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, 2009
0-24169
Commission
File No.
PEOPLES BANCORP,
INC.
(Exact
name of registrant as specified in its charter)
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Maryland
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52-2027776
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(State
or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation
or Organization)
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Identification
No.)
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P.O. Box
210, 100 Spring Avenue, Chestertown, Maryland
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21620
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(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
R
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
£
No
£
(Not
Applicable)
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
R
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes
£
No
R
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: $41,052,008.
The
number of shares outstanding of the registrant’s common stock as of March 1,
2010 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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3
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Item
1A.
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Risk
Factors
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9
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Item
1B.
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Unresolved
Staff Comments
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15
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Item
2.
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Properties
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16
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Item
3.
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Legal
Proceedings
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16
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Item
4.
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[Reserved]
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16
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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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16
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Item
6.
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Selected
Financial Data
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17
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition
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and
Results of Operations
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17
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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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32
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting
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and
Financial Disclosure
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57
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Item
9A(T).
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Controls
and Procedures
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57
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Item
9B.
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Other
Information
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59
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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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59
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Item
11.
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Executive
Compensation
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59
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management
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and
Related Stockholder Matters
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59
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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59
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Item
14.
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Principal
Accountant Fees and Services
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59
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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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59
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Signatures
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60
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Exhibit
Index
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61
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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, 2009 and 2008 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 5.12% 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, 2010, we employed 74
persons, of which 67 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, 2009, 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,
2009):
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Institution
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Offices
In Market Area
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Deposits
(in thousands)
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Market Share
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Peoples
Bank of Kent County, Maryland
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5
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175,605
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34.21
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%
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PNC
Bank National Assn
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5
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154,195
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30.03
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%
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Chesapeake
Bank & Trust Co
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2
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64,914
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12.64
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%
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Branch
Banking & Trust Co
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2
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49,559
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9.65
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%
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Centreville
National Bank of Maryland
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2
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38,488
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7.50
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%
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SunTrust
Bank
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1
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30,645
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5.97
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%
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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 that have investment components 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. Participating institutions will be assessed a
charge of 75 basis points per annum for guaranteed senior unsecured debt.
The second component, called the Transaction Accounts Guarantee Program (“TAG”),
provided full coverage for non-interest bearing transaction deposit accounts,
IOLTAs, and NOW accounts with interest rates of 0.50% or less, regardless of
account balance, initially until December 31, 2009. The TAG program has
been extended until June 30, 2010. Participating institutions will be
assessed a charge of 10 basis points per annum for the additional insured
deposits. We elected to participate in both programs and paid additional
FDIC premiums 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
Deposits at the Bank are insured
through the Deposit Insurance Fund, which is administered by the FDIC, and the
Bank is required to pay quarterly deposit insurance premium assessments to the
FDIC. The Deposit Insurance Fund was created pursuant to the Federal
Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into
law on February 8, 2006. Under the Reform Act, (i) the current $100,000
deposit insurance coverage per depositor 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. This law also allows
“eligible insured depository institutions”, such as the Bank, to share in a
one-time assessment credit pool. The Bank’s portion of this credit pool
was $132.329, which was used up in 2008. Effective October 3, 2008, the
Emergency Economic Stabilization Act of 2008 (the “EESA”) was enacted and, among
other things, temporarily raised the basic limit on federal deposit insurance
coverage from $100,000 to $250,000 per depositor. EESA initially
contemplated that the coverage limit would return to $100,000 after December 31,
2009, but the expiration date was recently extended to December 31, 2013.
The coverage for retirement accounts did not change and remains at
$250,000.
The Reform Act also gave the FDIC
greater latitude in setting the assessment rates for insured depository
institutions which could be used to impose minimum assessments. On
November 12, 2009, the FDIC adopted a final rule requiring insured depository
institutions to prepay their estimated quarterly risk-based deposit assessments
for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December
30, 2009, along with each institution’s risk based deposit insurance assessment
for the third quarter of 2009. This prepayment did not include the
assessments for TLGP participation or the FICO assessment that will be billed
quarterly. It was also announced that the assessment rate will increase by
3 basis points effective January 1, 2011. The prepayment will be accounted
for as a prepaid expense to be amortized quarterly. The prepaid assessment will
qualify for a zero risk weight under the risk-based capital requirements.
The Bank’s three-year prepaid assessment was $1,022,585. The Bank expensed
a total of $384,345 in FDIC premiums during 2009.
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, 2009, 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, the Company must disclose whether directors meet an “independent
director” standard, and the Company is required to comply with certain corporate
governance obligations.
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
which is concentrated in real estate lending, so a decline in the local economy
and real estate markets could adversely impact our financial condition and
results of operations.
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, 2009, 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, which could
materially and adversely impact our financial condition and results of
operations.
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. 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, 2009, we had
classified 23.13% 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 2008,
the banking industry became concerned about the financial strength of the banks
in the FHLB system, and some FHLB banks had 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 stopped paying dividends from the third
quarter of 2008 until the second quarter of 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, and our inability to effectively compete
in our markets could have an adverse impact on our financial condition and
results of operations.
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 federal laws, rules and programs
that have been enacted or adopted in response to the recent banking crisis and
the current national recession.
In response to the banking crisis that
began in 2008 and the resulting national recession, the federal government took
drastic steps to help stabilize the credit market and the financial industry.
These steps included the enactment of EESA, which, among other things, raised
the basic limit on federal deposit insurance coverage to $250,000, and the
FDIC’s adoption of the TLGP, which, under the TAG portion, provides full deposit
insurance coverage through June 30, 2010 for non-interest bearing transaction
deposit accounts, IOLTAs, and NOW accounts with interest rates of 0.50% or less,
regardless of account balance. The TLGP requires participating institutions,
like us, to pay 10 basis points per annum for the additional insured deposits.
These actions will cause our regulatory expenses to increase. Additionally, due
in part to the failure of several depository institutions around the country
since the banking crisis began, the FDIC imposed an emergency insurance
assessment to help restore the Deposit Insurance Fund and further required
insured depository institutions to prepay their estimated quarterly risk-based
deposit assessments through 2012 on December 30, 2009. Given the current state
of the national economy, there can be no assurance that the FDIC will not impose
future emergency assessments or further revise its rate
structure.
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, in which case we
may become less competitive and lose customers.
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
Subsidiary
|
|
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
We are not a party to, nor is any of
our properties the subject of, any material legal proceedings other than routine
litigation arising in the ordinary course of business. In the opinion of
management, no such proceeding will have a material adverse effect on our
financial condition or results of operations.
Item
4. [Reserved]
PART
II
Item
5. Market for Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
As of March 1, 2010, the Company had
633 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
transactions 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
2008 and 2009. 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.
|
|
|
2008
|
|
|
2009
|
|
|
|
|
Price Range
|
|
|
Price
Range
|
|
|
Price Range
|
|
|
Dividends
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
First
Quarter
|
|
$
|
80.00
|
|
|
$
|
80.00
|
|
|
$
|
0.43
|
|
|
$
|
70.00
|
|
|
$
|
65.00
|
|
|
$
|
0.44
|
|
|
Second
Quarter
|
|
|
88.00
|
|
|
|
58.00
|
|
|
|
0.44
|
|
|
|
70.00
|
|
|
|
65.00
|
|
|
|
0.45
|
|
|
Third
Quarter
|
|
|
80.00
|
|
|
|
61.00
|
|
|
|
0.44
|
|
|
|
72.00
|
|
|
|
59.00
|
|
|
|
0.45
|
|
|
Fourth
Quarter
|
|
|
80.00
|
|
|
|
46.00
|
|
|
|
0.44
|
|
|
|
69.00
|
|
|
|
65.00
|
|
|
|
0.45
|
|
The last
sale known to the Company occurred on February 25, 2010 and the price was
reported on the Pink Sheets as $60.00 per share.
In 2008 and 2009, the Company paid cash
dividends to stockholders totaling $1,369,366 and $1,395,326,
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,
2009.
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
consolidated financial condition and results of operations should be read in
conjunction with the consolidated financial statements and related notes and
other statistical information included in Item 8 of Part II of this annual
report.
Overview
We recorded a 12.62% decrease in net
income for 2009 when compared to 2008. Basic net income per share for 2009
was $2.42, compared to $2.77 for 2008.
Return on average assets decreased to
.75% for 2009 from .85% for 2008. Return on average stockholders’ equity
for 2009 was 6.61%, compared to 7.59% for 2008. Average assets decreased
to $252,102,641 in 2009, representing a 1.04% decrease when compared to
2008. Average loans net of loan loss decreased 3.46% in 2009 to
$208,266,915. During 2009, average deposits increased 5.16% to
$175,729,857 when compared to 2008. Average stockholders’ equity for the
year ended December 31, 2009 increased .37% over 2008, totaling
$28,608,628.
Critical
Accounting Policies
Our consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) 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 $1,889,928,
or $2.42 per share, for the year ended December 31, 2009, compared to
$2,162,877, or $2.77 per share, for the year ended December 31, 2008. This
represents a decrease for 2009 of $272,949 or 12.62% when compared to
2008.
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
2009 and 2008, 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, 2009,
net interest income decreased $366,393, or 3.79%, to $9,298,884 from $9,665,277
for the year ended December 31, 2008. The decrease in net interest income
in 2009 was the result of a $1,650,939 decrease in interest income offset by a
$1,284,546 decrease in interest expense. In 2009, deposits increased but
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 6.54% in 2008 and 6.10% in 2009, with the combined
effective rate on deposits and borrowed funds following the same fluctuation by
decreasing from 3.09% in 2008 to 2.46% in 2009.
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 2009 on a fully taxable equivalent basis was 4.09%, compared to 4.08% for
2008. 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, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
5,766,770
|
|
|
$
|
9,700
|
|
|
|
0.17
|
%
|
|
$
|
4,054,833
|
|
|
$
|
92,497
|
|
|
|
2.28
|
%
|
|
Interest-bearing
deposits
|
|
|
160,478
|
|
|
|
96
|
|
|
|
0.06
|
%
|
|
|
606,756
|
|
|
|
15,319
|
|
|
|
2.52
|
%
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agency
|
|
|
13,461,801
|
|
|
|
553,987
|
|
|
|
4.12
|
%
|
|
|
16,577,158
|
|
|
|
794,095
|
|
|
|
4.79
|
%
|
|
FHLB
of Atlanta and Community Bankers stock
|
|
|
2,378,191
|
|
|
|
7,678
|
|
|
|
0.32
|
%
|
|
|
2,641,479
|
|
|
|
149,560
|
|
|
|
5.66
|
%
|
|
Total
investment securities
|
|
|
15,839,992
|
|
|
|
561,665
|
|
|
|
3.55
|
%
|
|
|
19,218,637
|
|
|
|
943,655
|
|
|
|
4.91
|
%
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
33,032,256
|
|
|
|
2,017,459
|
|
|
|
6.11
|
%
|
|
|
40,699,926
|
|
|
|
2,732,868
|
|
|
|
6.71
|
%
|
|
Real
estate
|
|
|
170,371,008
|
|
|
|
10,845,710
|
|
|
|
6.37
|
%
|
|
|
172,627,810
|
|
|
|
11,522,045
|
|
|
|
6.67
|
%
|
|
Consumer
|
|
|
7,151,500
|
|
|
|
592,708
|
|
|
|
8.29
|
%
|
|
|
4,453,285
|
|
|
|
368,602
|
|
|
|
8.28
|
%
|
|
Total
loans
|
|
|
210,554,764
|
|
|
|
13,455,877
|
|
|
|
6.39
|
%
|
|
|
217,781,021
|
|
|
|
14,623,515
|
|
|
|
6.71
|
%
|
|
Allowance
for loan losses
|
|
|
2,287,849
|
|
|
|
|
|
|
|
|
|
|
|
2,050,202
|
|
|
|
|
|
|
|
|
|
|
Total
loans, net of allowance
|
|
|
208,266,915
|
|
|
|
13,455,877
|
|
|
|
6.46
|
%
|
|
|
215,730,819
|
|
|
|
14,623,515
|
|
|
|
6.78
|
%
|
|
Total
interest-earning assets
|
|
|
230,034,155
|
|
|
|
14,027,338
|
|
|
|
6.10
|
%
|
|
|
239,611,045
|
|
|
|
15,674,986
|
|
|
|
6.54
|
%
|
|
Noninterest-bearing
cash
|
|
|
9,760,027
|
|
|
|
|
|
|
|
|
|
|
|
4,602,456
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
6,537,536
|
|
|
|
|
|
|
|
|
|
|
|
6,146,570
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
5,770,923
|
|
|
|
|
|
|
|
|
|
|
|
4,388,778
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
252,102,641
|
|
|
|
|
|
|
|
|
|
|
$
|
254,748,849
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and NOW deposits
|
|
$
|
42,866,972
|
|
|
|
86,501
|
|
|
|
0.20
|
%
|
|
$
|
35,298,361
|
|
|
|
98,691
|
|
|
|
0.28
|
%
|
|
Money
market
|
|
|
10,727,609
|
|
|
|
62,839
|
|
|
|
0.59
|
%
|
|
|
17,413,552
|
|
|
|
162,757
|
|
|
|
0.93
|
%
|
|
Other
time deposits
|
|
|
88,579,998
|
|
|
|
2,925,853
|
|
|
|
3.30
|
%
|
|
|
80,475,959
|
|
|
|
3,226,487
|
|
|
|
4.01
|
%
|
|
Total
interest-bearing deposits
|
|
|
142,174,579
|
|
|
|
3,075,193
|
|
|
|
2.16
|
%
|
|
|
133,187,872
|
|
|
|
3,487,935
|
|
|
|
2.62
|
%
|
|
Borrowed
funds
|
|
|
45,084,559
|
|
|
|
1,532,291
|
|
|
|
3.40
|
%
|
|
|
57,208,973
|
|
|
|
2,404,095
|
|
|
|
4.20
|
%
|
|
Total
interest-bearing liabilities
|
|
|
187,259,138
|
|
|
|
4,607,484
|
|
|
|
2.46
|
%
|
|
|
190,396,845
|
|
|
|
5,892,030
|
|
|
|
3.09
|
%
|
|
Noninterest-bearing
deposits
|
|
|
33,555,278
|
|
|
|
|
|
|
|
|
|
|
|
33,924,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,814,416
|
|
|
|
|
|
|
|
|
|
|
|
224,321,716
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
2,679,597
|
|
|
|
|
|
|
|
|
|
|
|
1,922,568
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
28,608,628
|
|
|
|
|
|
|
|
|
|
|
|
28,504,565
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and Stockholders’ equity
|
|
$
|
252,102,641
|
|
|
|
|
|
|
|
|
|
|
$
|
254,748,849
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
|
|
|
3.45
|
%
|
|
Net
interest income
|
|
|
|
|
|
$
|
9,419,854
|
|
|
|
|
|
|
|
|
|
|
$
|
9,782,956
|
|
|
|
|
|
|
Net
margin on interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
4.09
|
%
|
|
|
|
|
|
|
|
|
|
|
4.08
|
%
|
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,
|
|
|
|
|
2009
compared with 2008
|
|
|
2008
compared with 2007
|
|
|
|
|
variance due to
|
|
|
variance due to
|
|
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
(82,797
|
)
|
|
$
|
(110,524
|
)
|
|
$
|
27,727
|
|
|
$
|
(29,716
|
)
|
|
$
|
(91,139
|
)
|
|
$
|
61,423
|
|
|
Interest-bearing
deposits
|
|
|
(15,223
|
)
|
|
|
(8,682
|
)
|
|
|
(6,541
|
)
|
|
|
5,493
|
|
|
|
(7,898
|
)
|
|
|
13,391
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agency
|
|
|
(240,108
|
)
|
|
|
(102,891
|
)
|
|
|
(137,217
|
)
|
|
|
(106,824
|
)
|
|
|
(13,840
|
)
|
|
|
(92,984
|
)
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(405
|
)
|
|
|
-
|
|
|
|
(405
|
)
|
|
FHLB
stock
|
|
|
(141,882
|
)
|
|
|
(128,319
|
)
|
|
|
(13,563
|
)
|
|
|
(22,622
|
)
|
|
|
(10,930
|
)
|
|
|
(11,692
|
)
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
and time
|
|
|
(715,409
|
)
|
|
|
(232,006
|
)
|
|
|
(483,403
|
)
|
|
|
(1,147,301
|
)
|
|
|
(937,311
|
)
|
|
|
(209,990
|
)
|
|
Mortgage
|
|
|
(676,335
|
)
|
|
|
(527,240
|
)
|
|
|
(149,095
|
)
|
|
|
(507,710
|
)
|
|
|
(830,423
|
)
|
|
|
322,713
|
|
|
Consumer
|
|
|
224,106
|
|
|
|
482
|
|
|
|
223,624
|
|
|
|
(43,311
|
)
|
|
|
(14,275
|
)
|
|
|
(29,036
|
)
|
|
Total
interest revenue
|
|
|
(1,647,648
|
)
|
|
|
(1,109,180
|
)
|
|
|
(538,468
|
)
|
|
|
(1,852,396
|
)
|
|
|
(1,905,816
|
)
|
|
|
53,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and NOW deposits
|
|
|
(12,190
|
)
|
|
|
(30,788
|
)
|
|
|
18,598
|
|
|
|
(99,282
|
)
|
|
|
(92,878
|
)
|
|
|
(6,404
|
)
|
|
Money
market and supernow
|
|
|
(99,918
|
)
|
|
|
(49,255
|
)
|
|
|
(50,663
|
)
|
|
|
(116,613
|
)
|
|
|
(122,370
|
)
|
|
|
5,757
|
|
|
Other
time deposits
|
|
|
(300,634
|
)
|
|
|
(604,728
|
)
|
|
|
304,094
|
|
|
|
(91,721
|
)
|
|
|
(296,637
|
)
|
|
|
204,916
|
|
|
Other
borrowed funds
|
|
|
(871,804
|
)
|
|
|
(413,517
|
)
|
|
|
(458,287
|
)
|
|
|
(454,498
|
)
|
|
|
(229,618
|
)
|
|
|
(224,880
|
)
|
|
Total
interest expense
|
|
|
(1,284,546
|
)
|
|
|
(1,098,288
|
)
|
|
|
(186,258
|
)
|
|
|
(762,114
|
)
|
|
|
(741,503
|
)
|
|
|
(20,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
(363,102
|
)
|
|
$
|
(10,892
|
)
|
|
$
|
(352,210
|
)
|
|
$
|
(1,090,282
|
)
|
|
$
|
(1,164,313
|
)
|
|
$
|
74,031
|
|
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, 2009 was $2,628,640, compared to $2,531,167 for same period
in 2008. This increase resulted primarily from a $107,821 increase in the
Insurance Subsidiary’s insurance commissions when compared to 2008.
The following table presents the
principal components of noninterest revenue for the years ended
December 31, 2009 and 2008:
Noninterest
Revenue
|
|
|
2009
|
|
|
2008
|
|
|
Service
charges on deposit accounts
|
|
$
|
951,122
|
|
|
$
|
997,133
|
|
|
Insurance
commissions
|
|
|
1,346,061
|
|
|
|
1,238,240
|
|
|
Other
noninterest revenue
|
|
|
331,457
|
|
|
|
295,794
|
|
|
Total
noninterest revenue
|
|
$
|
2,628,640
|
|
|
$
|
2,531,167
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
revenue as a percentage of average total assets
|
|
|
1.04
|
%
|
|
|
0.99
|
%
|
Noninterest
Expense
Noninterest expense for the 12-month
period ended December 31, 2009 increased by $185,212, or 2.63%, to $7,233,769,
from $7,048,557 in 2008. The largest component of this increase was the
Bank’s regulatory assessment. Regulatory assessments increased
$294,786, or 241.38%, as the result of increased FDIC insurance premiums.
Office supplies expense increased 57.03% in 2009 over 2008 and furniture and
equipment expense increased 20.17% in 2009 over 2008 primarily due to the
conversion of the Bank’s data processing from the Delmarva Data Center to FIS
Banking Solutions.
The following table presents the
principal components of noninterest expense for the years ended
December 31, 2009 and 2008:
Noninterest
Expense
|
|
|
2009
|
|
|
2008
|
|
|
Compensation
and related expenses
|
|
$
|
4,255,384
|
|
|
$
|
4,288,674
|
|
|
Occupancy
expense
|
|
|
448,845
|
|
|
|
443,281
|
|
|
Furniture
and equipment expense
|
|
|
345,992
|
|
|
|
287,923
|
|
|
Data
processing and correspondent bank costs
|
|
|
548,133
|
|
|
|
618,312
|
|
|
Director
fees
|
|
|
149,181
|
|
|
|
134,384
|
|
|
Postage
|
|
|
92,573
|
|
|
|
85,114
|
|
|
Office
supplies
|
|
|
122,920
|
|
|
|
78,276
|
|
|
Professional
fees
|
|
|
122,684
|
|
|
|
121,125
|
|
|
Printing
and stationery
|
|
|
17,044
|
|
|
|
46,596
|
|
|
Public
relations and contributions
|
|
|
48,398
|
|
|
|
69,346
|
|
|
Telephone
|
|
|
41,889
|
|
|
|
41,809
|
|
|
Regulatory
assessments
|
|
|
416,913
|
|
|
|
122,127
|
|
|
Loan
products
|
|
|
14,637
|
|
|
|
21,983
|
|
|
Advertising
|
|
|
60,464
|
|
|
|
73,020
|
|
|
Insurance
|
|
|
27,001
|
|
|
|
26,670
|
|
|
Other
|
|
|
521,711
|
|
|
|
589,917
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest expense
|
|
$
|
7,233,769
|
|
|
$
|
7,048,557
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense as a percentage of average total assets
|
|
|
2.87
|
%
|
|
|
2.77
|
%
|
Income
Taxes
Our effective income tax rate was
36.3% in 2009 and 37.0% in 2008.
Results
for the Fourth Quarter of 2009
Net income for the three months ended
December 31, 2009 was $395,063, compared to $182,669 for the corresponding
period in 2008. Earnings per share for the fourth quarters of 2009 and
2008 were $0.50 and $0.23, respectively. Increases in gross revenues
combined with decreases in noninterest expenses and a substantial increase in
the provisions for loan loss, offset by increased income taxes, contributed to
the increase in net income for the fourth quarter of 2009 when compared to the
same period last year.
Before provisions for loan losses, the
net interest income increase of $56,570, from $2,203,725 for the three months
ended December 31, 2008 to $2,260,295 for the three months ended December 31,
2009, was due primarily to loan revenues and borrowed funds interest expense
reducing in direct correlation to the reduction in loan and borrowed funds
account balances. Deposit balances rose during this period but interest
expense decreased as the direct result of lower interest rates for the period
and the repricing of matured time deposits at lower rates. Comparing the
fourth quarter of 2009 to the fourth quarter of 2008, interest revenue decreased
$193,541 while interest expense decreased $250,111, with $204,316 of the
decrease related to borrowed funds. The provision for loan losses for the
fourth quarter of 2009 decreased by $120,000 to $555,000 when compared to the
fourth quarter of 2008.
Noninterest income for the fourth
quarter of 2009 decreased $3,577 when compared to the same period of 2008 to
$538,242. This decrease was due primarily to a decrease in other income of
$12,855 offset by an increase of insurance commissions of $9,280 for the fourth
quarter of 2009 when compared to the fourth quarter of 2008.
Total noninterest expense decreased
$118,598 to $1,655,511 for the quarter ended December 31, 2009, from $1,774,109
for the corresponding quarter of 2008. This decrease primarily resulted
from a $99,351 decrease in salaries, a $58,533 decrease in data processing fees
and $117,625 increase in other expenses for the fourth quarter of 2009 over the
same period in 2008. These decreases were offset by increases of $88,801
in our FDIC insurance assessments, $48,166 in other real estate expenses and
$20,635 in office supplies for the fourth quarter of 2009 over 2008. These
fluctuations during the fourth quarter of 2009 are the result of the Bank’s data
processing conversion and recent trends in our economy. The Company has
reduced expenses under its control and constantly attempts to increase overall
income.
FINANCIAL
CONDITION
Assets
Total
assets increased 1.42% to $255,467,425 at December 31, 2009 when compared to
assets at December 31, 2008. Average total assets for 2009 were
$252,102,641, a decrease of 1.04% from 2008. The loan portfolio
represented 90.54% of average earning assets in 2009, compared to 90.03% in
2008, 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 increased
16.60% to $193,250,908 at December 31, 2009 when compared to 2008.
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 $208,266,915 and $215,730,819 for 2009 and 2008, respectively,
which constituted 90.54% and 90.03% of average interest-earning assets for the
respective years. At December 31, 2009, our loan to deposit ratio was
105.51%, compared to 129.53% at December 31, 2008, while the ratio of
average loans to average deposits was 118.52% and 129.09% for 2009 and 2008,
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 94.32% for the year ended December 31, 2009, compared to 96.17% for
the year ended December 31, 2008. 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, 2009 and 2008:
|
Composition of Loan Portfolio
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
Amount
|
|
|
of total
|
|
|
Amount
|
|
|
of total
|
|
|
Commercial
|
|
$
|
26,942,744
|
|
|
|
13.04
|
%
|
|
$
|
36,754,882
|
|
|
|
16.97
|
%
|
|
Real
estate – residential
|
|
|
74,431,249
|
|
|
|
36.02
|
%
|
|
|
60,579,916
|
|
|
|
27.98
|
%
|
|
Real
estate - commercial
|
|
|
92,686,252
|
|
|
|
44.85
|
%
|
|
|
104,175,727
|
|
|
|
48.11
|
%
|
|
Construction
|
|
|
5,988,692
|
|
|
|
2.90
|
%
|
|
|
7,255,246
|
|
|
|
3.35
|
%
|
|
Consumer
|
|
|
6,593,515
|
|
|
|
3.19
|
%
|
|
|
7,767,095
|
|
|
|
3.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
206,642,452
|
|
|
|
100.00
|
%
|
|
|
216,532,866
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
costs, net of deferred fees
|
|
|
102,590
|
|
|
|
|
|
|
|
148,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(2,845,364
|
)
|
|
|
|
|
|
|
(2,001,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
$
|
203,899,678
|
|
|
|
|
|
|
$
|
214,679,949
|
|
|
|
|
|
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,
2009:
|
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
|
|
|
|
|
December 31, 2009
|
|
|
|
|
One year
|
|
|
Over one
|
|
|
Over five
|
|
|
|
|
|
|
|
or less
|
|
|
through five years
|
|
|
years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
24,728,226
|
|
|
$
|
1,548,586
|
|
|
$
|
661,958
|
|
|
$
|
26,938,770
|
|
|
Real
estate – residential
|
|
|
37,337,361
|
|
|
|
38,299,614
|
|
|
|
0
|
|
|
|
75,636,975
|
|
|
Real
estate - commercial
|
|
|
54,590,100
|
|
|
|
30,448,740
|
|
|
|
0
|
|
|
|
85,038,840
|
|
|
Construction
|
|
|
10,618,793
|
|
|
|
1,811,585
|
|
|
|
0
|
|
|
|
12,430,378
|
|
|
Consumer
|
|
|
3,935,923
|
|
|
|
2,544,135
|
|
|
|
117,431
|
|
|
|
6,597,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,210,403
|
|
|
$
|
74,652,660
|
|
|
$
|
779,389
|
|
|
$
|
206,642,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
interest rate
|
|
$
|
72,115,325
|
|
|
$
|
72,934,031
|
|
|
$
|
312,349
|
|
|
$
|
145,361,705
|
|
|
Variable
interest rate
|
|
|
59,095,078
|
|
|
|
1,718,629
|
|
|
|
467,040
|
|
|
|
61,280,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,210,403
|
|
|
$
|
74,652,660
|
|
|
$
|
779,389
|
|
|
$
|
206,642,452
|
|
At
December 31, 2009, $61,280,747, or 29.66%, 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,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Non-Accrual
Loans
|
|
$
|
2,384,186
|
|
|
$
|
3,670,657
|
|
|
Accruing
Loans Past Due 90 Days or More
|
|
|
6,247,775
|
|
|
|
1,491,878
|
|
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, 2009 and 2008:
Allocation
of Allowance for Loan Losses
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Percentage (1)
|
|
|
Percentage (1)
|
|
|
Commercial
|
|
$
|
728,049
|
|
|
|
26.92
|
%
|
|
$
|
496,678
|
|
|
|
16.97
|
%
|
|
Real
estate
|
|
|
1,730,883
|
|
|
|
64.00
|
%
|
|
|
979,635
|
|
|
|
79.44
|
%
|
|
Consumer
|
|
|
245,681
|
|
|
|
9.08
|
%
|
|
|
92,570
|
|
|
|
3.59
|
%
|
|
Unallocated
|
|
|
140,751
|
|
|
|
|
|
|
|
432,856
|
|
|
|
|
|
|
Total
|
|
$
|
2,845,364
|
|
|
|
100.00
|
%
|
|
$
|
2,001,739
|
|
|
|
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 losses was $1,726,000 in 2009, which represents an increase of $11,000 over
the $1,715,000 that was funded in 2008. 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
|
|
|
2009
|
|
|
2008
|
|
|
Balance
at beginning of year
|
|
$
|
2,001,739
|
|
|
$
|
2,328,792
|
|
|
Loan
losses:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
290,126
|
|
|
|
1,452,890
|
|
|
Mortgages
|
|
|
490,049
|
|
|
|
570,665
|
|
|
Consumer
|
|
|
157,367
|
|
|
|
66,142
|
|
|
Total
loan losses
|
|
|
937,542
|
|
|
|
2,089,697
|
|
|
Recoveries
on loans previously charged off
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
47,501
|
|
|
|
4,688
|
|
|
Mortgages
|
|
|
3,207
|
|
|
|
40,000
|
|
|
Consumer
|
|
|
4,459
|
|
|
|
2,956
|
|
|
Total
loan recoveries
|
|
|
55,167
|
|
|
|
47,644
|
|
|
Net
loan losses
|
|
|
882,375
|
|
|
|
2,042,053
|
|
|
Provision
for loan losses charged to expense
|
|
|
1,726,000
|
|
|
|
1,715,000
|
|
|
Balance
at end of year
|
|
$
|
2,845,364
|
|
|
$
|
2,001,739
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to loans outstanding at end of year
|
|
|
1.38
|
%
|
|
|
0.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs to average loans
|
|
|
0.42
|
%
|
|
|
0.94
|
%
|
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
$8,631,961 and $5,162,535 at December 31, 2009 and 2008, respectively. We
had $1,335,000 and $1,407,000 in foreclosed other real estate at December 31,
2009 and 2008, respectively. Foreclosed other real estate is considered
part of non-performing assets. 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,
2009 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, 2009.
|
|
|
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
Yield
|
|
|
Carrying
Amount
|
|
|
Average
Yield
|
|
|
Carrying
Amount
|
|
|
Average
Yield
|
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
1,498,973
|
|
|
|
5.27
|
%
|
|
$
|
5,042,718
|
|
|
|
4.36
|
%
|
|
$
|
3,515,391
|
|
|
|
3.41
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Mortgage
backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,294
|
|
|
|
2.70
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Held to Maturity
|
|
$
|
1,498,973
|
|
|
|
5.27
|
%
|
|
$
|
5,042,718
|
|
|
|
4.36
|
%
|
|
$
|
3,521,685
|
|
|
|
3.41
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
1,017,300
|
|
|
|
0.50
|
%
|
|
$
|
2,010,400
|
|
|
|
1.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Available for Sale
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
1,017,300
|
|
|
|
0.50
|
%
|
|
$
|
2,010,400
|
|
|
|
1.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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, 2009 was $19,150,000.
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 17.94% of average deposits for 2009, compared to
17.04% for 2008.
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, 2009 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 the under one-year time horizons and
liability-sensitive for time frames after one year. 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, 2009
|
|
|
|
|
Within
|
|
|
After three
|
|
|
After one
|
|
|
|
|
|
|
|
|
|
|
three
|
|
|
but within
|
|
|
but within
|
|
|
After
|
|
|
|
|
|
|
|
months
|
|
|
12 months
|
|
|
five years
|
|
|
five years
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$
|
52,803
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
52,803
|
|
|
Federal
funds sold
|
|
|
7,015,811
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
7,015,811
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
0
|
|
|
|
1,017,300
|
|
|
|
2,010,400
|
|
|
|
0
|
|
|
|
3,027,700
|
|
|
Held
to maturity
|
|
|
1,498,973
|
|
|
|
5,042,718
|
|
|
|
3,521,685
|
|
|
|
0
|
|
|
|
10,063,376
|
|
|
Other
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,401,200
|
|
|
|
2,401,200
|
|
|
Loans
|
|
|
74,605,756
|
|
|
|
56,604,647
|
|
|
|
74,652,660
|
|
|
|
779,389
|
|
|
|
206,642,452
|
|
|
Total
earning assets
|
|
$
|
83,173,343
|
|
|
$
|
62,664,665
|
|
|
$
|
80,184,745
|
|
|
$
|
3,180,589
|
|
|
$
|
229,203,342
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market and Supernow
|
|
$
|
10,596,599
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
10,596,599
|
|
|
Savings
and NOW deposits
|
|
|
51,133,862
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
51,133,862
|
|
|
Certificates
$100,000 and over
|
|
|
2,228,470
|
|
|
|
3,407,597
|
|
|
|
28,120,879
|
|
|
|
0
|
|
|
|
33,756,946
|
|
|
Certificates
under $100,000
|
|
|
5,387,184
|
|
|
|
8,316,000
|
|
|
|
47,109,120
|
|
|
|
0
|
|
|
|
60,812,304
|
|
|
Securities
sold under repurchase agreements & federal funds
purchased
|
|
|
1,914,447
|
|
|
|
1,002,892
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,917,339
|
|
|
Notes
payable
|
|
|
4,000,000
|
|
|
|
5,000,000
|
|
|
|
9,000,000
|
|
|
|
10,000,000
|
|
|
|
28,000,000
|
|
|
Total
interest-bearing liabilities
|
|
$
|
75,260,562
|
|
|
$
|
17,726,489
|
|
|
$
|
84,229,999
|
|
|
$
|
10,000,000
|
|
|
$
|
187,217,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
gap
|
|
$
|
7,912,781
|
|
|
$
|
44,938,176
|
|
|
$
|
(4,045,254
|
)
|
|
$
|
(6,819,411
|
)
|
|
$
|
41,986,292
|
|
|
Cumulative
gap
|
|
|
7,912,781
|
|
|
|
52,850,957
|
|
|
|
48,805,703
|
|
|
|
41,986,292
|
|
|
|
41,986,292
|
|
|
Ratio
of cumulative gap to total earning assets
|
|
|
3.45
|
%
|
|
|
23.06
|
%
|
|
|
21.29
|
%
|
|
|
18.32
|
%
|
|
|
18.32
|
%
|
From time to time, we may also employ
other methods to assess our interest rate sensitivity, such as simulation models
to quantify the effect a hypothetical immediate upward or downward change in
rates would have on net interest income and the fair value of
capital.
Deposits
and Other Interest-Bearing Liabilities
Average interest-bearing liabilities
decreased $3,137,707, or 1.65%, to $187,259,138 in 2009, from $190,396,845 in
2008. Average interest-bearing deposits increased $8,986,707, or 6.75%, to
$142,174,579 in 2009 from $133,187,872 in 2008. Correspondingly, average
demand deposits decreased $369,593, or 1.09%, to $33,555,278 in 2009 from
$33,924,871 in 2008.
Total deposits at December 31, 2009
were $193,250,908, an increase of 16.60% when compared to deposits of
$165,738,573 at December 31, 2008.
The following table sets forth the
Company’s deposits by category at December 31, 2009 and 2008:
.
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
Amount
|
|
|
Deposits
|
|
|
Amount
|
|
|
Deposits
|
|
|
Demand
deposit accounts
|
|
$
|
36,951,197
|
|
|
|
19.12
|
%
|
|
$
|
34,387,604
|
|
|
|
20.75
|
%
|
|
Savings
and NOW accounts
|
|
|
51,133,862
|
|
|
|
26.46
|
%
|
|
|
40,226,168
|
|
|
|
24.27
|
%
|
|
Money
market accounts
|
|
|
10,596,599
|
|
|
|
5.48
|
%
|
|
|
9,825,132
|
|
|
|
5.93
|
%
|
|
Time
deposits less than $100,000
|
|
|
60,812,304
|
|
|
|
31.47
|
%
|
|
|
55,041,555
|
|
|
|
33.21
|
%
|
|
Time
deposits of $100,000 or more
|
|
|
33,756,946
|
|
|
|
17.47
|
%
|
|
|
26,258,114
|
|
|
|
15.84
|
%
|
|
Total
deposits
|
|
$
|
193,250,908
|
|
|
|
100.00
|
%
|
|
$
|
165,738,573
|
|
|
|
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
increased $20,013,503 during 2009, 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, 2009 is shown in the following
table.
|
Maturities of Certificates of Deposit and Other Time Deposits of $100,000 or More
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within three
months
|
|
|
After three
through
six months
|
|
|
After six
through
12 months
|
|
|
After 12
months
|
|
|
Total
|
|
|
Certificates
of Deposit - $100,000 or more
|
|
$
|
2,228,470
|
|
|
$
|
1,428,583
|
|
|
$
|
2,279,014
|
|
|
$
|
27,820,879
|
|
|
$
|
33,756,946
|
|
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 $12,124,414, or 21.19%, in 2009, compared to a decrease of $5,114,987,
or 8.21%, in 2008. The decrease in 2009 when compared to 2008 was due
primarily to the fact that loan demand has reduced and we were able to reduce
our lines of credit particularly at the FHLB of Atlanta during
2009.
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:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (daily re-price)
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
5,000,000
|
|
|
|
0.46
|
%
|
|
Repurchase
Agreements
|
|
|
2,917,339
|
|
|
|
0.36
|
%
|
|
|
9,959,539
|
|
|
|
0.21
|
%
|
|
Federal
Funds Borrowed
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
2,170,000
|
|
|
|
0.53
|
%
|
|
|
|
$
|
2,917,339
|
|
|
|
|
|
|
$
|
17,129,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
for the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (daily re-price)
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
415,301
|
|
|
|
1.45
|
%
|
|
Retail
Repurchase Agreements
|
|
|
8,918,437
|
|
|
|
0.78
|
%
|
|
|
9,453,623
|
|
|
|
1.72
|
%
|
|
Federal
Funds Borrowed
|
|
|
20,918
|
|
|
|
0.80
|
%
|
|
|
468,618
|
|
|
|
1.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
Month End Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (daily re-price)
|
|
$
|
0
|
|
|
|
|
|
|
$
|
5,000,000
|
|
|
|
|
|
|
Retail
Repurchase Agreements
|
|
|
12,929,966
|
|
|
|
|
|
|
|
10,552,060
|
|
|
|
|
|
|
Federal
Funds Borrowed
|
|
|
0
|
|
|
|
|
|
|
|
3,950,000
|
|
|
|
|
|
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 $13,650,000 in unsecured overnight federal funds and
$5,500,000 in secured overnight federal funds with correspondent banks at
December 31, 2009.
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, 2009
and 2008, 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 2009 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, 2009 did not cause the Company’s
capital ratios as of December 31, 2009 to materially differ from the Bank’s
ratios.
Analysis
of Capital
|
|
|
|
|
|
Actual Ratios
|
|
|
Actual Ratios
|
|
|
|
|
Required
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Minimums
|
|
|
Bank
|
|
|
Bank
|
|
|
Total
risk-based capital ratio
|
|
|
8.0
|
%
|
|
|
15.1
|
%
|
|
|
13.8
|
%
|
|
Tier
I risk-based capital ratio
|
|
|
4.0
|
%
|
|
|
13.9
|
%
|
|
|
12.8
|
%
|
|
Tier
I leverage ratio
|
|
|
4.0
|
%
|
|
|
11.0
|
%
|
|
|
11.1
|
%
|
Accounting
Rule Changes
On July
1, 2009, the Financial Accounting Standards Board (the “FASB”) established the
Accounting Standards Codification (“ASC”) as the source of authoritative
accounting principles recognized by the FASB to be applied by non-governmental
entities in the preparation of financial statements in conformity with
GAAP. Rules and interpretive releases of the SEC under the authority of
federal securities laws are also sources of authoritative guidance for SEC
registrants. All guidance contained in the ASC carries an equal level of
authority. All non-grandfathered, non-SEC accounting literature not included in
the ASC is superseded and deemed non-authoritative. The switch to the ASC
affects the way companies refer to U.S. GAAP in financial statements and
accounting policies. Citing particular content in the ASC involves
specifying the unique numeric path to the content through the Topic, Subtopic,
Section and Paragraph structure.
The
following accounting guidance has been approved by the FASB and would apply to
the Company if the Company or the Bank entered into an applicable
activity.
FASB ASC Topic 320,
“Investments-Debt and Equity Securities”
changes existing guidance for
determining whether an impairment is other than temporary to debt securities and
replaces the existing requirement that the entity’s management assert it has
both the intent and ability to hold an impaired security until recovery with a
requirement that management assert: (a) it does not have the intent to sell the
security; and (b) it is more likely than not it will not have to sell the
security before recovery of its cost basis. Under ASC Topic 320, declines in the
fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses to the extent the impairment is related to credit losses. The
amount of the impairment related to other factors is recognized in other
comprehensive income. Adoption of ASC Topic 320 was effective in the first
quarter of 2009 and did not have a significant impact on the Company’s financial
statements.
FASB ASC Topic 715, “Compensation -
Retirement Benefits”
provides guidance related to an employer’s
disclosures about plan assets of defined benefit pension or other
post-retirement benefit plans. Under ASC Topic 715, disclosures should provide
users of financial statements with an understanding of how investment allocation
decisions are made, the factors that are pertinent to an understanding of
investment policies and strategies, the major categories of plan assets, the
inputs and valuation techniques used to measure the fair value of plan assets,
the effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period and significant concentrations of risk
within plan assets. Adoption of the disclosure requirements of ASC topic 715 was
effective beginning with the financial statements for the year-ended December
31, 2009 and did not have a significant impact on the Company’s financial
statements.
Accounting Standards Update No.
2009-5, under FASB ASC Topic 820, “Fair Value Measurement and
Disclosures,”
provides authoritative guidance for measuring the fair
value of a liability in circumstances in which a quoted price in an active
market for the identical liability is not available. In such a case, the
reporting company must measure fair value utilizing a valuation technique that
uses (i) the quoted price of the identical liability when traded as an
asset, (ii) quoted prices for similar liabilities or similar liabilities
when traded as assets, or (iii) another valuation technique that is
consistent with the existing principles of ASC Topic 820, such as an income
approach or market approach. The new authoritative accounting guidance also
clarifies that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. The new authoritative accounting guidance under ASC Topic 820 was
effective for the Company’s financial statements beginning October 31, 2009, and
did not have a significant impact on the Company’s financial
statements.
FASB ASC Topic 855, “Subsequent
Events”
establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or available to be issued. ASC Topic 855 defines (i) the period
after the balance sheet date during which a reporting entity’s management should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements (ii) the circumstances under which
an entity should recognize events or transactions occurring after the balance
sheet date in its financial statements, and (iii) the disclosures an entity
should make about events or transactions that occurred after the balance sheet
date. ASC Topic 855 became effective for periods ending after June 15, 2009, and
did not have a significant impact on the Company’s financial
statements.
FASB ASC Topic 860, “Transfers and
Servicing”
enhances reporting about transfers of financial assets,
including securitizations, and where companies have continuing exposure to the
risks related to transferred financial assets. This new guidance eliminates the
concept of a “qualifying special-purpose entity” and changes the requirements
for derecognizing financial assets. It also requires additional disclosures
about all continuing involvements with transferred financial assets including
information about gains and losses resulting from transfers during the period.
ASC Topic 860 is effective January 1, 2010 and has not had a significant impact
on the Company’s financial statements.
The
accounting policies adopted by management are consistent with authoritative U.S.
GAAP and are consistent with those followed by peer bank holding companies and
banks.
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
|
33
|
|
Consolidated
Balance Sheets
|
34
|
|
Consolidated
Statements of Income
|
35
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
36
|
|
Consolidated
Statements of Cash Flows
|
37
|
|
Notes
to Consolidated Financial Statements
|
39
|
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, 2009 and 2008 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, 2009. 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, 2009 and 2008, and the results of its operations and its cash
flows for each of the years in the two year period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.
|
|
/s/
Rowles & Company, LLP
|
Baltimore,
Maryland
March 17,
2010
PEOPLES
BANCORP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
DECEMBER 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
15,988,739
|
|
|
$
|
3,789,925
|
|
|
Federal
funds sold
|
|
|
7,015,811
|
|
|
|
3,896,890
|
|
|
Cash
and cash equivalents
|
|
|
23,004,550
|
|
|
|
7,686,815
|
|
|
Securities
available for sale
|
|
|
3,027,700
|
|
|
|
4,077,898
|
|
|
Securities
held to maturity (fair value of
$10,312,156
and
$10,430,709)
|
|
|
10,063,376
|
|
|
|
10,055,715
|
|
|
Federal
Home Loan Bank & Community Bankers Bank stock, at cost
|
|
|
2,401,200
|
|
|
|
2,494,000
|
|
|
Loans,
less allowance for loan losses of
$2,845,364
and
$2,001,739
|
|
|
203,899,678
|
|
|
|
214,679,949
|
|
|
Premises
and equipment
|
|
|
6,521,504
|
|
|
|
6,523,845
|
|
|
Goodwill
and intangible assets
|
|
|
671,660
|
|
|
|
712,932
|
|
|
Accrued
interest receivable
|
|
|
1,450,155
|
|
|
|
1,582,688
|
|
|
Deferred
income taxes
|
|
|
1,277,611
|
|
|
|
858,423
|
|
|
Foreclosed
real estate
|
|
|
1,335,000
|
|
|
|
1,407,000
|
|
|
Other
assets
|
|
|
1,814,991
|
|
|
|
1,814,970
|
|
|
|
|
$
|
255,467,425
|
|
|
$
|
251,894,235
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing checking
|
|
$
|
36,951,197
|
|
|
$
|
34,387,604
|
|
|
Savings
and NOW
|
|
|
51,133,862
|
|
|
|
40,226,168
|
|
|
Money
market
|
|
|
10,596,599
|
|
|
|
9,825,132
|
|
|
Other
time
|
|
|
94,569,250
|
|
|
|
81,299,669
|
|
|
|
|
|
193,250,908
|
|
|
|
165,738,573
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under repurchase agreements
|
|
|
2,917,339
|
|
|
|
9,959,539
|
|
|
Federal
funds purchased
|
|
|
-
|
|
|
|
2,170,000
|
|
|
Federal
Home Loan Bank advances
|
|
|
28,000,000
|
|
|
|
43,000,000
|
|
|
Other
borrowings
|
|
|
-
|
|
|
|
173,216
|
|
|
Accrued
interest payable
|
|
|
439,410
|
|
|
|
441,832
|
|
|
Other
liabilities
|
|
|
1,970,020
|
|
|
|
1,968,151
|
|
|
|
|
|
226,577,677
|
|
|
|
223,451,311
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $10 per share; authorized 1,000,000
shares;
issued and outstanding 779,512 shares in 2009 and 2008
|
|
|
7,795,120
|
|
|
|
7,795,120
|
|
|
Additional
paid-in capital
|
|
|
2,920,866
|
|
|
|
2,920,866
|
|
|
Retained
earnings
|
|
|
18,865,399
|
|
|
|
18,370,797
|
|
|
|
|
|
29,581,385
|
|
|
|
29,086,783
|
|
|
Accumulated
other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on available for sale securities
|
|
|
3,587
|
|
|
|
51,965
|
|
|
Unfunded
liability for defined benefit plan
|
|
|
(695,224
|
)
|
|
|
(695,824
|
)
|
|
|
|
|
28,889,748
|
|
|
|
28,442,924
|
|
|
|
|
$
|
255,467,425
|
|
|
$
|
251,894,235
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES
BANCORP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Interest
and dividend revenue
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
13,360,850
|
|
|
$
|
14,550,122
|
|
|
U.S.
government agency securities
|
|
|
528,403
|
|
|
|
757,426
|
|
|
Federal
funds sold
|
|
|
9,700
|
|
|
|
92,497
|
|
|
Other
|
|
|
7,415
|
|
|
|
157,262
|
|
|
Total
interest and dividend revenue
|
|
|
13,906,368
|
|
|
|
15,557,307
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,075,193
|
|
|
|
3,487,935
|
|
|
Borrowed
funds
|
|
|
1,532,291
|
|
|
|
2,404,095
|
|
|
Total
interest expense
|
|
|
4,607,484
|
|
|
|
5,892,030
|
|
|
Net
interest income
|
|
|
9,298,884
|
|
|
|
9,665,277
|
|
|
Provision
for loan losses
|
|
|
1,726,000
|
|
|
|
1,715,000
|
|
|
Net
interest income after provision for loan losses
|
|
|
7,572,884
|
|
|
|
7,950,277
|
|
|
Noninterest
revenue
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
951,122
|
|
|
|
997,133
|
|
|
Insurance
commissions
|
|
|
1,346,061
|
|
|
|
1,238,240
|
|
|
Other
noninterest revenue
|
|
|
331,457
|
|
|
|
295,794
|
|
|
Total
noninterest revenue
|
|
|
2,628,640
|
|
|
|
2,531,167
|
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
|
3,211,979
|
|
|
|
3,256,114
|
|
|
Employee
benefits
|
|
|
1,043,405
|
|
|
|
1,032,560
|
|
|
Occupancy
|
|
|
448,845
|
|
|
|
443,281
|
|
|
Furniture
and equipment
|
|
|
345,992
|
|
|
|
287,923
|
|
|
Other
operating
|
|
|
2,183,548
|
|
|
|
2,028,679
|
|
|
Total
noninterest expense
|
|
|
7,233,769
|
|
|
|
7,048,557
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,967,755
|
|
|
|
3,432,887
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
1,077,827
|
|
|
|
1,270,010
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,889,928
|
|
|
$
|
2,162,877
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic and diluted
|
|
$
|
2.42
|
|
|
$
|
2.77
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES
BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Common stock
|
|
|
paid-in
|
|
|
Retained
|
|
|
other
|
|
|
Comprehensive
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
earnings
|
|
|
income
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,889,928
|
|
|
|
-
|
|
|
$
|
1,889,928
|
|
|
Change
in underfunded status of defined benefit plan net of income taxes of
$391
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600
|
|
|
|
600
|
|
|
Unrealized
gain on investment securities available for sale net of income taxes of
$31,513
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(48,378
|
)
|
|
|
(48,378
|
)
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,842,150
|
|
|
Cash
dividend, $1.79 per share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,395,326
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2009
|
|
|
779,512
|
|
|
$
|
7,795,120
|
|
|
$
|
2,920,866
|
|
|
$
|
18,865,399
|
|
|
$
|
(691,637
|
)
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES
BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Interest
received
|
|
$
|
14,097,355
|
|
|
$
|
15,834,760
|
|
|
Fees
and commissions received
|
|
|
2,599,275
|
|
|
|
2,531,167
|
|
|
Interest
paid
|
|
|
(4,609,906
|
)
|
|
|
(5,971,417
|
)
|
|
Cash
paid to suppliers and employees
|
|
|
(7,328,259
|
)
|
|
|
(6,720,079
|
)
|
|
Income
taxes paid
|
|
|
(896,099
|
)
|
|
|
(1,744,870
|
)
|
|
|
|
|
3,862,366
|
|
|
|
3,929,561
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of investment securities
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
1,000,840
|
|
|
|
5,501,211
|
|
|
Available
for sale
|
|
|
4,000,000
|
|
|
|
1,000,000
|
|
|
Purchase
of investment securities
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
(1,000,000
|
)
|
|
|
(2,505,170
|
)
|
|
Available
for sale
|
|
|
(3,049,383
|
)
|
|
|
-
|
|
|
Purchase
of Federal Home Loan Bank stock
|
|
|
32,800
|
|
|
|
403,600
|
|
|
Purchase
of Community Bankers stock
|
|
|
60,000
|
|
|
|
-
|
|
|
Loans
made, net of principal collected
|
|
|
8,693,040
|
|
|
|
2,518,356
|
|
|
Purchase
of premises, equipment, and software
|
|
|
(359,541
|
)
|
|
|
(906,525
|
)
|
|
Acquisition
of Insurance Subsidiary
|
|
|
(25,344
|
)
|
|
|
|
|
|
Proceeds
from sale of foreclosed real estate
|
|
|
371,364
|
|
|
|
-
|
|
|
|
|
|
9,723,776
|
|
|
|
6,011,472
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
|
13,269,581
|
|
|
|
1,810,593
|
|
|
Other
deposits
|
|
|
14,242,754
|
|
|
|
(5,124,269
|
)
|
|
Securities
sold under repurchase agreements and federal funds
purchased
|
|
|
(9,212,200
|
)
|
|
|
3,088,063
|
|
|
Federal
Home Loan Bank advances, net of repayments
|
|
|
(15,000,000
|
)
|
|
|
(10,000,000
|
)
|
|
Repayments
of other borrowings
|
|
|
(173,216
|
)
|
|
|
(19,381
|
)
|
|
Dividends
paid
|
|
|
(1,395,326
|
)
|
|
|
(1,369,366
|
)
|
|
Repurchase
of stock
|
|
|
-
|
|
|
|
(480,000
|
)
|
|
|
|
|
1,731,593
|
|
|
|
(12,094,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
15,317,735
|
|
|
|
(2,153,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
7,686,815
|
|
|
|
9,840,142
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
23,004,550
|
|
|
$
|
7,686,815
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES
BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
|
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,889,928
|
|
|
$
|
2,162,877
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
Amortization
of premiums and accretion of discounts
|
|
|
12,224
|
|
|
|
(34,854
|
)
|
|
Provision
for loan losses
|
|
|
1,726,000
|
|
|
|
1,715,000
|
|
|
Depreciation
and software amortization
|
|
|
351,914
|
|
|
|
283,020
|
|
|
Amortization
of intangible assets
|
|
|
66,616
|
|
|
|
55,000
|
|
|
Write-down
of foreclosed real estate
|
|
|
45,000
|
|
|
|
25,000
|
|
|
Gain
on sale of foreclosed real estate
|
|
|
(29,365
|
)
|
|
|
-
|
|
|
Deferred
income taxes
|
|
|
(388,710
|
)
|
|
|
204,946
|
|
|
Decrease
(increase) in
|
|
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
|
132,533
|
|
|
|
231,886
|
|
|
Other
assets
|
|
|
(559,890
|
)
|
|
|
(838,691
|
)
|
|
Increase
(decrease) in
|
|
|
|
|
|
|
|
|
|
Deferred
origination fees and costs, net
|
|
|
46,231
|
|
|
|
80,421
|
|
|
Income
taxes payable, net of refunds
|
|
|
569,837
|
|
|
|
-
|
|
|
Accrued
interest payable
|
|
|
(2,422
|
)
|
|
|
(79,387
|
)
|
|
Other
liabilities
|
|
|
2,470
|
|
|
|
124,343
|
|
|
|
|
$
|
3,862,366
|
|
|
$
|
3,929,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
supplemental disclosure
|
|
|
|
|
|
|
|
|
|
Loans
transferred to foreclosed real estate
|
|
$
|
315,000
|
|
|
$
|
1,432,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES
BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Summary
of Significant Accounting Policies
|
The
accounting and reporting policies reflected in the accompanying financial
statements of Peoples Bancorp, Inc. and its subsidiaries, The Peoples Bank, a
Maryland commercial bank (the “Bank”), and Fleetwood, Athey, MacBeth &
McCown, Inc., an insurance agency (the “Insurance Subsidiary”), conform to
accounting principles generally accepted in the United States of America
(“GAAP”) and to general practices within the banking industry. As used in
these notes, unless the context requires otherwise, the term “the Company”
refers collectively to Peoples Bancorp, Inc., the Bank and the Insurance
Subsidiary.
On July
1, 2009, the Financial Accounting Standards Board (the “FASB”) established the
Accounting Standards Codification (“ASC”) as the source of authoritative
accounting principles recognized by the FASB to be applied by non-governmental
entities in the preparation of financial statements in conformity with
GAAP. Rules and interpretive releases of the U.S. Securities and Exchange
Commission (the “SEC”) under the authority of federal securities laws are also
sources of authoritative guidance for SEC registrants. All guidance
contained in the ASC carries an equal level of authority. All
non-grandfathered, non-SEC accounting literature not included in the ASC is
superseded and deemed non-authoritative. The switch to the ASC affects the
way companies refer to U.S. GAAP in financial statements and accounting
policies. Citing particular content in the ASC involves specifying the
unique numeric path to the content through the Topic, Subtopic, Section and
Paragraph structure.
Principles
of consolidation
Peoples
Bancorp, Inc. and its subsidiaries operate primarily in Kent and Queen Anne’s
Counties, Maryland. The consolidated financial statements include the
accounts of the Peoples Bancorp, Inc., the Bank, and the Insurance
Subsidiary. Intercompany balances and transactions have been
eliminated.
Nature
of business
The Bank, which operates out of 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 GAAP 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.
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.
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 during the period and does not include the effect of
any potentially dilutive common stock equivalents. The weighted average
number of shares outstanding were 779,512 and 781,578 for 2009 and 2008,
respectively. There were no dilutive common stock equivalents outstanding
in 2009 or 2008.
Subsequent
Events
The Company has evaluated events and
transactions occurring subsequent to the balance sheet date as of December 31,
2009 through the date the financial statements were filed for items that should
potentially be recognized or disclosed in these financial statements as
prescribed by recently issued FASB ASC Topic 855, “
Subsequent Events
”. The
evaluation was conducted and it was concluded that no items required
disclosure.
|
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 $5,766,770 for 2009 and $4,411,589 for
2008.
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.
Investment securities are summarized
as follows:
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
December
31, 2009
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agency
|
|
$
|
3,020,741
|
|
|
$
|
6,959
|
|
|
$
|
-
|
|
|
$
|
3,027,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agency
|
|
$
|
10,057,082
|
|
|
$
|
248,790
|
|
|
$
|
-
|
|
|
$
|
10,305,872
|
|
|
Mortgage-backed
securities
|
|
|
6,294
|
|
|
|
3
|
|
|
|
13
|
|
|
|
6,284
|
|
|
|
|
$
|
10,063,376
|
|
|
$
|
248,793
|
|
|
$
|
13
|
|
|
$
|
10,312,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
376,170
|
|
|
$
|
-
|
|
|
|
10,424,740
|
|
|
Mortgage-backed
securities
|
|
|
7,145
|
|
|
|
-
|
|
|
|
176
|
|
|
|
6,969
|
|
|
|
|
$
|
10,055,715
|
|
|
$
|
376,170
|
|
|
$
|
176
|
|
|
$
|
10,431,709
|
|
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, 2009
|
|
cost
|
|
|
value
|
|
|
cost
|
|
|
value
|
|
|
Maturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
1,015,880
|
|
|
$
|
1,017,300
|
|
|
$
|
6,541,691
|
|
|
$
|
6,663,095
|
|
|
Over
one to five years
|
|
|
2,004,861
|
|
|
|
2,010,400
|
|
|
|
3,515,391
|
|
|
|
3,642,777
|
|
|
Mortgage-backed
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
6,294
|
|
|
|
6,284
|
|
|
|
|
$
|
3,020,741
|
|
|
$
|
3,027,700
|
|
|
$
|
10,063,376
|
|
|
$
|
10,312,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pledged
securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,971,405
|
|
|
$
|
3,068,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Investments are pledged to secure the
deposits of federal and local governments and as collateral for repurchase
agreements.
Securities in a continuous unrealized
loss position at December 31, 2009, 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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13
|
|
|
$
|
2,267
|
|
|
$
|
13
|
|
|
$
|
2,267
|
|
All unrealized losses on securities as
of December 31, 2009, 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:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Real
estate
|
|
|
|
|
|
|
|
Residential
|
|
$
|
74,431,249
|
|
|
$
|
60,579,916
|
|
|
Commercial
|
|
|
92,686,252
|
|
|
|
104,175,727
|
|
|
Construction
|
|
|
5,988,692
|
|
|
|
7,255,246
|
|
|
Commercial
|
|
|
26,942,744
|
|
|
|
36,754,882
|
|
|
Consumer
|
|
|
6,593,515
|
|
|
|
7,767,095
|
|
|
|
|
|
206,642,452
|
|
|
|
216,532,866
|
|
|
Deferred
costs, net of deferred fees
|
|
|
102,590
|
|
|
|
148,822
|
|
|
Allowance
for loan losses
|
|
|
(2,845,364
|
)
|
|
|
(2,001,739
|
)
|
|
|
|
$
|
203,899,678
|
|
|
$
|
214,679,949
|
|
The rate repricing and maturity
distribution of the loan portfolio is as follows:
|
Within
ninety days
|
|
$
|
74,605,756
|
|
|
$
|
90,467,239
|
|
|
Over
ninety days to one year
|
|
|
56,604,647
|
|
|
|
41,811,237
|
|
|
Over
one year to five years
|
|
|
74,652,660
|
|
|
|
84,132,243
|
|
|
Over
five years
|
|
|
779,389
|
|
|
|
122,147
|
|
|
|
|
$
|
206,642,452
|
|
|
$
|
216,532,866
|
|
Transactions in the allowance for
loan losses were as follows:
|
Beginning
balance
|
|
$
|
2,001,739
|
|
|
$
|
2,328,792
|
|
|
Provision
charged to operations
|
|
|
1,726,000
|
|
|
|
1,715,000
|
|
|
Recoveries
|
|
|
55,167
|
|
|
|
47,644
|
|
|
|
|
|
3,782,906
|
|
|
|
4,091,436
|
|
|
Loans
charged off
|
|
|
937,542
|
|
|
|
2,089,697
|
|
|
Ending
balance
|
|
$
|
2,845,364
|
|
|
$
|
2,001,739
|
|
Management has identified no
significant impaired loans.
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:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loan balances
|
|
$
|
2,384,186
|
|
|
$
|
3,670,657
|
|
|
Interest
not accrued
|
|
|
289,779
|
|
|
|
222,461
|
|
Amounts past due 90 days or more at
December 31, still accruing interest, are as follows:
|
Commercial
|
|
$
|
168,020
|
|
|
$
|
19,540
|
|
|
Mortgage
|
|
|
6,055,484
|
|
|
|
1,447,221
|
|
|
Consumer
|
|
|
24,271
|
|
|
|
25,117
|
|
|
|
|
$
|
6,247,775
|
|
|
$
|
1,491,878
|
|
Outstanding
loan commitments, unused lines of credit, and letters of credit as of December
31, are as follows:
|
Check
loan lines of credit
|
|
$
|
502,887
|
|
|
$
|
1,469,145
|
|
|
Mortgage
lines of credit
|
|
|
11,202,534
|
|
|
|
6,218,412
|
|
|
Other
lines of credit
|
|
|
16,776,329
|
|
|
|
13,556,168
|
|
|
Undisbursed
construction loan commitments
|
|
|
933,503
|
|
|
|
5,290,834
|
|
|
|
|
$
|
29,415,253
|
|
|
$
|
26,534,559
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby
letters of credit
|
|
$
|
3,761,110
|
|
|
$
|
5,278,824
|
|
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.
|
5.
|
Premises
and Equipment
|
A summary of premises and equipment
and related depreciation expense as of December 31, is as follows:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,432,279
|
|
|
$
|
2,432,279
|
|
|
Premises
|
|
|
5,015,237
|
|
|
|
4,904,963
|
|
|
Furniture
and equipment
|
|
|
2,901,349
|
|
|
|
2,726,581
|
|
|
|
|
|
10,348,865
|
|
|
|
10,063,823
|
|
|
Accumulated
depreciation
|
|
|
3,827,361
|
|
|
|
3,539,978
|
|
|
Net
premises and equipment
|
|
$
|
6,521,504
|
|
|
$
|
6,523,845
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$
|
339,779
|
|
|
$
|
278,885
|
|
Computer software included in other
assets and the related amortization are as follows:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
88,412
|
|
|
$
|
74,728
|
|
|
Accumulated
amortization
|
|
|
74,000
|
|
|
|
70,284
|
|
|
Net
computer software
|
|
$
|
14,412
|
|
|
$
|
4,444
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
|
$
|
3,715
|
|
|
$
|
4,135
|
|
Maturities of other time deposits as
of December 31, are as follows:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
19,339,251
|
|
|
$
|
22,025,234
|
|
|
Over
one to two years
|
|
|
19,153,090
|
|
|
|
10,537,866
|
|
|
Over
two to three years
|
|
|
7,506,085
|
|
|
|
17,799,526
|
|
|
Over
three to four years
|
|
|
22,161,944
|
|
|
|
7,426,675
|
|
|
Over
four to five years
|
|
|
26,408,880
|
|
|
|
23,510,368
|
|
|
|
|
$
|
94,569,250
|
|
|
$
|
81,299,669
|
|
Included in other time deposits are
certificates of deposit in amounts of $100,000 or more of $33,756,946 and
$26,258,114 as of December 31, 2009 and 2008, respectively.
|
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:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Maximum
month-end amount outstanding
|
|
$
|
12,929,966
|
|
|
$
|
10,552,060
|
|
|
Average
amount outstanding
|
|
|
8,918,437
|
|
|
|
9,453,623
|
|
|
Average
rate paid during the year
|
|
|
0.78
|
%
|
|
|
1.72
|
%
|
|
Investment
securities underlying agreements at year-end
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
|
2,461,938
|
|
|
|
6,404,158
|
|
|
Estimated
fair value
|
|
|
2,533,874
|
|
|
|
6,618,769
|
|
|
8.
|
Notes
Payable and Lines of Credit
|
The Company may borrow up to
approximately 30% of total assets from the Federal Home Loan Bank (the “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, 2009, the
Company had $13,990,133 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, 2009 and 2008, are summarized as
follows:
|
Maturity
|
|
Interest
|
|
|
2009
|
|
|
2008
|
|
|
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
|
|
|
October
9, 2012
|
|
|
1.94
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
June
9, 2012
|
|
|
2.19
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
March
27, 2012
|
|
|
2.43
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
March
9, 2012
|
|
|
4.29
|
%
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
October
11, 2011
|
|
|
1.32
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
July
11, 2011
|
|
|
1.48
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
March
28, 2011
|
|
|
2.00
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
March
17,2011
|
|
|
2.12
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
September
17, 2010
|
|
|
1.72
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
June
27, 2010
|
|
|
1.56
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
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
|
|
|
October
22, 2009
|
|
|
4.59
|
%
|
|
|
-
|
|
|
|
2,000,000
|
|
|
October
21, 2009
|
|
Variable
|
|
|
|
-
|
|
|
|
5,000,000
|
|
|
September
25, 2009
|
|
|
5.48
|
%
|
|
|
-
|
|
|
|
1,000,000
|
|
|
August
25, 2009
|
|
|
5.48
|
%
|
|
|
-
|
|
|
|
1,000,000
|
|
|
July
22, 2009
|
|
|
5.55
|
%
|
|
|
-
|
|
|
|
1,000,000
|
|
|
June
8, 2009
|
|
|
5.05
|
%
|
|
|
-
|
|
|
|
1,000,000
|
|
|
May
18, 2009
|
|
|
5.28
|
%
|
|
|
-
|
|
|
|
1,000,000
|
|
|
April
6, 2009
|
|
|
5.11
|
%
|
|
|
-
|
|
|
|
2,000,000
|
|
|
March
17, 2009
|
|
|
5.28
|
%
|
|
|
-
|
|
|
|
2,000,000
|
|
|
January
26, 2009
|
|
|
5.36
|
%
|
|
|
-
|
|
|
|
2,000,000
|
|
|
January
16, 2009
|
|
|
5.28
|
%
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
$
|
28,000,000
|
|
|
$
|
43,000,000
|
|
The outstanding advances require
interest payments monthly or quarterly with principal due at
maturity.
In
addition to the line from the FHLB, the Company has lines of credit of
$13,650,000 in unsecured overnight federal funds and $5,500,000 in secured
overnight federal funds at December 31, 2009. As of December 31,
2009, the Company had not borrowed under these federal funds lines of
credit.
The components of income tax expense
are as follows:
|
|
|
2009
|
|
|
2008
|
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,200,370
|
|
|
$
|
892,890
|
|
|
State
|
|
|
266,167
|
|
|
|
172,174
|
|
|
|
|
|
1,466,537
|
|
|
|
1,065,064
|
|
|
Deferred
|
|
|
(388,710
|
)
|
|
|
204,946
|
|
|
|
|
$
|
1,077,827
|
|
|
$
|
1,270,010
|
|
The components of the deferred income
tax expense are as follows:
|
Provision
for loan losses and bad debts
|
|
$
|
(292,569
|
)
|
|
$
|
170,038
|
|
|
Prepaid
pension costs
|
|
|
(8,257
|
)
|
|
|
59,232
|
|
|
Depreciation
and amortization
|
|
|
(6,349
|
)
|
|
|
53,542
|
|
|
Discount
accretion
|
|
|
(17,552
|
)
|
|
|
4,514
|
|
|
Nonaccrual
interest
|
|
|
(23,757
|
)
|
|
|
(62,506
|
)
|
|
Deferred
compensation
|
|
|
(6,990
|
)
|
|
|
(10,013
|
)
|
|
Write-down
of foreclosed real estate
|
|
|
(33,236
|
)
|
|
|
(9,861
|
)
|
|
|
|
$
|
(388,710
|
)
|
|
$
|
204,946
|
|
The components of the net deferred
income tax asset are as follows:
|
Deferred
income tax assets
|
|
|
|
|
|
|
|
Allowance
for loan losses and bad debt reserve
|
|
$
|
914,469
|
|
|
$
|
621,900
|
|
|
Deferred
compensation
|
|
|
186,835
|
|
|
|
179,845
|
|
|
Pension
liability
|
|
|
252,798
|
|
|
|
244,541
|
|
|
Nonaccrual
interest
|
|
|
111,507
|
|
|
|
87,750
|
|
|
Foreclosed
real estate valuation allowance
|
|
|
43,097
|
|
|
|
9,861
|
|
|
|
|
|
1,508,706
|
|
|
|
1,143,897
|
|
|
Deferred
income tax liabilities
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
198,397
|
|
|
|
204,746
|
|
|
Discount
accretion
|
|
|
29,326
|
|
|
|
46,878
|
|
|
Unrealized
gain on investment securities available for sale
|
|
|
3,372
|
|
|
|
33,850
|
|
|
|
|
|
231,095
|
|
|
|
285,474
|
|
|
Net
deferred income tax asset
|
|
$
|
1,277,611
|
|
|
$
|
858,423
|
|
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
|
|
|
(1.6
|
)
|
|
|
(1.1
|
)
|
|
State
income taxes, net of federal benefit
|
|
|
4.1
|
|
|
|
3.9
|
|
|
Other,
net
|
|
|
(0.2
|
)
|
|
|
0.2
|
|
|
|
|
|
36.3
|
%
|
|
|
37.0
|
%
|
The Bank has a profit sharing plan
qualifying under section 401(k) of the Internal Revenue Code that covers all of
the Company’s employees with one year of service who have attained age 21.
The Bank matches 15% of employee contributions to the Plan, up to a maximum of
2% of pay. The Bank may make discretionary contributions to the Plan in
amounts approved by its Board of Directors. The Bank’s contributions to
the plan, included in employee benefits expense for 2009 and 2008, were $7,256
and $6,897, respectively.
The Bank has a defined benefit
pension plan covering substantially all of the employees of the Company.
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 Bank’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:
|
|
|
2009
|
|
|
2008
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
2,567,432
|
|
|
$
|
2,078,439
|
|
|
Actual
return on plan assets
|
|
|
85,787
|
|
|
|
110,595
|
|
|
Employer
contribution
|
|
|
136,351
|
|
|
|
415,747
|
|
|
Benefits
paid
|
|
|
(171,296
|
)
|
|
|
(37,349
|
)
|
|
Fair
value of plan assets at end of year
|
|
|
2,618,274
|
|
|
|
2,567,432
|
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
|
3,187,386
|
|
|
|
2,965,180
|
|
|
Service
cost
|
|
|
171,013
|
|
|
|
159,042
|
|
|
Interest
cost
|
|
|
193,859
|
|
|
|
184,157
|
|
|
Benefits
paid
|
|
|
(171,296
|
)
|
|
|
(37,349
|
)
|
|
Actuarial
loss (gain)
|
|
|
(16,844
|
)
|
|
|
(83,644
|
)
|
|
Benefit
obligation at end of year
|
|
|
3,364,118
|
|
|
|
3,187,386
|
|
|
Funded
status
|
|
|
(745,844
|
)
|
|
|
(619,954
|
)
|
|
Unamortized
prior service cost
|
|
|
(2,759
|
)
|
|
|
(4,136
|
)
|
|
Unrecognized
net loss
|
|
|
1,150,845
|
|
|
|
1,153,214
|
|
|
Prepaid
pension expense included in other assets
|
|
$
|
402,242
|
|
|
$
|
529,124
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
$
|
2,571,973
|
|
|
$
|
2,083,410
|
|
Net pension expense includes the
following components:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
171,013
|
|
|
$
|
159,042
|
|
|
Interest
cost
|
|
|
193,859
|
|
|
|
184,157
|
|
|
Expected
return on assets
|
|
|
(146,622
|
)
|
|
|
(130,389
|
)
|
|
Amortization
of prior service cost
|
|
|
(1,377
|
)
|
|
|
(1,377
|
)
|
|
Amortization
of loss
|
|
|
46,360
|
|
|
|
54,150
|
|
|
Net
pension expense
|
|
$
|
263,233
|
|
|
$
|
265,583
|
|
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
|
%
|
|
|
5.75
|
%
|
The Bank intends to contribute
approximately $140,000 to the Plan in 2010.
Benefits expected to be paid from the
Plan are as follows:
|
Year
|
|
Amount
|
|
|
|
|
|
|
|
2010
|
|
|
51,000
|
|
|
2011
|
|
|
60,000
|
|
|
2012
|
|
|
61,000
|
|
|
2013
|
|
|
129,000
|
|
|
2014
|
|
|
133,000
|
|
|
2015-2019
|
|
|
674,000
|
|
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
Bank.
|
12.
|
Other
Operating Expenses
|
Other operating expenses consist of
the following:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Data
processing and correspondent fees
|
|
$
|
548,133
|
|
|
$
|
618,312
|
|
|
Directors'
fees
|
|
|
149,181
|
|
|
|
134,384
|
|
|
Professional
fees
|
|
|
122,684
|
|
|
|
121,125
|
|
|
Advertising
|
|
|
60,464
|
|
|
|
73,020
|
|
|
Postage
|
|
|
92,573
|
|
|
|
85,114
|
|
|
Public
relations and contributions
|
|
|
48,398
|
|
|
|
69,346
|
|
|
Office
supplies
|
|
|
122,920
|
|
|
|
78,276
|
|
|
Printing
and stationery
|
|
|
17,044
|
|
|
|
46,596
|
|
|
Telephone
|
|
|
41,889
|
|
|
|
41,809
|
|
|
Regulatory
assessments
|
|
|
416,913
|
|
|
|
122,127
|
|
|
Loan
product costs
|
|
|
14,637
|
|
|
|
21,983
|
|
|
Insurance
|
|
|
27,001
|
|
|
|
26,670
|
|
|
Other
|
|
|
521,711
|
|
|
|
589,917
|
|
|
|
|
$
|
2,183,548
|
|
|
$
|
2,028,679
|
|
|
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:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Beginning
loan balances
|
|
$
|
6,665,231
|
|
|
$
|
4,566,457
|
|
|
Advances
|
|
|
3,527,233
|
|
|
|
8,379,453
|
|
|
Repayments
|
|
|
(4,868,368
|
)
|
|
|
(6,316,307
|
)
|
|
Change
in related parties
|
|
|
(72,991
|
)
|
|
|
35,628
|
|
|
Ending
loan balances
|
|
$
|
5,251,105
|
|
|
$
|
6,665,231
|
|
In addition to
the outstanding balances listed above, the officers and directors and
their related interests have $3,411,296 in unused loans committed but not funded
as of December 31, 2009.
A director is a partner in a law firm
that provides services to the Company. Payments of $11,000 were made to
that firm during 2009 and 2008.
Deposits from senior officers and
directors and their related interests were $2,434,699 as of December 31, 2009
and $2,496,245 as of December 31, 2008.
The Board of Governors of the Federal
Reserve System 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,
2009 and 2008. Because Peoples Bancorp, Inc.’s only asset other than its
equity interest in the Bank and the Insurance Subsidiary 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, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
(to
risk-weighted assets)
|
|
$
|
30,361
|
|
|
|
15.1
|
%
|
|
$
|
16,051
|
|
|
|
8.0
|
%
|
|
$
|
20,063
|
|
|
|
10.0
|
%
|
|
Tier 1 capital
(to
risk-weighted assets)
|
|
$
|
27,849
|
|
|
|
13.9
|
%
|
|
$
|
8,025
|
|
|
|
4.0
|
%
|
|
$
|
12,038
|
|
|
|
6.0
|
%
|
|
Tier 1 capital
(to average
fourth quarter assets)
|
|
$
|
27,849
|
|
|
|
11.0
|
%
|
|
$
|
10,135
|
|
|
|
4.0
|
%
|
|
$
|
12,669
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
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.
|
15.
|
Fair
Value of Financial Instruments
|
GAAP define fair value, establish a
framework for measuring fair value, expand disclosures about fair value, and
establish a hierarchy for determining fair value measurement. The
hierarchy includes three levels and is based upon the valuation techniques used
to measure assets and liabilities. The three levels are as
follows:
Level
1: Inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
Level
2: 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; and
Level
3: Inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
The following is a description of the
valuation methodologies used for instruments measured at fair value; as well as
the general classification of such instruments pursuant to valuation
methodology.
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
|
|
$
|
3,027,700
|
|
|
$
|
3,027,700
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Foreclosed real estate
– The
Company measures its foreclosed real estate at fair value less cost to
sell. As of December 31, 2009, 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 estimated fair values of the
Company’s financial instruments are summarized below. The fair values of a
significant portion of these financial instruments are estimates derived using
present value techniques prescribed by the FASB and may not be indicative of the
net realizable or liquidation values. Also, the calculation of estimated
fair values is based on market conditions at a specific point in time and may
not reflect current or future fair values.
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,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
amount
|
|
|
value
|
|
|
amount
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
15,988,739
|
|
|
$
|
15,988,739
|
|
|
$
|
3,789,925
|
|
|
$
|
3,789,925
|
|
|
Federal
funds sold
|
|
|
7,015,811
|
|
|
|
7,015,811
|
|
|
|
3,896,890
|
|
|
|
3,896,890
|
|
|
Investment
securities (total)
|
|
|
13,091,076
|
|
|
|
13,339,856
|
|
|
|
14,133,613
|
|
|
|
14,509,607
|
|
|
Federal
Home Loan Bank stock
|
|
|
2,401,200
|
|
|
|
2,401,200
|
|
|
|
2,494,000
|
|
|
|
2,494,000
|
|
|
Loans,
net
|
|
|
203,899,678
|
|
|
|
204,083,903
|
|
|
|
214,679,949
|
|
|
|
214,784,949
|
|
|
Accrued
interest receivable
|
|
|
1,450,155
|
|
|
|
1,450,155
|
|
|
|
1,582,688
|
|
|
|
1,582,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$
|
36,951,197
|
|
|
$
|
36,951,197
|
|
|
$
|
34,387,604
|
|
|
$
|
34,387,604
|
|
|
Interest-bearing
deposits
|
|
|
156,299,711
|
|
|
|
160,895,134
|
|
|
|
131,350,969
|
|
|
|
133,996,055
|
|
|
Short-term
borrowings
|
|
|
2,917,339
|
|
|
|
2,917,339
|
|
|
|
12,129,539
|
|
|
|
12,129,539
|
|
|
Federal
Home Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
advances
|
|
|
28,000,000
|
|
|
|
28,457,862
|
|
|
|
43,000,000
|
|
|
|
43,879,670
|
|
|
Accrued
interest payable
|
|
|
439,410
|
|
|
|
439,410
|
|
|
|
441,832
|
|
|
|
441,832
|
|
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
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
307,239
|
|
|
$
|
308,309
|
|
|
Investment
in bank subsidiary
|
|
|
27,157,172
|
|
|
|
26,939,481
|
|
|
Investment
in insurance agency subsidiary
|
|
|
1,434,757
|
|
|
|
1,201,267
|
|
|
Income
tax refund receivable
|
|
|
7,395
|
|
|
|
5,979
|
|
|
Total
assets
|
|
$
|
28,906,563
|
|
|
$
|
28,455,036
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$
|
16,815
|
|
|
$
|
12,112
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
7,795,120
|
|
|
|
7,795,120
|
|
|
Additional
paid-in capital
|
|
|
2,920,866
|
|
|
|
2,920,866
|
|
|
Retained
earnings
|
|
|
18,865,399
|
|
|
|
18,370,797
|
|
|
Accumulated
other comprehensive income
|
|
|
(691,637
|
)
|
|
|
(643,859
|
)
|
|
Total
stockholders' equity
|
|
|
28,889,748
|
|
|
|
28,442,924
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
28,906,563
|
|
|
$
|
28,455,036
|
|
|
|
|
Years Ended December 31,
|
|
|
Statements of Income
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Interest
revenue
|
|
$
|
5,482
|
|
|
$
|
7,883
|
|
|
Dividends
from bank subsidiary
|
|
|
1,405,326
|
|
|
|
1,859,367
|
|
|
Equity
in undistributed income of insurance agency subsidiary
|
|
|
233,490
|
|
|
|
110,250
|
|
|
Equity
in undistributed income of bank subsidiary
|
|
|
265,468
|
|
|
|
204,867
|
|
|
|
|
|
1,909,766
|
|
|
|
2,182,367
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Professional
fees
|
|
|
21,750
|
|
|
|
23,115
|
|
|
Other
|
|
|
5,483
|
|
|
|
2,354
|
|
|
|
|
|
27,233
|
|
|
|
25,469
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
1,882,533
|
|
|
|
2,156,898
|
|
|
Income
tax expense (benefit)
|
|
|
(7,395
|
)
|
|
|
(5,979
|
)
|
|
Net
income
|
|
$
|
1,889,928
|
|
|
$
|
2,162,877
|
|
|
|
|
Years Ended December 31,
|
|
|
Statements of Cash Flows
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Interest
and dividends received
|
|
$
|
1,410,808
|
|
|
$
|
1,867,250
|
|
|
Income
taxes refunded
|
|
|
5,979
|
|
|
|
3,172
|
|
|
Cash
paid for operating expenses
|
|
|
(22,531
|
)
|
|
|
(24,921
|
)
|
|
|
|
|
1,394,256
|
|
|
|
1,845,501
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Acquisition
of insurance agency
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(1,395,326
|
)
|
|
|
(1,369,366
|
)
|
|
Repurchase
of stock
|
|
|
-
|
|
|
|
(480,000
|
)
|
|
|
|
|
(1,395,326
|
)
|
|
|
(1,849,366
|
)
|
|
Net
increase (decrease) in cash
|
|
|
(1,070
|
)
|
|
|
(3,865
|
)
|
|
Cash
at beginning of year
|
|
|
308,309
|
|
|
|
312,174
|
|
|
Cash
at end of year
|
|
$
|
307,239
|
|
|
$
|
308,309
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,889,928
|
|
|
$
|
2,162,877
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
Undistributed
net income of subsidiaries
|
|
|
(498,958
|
)
|
|
|
(315,117
|
)
|
|
Increase
(decrease) in other liabilities
|
|
|
4,702
|
|
|
|
548
|
|
|
(Increase)
decrease in income tax refund receivable
|
|
|
(1,416
|
)
|
|
|
(2,807
|
)
|
|
|
|
$
|
1,394,256
|
|
|
$
|
1,845,501
|
|
|
17.
|
Quarterly
Results of Operations (Unaudited)
|
|
|
|
Three Months Ended
|
|
|
(in thousands)
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
except per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
revenue
|
|
$
|
3,342
|
|
|
$
|
3,440
|
|
|
$
|
3,527
|
|
|
$
|
3,597
|
|
|
Interest
expense
|
|
|
1,082
|
|
|
|
1,156
|
|
|
|
1,177
|
|
|
|
1,192
|
|
|
Net
interest income
|
|
|
2,260
|
|
|
|
2,284
|
|
|
|
2,350
|
|
|
|
2,405
|
|
|
Provision
for loan losses
|
|
|
555
|
|
|
|
316
|
|
|
|
425
|
|
|
|
430
|
|
|
Net
income
|
|
|
395
|
|
|
|
470
|
|
|
|
382
|
|
|
|
643
|
|
|
Comprehensive
income
|
|
|
393
|
|
|
|
462
|
|
|
|
368
|
|
|
|
619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
$
|
0.50
|
|
|
$
|
0.60
|
|
|
$
|
0.49
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
18.
|
Insurance
Subsidiary Acquisition
|
On January 2, 2007, Peoples Bancorp,
Inc. purchased all of the outstanding stock of the Insurance Subsidiary, such
that the Insurance Subsidiary is a wholly-owned subsidiary of Peoples Bancorp,
Inc. The person from whom Peoples Bancorp, Inc. purchased the stock of the
Insurance Subsidiary agreed to a two-year consulting agreement as part of the
acquisition.
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 the Insurance Subsidiary 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.
Selected financial information by line
of business for the year ended December 31, 2009 and 2008, are included in the
following table:
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
products
|
|
|
|
|
|
|
|
|
|
|
Community
|
|
|
and
|
|
|
Intersegment
|
|
|
Consolidated
|
|
|
2009
|
|
banking
|
|
|
services
|
|
|
transactions
|
|
|
total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
9,303,236
|
|
|
$
|
(4,352
|
)
|
|
$
|
-
|
|
|
$
|
9,298,884
|
|
|
Provision
for loan losses
|
|
|
(1,726,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,726,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision
|
|
|
7,577,236
|
|
|
|
(4,352
|
)
|
|
|
-
|
|
|
|
7,572,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
revenue
|
|
|
1,275,479
|
|
|
|
1,353,161
|
|
|
|
-
|
|
|
|
2,628,640
|
|
|
Noninterest
expense
|
|
|
(6,274,402
|
)
|
|
|
(959,367
|
)
|
|
|
-
|
|
|
|
(7,233,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,578,313
|
|
|
|
389,442
|
|
|
|
-
|
|
|
|
2,967,755
|
|
|
Income
taxes
|
|
|
(921,874
|
)
|
|
|
(155,953
|
)
|
|
|
-
|
|
|
|
(1,077,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,656,439
|
|
|
$
|
233,489
|
|
|
$
|
-
|
|
|
$
|
1,889,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets
|
|
$
|
251,003,285
|
|
|
$
|
1,710,257
|
|
|
$
|
(610,901
|
)
|
|
$
|
252,102,641
|
|
|
|
|
|
|
|
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
|
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
|
Item
9A(T).
|
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 (“CEO”), who
also serves as the Company’s Chief Financial Officer (“CFO”), 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, 2009 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 2009,
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,
2009. 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,
2009 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, 2009, the
Company’s internal control over financial reporting is effective.
March 29,
2010
|
/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 2010 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 2010 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 2010 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 2010 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 2010 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, 2009 and 2008
Consolidated Statements of Income for
the years Ended December 31, 2009 and 2008
Consolidated Statements of Changes in
Stockholders’ Equity for the years Ended December 31, 2009 and 2008
Consolidated Statements of Cash Flows
for the years Ended December 31, 2009 and 2008
Notes to Consolidated Financial
Statements for the years ended December 31, 2009 and 2008
(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 29, 2010
|
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 29, 2010
|
|
By:
|
/s/ E. Jean Anthony
|
|
|
|
|
E.
Jean Anthony, Director
|
|
|
|
|
|
|
Date:
March 29, 2010
|
|
By:
|
|
|
|
|
|
Robert
W. Clark, Jr., Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
By:
|
/s/Lamont e. Cooke
|
|
|
|
|
LaMonte
E. Cooke, Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
By:
|
/s/ Gary B. Fellows
|
|
|
|
|
Gary
B. Fellows, Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
By:
|
/s/ Herman E. Hill, Jr.
|
|
|
|
|
Herman
E. Hill, Jr., Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
By:
|
/s/ Patricia Joan Ozman
Horsey
|
|
|
|
|
Patricia
Joan Ozman Horsey, Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
By:
|
|
|
|
|
|
P.
Patrick McCleary, Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
By:
|
/s/ Alexander P. Rasin,
III
|
|
|
|
|
Alexander
P. Rasin, III, Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
By:
|
/s/ Stefan R. Skipp
|
|
|
|
|
Stefan
R. Skipp, Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
By:
|
/s/ Thomas G. Stevenson
|
|
|
|
|
Thomas
G. Stevenson, President, CEO,
|
|
|
|
|
CFO
and Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
By:
|
/s/ Elizabeth A. Strong
|
|
|
|
|
Elizabeth
A. Strong, Director
|
|
|
|
|
|
|
Date: March
29, 2010
|
|
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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