Policy
|
|
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Limit
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
Change in Net Interest Income
|
|
|
6.77
|
%
|
|
|
3.40
|
%
|
|
|
-4.07
|
%
|
|
|
-9.50
|
%
|
|
|
+
10
|
%
|
|
%
Change in Fair Value of Capital
|
|
|
8.15
|
%
|
|
|
3.96
|
%
|
|
|
-3.83
|
%
|
|
|
-7.61
|
%
|
|
|
+
20
|
%
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
Change in Net Interest Income
|
|
|
4.12
|
%
|
|
|
2.07
|
%
|
|
|
-2.55
|
%
|
|
|
-5.62
|
%
|
|
|
+
10
|
%
|
|
%
Change in Fair Value of Capital
|
|
|
5.89
|
%
|
|
|
2.88
|
%
|
|
|
-3.26
|
%
|
|
|
-6.50
|
%
|
|
|
+
20
|
%
|
Deposits
and Other Interest-Bearing Liabilities
Average interest-bearing liabilities
decreased $1,127,120, or 0.59%, to $190,396,845 in 2008, compared to
$191,523,966 in 2007. Average interest-bearing deposits increased
$3,987,866, or 3.09%, to $133,187,872 in 2008 compared to $129,200,006 in
2007. Correspondingly, average demand deposits increased $2,472,810,
or 7.86%, to $33,924,871 in 2008 from $31,452,061 in 2007.
Total
deposits at December 31, 2008 were $165,738,573, a decrease of 1.96% when
compared to deposits of $169,052,249 at December 31, 2007.
The following table sets forth the
Company’s deposits by category at December 31, 2008 and 2007:
.
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
Amount
|
|
|
Deposits
|
|
|
Amount
|
|
|
deposits
|
|
|
Demand
deposit accounts
|
|
$
|
34,387,604
|
|
|
|
20.75
|
%
|
|
$
|
36,630,744
|
|
|
|
21.67
|
%
|
|
Savings
and NOW accounts
|
|
|
33,313,198
|
|
|
|
20.10
|
%
|
|
|
36,419,455
|
|
|
|
21.54
|
%
|
|
Money
market and Supernow accounts
|
|
|
16,738,102
|
|
|
|
10.10
|
%
|
|
|
16,512,974
|
|
|
|
9.77
|
%
|
|
Time
deposits less than $100,000
|
|
|
55,041,555
|
|
|
|
33.21
|
%
|
|
|
53,030,953
|
|
|
|
31.37
|
%
|
|
Time
deposits of $100,000 or more
|
|
|
26,258,114
|
|
|
|
15.84
|
%
|
|
|
26,458,123
|
|
|
|
15.65
|
%
|
|
Total
deposits
|
|
$
|
165,738,573
|
|
|
|
100.00
|
%
|
|
$
|
169,052,249
|
|
|
|
100.00
|
%
|
Core deposits, which exclude
certificates of deposit of $100,000 or more, provide a relatively stable funding
source for our loan portfolio and other earning assets. Our core
deposits decreased $3,113,667 during 2008 primarily due to recent conditions in
the economy. In the past, deposits, particularly core deposits, have
been our primary source of funding and have enabled us to meet our short-term
liquidity needs. In recent years, we have borrowed from correspondent
banks and the FHLB of Atlanta to meet liquidity needs. The maturity
distribution of our time deposits over $100,000 at December 31, 2008 is
shown in the following table.
Maturities
of Certificates of Deposit and Other Time Deposits of $100,000 or
More
|
|
|
December 31, 2008
|
|
|
|
Within three
Months
|
|
|
After three
Through
six months
|
|
|
After six
through
12
Months
|
|
|
After 12
Months
|
|
|
Total
|
|
|
Certificates
of Deposit - $100,000 or more
|
|
$
|
3,557,339
|
|
|
$
|
927,601
|
|
|
$
|
1,650,323
|
|
|
$
|
20,122,851
|
|
|
$
|
26,258,114
|
|
Large certificate of deposit customers
tend to be extremely sensitive to interest rates, making these deposits less
reliable sources of funding for liquidity planning purposes than core
deposits. Some financial institutions partially fund their balance
sheets using large certificates of deposit obtained through
brokers. These brokered deposits are generally expensive and are
unreliable as long-term funding sources. Accordingly, we do not
typically purchase brokered deposits.
The average balance of borrowings
decreased $5,114,987, or 8.21%, in 2008, compared to an increase of $7,799,208,
or 14.30%, in 2007. The decrease in 2008 over 2007 was due primarily
to the fact that the Bank has reduced investment securities to reduce our lines
of credit particularly at the FHLB of Atlanta during 2008.
Short-term
Borrowings
The following table sets forth our
position with respect to short-term borrowings for each of the last two years
ended December 31:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (daily re-price)
|
|
$
|
5,000,000
|
|
|
|
0.46
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
Repurchase
Agreements
|
|
|
9,959,539
|
|
|
|
0.21
|
%
|
|
|
9,041,476
|
|
|
|
0.96
|
%
|
|
Federal
Funds Borrowed
|
|
|
2,170,000
|
|
|
|
0.53
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
$
|
17,129,539
|
|
|
|
|
|
|
$
|
9,041,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
for the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (daily re-price)
|
|
$
|
415,301
|
|
|
|
1.45
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
Retail
Repurchase Agreements
|
|
|
9,453,623
|
|
|
|
1.72
|
%
|
|
|
8,236,694
|
|
|
|
3.70
|
%
|
|
Federal
Funds Borrowed
|
|
|
468,618
|
|
|
|
1.91
|
%
|
|
|
1,626,893
|
|
|
|
5.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
Month End Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (daily re-price)
|
|
$
|
5,000,000
|
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
Retail
Repurchase Agreements
|
|
|
10,552,060
|
|
|
|
|
|
|
|
9,123,069
|
|
|
|
|
|
|
Federal
Funds Borrowed
|
|
|
3,950,000
|
|
|
|
|
|
|
|
6,900,000
|
|
|
|
|
|
The Bank may borrow up to
approximately 30% of total assets from the FHLB of Atlanta through any
combination of notes or line of credit advances. Both the notes
payable and the line of credit are secured by a floating lien on all of the
Bank’s real estate mortgage loans. The Bank was required to purchase
shares of capital stock in the FHLB of Atlanta as a condition to obtaining the
line of credit.
We provide collateral of 105% of the
repurchase agreement balances by pledging U.S. Government Agency
securities.
The Bank
has lines of credit of $16,500,000 in unsecured overnight federal funds and
$5,000,000 in secured overnight federal funds with correspondent banks at
December 31, 2008.
Capital
Under the capital adequacy guidelines
of the FRB and the FDIC, the Company and the Bank are required to maintain
minimum capital ratios. These requirements are described above in
Item 1 or Part I under “Regulation and Supervision—Capital
Requirements”. At December 31, 2008 and 2007, the Company and the
Bank were considered “well-capitalized”. The table below compares the
capital ratios of the Bank with the regulatory minimums. The
Company’s only assets in 2008 other than its equity interest in the Bank were
its equity interest in the Insurance Subsidiary and a small amount of
cash.
The value of the
equity interest in the Insurance Subsidiary at December 31, 2008 did not cause
the Company’s capital ratios as of December 31, 2008 to materially differ from
the Bank’s ratios.
Analysis
of Capital
|
|
|
|
|
|
Actual Ratios
|
|
|
Actual Ratios
|
|
|
|
|
Required
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Minimums
|
|
|
Bank
|
|
|
Bank
|
|
|
Total
risk-based capital ratio
|
|
|
8.0
|
%
|
|
|
13.8
|
%
|
|
|
13.5
|
%
|
|
Tier
I risk-based capital ratio
|
|
|
4.0
|
%
|
|
|
12.8
|
%
|
|
|
12.5
|
%
|
|
Tier
I leverage ratio
|
|
|
4.0
|
%
|
|
|
11.1
|
%
|
|
|
10.7
|
%
|
Accounting
Rule Changes
In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 157,
Fair Value Measurements.
SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. It clarifies that
fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in
the market in which the reporting entity transacts. This Statement does not
require any new fair value measurements, but rather, it provides enhanced
guidance to other pronouncements that require or permit assets or liabilities to
be measured at fair value. This Statement is effective for fiscal years
beginning after November 15, 2007, with earlier adoption permitted. In
February 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-2,
Effective Date of FASB Statement
No. 157.
This FSP defers the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to years beginning after November 15, 2008, and
interim periods within those fiscal years. The adoption of this Statement did
not have a material impact on the Company's financial position, results of
operations or cash flows.
In December 2007, the FASB issued
SFAS 141, Revised 2007 (SFAS 141R),
Business Combinations.
SFAS 141R's objective is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after December 31, 2008. The Company does not
expect the implementation of SFAS 141R to have a material impact on its
consolidated financial statements.
In February 2007, the FASB issued
SFAS 159,
The Fair Value
Option for Financial Assets and Liabilities
. This Statement permits
entities to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This pronouncement became effective as of
the beginning of an entity's first fiscal year beginning after November 15,
2007. The Company has not elected to measure any of its financial instruments at
fair value other than securities available for sale and foreclosed real
estate.
In December 2007, the FASB issued
SFAS 160,
Noncontrolling
Interests in Consolidated Financial Statements.
SFAS 160's objective
is to improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 shall be effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15, 2008.
The Company does not expect the implementation of SFAS 160 to have a
material impact on its consolidated financial statements.
In March 2008, the FASB issued
SFAS 161,
Disclosures
about Derivative Instruments and Hedging Activities
, an amendment of
SFAS 133. SFAS 161 establishes, among other things, the disclosure
requirements for derivative instruments and for hedging activities.
SFAS 161 amends and expands the disclosure requirements of SFAS 133
with the intent to provide users financial statements with enhanced
understanding of: (a) How and why an entity uses derivatives instruments;
(b) How derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. SFAS 161 shall be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company does not expect the implementation of
SFAS 161 to have a material impact on its consolidated financial
statements.
In May 2008, the FASB issued
SFAS 162,
The Hierarchy
of Generally Accepted Accounting Principles
. SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles in the
United States. The implementation of SFAS 162 did not have a material
impact on its consolidated financial statements.
Item
7A. Quantitative and Qualitative
Disclosure About Market Risk.
The
information required by this item may be found in Item 7 of this Part II under
the caption “FINANCIAL CONDITION—Market Risk Management”, which is incorporated
herein by reference.
Item
8. Financial
Statements and Supplementary Data.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Report
of Independent Registered Public Accounting Firm
|
34
|
|
Consolidated
Balance Sheets
|
35
|
|
Consolidated
Statements of Income
|
36
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
37
|
|
Consolidated
Statements of Cash Flows
|
38
|
|
Notes
to Consolidated Financial Statements
|
40
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Peoples
Bancorp, Inc.
Chestertown,
Maryland
We have audited the accompanying
consolidated balance sheets of Peoples Bancorp, Inc. and Subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the two
year period ended December 31, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
financial position of Peoples Bancorp, Inc. and Subsidiaries as of December 31,
2008 and 2007, and the results of its operations and its cash flows for each of
the years in the two year period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
Rowles & Company, LLP
Baltimore,
Maryland
March 17,
2009
CONSOLIDATED
BALANCE SHEETS
|
ASSETS
|
|
DECEMBER 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
and due from banks
|
|
$
|
3,789,925
|
|
|
$
|
5,399,704
|
|
|
Federal
funds sold
|
|
|
3,896,890
|
|
|
|
4,440,438
|
|
|
Cash
and cash equivalents
|
|
|
7,686,815
|
|
|
|
9,840,142
|
|
|
Securities
available for sale
|
|
|
4,077,898
|
|
|
|
5,037,273
|
|
|
Securities
held to maturity (fair value of
$10,430,709
and
$13,198,704)
|
|
|
10,055,715
|
|
|
|
13,026,151
|
|
|
Federal
Home Loan Bank stock, at cost
|
|
|
2,494,000
|
|
|
|
2,897,600
|
|
|
Loans,
less allowance for loan losses of
$2,001,739
and
$2,328,792
|
|
|
214,679,949
|
|
|
|
220,425,725
|
|
|
Premises
and equipment
|
|
|
6,523,845
|
|
|
|
5,901,649
|
|
|
Goodwill
and intangible assets
|
|
|
712,932
|
|
|
|
767,932
|
|
|
Accrued
interest receivable
|
|
|
1,582,688
|
|
|
|
1,814,574
|
|
|
Deferred
income taxes
|
|
|
858,423
|
|
|
|
1,121,746
|
|
|
Foreclosed
real estate
|
|
|
1,407,000
|
|
|
|
-
|
|
|
Other
assets
|
|
|
1,814,970
|
|
|
|
974,970
|
|
|
|
|
$
|
251,894,235
|
|
|
$
|
261,807,762
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing checking
|
|
$
|
34,387,604
|
|
|
$
|
36,630,744
|
|
|
Savings
and NOW
|
|
|
33,313,198
|
|
|
|
36,419,455
|
|
|
Money
market and Super NOW
|
|
|
16,738,102
|
|
|
|
16,512,974
|
|
|
Other
time
|
|
|
81,299,669
|
|
|
|
79,489,076
|
|
|
|
|
|
165,738,573
|
|
|
|
169,052,249
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under repurchase agreements
|
|
|
9,959,539
|
|
|
|
9,041,476
|
|
|
Federal
funds purchased
|
|
|
2,170,000
|
|
|
|
-
|
|
|
Federal
Home Loan Bank advances
|
|
|
43,000,000
|
|
|
|
53,000,000
|
|
|
Other
borrowings
|
|
|
173,216
|
|
|
|
192,597
|
|
|
Accrued
interest payable
|
|
|
441,832
|
|
|
|
521,219
|
|
|
Other
liabilities
|
|
|
1,968,151
|
|
|
|
1,960,427
|
|
|
|
|
|
223,451,311
|
|
|
|
233,767,968
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $10 per share; authorized 1,000,000 shares; issued and
outstanding 779,512 shares in 2008 and 785,512 shares in
2007
|
|
|
7,795,120
|
|
|
|
7,855,120
|
|
|
Additional
paid-in capital
|
|
|
2,920,866
|
|
|
|
2,920,866
|
|
|
Retained
earnings
|
|
|
18,370,797
|
|
|
|
17,997,286
|
|
|
|
|
|
29,086,783
|
|
|
|
28,773,272
|
|
|
Accumulated
other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on available for sale securities
|
|
|
51,965
|
|
|
|
32,967
|
|
|
Unfunded
liability for defined benefit plan
|
|
|
(695,824
|
)
|
|
|
(766,445
|
)
|
|
|
|
|
28,442,924
|
|
|
|
28,039,794
|
|
|
|
|
$
|
251,894,235
|
|
|
$
|
261,807,762
|
|
The notes to the consolidated financial
statements are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend revenue
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
14,550,122
|
|
|
$
|
16,253,268
|
|
|
U.S.
government agency securities
|
|
|
757,426
|
|
|
|
859,323
|
|
|
Federal
funds sold
|
|
|
92,497
|
|
|
|
122,213
|
|
|
Other
|
|
|
157,262
|
|
|
|
174,018
|
|
|
Total
interest and dividend revenue
|
|
|
15,557,307
|
|
|
|
17,408,822
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,487,935
|
|
|
|
3,795,551
|
|
|
Borrowed
funds
|
|
|
2,404,095
|
|
|
|
2,858,593
|
|
|
Total
interest expense
|
|
|
5,892,030
|
|
|
|
6,654,144
|
|
|
Net
interest income
|
|
|
9,665,277
|
|
|
|
10,754,678
|
|
|
Provision
for loan losses
|
|
|
1,715,000
|
|
|
|
580,000
|
|
|
Net
interest income after provision for loan losses
|
|
|
7,950,277
|
|
|
|
10,174,678
|
|
|
Noninterest
revenue
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
997,133
|
|
|
|
986,299
|
|
|
Insurance
commissions
|
|
|
1,238,240
|
|
|
|
1,171,826
|
|
|
Other
noninterest revenue
|
|
|
295,794
|
|
|
|
286,675
|
|
|
Total
noninterest revenue
|
|
|
2,531,167
|
|
|
|
2,444,800
|
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
|
3,256,114
|
|
|
|
3,053,372
|
|
|
Employee
benefits
|
|
|
1,032,560
|
|
|
|
1,009,533
|
|
|
Occupancy
|
|
|
443,281
|
|
|
|
367,453
|
|
|
Furniture
and equipment
|
|
|
287,923
|
|
|
|
258,795
|
|
|
Other
operating
|
|
|
2,028,679
|
|
|
|
1,717,584
|
|
|
Total
noninterest expense
|
|
|
7,048,557
|
|
|
|
6,406,737
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,432,887
|
|
|
|
6,212,741
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
1,270,010
|
|
|
|
2,313,246
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,162,877
|
|
|
$
|
3,899,495
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic and diluted
|
|
$
|
2.77
|
|
|
$
|
4.96
|
|
The
notes to the consolidated financial statements are an integral part of these
statements.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS
ENDED DECEMBER 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
Common stock
|
|
|
paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
Comprehensive
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
earnings
|
|
|
income
|
|
|
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
789,012
|
|
|
$
|
7,890,120
|
|
|
$
|
2,920,866
|
|
|
$
|
15,632,965
|
|
|
$
|
(836,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,899,495
|
|
|
|
-
|
|
|
$
|
3,899,495
|
|
|
Change
in underfunded status of defined benefit plan net of income taxes of
$17,020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,089
|
|
|
|
54,089
|
|
|
Unrealized
gain on investment securities available for sale net of income taxes of
$31,718
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,228
|
|
|
|
49,228
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,002,812
|
|
|
Repurchase
of stock
|
|
|
(3,500
|
)
|
|
|
(35,000
|
)
|
|
|
-
|
|
|
|
(220,500
|
)
|
|
|
-
|
|
|
|
|
|
|
Cash
dividend, $1.67 per share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,314,674
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
785,512
|
|
|
|
7,855,120
|
|
|
|
2,920,866
|
|
|
|
17,997,286
|
|
|
|
(733,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,162,877
|
|
|
|
-
|
|
|
$
|
2,162,877
|
|
|
Change
in underfunded status of defined benefit plan net of income taxes of
$46,002
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,621
|
|
|
|
70,621
|
|
|
Unrealized
gain on investment securities available for sale net of income taxes of
$12,375
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,998
|
|
|
|
18,998
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,252,496
|
|
|
Repurchase
of stock
|
|
|
(6,000
|
)
|
|
|
(60,000
|
)
|
|
|
-
|
|
|
|
(420,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Cash
dividend, $1.75 per share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,369,366
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
779,512
|
|
|
$
|
7,795,120
|
|
|
$
|
2,920,866
|
|
|
$
|
18,370,797
|
|
|
$
|
(643,859
|
)
|
|
|
|
|
The notes to the consolidated financial
statements are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
YEARS ENDED DECEMBER
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Interest
received
|
|
$
|
15,834,760
|
|
|
$
|
16,961,337
|
|
|
Fees
and commissions received
|
|
|
2,531,167
|
|
|
|
2,444,801
|
|
|
Interest
paid
|
|
|
(5,971,417
|
)
|
|
|
(6,602,672
|
)
|
|
Cash
paid to suppliers and employees
|
|
|
(6,720,079
|
)
|
|
|
(5,775,379
|
)
|
|
Income
taxes paid
|
|
|
(1,744,870
|
)
|
|
|
(2,565,718
|
)
|
|
|
|
|
3,929,561
|
|
|
|
4,462,369
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of investment securities
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
5,501,211
|
|
|
|
1,002,269
|
|
|
Available
for sale
|
|
|
1,000,000
|
|
|
|
3,000,000
|
|
|
Purchase
of investment securities
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
(2,505,170
|
)
|
|
|
(3,065,521
|
)
|
|
Purchase
of Federal Home Loan Bank stock
|
|
|
403,600
|
|
|
|
(364,500
|
)
|
|
Loans
made, net of principal collected
|
|
|
2,518,356
|
|
|
|
(14,903,275
|
)
|
|
Purchase
of premises, equipment, and software
|
|
|
(906,525
|
)
|
|
|
(1,657,783
|
)
|
|
Acquisition
of insurance agency, net
|
|
|
-
|
|
|
|
(884,634
|
)
|
|
|
|
|
6,011,472
|
|
|
|
(16,873,444
|
)
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
|
1,810,593
|
|
|
|
7,554,647
|
|
|
Other
deposits
|
|
|
(5,124,269
|
)
|
|
|
6,312,018
|
|
|
Securities
sold under repurchase agreements and federal funds
purchased
|
|
|
3,088,063
|
|
|
|
(6,532,117
|
)
|
|
Federal
Home Loan Bank advances, net of repayments
|
|
|
(10,000,000
|
)
|
|
|
9,300,000
|
|
|
Repayments
of other borrowings
|
|
|
(19,381
|
)
|
|
|
(278,567
|
)
|
|
Dividends
paid
|
|
|
(1,369,366
|
)
|
|
|
(1,314,674
|
)
|
|
Repurchase
of stock
|
|
|
(480,000
|
)
|
|
|
(255,500
|
)
|
|
|
|
|
(12,094,360
|
)
|
|
|
14,785,807
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(2,153,327
|
)
|
|
|
2,374,732
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
9,840,142
|
|
|
|
7,465,410
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
7,686,815
|
|
|
$
|
9,840,142
|
|
The notes to the consolidated financial
statements are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
YEARS
ENDED DECEMBER 31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,162,877
|
|
|
$
|
3,899,495
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
Amortization
of premiums and accretion of discounts
|
|
|
(34,854
|
)
|
|
|
(53,453
|
)
|
|
Provision
for loan losses
|
|
|
1,715,000
|
|
|
|
580,000
|
|
|
Depreciation
and software amortization
|
|
|
283,020
|
|
|
|
243,481
|
|
|
Amortization
of intangible assets
|
|
|
55,000
|
|
|
|
55,000
|
|
|
Write-down
of foreclosed real estate
|
|
|
25,000
|
|
|
|
-
|
|
|
Deferred
income taxes
|
|
|
204,946
|
|
|
|
(252,472
|
)
|
|
Decrease
(increase) in
|
|
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
|
231,886
|
|
|
|
(368,741
|
)
|
|
Other
assets
|
|
|
(838,691
|
)
|
|
|
233,679
|
|
|
Increase
(decrease) in
|
|
|
|
|
|
|
|
|
|
Deferred
origination fees and costs, net
|
|
|
80,421
|
|
|
|
(25,293
|
)
|
|
Accrued
interest payable
|
|
|
(79,387
|
)
|
|
|
51,472
|
|
|
Other
liabilities
|
|
|
124,343
|
|
|
|
99,201
|
|
|
|
|
$
|
3,929,561
|
|
|
$
|
4,462,369
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure regarding insurance agency acquisition
|
|
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
$
|
-
|
|
|
$
|
696,499
|
|
|
Fair
value of liabilities assumed
|
|
|
-
|
|
|
|
(634,797
|
)
|
|
Purchase
price in excess of net assets acquired
|
|
|
-
|
|
|
|
822,932
|
|
|
Net
cash paid for insurance agency acquisition
|
|
$
|
-
|
|
|
$
|
884,634
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
supplemental disclosure
|
|
|
|
|
|
|
|
|
|
Loans
transferred to foreclosed real estate
|
|
$
|
1,432,000
|
|
|
$
|
-
|
|
The notes to the consolidated financial
statements are an integral part of these statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Summary of Significant
Accounting Policies
|
The accounting and reporting policies
reflected in the accompanying financial statements conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry.
Principles
of consolidation
Peoples Bancorp, Inc. and its
subsidiaries, The Peoples Bank, a financial institution and Fleetwood, Athey,
MacBeth & McCown, Inc., an insurance agency, operate primarily in Kent and
Queen Anne’s Counties, Maryland. The consolidated financial
statements include the accounts of the Company, the Bank, and the Insurance
Subsidiary. Intercompany balances and transactions have been
eliminated. References in these notes to "the Company" are intended
to mean Peoples Bancorp, Inc. and, as the context requires, the Bank or the
Insurance Subsidiary.
Nature
of business
The Bank which includes a Main office
and six branches, offers deposit services and loans to individuals, small
businesses, associations, and government entities. Other services
include direct deposit of payroll and social security checks, automatic drafts
from accounts, automated teller machine services, cash management services, safe
deposit boxes, money orders, travelers cheques, and on-line banking with bill
payment service. The Bank also offers credit card services and
discount brokerage services through a correspondent.
The Insurance Subsidiary operates from
one location in Kent County and provides a full range of insurance products to
businesses and consumers. Product lines include property, casualty,
life, marine, long-term care and health insurance.
Use
of estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions may affect the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Summary of Significant
Accounting Policies
(Continued
)
|
Cash
and cash equivalents
For purposes of reporting cash flows,
cash and cash equivalents include cash on hand, amounts due from banks, and
federal funds sold. Generally, federal funds are purchased and sold
for one-day periods.
Investment
securities
As securities are purchased,
management determines if the securities should be classified as held to maturity
or available for sale. Securities which management has the intent and
ability to hold to maturity are classified as held to maturity and recorded at
amortized cost which is cost adjusted for amortization of premiums and accretion
of discounts to maturity, or over the expected life in the case of
mortgage-backed securities. Amortization and accretion are recorded
using the interest method. Securities which may be sold before
maturity are classified as available for sale and carried at fair value with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income.
Gains and losses on the sale of
securities are determined using the specific identification method.
Loans
and allowance for loan losses
Loans are stated at their outstanding
unpaid principal balance adjusted for deferred origination costs, deferred
origination fees, and the allowance for loan losses.
Interest on loans is accrued based on
the principal amounts outstanding. Loan origination fees, net of
certain direct origination costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method. The accrual of
interest is discontinued when any portion of the principal or interest is ninety
days past due and collateral is insufficient to discharge the debt in
full. When the accrual of interest is discontinued, loans are
reviewed for impairment. Past due status is based on contractual
terms of the loan. All interest accrued but not collected for loans
that are placed on nonaccrual status is reversed against interest
revenue.
The allowance for loan losses is
established as losses are estimated to have occurred through a provision for
loan losses charged to earnings. Loan losses are charged against the
allowance when management believes a loan is
uncollectible. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is
evaluated on a regular basis by management and is based upon management's
periodic review of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
The allowance consists of specific,
general, and unallocated components. The specific component relates
to loans that are classified as either doubtful, substandard, or special
mention. The general component covers nonclassified loans and is
based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable
losses. The unallocated component of the allowance reflects the
margin of imprecision in the underlying assumptions used in the methodologies
for estimating specific and general losses in the portfolio.
A loan is considered impaired when,
based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Impairment
is measured on a loan by loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Premises
and equipment
Premises and equipment are recorded
at cost less accumulated depreciation. Depreciation is computed using
the straight-line method over estimated useful lives of three to ten years for
furniture and equipment and ten to forty years for premises.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Summary of Significant
Accounting Policies
(Continued)
|
Foreclosed
real estate
Real
estate acquired through foreclosure is recorded at the lower of cost or fair
market value on the date acquired. In general, cost equals the
Company's investment in the property at the time of
foreclosure. Losses incurred at the time of acquisition of the
property are charged to the allowance for loan losses. Subsequent
reductions in the estimated value of the property are included in other
operating expense.
Goodwill
and intangible assets
Goodwill
represents the excess of the cost of an acquisition over the fair value of the
net assets acquired. Other intangible assets represent purchased
assets that lack physical substance but can be distinguished from goodwill
because of contractual or other legal rights or because the asset is capable of
being sold or exchanged either on its own or in combination with a related
contract, asset or liability. Goodwill is not ratably amortized into
the income statement over an estimated life, but rather is tested at least
annually for impairment. Intangible assets that have finite lives are
amortized over their estimated useful lives and are also subject to impairment
testing. The Company’s intangible assets have finite lives and are
amortized on a straight-line basis over periods not exceeding 10
years.
Advertising
Advertising costs are expensed over
the life of ad campaigns. General purpose advertising is charged to
expense as incurred.
Income
taxes
The provision for income taxes
includes taxes payable for the current year and deferred income
taxes. Deferred income taxes are provided for the temporary
differences between financial and taxable income.
The Company recognizes deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax
returns. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Per
share data
Earnings per common share are
determined by dividing net income by the weighted average number of shares of
common stock outstanding. The weighted average number of shares
outstanding were 781,578 and 786,950 for 2008 and 2007,
respectively. There are no dilutive shares.
|
2
.
|
Cash and Due from
Banks
|
The Company normally carries balances
with other banks that exceed the federally insured limit. The average
balances carried in excess of the limit, including unsecured federal funds sold
to the same banks, were $4,411,589 for 2008 and $5,421,260 for
2007.
Banks are required to carry
noninterest-bearing cash reserves at specified percentages of deposit
balances. The Company's normal amount of cash on hand and on deposit
with other banks is sufficient to satisfy the reserve
requirements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Investment securities are summarized
as follows:
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
December 31, 2008
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agency
|
|
$
|
3,992,083
|
|
|
$
|
85,815
|
|
|
$
|
-
|
|
|
$
|
4,077,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agency
|
|
$
|
10,048,570
|
|
|
$
|
375,170
|
|
|
$
|
-
|
|
|
$
|
10,423,740
|
|
|
Mortgage-backed
securities
|
|
|
7,145
|
|
|
|
-
|
|
|
|
176
|
|
|
|
6,969
|
|
|
|
|
$
|
10,055,715
|
|
|
$
|
375,170
|
|
|
$
|
176
|
|
|
$
|
10,430,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agency
|
|
$
|
4,982,834
|
|
|
$
|
54,439
|
|
|
$
|
-
|
|
|
$
|
5,037,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agency
|
|
$
|
13,017,782
|
|
|
$
|
180,370
|
|
|
$
|
7,808
|
|
|
$
|
13,190,344
|
|
|
Mortgage-backed
securities
|
|
|
8,369
|
|
|
|
7
|
|
|
|
16
|
|
|
|
8,360
|
|
|
|
|
$
|
13,026,151
|
|
|
$
|
180,377
|
|
|
$
|
7,824
|
|
|
$
|
13,198,704
|
|
Contractual maturities and the amount
of pledged securities are shown below. Actual maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
|
Available for sale
|
|
|
Held to maturity
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
December 31, 2008
|
|
cost
|
|
|
value
|
|
|
cost
|
|
|
value
|
|
|
Maturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
3,992,083
|
|
|
$
|
4,077,898
|
|
|
$
|
999,039
|
|
|
$
|
1,004,100
|
|
|
Over
one to five years
|
|
|
-
|
|
|
|
-
|
|
|
|
9,049,531
|
|
|
|
9,420,640
|
|
|
Mortgage-backed
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
7,145
|
|
|
|
6,969
|
|
|
|
|
$
|
3,992,083
|
|
|
$
|
4,077,898
|
|
|
$
|
10,055,715
|
|
|
$
|
10,431,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pledged
securities
|
|
$
|
1,449,341
|
|
|
$
|
1,484,759
|
|
|
$
|
6,216,627
|
|
|
$
|
6,441,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
1,004,867
|
|
|
$
|
1,006,266
|
|
|
$
|
5,492,583
|
|
|
$
|
5,495,088
|
|
|
Over
one to five years
|
|
|
3,977,967
|
|
|
|
4,031,007
|
|
|
|
7,525,199
|
|
|
|
7,695,256
|
|
|
Mortgage-backed
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
8,369
|
|
|
|
8,360
|
|
|
|
|
$
|
4,982,834
|
|
|
$
|
5,037,273
|
|
|
$
|
13,026,151
|
|
|
$
|
13,198,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pledged
securities
|
|
$
|
2,254,626
|
|
|
$
|
2,279,019
|
|
|
$
|
6,726,475
|
|
|
$
|
6,808,743
|
|
Investments are pledged to secure the
deposits of federal and local governments and as collateral for repurchase
agreements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
3.
|
Investment Securities
(
Continued)
|
Securities in a continuous unrealized
loss position at December 31, 2008, are as follows:
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency
|
|
$
|
113
|
|
|
$
|
4,492
|
|
|
$
|
63
|
|
|
$
|
2,477
|
|
|
$
|
176
|
|
|
$
|
6,969
|
|
All unrealized losses on securities as
of December 31, 2008, are considered to be temporary losses. Each
security will be redeemed at face value at, or prior to, maturity. In
most cases, the temporary impairment in value is caused by market interest rate
fluctuations.
|
4.
|
Loans and Allowance for Loan
Losses
|
Major classifications of loans as of
December 31, are as follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Real
estate
|
|
|
|
|
|
|
|
Residential
|
|
$
|
60,579,916
|
|
|
$
|
56,041,357
|
|
|
Commercial
|
|
|
104,175,727
|
|
|
|
105,838,014
|
|
|
Construction
|
|
|
7,255,246
|
|
|
|
10,996,273
|
|
|
Commercial
|
|
|
36,754,882
|
|
|
|
40,822,119
|
|
|
Consumer
|
|
|
7,767,095
|
|
|
|
8,827,512
|
|
|
|
|
|
216,532,866
|
|
|
|
222,525,275
|
|
|
Deferred
costs, net of deferred fees
|
|
|
148,822
|
|
|
|
229,242
|
|
|
Allowance
for loan losses
|
|
|
(2,001,739
|
)
|
|
|
(2,328,792
|
)
|
|
|
|
$
|
214,679,949
|
|
|
$
|
220,425,725
|
|
The rate repricing and maturity
distribution of the loan portfolio is as follows:
|
Within
ninety days
|
|
$
|
90,467,239
|
|
|
$
|
85,112,795
|
|
|
Over
ninety days to one year
|
|
|
41,811,237
|
|
|
|
46,022,843
|
|
|
Over
one year to five years
|
|
|
84,132,243
|
|
|
|
91,096,171
|
|
|
Over
five years
|
|
|
122,147
|
|
|
|
293,466
|
|
|
|
|
$
|
216,532,866
|
|
|
$
|
222,525,275
|
|
Transactions in the allowance for
loan losses were as follows:
|
Beginning
balance
|
|
$
|
2,328,792
|
|
|
$
|
1,860,283
|
|
|
Provision
charged to operations
|
|
|
1,715,000
|
|
|
|
580,000
|
|
|
Recoveries
|
|
|
47,644
|
|
|
|
3,272
|
|
|
|
|
|
4,091,436
|
|
|
|
2,443,555
|
|
|
Loans
charged off
|
|
|
2,089,697
|
|
|
|
114,763
|
|
|
Ending
balance
|
|
$
|
2,001,739
|
|
|
$
|
2,328,792
|
|
Management has identified no
significant impaired loans.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
4.
|
Loans and Allowance for Loan
Losses
(Continued)
|
Loans on which the accrual of
interest has been discontinued or reduced, and the interest that would have been
accrued at December 31, are as follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loan balances
|
|
$
|
3,670,657
|
|
|
$
|
2,877,002
|
|
|
Interest
not accrued
|
|
|
222,461
|
|
|
|
63,999
|
|
Amounts past due 90 days or more at
December 31, still accruing interest, are as follows:
|
Demand
and time
|
|
$
|
19,540
|
|
|
$
|
396,003
|
|
|
Mortgage
|
|
|
1,447,221
|
|
|
|
2,162,829
|
|
|
Installment
|
|
|
25,117
|
|
|
|
14,004
|
|
|
|
|
$
|
1,491,878
|
|
|
$
|
2,572,836
|
|
Outstanding loan commitments, unused
lines of credit, and letters of credit as of December 31, are as
follows:
|
Check
loan lines of credit
|
|
$
|
1,469,145
|
|
|
$
|
1,569,366
|
|
|
Mortgage
lines of credit
|
|
|
6,218,412
|
|
|
|
12,096,030
|
|
|
Other
lines of credit
|
|
|
13,556,168
|
|
|
|
11,037,113
|
|
|
Undisbursed
construction loan commitments
|
|
|
5,290,834
|
|
|
|
1,253,806
|
|
|
|
|
$
|
26,534,559
|
|
|
$
|
25,956,315
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby
letters of credit
|
|
$
|
5,278,824
|
|
|
$
|
4,636,444
|
|
Loan commitments and lines of credit
are agreements to lend to a customer as long as there is no violation of any
condition to the contract. Loan commitments generally have interest
rates fixed at current market rates, fixed expiration dates, and may require
payment of a fee. Lines of credit generally have variable interest
rates. Such lines do not represent future cash requirements because
it is unlikely that all customers will draw upon their lines in full at any
time.
Letters of credit are commitments
issued to guarantee the performance of a customer to a third party.
Loan commitments, lines of credit, and
letters of credit are made on the same terms, including collateral, as
outstanding loans. The Company's exposure to credit loss in the event
of nonperformance by the borrower is represented by the contract amount of the
commitment. Management is not aware of any accounting loss the
Company will incur by the funding of these commitments.
The Company lends to customers
located primarily in and near Kent County, Queen Anne’s County, and Cecil
County, Maryland. Although the loan portfolio is diversified, its
performance will be influenced by the economy of the region.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
5.
|
Premises and
Equipment
|
A summary of premises and equipment
and related depreciation expense as of December 31, is as follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,432,279
|
|
|
$
|
2,432,279
|
|
|
Premises
|
|
|
4,904,963
|
|
|
|
4,289,137
|
|
|
Furniture
and equipment
|
|
|
2,726,581
|
|
|
|
2,441,325
|
|
|
|
|
|
10,063,823
|
|
|
|
9,162,741
|
|
|
Accumulated
depreciation
|
|
|
3,539,978
|
|
|
|
3,261,092
|
|
|
Net
premises and equipment
|
|
$
|
6,523,845
|
|
|
$
|
5,901,649
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$
|
278,885
|
|
|
$
|
237,211
|
|
Computer software included in other
assets and the related amortization are as follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
74,728
|
|
|
$
|
69,284
|
|
|
Accumulated
amortization
|
|
|
70,284
|
|
|
|
66,149
|
|
|
Net
computer software
|
|
$
|
4,444
|
|
|
$
|
3,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
|
$
|
4,135
|
|
|
$
|
6,270
|
|
Maturities of other time deposits as
of December 31, are as follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
22,025,234
|
|
|
$
|
46,008,278
|
|
|
Over
one to two years
|
|
|
10,537,866
|
|
|
|
3,184,647
|
|
|
Over
two to three years
|
|
|
17,799,526
|
|
|
|
7,798,720
|
|
|
Over
three to four years
|
|
|
7,426,675
|
|
|
|
15,060,021
|
|
|
Over
four to five years
|
|
|
23,510,368
|
|
|
|
7,437,410
|
|
|
|
|
$
|
81,299,669
|
|
|
$
|
79,489,076
|
|
Included in other time deposits are
certificates of deposit in amounts of $100,000 or more of $26,258,114 and
$26,458,123, as of December 31, 2008 and 2007, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
7.
|
Securities Sold Under
Repurchase Agreements
|
Securities sold under repurchase
agreements represent borrowings from customers. The government agency
securities that are the collateral for these agreements are owned by the Company
and maintained in the custody of a nonaffiliated bank. Additional
information is as follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Maximum
month-end amount outstanding
|
|
$
|
10,552,060
|
|
|
$
|
9,123,069
|
|
|
Average
amount outstanding
|
|
|
9,453,623
|
|
|
|
8,245,549
|
|
|
Average
rate paid during the year
|
|
|
1.72
|
%
|
|
|
3.70
|
%
|
|
Investment
securities underlying agreements at year-end
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
|
6,404,158
|
|
|
|
6,173,970
|
|
|
Estimated
fair value
|
|
|
6,618,769
|
|
|
|
6,097,162
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
8.
|
Notes Payable and Lines of
Credit
|
The Company may borrow up to
approximately 30% of total assets from the Federal Home Loan Bank (FHLB) through
any combination of notes or line of credit advances. Both the notes
payable and the line of credit are secured by a floating lien on all of the
Company’s real estate mortgage loans. As of December 31, 2008, the
Company had $939,172 of mortgage loans available to pledge as collateral to the
FHLB. The Company was required to purchase shares of capital stock in
the FHLB as a condition to obtaining the line of credit.
The Company’s borrowings from the
Federal Home Loan Bank as of December 31, 2008 and 2007, are summarized as
follows:
|
Maturity
|
|
Interest
|
|
|
2008
|
|
|
2007
|
|
|
date
|
|
rate
|
|
|
Balance
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
2, 2017
|
|
|
4.34
|
%
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
|
January
26, 2017
|
|
|
4.36
|
%
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
March
9, 2012
|
|
|
4.29
|
%
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
June
22, 2010
|
|
|
5.59
|
%
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
April
2, 2010
|
|
|
5.02
|
%
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
March
22, 2010
|
|
|
4.04
|
%
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
January
25, 2010
|
|
|
5.29
|
%
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
December
2, 2009
|
|
|
5.08
|
%
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
October
22, 2009
|
|
|
4.59
|
%
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
October
21, 2009
|
|
Variable
|
|
|
5,000,000
|
|
|
|
-
|
|
|
September
25, 2009
|
|
|
5.48
|
%
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
August
25, 2009
|
|
|
5.48
|
%
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
July
22, 2009
|
|
|
5.55
|
%
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
June
8, 2009
|
|
|
5.05
|
%
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
May
18, 2009
|
|
|
5.28
|
%
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
April
6, 2009
|
|
|
5.11
|
%
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
March
17, 2009
|
|
|
5.28
|
%
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
January
26, 2009
|
|
|
5.36
|
%
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
January
16, 2009
|
|
|
5.28
|
%
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
December
5, 2008
|
|
|
4.90
|
%
|
|
|
-
|
|
|
|
3,000,000
|
|
|
October
21, 2008
|
|
|
4.37
|
%
|
|
|
-
|
|
|
|
2,000,000
|
|
|
September
22, 2008
|
|
|
5.50
|
%
|
|
|
-
|
|
|
|
1,000,000
|
|
|
August
18, 2008
|
|
|
5.28
|
%
|
|
|
-
|
|
|
|
1,000,000
|
|
|
July
25, 2008
|
|
|
5.61
|
%
|
|
|
-
|
|
|
|
1,000,000
|
|
|
June
20, 2008
|
|
|
4.37
|
%
|
|
|
-
|
|
|
|
2,000,000
|
|
|
April
11, 2008
|
|
|
4.36
|
%
|
|
|
-
|
|
|
|
3,000,000
|
|
|
March
10, 2008
|
|
|
4.24
|
%
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
$
|
43,000,000
|
|
|
$
|
53,000,000
|
|
The outstanding advances require
interest payments monthly or quarterly with principle due at
maturity.
In
addition to the line from the FHLB, the Company has lines of credit of
$16,500,000 in unsecured overnight federal funds and $5,000,000 in secured
overnight federal funds at December 31, 2008. As of December 31,
2008, the Company had $2,170,000 in borrowings under these federal funds lines
of credit.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The components of income tax expense
are as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
892,890
|
|
|
$
|
2,156,068
|
|
|
State
|
|
|
172,174
|
|
|
|
409,650
|
|
|
|
|
|
1,065,064
|
|
|
|
2,565,718
|
|
|
Deferred
|
|
|
204,946
|
|
|
|
(252,472
|
)
|
|
|
|
$
|
1,270,010
|
|
|
$
|
2,313,246
|
|
The components of the deferred income
tax expense are as follows:
|
Provision
for loan losses and bad debts
|
|
$
|
170,038
|
|
|
$
|
(202,479
|
)
|
|
Prepaid
pension costs
|
|
|
59,232
|
|
|
|
(22,107
|
)
|
|
Depreciation
and amortization
|
|
|
53,542
|
|
|
|
8,772
|
|
|
Discount
accretion
|
|
|
4,514
|
|
|
|
7,707
|
|
|
Nonaccrual
interest
|
|
|
(62,506
|
)
|
|
|
(24,673
|
)
|
|
Deferred
compensation
|
|
|
(10,013
|
)
|
|
|
(19,692
|
)
|
|
Write-down
of foreclosed real estate
|
|
|
(9,861
|
)
|
|
|
-
|
|
|
|
|
$
|
204,946
|
|
|
$
|
(252,472
|
)
|
The components of the net deferred
income tax asset are as follows:
|
Deferred
income tax assets
|
|
|
|
|
|
|
|
Allowance
for loan losses and bad debt reserve
|
|
$
|
621,900
|
|
|
$
|
791,938
|
|
|
Deferred
compensation
|
|
|
179,845
|
|
|
|
169,832
|
|
|
Pension
liability
|
|
|
244,541
|
|
|
|
349,775
|
|
|
Nonaccrual
interest
|
|
|
87,750
|
|
|
|
25,244
|
|
|
Foreclosed
real estate valuation allowance
|
|
|
9,861
|
|
|
|
-
|
|
|
|
|
|
1,143,897
|
|
|
|
1,336,789
|
|
|
Deferred
income tax liabilities
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
204,746
|
|
|
|
151,204
|
|
|
Discount
accretion
|
|
|
46,878
|
|
|
|
42,364
|
|
|
Prepaid
pension costs
|
|
|
-
|
|
|
|
-
|
|
|
Unrealized
gain on investment securities available for sale
|
|
|
33,850
|
|
|
|
21,475
|
|
|
|
|
|
285,474
|
|
|
|
215,043
|
|
|
Net
deferred income tax asset
|
|
$
|
858,423
|
|
|
$
|
1,121,746
|
|
A reconciliation of the provisions
for income taxes from statutory federal rates to effective rates
follows:
|
Tax
at statutory federal income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
Tax
effect of
|
|
|
|
|
|
|
|
|
|
Tax-exempt
income
|
|
|
(1.1
|
)
|
|
|
(0.5
|
)
|
|
State
income taxes, net of federal benefit
|
|
|
3.9
|
|
|
|
3.8
|
|
|
Change
in State income tax rate
|
|
|
-
|
|
|
|
(0.2
|
)
|
|
Other,
net
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
37.0
|
%
|
|
|
37.2
|
%
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a profit sharing plan
qualifying under section 401(k) of the Internal Revenue Code that covers all
employees with one year of service who have attained age 21. The
Company matches 15% of employee contributions to the Plan, up to a maximum of 2%
of pay. The Company may make discretionary contributions to the Plan
in amounts approved by the Board of Directors. The Company’s
contributions to the plan, included in employee benefits expense for 2008 and
2007, were $6,897 and $55,895, respectively.
The Company has a defined benefit
pension plan covering substantially all of the employees. Benefits
are based on years of service and the employee's highest average rate of
earnings for five consecutive years during the final ten full years before
retirement. The Company's funding policy is to contribute annually
the maximum amount that can be deducted for income tax purposes, determined
using the projected unit credit cost method.
The following table sets forth the
financial status of the plan at December 31:
|
|
|
2008
|
|
|
2007
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
2,078,439
|
|
|
$
|
1,876,004
|
|
|
Actual
return on plan assets
|
|
|
110,595
|
|
|
|
98,014
|
|
|
Employer
contribution
|
|
|
415,747
|
|
|
|
185,000
|
|
|
Benefits
paid
|
|
|
(37,349
|
)
|
|
|
(80,579
|
)
|
|
Fair
value of plan assets at end of year
|
|
|
2,567,432
|
|
|
|
2,078,439
|
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
|
2,965,180
|
|
|
|
2,768,513
|
|
|
Service
cost
|
|
|
159,042
|
|
|
|
150,062
|
|
|
Interest
cost
|
|
|
184,157
|
|
|
|
170,242
|
|
|
Benefits
paid
|
|
|
(37,349
|
)
|
|
|
(80,579
|
)
|
|
Actuarial
loss (gain)
|
|
|
(83,644
|
)
|
|
|
(43,058
|
)
|
|
Benefit
obligation at end of year
|
|
|
3,187,386
|
|
|
|
2,965,180
|
|
|
Funded
status
|
|
|
(619,954
|
)
|
|
|
(886,741
|
)
|
|
Unamortized
prior service cost
|
|
|
(4,136
|
)
|
|
|
(5,513
|
)
|
|
Unrecognized
net loss
|
|
|
1,153,214
|
|
|
|
1,271,214
|
|
|
Prepaid
pension expense included in other assets
|
|
$
|
529,124
|
|
|
$
|
378,960
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
$
|
2,083,410
|
|
|
$
|
1,830,350
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Net pension expense includes the
following components:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
159,042
|
|
|
$
|
150,062
|
|
|
Interest
cost
|
|
|
184,157
|
|
|
|
170,242
|
|
|
Expected
return on assets
|
|
|
(130,389
|
)
|
|
|
(118,935
|
)
|
|
Amortization
of prior service cost
|
|
|
(1,377
|
)
|
|
|
(1,377
|
)
|
|
Amortization
of loss
|
|
|
54,150
|
|
|
|
50,350
|
|
|
Net
pension expense
|
|
$
|
265,583
|
|
|
$
|
250,342
|
|
Assumptions used in the accounting
for net pension expense were:
|
Discount
rates
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
Rate
of increase in compensation level
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
Long-term
rate of return on assets
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
The Company intends to contribute
approximately $272,000 to the Plan in 2009.
Benefits expected to be paid from the
Plan are as follows:
|
Year
|
|
Amount
|
|
|
|
|
|
|
|
2009
|
|
$
|
48,702
|
|
|
2010
|
|
|
50,252
|
|
|
2011
|
|
|
59,356
|
|
|
2012
|
|
|
60,439
|
|
|
2013
|
|
|
127,646
|
|
|
2014-2018
|
|
$
|
730,011
|
|
The long-term rate of return on
assets assumption considers the current earnings on assets of the Plan as well
as the effects of asset diversification. The Plan's investment
strategy is to earn a reasonable return while safeguarding the benefits promised
to employees. All assets of the Plan are invested in deposit accounts
at the Company.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
Other Operating
Expenses
|
Other operating expenses consist of
the following:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Data
processing and correspondent fees
|
|
$
|
618,312
|
|
|
$
|
583,474
|
|
|
Directors'
fees
|
|
|
134,384
|
|
|
|
131,957
|
|
|
Professional
fees
|
|
|
121,125
|
|
|
|
110,981
|
|
|
Advertising
|
|
|
73,020
|
|
|
|
85,578
|
|
|
Postage
|
|
|
85,114
|
|
|
|
84,986
|
|
|
Public
relations and contributions
|
|
|
69,346
|
|
|
|
82,993
|
|
|
Office
supplies
|
|
|
78,276
|
|
|
|
79,323
|
|
|
Printing
and stationery
|
|
|
46,596
|
|
|
|
41,746
|
|
|
Telephone
|
|
|
41,809
|
|
|
|
38,558
|
|
|
Regulatory
assessments
|
|
|
122,127
|
|
|
|
38,546
|
|
|
Loan
product costs
|
|
|
21,983
|
|
|
|
33,764
|
|
|
Insurance
|
|
|
26,670
|
|
|
|
29,307
|
|
|
Other
|
|
|
589,917
|
|
|
|
376,371
|
|
|
|
|
$
|
2,028,679
|
|
|
$
|
1,717,584
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
13.
|
Related Party
Transactions
|
In the normal course of banking
business, loans are made to senior officers and directors of the Company as well
as to companies and individuals affiliated with those officers and
directors. The terms of these transactions are substantially the same
as the terms provided to other borrowers entering into similar loan
transactions. In the opinion of management, these loans are
consistent with sound banking practices, are within regulatory lending
limitations, and do not involve more than normal credit risk.
A summary of these loans is as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Beginning
loan balances
|
|
$
|
4,566,457
|
|
|
$
|
6,667,226
|
|
|
Advances
|
|
|
8,379,453
|
|
|
|
2,870,397
|
|
|
Repayments
|
|
|
(6,316,307
|
)
|
|
|
(3,640,766
|
)
|
|
Change
in related parties
|
|
|
35,628
|
|
|
|
(1,330,400
|
)
|
|
Ending
loan balances
|
|
$
|
6,665,231
|
|
|
$
|
4,566,457
|
|
In addition to
the outstanding balances listed above, the officers and directors and
their related interests have $2,778,340 in unused loans committed but not funded
as of December 31, 2008.
A director is a partner in a law firm
that provides services to the Company. Payments of $11,000 and
$10,875 were made to that firm during 2008 and 2007, respectively.
Deposits from senior officers and
directors and their related interests were $2,496,245 as of December 31, 2008
and $2,471,646 as of December 31, 2007.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The Federal Reserve Board and the
Federal Deposit Insurance Corporation have adopted risk-based capital standards
for banking organizations. These standards require ratios of capital
to assets for minimum capital adequacy and to be classified as well capitalized
under prompt corrective action provisions. The table below sets forth
the capital ratios of the Bank as of December 31, 2008 and
2007. Because the Company's only asset other than its equity interest
in the Bank and Insurance Agency is a small amount of cash, its capital ratios
do not differ materially from those of the Bank.
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
To be well
|
|
|
|
|
Actual
|
|
|
capital
adequacy
|
|
|
capitalized
|
|
|
(in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
29,585
|
|
|
|
13.8
|
%
|
|
$
|
17,199
|
|
|
|
8.0
|
%
|
|
$
|
21,498
|
|
|
|
10.0
|
%
|
|
Tier
1 capital (to risk-weighted assets)
|
|
$
|
27,583
|
|
|
|
12.8
|
%
|
|
$
|
8,599
|
|
|
|
4.0
|
%
|
|
$
|
12,899
|
|
|
|
6.0
|
%
|
|
Tier
1 capital (to average fourth quarter assets)
|
|
$
|
27,583
|
|
|
|
11.1
|
%
|
|
$
|
9,988
|
|
|
|
4.0
|
%
|
|
$
|
12,485
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
29,707
|
|
|
|
13.5
|
%
|
|
$
|
17,553
|
|
|
|
8.0
|
%
|
|
$
|
21,941
|
|
|
|
10.0
|
%
|
|
Tier
1 capital (to risk-weighted assets)
|
|
$
|
27,378
|
|
|
|
12.5
|
%
|
|
$
|
8,776
|
|
|
|
4.0
|
%
|
|
$
|
13,164
|
|
|
|
6.0
|
%
|
|
Tier
1 capital (to average fourth quarter assets)
|
|
$
|
27,378
|
|
|
|
10.7
|
%
|
|
$
|
10,280
|
|
|
|
4.0
|
%
|
|
$
|
12,850
|
|
|
|
5.0
|
%
|
Tier 1 capital consists of common
stock, additional paid on capital, and undivided profits. Total
capital includes a limited amount of the allowance for loan
losses. In calculating risk-weighted assets, specified risk
percentages are applied to each category of asset and off-balance sheet
items.
Failure to meet the capital
requirements could affect the Bank's ability to pay dividends and accept
deposits and may significantly affect the operations of the Bank.
In the most recent regulatory report,
the Bank was categorized as well capitalized under the prompt corrective action
regulations. Management knows of no events or conditions that should
change this classification.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
15.
|
Fair Value of Financial
Instruments
|
On January 1, 2008, the Company
adopted SFAS No. 157,
Fair
Value Measurements.
The adoption had no effect on the
Company's December 31, 2007 balance sheet or the statement of income for the
year ended December 31, 2008. The fair value of a financial
instrument is the current amount that would be exchanged between willing
parties, other than in a forced liquidation. SFAS No. 157 defines the
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair values. SFAS No. 157 also establishes a
hierarchy for determining fair value measurements. The hierarchy
includes three levels and is based upon the valuation techniques used to measure
assets and liabilities.
Level one uses inputs of quoted
prices, unadjusted, for identical assets or liabilities in active
markets. Level two inputs to the valuation methodology include quoted
prices for similar assets and liabilities in active markets, and inputs that are
observable for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument. Level three
assumes inputs to the valuation methodology that are unobservable and
significant to the fair value measurement.
Securities available for sale – If
quoted prices are available in an active market, securities are classified
within level 1 of the hierarchy. Level 1 includes securities that
have quoted prices in an active market for identical assets. If
quoted market prices are not available, then fair values are estimated using
pricing models, quoted prices of securities with similar characteristics or
discounted cash flows. The Company has categorized its securities
available for sale as follows:
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
Total
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$
|
10,055,715
|
|
|
$
|
10,055,715
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Foreclosed real estate – The Company
measures its foreclosed real estate at fair value less cost to
sell. As of December 31, 2008, the fair value of foreclosed real
estate was based on offers and/or appraisals. Cost to sell the real
estate was based on standard market factors. The Company has
categorized its foreclosed real estate as level three.
The Company does not measure the fair
value of any of its other financial assets or liabilities on a recurring or
nonrecurring basis. The estimated fair values of the Company's other
financial instruments were as follows:
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
amount
|
|
|
value
|
|
|
amount
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
3,789,925
|
|
|
$
|
3,789,925
|
|
|
$
|
5,399,704
|
|
|
$
|
5,399,704
|
|
|
Federal
funds sold
|
|
|
3,896,890
|
|
|
|
3,896,890
|
|
|
|
4,440,438
|
|
|
|
4,440,438
|
|
|
Investment
securities (total)
|
|
|
14,133,613
|
|
|
|
14,509,608
|
|
|
|
18,063,424
|
|
|
|
18,235,977
|
|
|
Federal
Home Loan Bank stock
|
|
|
2,494,000
|
|
|
|
2,494,000
|
|
|
|
2,897,600
|
|
|
|
2,897,600
|
|
|
Loans,
net
|
|
|
214,679,949
|
|
|
|
214,784,949
|
|
|
|
220,425,725
|
|
|
|
220,196,736
|
|
|
Accrued
interest receivable
|
|
|
1,582,688
|
|
|
|
1,582,688
|
|
|
|
1,814,574
|
|
|
|
1,814,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$
|
34,387,604
|
|
|
$
|
34,387,604
|
|
|
$
|
36,630,744
|
|
|
$
|
36,630,744
|
|
|
Interest-bearing
deposits
|
|
|
131,350,969
|
|
|
|
133,996,055
|
|
|
|
132,421,505
|
|
|
|
133,642,130
|
|
|
Short-term
borrowings
|
|
|
12,129,539
|
|
|
|
12,129,539
|
|
|
|
9,041,476
|
|
|
|
9,041,476
|
|
Federal
Home Loan
Bank advances
|
|
|
43,000,000
|
|
|
|
43,879,670
|
|
|
|
53,000,000
|
|
|
|
53,129,166
|
|
|
Accrued
interest payable
|
|
|
441,832
|
|
|
|
441,832
|
|
|
|
521,219
|
|
|
|
521,219
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
15.
|
Fair Value of Financial
Instruments
(Continued)
|
The fair value of fixed-rate loans is
estimated to be the present value of scheduled payments discounted using
interest rates currently in effect. The fair value of variable-rate
loans, including loans with a demand feature, is estimated to equal the carrying
amount. The valuation of loans is adjusted for possible loan
losses.
The fair value of interest-bearing
checking, savings, and money market deposit accounts is equal to the carrying
amount. The fair value of fixed-maturity time deposits and borrowings
is estimated based on interest rates currently offered for deposits and
borrowings of similar remaining maturities.
It is not practicable to estimate the
fair value of outstanding loan commitments, unused lines of credit, and letters
of credit.
|
16.
|
Parent Company Financial
Information
|
The balance sheets, statements of
income, and statements of cash flows for Peoples Bancorp, Inc. (Parent Only)
follow:
|
|
|
December
31,
|
|
|
Balance
Sheets
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
308,309
|
|
|
$
|
312,174
|
|
|
Investment
in bank subsidiary
|
|
|
26,939,481
|
|
|
|
26,644,994
|
|
|
Investment
in insurance agency subsidiary
|
|
|
1,201,267
|
|
|
|
1,091,018
|
|
|
Income
tax refund receivable
|
|
|
5,979
|
|
|
|
3,172
|
|
|
Total
assets
|
|
$
|
28,455,036
|
|
|
$
|
28,051,358
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$
|
12,112
|
|
|
$
|
11,564
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
7,795,120
|
|
|
|
7,855,120
|
|
|
Additional
paid-in capital
|
|
|
2,920,866
|
|
|
|
2,920,866
|
|
|
Retained
earnings
|
|
|
18,370,797
|
|
|
|
17,997,286
|
|
|
Accumulated
other comprehensive income
|
|
|
(643,859
|
)
|
|
|
(733,478
|
)
|
|
Total
stockholders' equity
|
|
|
28,442,924
|
|
|
|
28,039,794
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
28,455,036
|
|
|
$
|
28,051,358
|
|
|
|
|
Years
Ended December 31,
|
|
|
Statements
of Income
|
|
2008
|
|
|
2007
|
|
|
Interest
revenue
|
|
$
|
7,883
|
|
|
$
|
10,950
|
|
|
Dividends
from bank subsidiary
|
|
|
1,859,367
|
|
|
|
2,580,175
|
|
|
Equity
in undistributed income of insurance agency subsidiary
|
|
|
110,250
|
|
|
|
70,932
|
|
|
Equity
in undistributed income of bank subsidiary
|
|
|
204,867
|
|
|
|
1,254,546
|
|
|
|
|
|
2,182,367
|
|
|
|
3,916,603
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Professional
fees
|
|
|
23,115
|
|
|
|
17,250
|
|
|
Other
|
|
|
2,354
|
|
|
|
3,030
|
|
|
|
|
|
25,469
|
|
|
|
20,280
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,156,898
|
|
|
|
3,896,323
|
|
|
Income
tax expense (benefit)
|
|
|
(5,979
|
)
|
|
|
(3,172
|
)
|
|
Net
income
|
|
$
|
2,162,877
|
|
|
$
|
3,899,495
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
16.
|
Parent Company Financial
Information
(Continued)
|
|
|
|
Years
Ended December 31,
|
|
|
Statements
of Cash Flows
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Interest
and dividends received
|
|
$
|
1,867,250
|
|
|
$
|
2,591,125
|
|
|
Income
taxes refunded
|
|
|
3,172
|
|
|
|
7,850
|
|
|
Cash
paid for operating expenses
|
|
|
(24,921
|
)
|
|
|
(21,371
|
)
|
|
|
|
|
1,845,501
|
|
|
|
2,577,604
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Acquisition
of insurance agency
|
|
|
-
|
|
|
|
(1,000,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(1,369,366
|
)
|
|
|
(1,314,674
|
)
|
|
Repurchase
of stock
|
|
|
(480,000
|
)
|
|
|
(255,500
|
)
|
|
|
|
|
(1,849,366
|
)
|
|
|
(1,570,174
|
)
|
|
Net
increase (decrease) in cash
|
|
|
(3,865
|
)
|
|
|
6,930
|
|
|
Cash
at beginning of year
|
|
|
312,174
|
|
|
|
305,244
|
|
|
Cash
at end of year
|
|
$
|
308,309
|
|
|
$
|
312,174
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,162,877
|
|
|
$
|
3,899,495
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
Undistributed
net income of subsidiaries
|
|
|
(315,117
|
)
|
|
|
(1,325,478
|
)
|
|
Increase
(decrease) in other liabilities
|
|
|
548
|
|
|
|
(1,091
|
)
|
|
(Increase)
decrease in income tax refund receivable
|
|
|
(2,807
|
)
|
|
|
4,678
|
|
|
|
|
$
|
1,845,501
|
|
|
$
|
2,577,604
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
17.
|
Quarterly Results of Operations
(Unaudited)
|
|
|
|
Three Months Ended
|
|
|
(in thousands)
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
except per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
revenue
|
|
$
|
3,536
|
|
|
$
|
3,933
|
|
|
$
|
3,923
|
|
|
$
|
4,165
|
|
|
Interest
expense
|
|
|
1,332
|
|
|
|
1,426
|
|
|
|
1,484
|
|
|
|
1,650
|
|
|
Net
interest income
|
|
|
2,204
|
|
|
|
2,507
|
|
|
|
2,439
|
|
|
|
2,515
|
|
|
Provision
for loan losses
|
|
|
675
|
|
|
|
440
|
|
|
|
480
|
|
|
|
120
|
|
|
Net
income
|
|
|
183
|
|
|
|
587
|
|
|
|
483
|
|
|
|
910
|
|
|
Comprehensive
income
|
|
|
275
|
|
|
|
576
|
|
|
|
448
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
$
|
0.23
|
|
|
$
|
0.75
|
|
|
$
|
0.62
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
revenue
|
|
$
|
4,395
|
|
|
$
|
4,434
|
|
|
$
|
4,339
|
|
|
$
|
4,241
|
|
|
Interest
expense
|
|
|
1,733
|
|
|
|
1,719
|
|
|
|
1,637
|
|
|
|
1,565
|
|
|
Net
interest income
|
|
|
2,662
|
|
|
|
2,715
|
|
|
|
2,702
|
|
|
|
2,676
|
|
|
Provision
for loan losses
|
|
|
540
|
|
|
|
10
|
|
|
|
30
|
|
|
|
-
|
|
|
Net
income
|
|
|
614
|
|
|
|
1,081
|
|
|
|
1,004
|
|
|
|
1,200
|
|
|
Comprehensive
income
|
|
|
689
|
|
|
|
1,119
|
|
|
|
990
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
$
|
0.78
|
|
|
$
|
1.37
|
|
|
$
|
1.27
|
|
|
$
|
1.52
|
|
|
18.
|
Insurance Agency
Acquisition
|
On January 2, 2007, the Company
purchased all of the outstanding stock of Fleetwood, Athey, MacBeth, and McCown,
Inc. (FAM&M), an insurance agency with an office located in Chestertown,
Maryland. The agency is now a wholly-owned subsidiary of the
Company. The principal and sole shareholder of FAM&M agreed to a
two year consulting agreement as part of the acquisition agreement.
The purchase price of approximately
$1,000,000 was paid in cash. The Company recorded approximately
$273,000 of goodwill and approximately $550,000 of other intangible assets as a
result of the acquisition. The goodwill will not be amortized for
financial statement purposes but will be reviewed annually for
impairment. The intangible assets will be amortized over 10 years for
financial statement purposes. The goodwill and intangible assets will
be amortized over 15 years for income tax purposes.
The consolidated financial statements
include the results of operations of FAM&M since the date of
purchase.
The Company operates two primary
businesses: community banking and insurance products and
services. Through the community banking business, the Company
provides services to consumers and small businesses on the upper Eastern Shore
of Maryland through its seven branches. Community banking activities
include serving the deposit needs of small business and individual consumers by
providing banking products and services to fit their needs. Loan
products available to consumers include mortgage, home equity, automobile,
marine, and installment loans and other secured and unsecured personal lines of
credit. Small business lending includes commercial mortgages, real
estate development loans, equipment and operating loans, as well as secured and
unsecured lines of credit, accounts receivable financing arrangements, and
merchant card services.
Through the insurance products and
services business, the Company provides a full range of insurance products and
services to businesses and consumers in the Company’s market
areas. Products include property and casualty, life, marine,
individual health and long-term care insurance.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
19.
|
Segment Reporting
(Continued)
|
Selected financial information by line
of business for the year ended December 31 2008 and 2007, are included in the
following table:
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
products
|
|
|
|
|
|
|
|
|
|
|
Community
|
|
|
and
|
|
|
Intersegment
|
|
|
Consolidated
|
|
|
2008
|
|
banking
|
|
|
services
|
|
|
transactions
|
|
|
total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
9,676,667
|
|
|
$
|
(11,390
|
)
|
|
$
|
-
|
|
|
$
|
9,665,277
|
|
|
Provision
for loan losses
|
|
|
(1,715,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,715,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision
|
|
|
7,961,667
|
|
|
|
(11,390
|
)
|
|
|
-
|
|
|
|
7,950,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
revenue
|
|
|
1,287,091
|
|
|
|
1,244,076
|
|
|
|
-
|
|
|
|
2,531,167
|
|
|
Noninterest
expense
|
|
|
(6,001,527
|
)
|
|
|
(1,047,030
|
)
|
|
|
-
|
|
|
|
(7,048,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,247,231
|
|
|
|
185,656
|
|
|
|
-
|
|
|
|
3,432,887
|
|
|
Income
taxes
|
|
|
(1,194,604
|
)
|
|
|
(75,406
|
)
|
|
|
-
|
|
|
|
(1,270,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,052,627
|
|
|
$
|
110,250
|
|
|
$
|
-
|
|
|
$
|
2,162,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets
|
|
$
|
253,493,543
|
|
|
$
|
1,526,739
|
|
|
$
|
(271,433
|
)
|
|
$
|
254,748,849
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
products
|
|
|
|
|
|
|
|
|
|
|
Community
|
|
|
and
|
|
|
Intersegment
|
|
|
Consolidated
|
|
|
2007
|
|
banking
|
|
|
services
|
|
|
transactions
|
|
|
total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
10,768,015
|
|
|
$
|
(13,337
|
)
|
|
$
|
-
|
|
|
$
|
10,754,678
|
|
|
Provision
for loan losses
|
|
|
(580,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(580,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision
|
|
|
10,188,015
|
|
|
|
(13,337
|
)
|
|
|
-
|
|
|
|
10,174,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
revenue
|
|
|
1,259,672
|
|
|
|
1,185,128
|
|
|
|
-
|
|
|
|
2,444,800
|
|
|
Noninterest
expense
|
|
|
(5,352,156
|
)
|
|
|
(1,054,581
|
)
|
|
|
-
|
|
|
|
(6,406,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
6,095,531
|
|
|
|
117,210
|
|
|
|
-
|
|
|
|
6,212,741
|
|
|
Income
taxes
|
|
|
(2,266,968
|
)
|
|
|
(46,278
|
)
|
|
|
-
|
|
|
|
(2,313,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,828,563
|
|
|
$
|
70,932
|
|
|
$
|
-
|
|
|
$
|
3,899,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets
|
|
$
|
250,961,612
|
|
|
$
|
970,250
|
|
|
$
|
(168,205
|
)
|
|
$
|
251,763,657
|
|
Item
9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
9A. Controls and
Procedures.
The Company maintains disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in the Company’s reports filed under the Exchange Act with the
Securities and Exchange Commission, such as this annual report, is recorded,
processed, summarized and reported within the time periods specified in those
rules and forms, and that such information is accumulated and communicated to
the Company’s management, including the Chief Executive Officer, who also serves
as the Company’s Chief Financial Officer (“CEO”), as appropriate, to allow for
timely decisions regarding required disclosure. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate.
An evaluation of the effectiveness of
these disclosure controls as of December 31, 2008 was carried out under the
supervision and with the participation of the Company’s management, including
the CEO. Based on that evaluation, the Company’s management,
including the CEO, has concluded that the Company’s disclosure controls and
procedures are, in fact, effective at the reasonable assurance
level.
During the fourth quarter of 2008,
there was no change in the Company’s internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
As required by Section 404 of the
Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing
of the Company’s internal control over financial reporting as of December 31,
2008. Management’s report on the Company’s internal control over
financial reporting is included on the following page.
Management’s Report on
Internal Control Over Financial Reporting
Management of Peoples Bancorp, Inc.
(the “Company”) is responsible for the preparation, integrity and fair
presentation of the consolidated financial statements included in this annual
report. The Company’s consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and, as such, include some amounts that are based on
the best estimates and judgments of management.
This annual report on Form 10-K does
not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting because management’s
report was not subject to attestation pursuant to temporary rules of the SEC
that permit the Company to provide only this management’s report.
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial
reporting. This internal control system is designed to provide
reasonable assurance to management and the Board of Directors regarding the
reliability of the Company’s financial reporting and the preparation and
presentation of financial statements for external reporting purposes in
conformity with accounting principles generally accepted in the United States of
America, as well as to safeguard assets from unauthorized use or
disposition. The system of internal control over financial reporting
is evaluated for effectiveness by management and tested for reliability through
a program of internal audit with actions taken to correct potential deficiencies
as they are identified. Because of inherent limitations in any
internal control system, no matter how well designed, misstatement due to error
or fraud may occur and not be detected, including the possibility of the
circumvention or overriding of controls. Accordingly, even an
effective internal control system can provide only reasonable assurance with
respect to financial statement preparation. Further, because of
changes in conditions, internal control effectiveness may vary over
time.
Management assessed the effectiveness
of the Company’s internal control over financial reporting as of December 31,
2008 based upon criteria set forth in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Based on this assessment and on the
foregoing criteria, management has concluded that, as of December 31, 2008, the
Company’s internal control over financial reporting is effective.
March 25,
2009
|
/s/ Thomas G. Stevenson
|
|
Thomas
G. Stevenson,
|
|
President,
Chief Executive Officer, and
|
|
Chief
Financial Officer
|
|
Item
9B.
|
Other
Information.
|
None.
PART
III
|
Item 10.
|
Directors, Executive Officers
and Corporate Governance
.
|
The Company has adopted a Code of
Ethics that applies to all of its directors, officers, and employees, including
its principal executive officer, principal financial officer, principal
accounting officer, or controller, or persons performing similar
functions. A written copy of the Company’s Code of Ethics will be
provided to stockholders, free of charge, upon request to: Stephanie Usilton,
Peoples Bancorp, Inc., 100 Spring Avenue, Chestertown, Maryland 21620 or (410)
778-3500.
All other information required by this
item is incorporated herein by reference to the Company’s definitive proxy
statement to be filed in connection with the 2009 Annual Meeting of
Stockholders.
|
Item
11.
|
Executive
Compensation.
|
The information required by this item
is incorporated herein by reference to the Company’s definitive proxy statement
to be filed in connection with the 2009 Annual Meeting of
Stockholders.
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
StockholderMatters.
|
The information required by this item
is incorporated herein by reference to the Company’s definitive proxy statement
to be filed in connection with the 2009 Annual Meeting of
Stockholders.
|
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence.
|
The information required by this item
is incorporated herein by reference to the Company’s definitive proxy statement
to be filed in connection with the 2009 Annual Meeting of
Stockholders.
|
Item
14.
|
Principal
Accountant Fees and Services.
|
The information required by this item
is incorporated herein by reference to the Company’s definitive proxy statement
to be filed in connection with the 2009 Annual Meeting of
Stockholders.
|
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
|
(a)(1),
(2) and (c). Financial statements and
schedules:
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
|
|
|
Consolidated
Statements of Income for the years Ended December 31, 2008 and
2007
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years Ended December
31,
|
|
|
|
2008
and 2007
|
|
|
|
Consolidated
Statements of Cash Flows for the years Ended December 31, 2008 and
2007
|
|
|
|
Notes
to Consolidated Financial Statements for the years ended December 31, 2008
and 2007
|
|
|
(a)(3) and (b). Exhibits
required to be filed by Item 601 of Regulation S-K:
The
exhibits filed or furnished with this annual report are shown on the Exhibit
List that follows the signatures to this annual report, which list is
incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Exchange Act, the registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
|
|
PEOPLES
BANCORP, INC.
|
|
|
|
|
|
Date: March
25, 2009
|
By:
|
/s/ Thomas G. Stevenson
|
|
|
|
Thomas
G. Stevenson
|
|
|
|
President,
CEO and CFO
|
In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
Date:
|
March
25, 2009
|
By:
|
/s/ E. Jean
Anthony
|
|
|
|
|
E. Jean Anthony, Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ Robert W. Clark,
Jr.
|
|
|
|
|
Robert W. Clark, Jr., Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
|
|
|
|
|
LaMonte E. Cooke, Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ Gary B.
Fellows
|
|
|
|
|
Gary B. Fellows, Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ Herman E. Hill,
Jr.
|
|
|
|
|
Herman E. Hill, Jr., Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ Patricia Joan Ozman
Horsey
|
|
|
|
|
Patricia Joan Ozman Horsey, Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ P. Patrick
McCleary
|
|
|
|
|
P. Patrick McCleary, Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ Alexander P. Rasin,
III
|
|
|
|
|
Alexander P. Rasin, III, Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ Stefan R.
Skipp
|
|
|
|
|
Stefan R. Skipp, Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ Thomas G.
Stevenson
|
|
|
|
|
Thomas G. Stevenson, President, CEO,
|
|
|
|
|
CFO and Director
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ Elizabeth A.
Strong
|
|
|
|
|
Elizabeth A. Strong, Director
|
|
|
|
|
|
|
Date:
|
March
25, 2009
|
By:
|
/s/ William G.
Wheatley
|
|
|
|
|
William G. Wheatley,
Director
|
EXHIBIT
INDEX
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
3.1
|
|
Articles
of Incorporation of the Company, as corrected and amended (incorporated by
reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
on January 24, 2005)
|
|
3.2
|
|
Bylaws
of the Company, as amended (incorporated by reference to Exhibit 3.2 of
the Company’s Annual Report on Form 10-KSB for the year ended December 31,
2004)
|
|
21
|
|
Subsidiaries
of the Company (filed herewith)
|
|
31.1
|
|
Certifications
of the CEO/CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)
|
|
32.1
|
|
Certifications
of the CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)
|
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