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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-18279
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TRI-COUNTY FINANCIAL CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Maryland 52-1652138
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification no.)
3035 Leonardtown Road, Waldorf, Maryland 20601
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (301) 645-5601
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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 such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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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 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. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $23 million based on the closing price at which the
common stock, $0.01 par value, was sold on the last business day of the
Company's most recently completed second fiscal quarter. For purposes of this
calculation only, the shares held by directors and executive officers of the
registrant and by any stockholder beneficially owning more than 5% of the
registrant's outstanding common stock are deemed to be shares held by
affiliates.
Number of shares of Common Stock outstanding as of March 3, 2004: 756,737
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 2003. (Part II)
2. Portions of Proxy Statement for 2004 Annual Meeting of Stockholders. (Part
III)
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PART I
Item 1. Business
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Tri-County Financial Corporation (the "Company") is a bank holding company
organized in 1989 under the laws of the State of Maryland. It presently owns all
the outstanding shares of capital stock of the Community Bank of Tri-County (the
"Bank"), a Maryland-chartered commercial bank. The Bank was originally organized
in 1950 as Tri-County Building and Loan Association of Waldorf, a mutual savings
and loan association, and in 1986 converted to a federal stock savings bank and
adopted the name Tri-County Federal Savings Bank. In 1997, the Bank converted to
a Maryland-chartered commercial bank and adopted its current corporate title.
The Company engages in no significant activity other than holding the stock of
the Bank and operating the business of the Bank. Accordingly, the information
set forth in this report, including financial statements and related data,
relates primarily to the Bank and its subsidiaries.
The Bank serves the southern Maryland counties of Charles, Calvert and St.
Mary's, (the "Tri-County area") through its main office and seven branches
located in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall,
and Lexington Park, Maryland. The Bank also expects to open an office in Prince
Frederick, Maryland in 2004. The Bank also operates sixteen Automated Teller
Machines ("ATMs") including seven stand-alone locations in the Tri-County area.
The Bank also offers bank by phone and began offering internet banking in 2003.
The Bank is engaged in the commercial and retail banking business as authorized
by the banking statutes of the State of Maryland and applicable Federal
regulations, including the acceptance of deposits, and the origination of loans
to individuals, associations, partnerships and corporations. The Bank's real
estate financing consists of residential first and second mortgage loans, home
equity lines of credit and commercial mortgage loans. Commercial lending
consists of both secured and unsecured loans. The Bank is a member of the
Federal Reserve and Federal Home Loan Bank ("FHLB") Systems and its deposits are
insured up to applicable limits by Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation ("FDIC").
The Company's executive offices are located at 3035 Leonardtown Road,
Waldorf, Maryland. Its telephone number is (301) 645-5601. The Bank also
maintains a website at www.cbtc.com.
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MARKET AREA
The Bank considers its principal lending and deposit market area to consist
of the Southern Maryland counties of Charles, Calvert and St. Mary's. These
counties have experienced significant population growth during the past decade
due to their proximity to the rapidly growing Washington, D.C. and Baltimore
metropolitan areas. Southern Maryland is generally considered to have more
affordable housing than many other Washington and Baltimore area suburbs. In
addition, the area has experienced rapid growth in businesses and federal
facilities located in the area. Major federal facilities include the Patuxent
Naval Air Station in St. Mary's County. The Patuxent Naval Air Station has
undergone significant expansion in the last several years and is projected to
continue to expand for several more years.
Rapid growth in our market area has been constrained by certain government
policies, as all three counties have attempted to limit growth in certain areas.
These policies have created some uncertainty about zoning and land use
regulations. In some cases, real estate development work has been delayed or
cancelled as a result of these policies. Recently, Charles County introduced a
user fee system which would involve upfront payments in real estate development,
but would remove subsequent regulatory delays. This system has not had an
appreciable effect on the pace of residential development. Future regulatory
events may adversely affect the Bank's loan growth.
LENDING ACTIVITIES
GENERAL. The Bank offers a wide variety of consumer and commercial loans.
The Bank's lending activities include residential and commercial real estate
loans, construction loans, land acquisition and development loans, equipment
financing, and commercial and consumer demand and installment loans. Most of the
Bank's customers are residents of, or businesses located in the Southern
Maryland area. The Bank's primary market for commercial loans consists of small
and medium sized businesses located in Southern Maryland. The Bank believes that
this market is responsive to the Bank's ability to provide personal service and
flexibility. The Bank attracts customers for its consumer lending products based
upon its ability to offer service, flexibility, and competitive pricing, as well
as by leveraging other banking relationships such as soliciting deposit
customers for loans.
1
The Bank's previous savings and loan charter restricted its ability to hold
certain loan types in its portfolio. As a result, prior to its conversion to a
state-chartered commercial bank, the Bank's loan portfolio was primarily
comprised of residential mortgage loans. Since conversion, the Bank has moved to
diversify its lending by adding a larger portion of commercial real estate,
commercial, and consumer loans to its portfolio. Management believes that this
diversification of the loan portfolio will increase the Bank's overall long-term
financial performance. Management recognizes that these new loan types may
increase the Bank's risk of losses due to loan default, although the Bank is
taking measures to monitor and control the increased risk of these loan types.
RESIDENTIAL FIRST MORTGAGE LOANS. Prior to its conversion to a commercial
bank on March 29, 1997, residential first mortgages made up the majority of the
Bank's loan portfolio. Since that date, residential first mortgage loans have
represented a progressively smaller portion of the Bank's loan portfolio. Since
December 31, 1997, residential first mortgage loans have decreased in dollar
amount to $43.0 million from $62.2 million, while falling as a percentage of the
loan portfolio to 19% from 50%.
Residential first mortgage loans made by the Bank are generally long-term
loans, amortized on a monthly basis, with principal and interest due each month.
The initial contractual loan payment period for residential loans typically
ranges from 10 to 30 years. The Bank's experience indicates that real estate
loans remain outstanding for significantly shorter periods than their
contractual terms. Borrowers may refinance or prepay loans at their option,
without penalty. The Bank originates both fixed and adjustable-rate residential
first mortgages.
The Bank offers fixed rate residential first mortgages on a variety of
terms including loan periods from 10 to 30 years, and biweekly payment loans.
Total fixed rate loan products in our residential first mortgage amount to $30
million as of December 31, 2003. Fixed-rate loans may also be packaged and sold
in the secondary market, primarily to the Federal Home Loan Mortgage Corporation
("FHLMC"), private mortgage correspondents, the Federal National Mortgage
Association ("FNMA") and the Mortgage Partnership Finance program of the FHLB of
Atlanta. The Bank may also add these loans to its portfolio. Depending on market
conditions the Bank may elect to retain the right to service the loans sold for
a payment based upon a percentage, (generally 0.25% of the outstanding loan
balance). These servicing rights may be sold to other qualified servicers. As of
December 31, 2003, the Bank serviced $54.7 million in residential mortgage loans
for various organizations.
The Bank also offers mortgages which are adjustable on a one, three, and
five-year basis generally with limitations on upward adjustments of two
percentage points per year and six percentage points over the life of the loan.
The Bank markets adjustable-rate loans with rate adjustments based upon a United
States Treasury bill index. As of December 31, 2003, the Bank had $13 million in
residential mortgage loans using a U.S. Treasury bill index. The retention of
adjustable-rate mortgage loans in the Bank's loan portfolio helps reduce the
negative effects of increases in interest rates on the Bank's net interest
income. Under certain conditions, however, the annual and lifetime limitations
on interest rate adjustments may limit the increases in interest rates on these
loans. There are also unquantifiable credit risks resulting from potential
increased costs to the borrower as a result of repricing of adjustable-rate
mortgage loans. It is foreseeable that during periods of rising interest rates,
the risk of default on adjustable-rate mortgage loans may increase due to the
upward adjustment of interest cost to the borrower. In addition, depending on
market conditions, the initial interest rate on adjustable-rate loans is
generally lower than that on a fixed-rate loan of similar credit quality and
size.
The Bank makes residential first mortgage loans of up to 97% of appraised
value or sales price of the property, whichever is less, to qualified
owner-occupants upon the security of single-family homes. Non-owner occupied one
to four family loans and loans secured by other than residential real estate are
generally permitted to a maximum 80% loan-to-value of the appraised value
depending on the overall strength of the application. The Bank currently
requires that substantially all residential first mortgage loans with
loan-to-value ratios in excess of 80% carry private mortgage insurance to lower
the Bank's exposure to approximately 80% of the value of the property. In
certain cases, the borrower may elect to borrow amounts in excess of 80%
loan-to-value in the form of a second mortgage. The second mortgage will
generally have a higher interest rate and shorter repayment period than the
first mortgage on the same property.
All improved real estate which serves as security for a loan made by the
Bank must be insured, in the amount and by such companies as may be approved by
the Bank, against fire, vandalism, malicious mischief
2
and other hazards. Such insurance must be maintained through the entire term of
the loan and in an amount not less than that amount necessary to pay the Bank's
indebtedness in full.
COMMERCIAL REAL ESTATE AND OTHER NON-RESIDENTIAL REAL ESTATE LOANS. The
Bank has increased its emphasis on loans for the permanent financing of
commercial and other improved real estate projects, including, to a limited
extent, office buildings, as well as churches and other special purpose
projects. As a result, commercial real estate loans increased to $93.8 million
or 42% of the loan portfolio during 2003. The primary security on a commercial
real estate loan is the real property and the leases which produce income for
the real property. The Bank generally limits its exposure to a single borrower
to 15% of the Bank's capital and frequently participates with other lenders on
larger projects. Loans secured by commercial real estate are generally limited
to 80% of appraised value and have an initial contractual loan payment period
ranging from three to 20 years. Virtually all of the Bank's commercial real
estate loans, as well as its construction loans discussed below, are secured by
real estate located in the Bank's primary market area.
Loans secured by commercial real estate are larger and involve greater
risks than one to four family residential mortgage loans. Because payments on
loans secured by such properties are often dependent on the successful operation
or management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
As a result of the greater emphasis that the Bank places on commercial real
estate loans under its business plan as a commercial bank, the Bank is
increasingly exposed to the risks posed by this type of lending.
CONSTRUCTION AND LAND DEVELOPMENT LOANS. The Bank offers construction loans
to individuals and building contractors primarily for the construction of one to
four family dwellings. Loans to individuals primarily consist of
construction/permanent loans which have fixed rates, payable monthly for the
construction period and are followed by a 30-year, fixed or adjustable-rate
permanent loan. The construction/permanent loans provide for disbursement of
loan funds based on draw requests submitted by the builder during construction
and site inspections by independent inspectors. The Bank will also make a
construction loan if the borrower has a commitment from another lender for a
permanent loan at the completion of the construction. These loans typically have
terms of six months. The application process includes the same items which are
required for other mortgage loans and also requires the borrower to submit to
the Bank accurate plans, specifications, and costs of the property to be
constructed. These items are used as a basis to determine the appraised value of
the subject property.
The Bank also provides construction and land development loans to home
building and real estate development companies. Generally, these loans are
secured by the real estate under construction as well as by guarantees of the
principals involved. Draws are made upon satisfactory completion of predefined
stages of construction or development. The Bank will lend up to 80% of the
appraised value.
The Bank also offers builders lines of credit, which are revolving notes
generally secured by real property. Outstanding builders lines of credit
amounted to approximately $11.2 million at December 31, 2003. The Bank offers a
builder's master note program in which the builder receives a revolving line of
credit at a market rate and the Bank obtains security in the form of a first
lien on home sites under construction.
In addition, the Bank offers loans for the purpose of acquisition and
development of land, as well as loans on undeveloped, subdivided lots for home
building by individuals. Land acquisition and development loans, included in
construction loans discussed above, totaled $5.8 million at December 31, 2003.
Bank policy requires that zoning and permits must be in place prior to making
development loans.
The Bank's ability to originate all types of construction and development
loans is heavily dependent on the continued demand for single-family housing
construction in the Bank's market areas. In the event the demand for new houses
in the Bank's market areas were to decline, the Bank may be forced to shift a
portion of its lending emphasis. There can be no assurance of the Bank's ability
to continue growth and profitability in its construction lending activities in
the event of such a decline.
Construction and land development loans are inherently riskier than
providing financing on owner-occupied real estate. The Bank's risk of loss is
dependent on the accuracy of the initial estimate of the market value of the
completed project as well as the accuracy of the cost estimates made to complete
the project. As these
3
projects may take an extended period of time to complete, market, economic, and
regulatory conditions may change during the construction or development period.
HOME EQUITY AND SECOND MORTGAGE LOANS. The Bank has maintained a growing
level of home equity and second mortgage loans in recent years. Home equity
loans, which totaled $15 million at December 31, 2003, are generally made in the
form of lines of credit with minimum amounts of $5,000, have terms of up to 20
years, variable rates priced at prime or some margin above prime and require an
80% or 90% loan-to-value ratio (including any prior liens), depending on the
specific loan program. Second mortgage loans which totaled $4 million at
December 31, 2003 are fixed and variable-rate loans which have original terms
between 5 and 15 years. Loan-to-value ratios of up to 80% or 95% are allowed
depending on the specific loan program.
These products represent a higher risk of default than residential first
mortgages as in the event of foreclosure, the first mortgage would need to be
paid off prior to collection of the second. The Bank believes that its policies
and procedures are sufficient to mitigate the additional risk.
CONSUMER AND COMMERCIAL LOANS. The Bank has developed a number of programs
to serve the needs of its customers with primary emphasis upon direct loans
secured by automobiles, boats, recreational vehicles and trucks and heavy
equipment. The Bank also makes home improvement loans and offers both secured
and unsecured lines of credit.
The Bank also offers a variety of commercial loan services including term
loans, lines of credit and equipment financing. The Bank's commercial loans are
primarily underwritten on the basis of the borrower's ability to service the
debt from income. Such loans are generally made for terms of five years or less
at interest rates which adjust periodically.
The higher interest rates and shorter loan terms available on commercial
and consumer lending make these products attractive to the Bank. In particular,
the consumer and commercial loan portfolio will increase its yield as interest
rates increase. Consumer and commercial business loans, however, entail greater
risk than residential mortgage loans, particularly in the case of consumer loans
which are unsecured or secured by rapidly depreciable assets such as
automobiles. In such cases, any repossessed collateral may not provide an
adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various Federal and state laws including Federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Such loans may also give rise to claims and defenses by a consumer
loan borrower against an assignee such as the Bank, and a borrower may be able
to assert against such assignee claims and defenses which it has against the
seller of the underlying collateral.
4
LOAN PORTFOLIO ANALYSIS. Set forth below is selected data relating to the
composition of the Bank's loan portfolio by type of loan on the dates indicated.
(Dollars In Thousands)
At December 31,
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2003 2002 2001 2000 1999
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Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
Real Estate Loans
Commercial $ 93,825 42.46% $ 74,292 37.07% $ 65,617 33.39% $ 42,226 24.16% $ 29,947 20.08%
Residential first mortgage 42,971 19.45% 48,976 24.44% 61,430 31.26% 67,975 38.89% 66,263 44.42%
Construction and land development 19,599 8.87% 14,579 7.27% 18,136 9.23% 17,301 9.90% 17,142 11.49%
Home equity and second mortgage 19,562 8.85% 19,007 9.48% 18,580 9.46% 18,637 10.66% 16,691 11.19%
Commercial loans 30,436 13.77% 29,947 14.94% 18,539 9.44% 15,047 8.61% 10,025 6.72%
Consumer loans 4,097 1.85% 4,623 2.31% 5,092 2.59% 5,512 3.15% 4,193 2.81%
Commercial equipment 10,473 4.75% 9,007 4.49% 9,095 4.63% 8,098 4.63% 4,909 3.29%
------- ------- ------- ------- ------- ------- ------- ------- ------- -----
Total loans $ 220,963 100.00% $200,431 100.00% $196,489 100.00% $174,796 100.00% $149,170 100.00%
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Less: Deferred loan fees 650 668 757 776 808
Loan loss reserve 2,573 2,314 2,282 1,930 1,653
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Loans receivable, net $ 217,740 $197,449 $193,450 $172,090 $146,710
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5
LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank solicits loan applications
through its branch network, direct solicitation of customers, referrals from
customers, and marketing by commercial and residential mortgage loan officers.
Loans are processed and approved according to guidelines deemed appropriate for
each product type. Loan requirements such as income verification, collateral
appraisal, credit reports, etc. vary by loan type. Loan processing functions are
generally centralized except for small consumer loans. Loan approval authority
is established by Board policy and delegated as deemed necessary and
appropriate. Loan approval authorities vary by individual with the President
having approval authority up to $750,000, Senior Vice Presidents up to $400,000,
and Business Development officers up to $150,000. Authorities may be combined up
to $1,000,000. For residential mortgage loans, the residential loan underwriter
may approve loans up to the conforming loan limit of $307,000. Selected branch
personnel may approve secured loans up to $75,000, and unsecured loans up to
$50,000. A loan committee consisting of the President and two members of the
Board, ratify all real estate mortgages and approve all loans in excess of
$1,000,000. Depending on the loan and collateral type, conditions for protecting
the Bank's collateral are specified in the loan documents. Typically these
conditions might include requirements to maintain hazard and title insurance,
pay property taxes, and other conditions.
Depending on market conditions, mortgage loans may be originated primarily
with the intent to sell to third parties such as FNMA or FHLMC. During the year
2003, the Bank sold $17 million of mortgage loans which were originated during
the year generating $505 thousand in income. In order to comply with internal
and regulatory limits on loans to one borrower, the Bank routinely sells
portions of commercial and commercial real estate loans to other lenders. The
Bank also routinely buys portions of loans, whole loans, or participation
certificates from other lenders. The Bank only purchases loans or portions of
loans after reviewing loan documents, underwriting support, and other procedures
as necessary. Purchased loans are subject to the same regulatory and internal
policy requirements as other loans in the Bank's portfolio.
LOANS TO ONE BORROWER. Under Maryland law, the maximum amount which the
Bank is permitted to lend to any one borrower and their related interests may
generally not exceed 10% of the Bank's unimpaired capital and surplus which is
defined to include the Bank's capital, surplus, retained earnings and 50% of its
reserve for possible loan losses. Under this authority, the Bank would have been
permitted to lend up to $4.0 million to any one borrower at December 31, 2003.
By interpretive ruling of the Commissioner of Financial Regulation, Maryland
banks have the option of lending up to the amount that would be permissible for
a national bank which is generally 15% of unimpaired capital and surplus
(defined to include a bank's total capital for regulatory capital purposes plus
any loan loss allowances not included in regulatory capital). Under this
formula, the Bank would have been permitted to lend up to $4.6 million to any
one borrower at December 31, 2003. At December 31, 2003, the largest amount
outstanding to any one borrower and their related interests was $3.4 million.
LOAN COMMITMENTS. The Bank does not normally negotiate standby commitments
for the construction and purchase of real estate. Conventional loan commitments
are granted for a one-month period. The total amount of the Bank's outstanding
commitments to originate loans at December 31, 2003, was approximately $2.9
million, excluding undisbursed portions of loans in process. It has been the
Bank's experience that few commitments expire unfunded.
6
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 2003 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.
(Dollars in Thousands)
Due after 1
through
Due within 1 5 years from Due more than
year after December 31, 5 years from
December 31, 2003 2003 December 31, 2003 Total
----------------- ---- ----------------- -----
Real Estate Loans
Commercial $ 7,717 $16,763 $ 69,346 $ 93,825
Residential first mortgage 2,244 9,248 31,479 42,971
Construction 8,678 7,994 2,927 19,599
Home equity and second mortgage 16,085 1,770 1,707 19,562
Commercial loans 29,904 532 -- 30,436
Consumer loans 1,333 2,763 -- 4,096
Commercial equipment 2,257 7,886 330 10,473
------- ------- -------- --------
Total loans $68,217 $46,956 $105,789 $220,963
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The following table sets forth the dollar amount of all loans due after one year
from December 31, 2003 which have predetermined interest rates and have floating
or adjustable interest rates.
(Dollars in Thousands)
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -------
Real Estate Loans
Commercial $ 7,672 $ 78,436 $ 86,108
Residential first mortgage 27,742 12,986 40,727
Construction 3,257 7,664 10,921
Home equity and second mortgage 3,477 -- 3,477
Commercial loans -- 532 532
Consumer loans 2,763 -- 2,763
Commercial equipment 7,446 770 8,216
------- -------- --------
$52,357 $100,388 $152,745
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DELINQUENCIES. The Bank's collection procedures provide that when a loan is
15 days delinquent, the borrower is contacted by mail and payment is requested.
If the delinquency continues, subsequent efforts will be made to contact the
delinquent borrower and obtain payment. If these efforts prove unsuccessful, the
Bank will pursue appropriate legal action including repossession of the
collateral and other actions as deemed necessary. In certain instances, the Bank
will attempt to modify the loan or grant a limited moratorium on loan payments
to enable the borrower to reorganize his financial affairs.
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful.
7
Residential mortgage loans are placed on non-accrual status when either
principal or interest is 90 days or more past due unless they are adequately
secured and there is reasonable assurance of full collection of principal and
interest. Consumer loans generally are charged off when the loan becomes more
than 120 days delinquent. Commercial business and real estate loans are placed
on non-accrual status when the loan is 90 days or more past due or when the
loan's condition puts the timely repayment of principal and interest in doubt.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
management's assessment of the ultimate collectibility of the loan.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as foreclosed real estate until such time as
it is sold. When such property is acquired, it is recorded at its fair market
value. Subsequent to foreclosure, the property is carried at the lower of cost
or fair value less selling costs. Additional write-downs as well as carrying
expenses of the foreclosed properties are charged to expenses in the current
period. The Bank had foreclosed real estate with a fair market value of
approximately $706 thousand at December 31, 2003.
FORECLOSED REAL ESTATE
Foreclosed real estate is recorded net of a valuation allowance. The
allowance is adjusted as circumstances require. These adjustments in the
allowance include changes in the value of the property as well as the sale or
disposal of the foreclosed property. The largest portion of the foreclosed real
estate, $476 thousand, is related to one development project. This project was
acquired in July 2001 by deed in lieu of foreclosure. The project is being
developed in two phases. Preliminary approvals have been obtained for phase 1
and this portion of the project was sold in 2002. Phase 2 is under contract to
sell and will be sold when preliminary approval from the county is granted.
Total sales price for Phase 2 would be $1.7 million. Under the terms of the
agreement, the buyer is responsible for all development costs associated with
both phases. The sales agreement provides for a minimal ($25 thousand) payment
to the Bank should the buyer decide to not complete its purchase of Phase 2. The
Bank did not provide financing for the sales agreement or subsequent development
work. Based upon these facts and circumstances the Bank recognized the sale of
Phase 1 for accounting purposes. The Bank determined that no sales recognition
on the agreement to sell Phase 2 is appropriate at this time. The amount of the
remaining allowance and total carrying value of Phase 2 is periodically
evaluated for possible impairment. Other properties in the foreclosed real
estate section of the balance sheet consist of various properties currently
being marketed by the Bank.
8
DELINQUENT AND NONACCRUAL LOANS
The following table sets forth information with respect to the Bank's
non-performing loans for the dates indicated. At the dates shown, the Bank had
no impaired loans within the meaning of Statement of Financial Accounting
Standards No. 114 and 118.
At December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
Restructured Loans $ -- $ -- $ -- $ -- $ --
------ ------ ------ ------- ------
Accruing loans which are contractually
past past due 90days or more:
Real Estate Loans
Commercial -- -- -- -- --
Residential first mortgage -- -- -- -- --
Construction and land development -- -- -- -- --
Home equity and second mortgage -- -- 25 102 171
Commercial loans -- -- -- -- --
Consumer loans -- -- -- -- --
Commercial equipment -- -- -- -- --
------ ------ ------- -------- ------
Total -- -- 25 102 171
------ ------ ------- -------- ------
Loans accounted for on a nonaccrual basis:
Real Estate Loans
Commercial -- -- -- -- --
Residential first mortgage 275 278 134 -- 20
Construction and land development -- -- -- -- --
Home equity and second mortgage -- 49 -- -- --
Commercial loans 103 269 -- -- --
Consumer loans 1 1 70 7 198
Commercial equipment -- -- -- -- --
-- -- -- -- --
Total 379 597 204 7 218
------ ------ ------- -------- ------
Total non-performing loans $379 $597 $229 $109 $389
====== ====== ======= ======== ======
Non-performing loans to total loans 0.17% 0.30% 0.12% 0.06% 0.26%
====== ====== ======= ======== ======
Allowance for loan losses to
non-performing loans 678.33% 387.60% 996.51% 1,770.64% 424.94%
====== ====== ======= ======== ======
For a detailed discussion of foreclosed real estate at December 31, 2003
see the "Foreclosed Real Estate" section discussed previously. During the year
ended December 31, 2003, gross interest income of $41 thousand would have been
recorded on loans accounted for on a non-accrual basis if the loans had been
current throughout the period. During the year 2003, the Company recognized $12
thousand in interest on these loans.
9
At December 31, 2003, there were no loans outstanding not reflected in the
above table as to which known information about possible credit problems of
borrowers caused management to have serious doubts as to the ability of such
borrowers to comply with present loan repayment terms.
The following table sets forth an analysis of activity in the Bank's
allowance for possible loan losses for the periods indicated.
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period $2,314 $2,282 $1,930 $1,653 $1,540
====== ====== ====== ====== ======
Charge-offs:
Real Estate Loans
Commercial
Residential first mortgage -- -- -- 56 --
Construction and land development -- 36 -- -- --
Home equity and second mortgage -- 21 -- -- --
Commercial loans 35 59 -- 33 102
Consumer loans 2 15 39 6 32
Commercial equipment 24 -- -- -- --
------ ------ ------ ------ ------
Total Charge-offs: 61 131 39 95 134
------ ------ ------ ------ ------
Recoveries:
Real Estate Loans
Commercial -- -- -- -- --
Residential first mortgage -- -- -- -- --
Construction and land development -- -- -- -- --
Home equity and second mortgage -- -- -- -- --
Commercial loans -- -- -- -- --
Consumer loans -- 3 31 -- --
Commercial equipment 2 -- -- 12 7
------ ------ ------ ------ ------
Total Recoveries 2 3 31 12 7
------ ------ ------ ------ ------
Net charge-offs 58 128 8 83 127
Provision for Possible Loan Losses 317 160 360 360 240
------ ------ ------ ------ ------
Balance at End of Period $2,573 $2,314 $2,282 $1,930 $1,653
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding during the year 0.03% 0.06% 0.00% 0.05% 0.09%
====== ====== ====== ====== ======
10
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
(Dollars in Thousands)
At December 31,
-------------------------------------------------------------------------
2003 2002 2001
---------------------- ------------------------- ----------------------
Percent Percent of Percent of
of Loans Loans in Loans in
in Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ --------- ------ ---------- ------ ---------
Real Estate Loans:
Commercial $1,409 42.46% $1,077 37.07% $ 923 33.39%
Residential first mortgage 64 19.45% 118 24.44% 160 31.26%
Construction and land development 281 8.87% 211 7.27% 355 9.23%
Home equity and second mortgage 244 8.85% 276 9.48% 373 9.46%
Commercial loans 381 13.77% 434 14.94% 186 9.44%
Consumer loans 63 1.85% 68 2.31% 102 2.59%
Commercial equipment 131 4.74% 130 4.49% 183 4.63%
------ ------ ------ ------ ------ ------
Total allowance for loan losses $2,573 100.00% $2,314 100.00% $2,282 100.00%
====== ====== ====== ====== ====== ======
(Dollars in Thousands)
At December 31,
------------------------------------------------
2000 1999
---------------------- ----------------------
Percent Percent of
of Loans Loans in
in Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ --------- ------ ----------
Real Estate Loans:
Commercial $ 645 24.16% $ 399 20.08%
Residential first mortgage 192 38.89% 632 44.42%
Construction and land development 285 9.90% 164 11.49%
Home equity and second mortgage 394 10.66% 159 11.19%
Commercial loans 138 8.61% 178 6.72%
Consumer loans 111 3.15% 55 2.81%
Commercial equipment 165 4.63% 66 3.29%
------ ------ ------ ------
Total allowance for loan
losses $1,930 100.00% $1,653 100.00%
====== ====== ====== ======
11
The Bank closely monitors the loan payment activity of all its loans. A
loan loss provision is provided by a regular accrual. The Bank periodically
reviews the adequacy of the allowance for loan losses based on an analysis of
the loan portfolio, the Bank's historical loss experience, economic conditions
in the Bank's market area, and a review of selected individual loans. Loan
losses are charged off against the allowance when the uncollectibility is
confirmed. Subsequent recoveries, if any, are credited to the allowance. The
Bank believes it has established its existing allowance for loan losses in
accordance with generally accepted accounting principles and is in compliance
with appropriate regulatory guidelines. However, the establishment of the level
of the allowance for loan losses is highly subjective and dependent on
incomplete information as to the ultimate disposition of loans. Accordingly,
there can be no assurance that actual losses may vary from the amounts estimated
or that the Bank's regulators will not require the Bank to significantly
increase or decrease its allowance for loan losses, thereby affecting the Bank's
financial condition and earnings.
INVESTMENT ACTIVITIES
The Bank maintains a portfolio of investment securities to provide
liquidity as well as a source of earnings. The Bank's investment securities
portfolio consists primarily of mortgage-backed and other securities issued by
U.S. Government-sponsored enterprises ("GSEs") including FHLMC and FNMA. The
Bank also has smaller holdings of privately issued mortgage-backed securities,
U.S. Treasury obligations, and other equity and debt securities. As a member of
the Federal Reserve and FHLB Systems, the Bank is also required to invest in the
stock of the Federal Reserve Bank of Richmond and FHLB of Atlanta, respectively.
The following table sets forth the carrying value of the Company's
investment securities portfolio and FHLB of Atlanta and Federal Reserve Bank
stock at the dates indicated. At December 31, 2003, their market value was $104
million.
At December 31,
-------------------------------------------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Asset-backed securities:
FHLMC and FNMA $ 84,764 $ 29,200 $ 26,084
Other 7,284 7,930 8,993
-------- -------- --------
Total asset-backed securities 92,048 37,130 35,077
FHLMC and FNMA Stock 756 734 727
Bond mutual funds 2,838 3,962 --
U.S. Treasury bills 300 300 300
Other Investments 3,954 2,542 1,989
-------- -------- --------
Total investment securities 99,895 44,668 38,093
FHLB and Federal Reserve Bank stock 4,777 2,737 3,036
-------- -------- --------
Total investment securities and FHLB and
Federal Reserve Bank stock $104,672 $ 47,405 $ 41,129
======== ======== ========
12
The maturities and weighted average yields for investment securities
available for sale and held to maturity at December 31, 2003 are shown below.
After One After Five
One Year or Less Through Five Years Through Ten Years After Ten Years
------------------ ------------------ ------------------ ------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Investment securities available for sale:
Corporate equity securities $ 546 5.01% $ -- -- $ -- -- $ -- --
Asset-backed securities 9,295 4.41% 15,731 4.38% 5,389 4.31% 4,488 4.38%
Mutual Funds 2,846 2.19% -- -- -- -- -- --
------ ----- ------- ----- ------- ---- ------- ----
Total investment securities
available for sale $12,687 3.94% $15,731 4.38% $ 5,389 4.31% $ 4,488 4.38%
======= ===== ======= ===== ======= ==== ======= ====
Investment securities held-to- maturity:
Asset-backed securities $ 5,231 4.37% $17,727 4.37% $14,938 4.35% $19,456 4.37%
Treasury bills 300 1.22% -- -- -- -- -- --
Other investments 34 6.57% 1,153 4.49% 2,766 3.13% -- --
------- ----- ------- ----- ------- ---- ------- ----
Total investment securities
held-to-maturity $ 5,565 4.21% $18,880 4.38% $17,704 4.16% $19,456 4.37%
======= ===== ======= ===== ======= ==== ======= ====
The Bank's investment policy provides that securities that will be held for
indefinite periods of time, including securities that will be used as part of
the Bank's asset/liability management strategy and that may be sold in response
to changes in interest rates, prepayments and similar factors, are classified as
available for sale and accounted for at fair value. Management's intent is to
hold securities reported at amortized cost to maturity. Certain of the Company's
securities are issued by private issuers (defined as an issuer which is not a
government or a government sponsored entity). The Company has no investment in
any one issuer that is greater than a 10% equity interest as of December 31,
2003. For further information regarding the Company's investment securities, see
Note 2 of Notes to Consolidated Financial Statements.
DEPOSITS AND OTHER SOURCES OF FUNDS
GENERAL. The funds needed by the Bank to make loans are primarily generated
by deposit accounts solicited from the communities surrounding its main office
and seven branches in the southern Maryland area. Consolidated total deposits
were $228 million as of December 31, 2003. The Bank uses borrowings from the
FHLB of Atlanta and other sources to supplement funding from deposits.
DEPOSITS. The Bank's deposit products include savings, money market, demand
deposit, IRA, SEP, Christmas clubs and time deposit accounts. Variations in
service charges, terms and interest rates are used to target specific markets.
Ancillary products and services for deposit customers include safe deposit
boxes, travelers checks, night depositories, automated clearinghouse
transactions, wire transfers, ATMs, and online and telephone banking. The Bank
is a member of JEANIE, Cirrus and STAR ATM networks. The Bank has occasionally
used deposit brokers to obtain funds. At year end 2003, no brokered deposits
were held.
13
The following table sets forth for the periods indicated the average
balances outstanding and average interest rates for each major category of
deposits.
2003 2002 2001
------------------------ ---------------------- ----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Savings $ 32,772 0.21% $ 23,334 0.86% $ 19,723 2.01%
Interest-bearing demand and money
market accounts 67,346 0.66% 73,668 0.47% 72,052 2.35%
Certificates of deposit 82,248 2.75% 70,885 4.10% 70,453 5.45%
----------- ----- ------- ----- ------- -----
Total interest-bearing deposits 182,366 1.57% 167,887 2.06% 162,228 3.65%
Noninterest-bearing demand deposits 30,277 21,631 13,691
----------- ------- -------
$212,643 1.35% $189,518 1.82% $175,919 3.37%
=========== ===== ======== ===== ======== =====
The following table indicates the amount of the Bank's certificates of
deposit and other time deposits of more than $100,000 by time remaining until
maturity as of December 31, 2003.
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
Three months or less.................................... $ 4,402
Three through six months................................ 1,112
Six through twelve months............................... 14,493
Over twelve months...................................... 6,862
-----------
Total............................................ $ 26,869
===========
BORROWINGS. Deposits are the primary source of funds for the Bank's lending
and investment activities and for its general business purposes. The Bank uses
advances from the FHLB of Atlanta to supplement its supply of lendable funds and
to meet deposit withdrawal requirements. Advances from the FHLB are secured by
the Bank's stock in the FHLB, a portion of the Bank's residential mortgage loans
and its eligible investments. Generally the Bank's ability to borrow from the
FHLB of Atlanta is limited by its available collateral and also by an overall
limitation of 35% of assets. Other short-term debt consists of notes payable to
the U.S. Treasury on Treasury, Tax and Loan accounts. Long-term borrowings
consist of adjustable-rate advances with rates based upon LIBOR, fixed-rate
advances and convertible advances. Information about borrowings for the years
indicated (which consisted almost entirely of FHLB advances) is as follows:
At or for the
Year Ended December 31,
------------------------------
2003 2002 2001
------ ------ ------
(Dollars in thousands)
Long term amounts outstanding at end of period $63,051 $48,170 $48,650
Weighted average rate on outstanding long-term 4.55% 4.99% 5.41%
Short-term borrowing outstanding at end of period 31,191 752 1,813
Weighted average rate on outstanding short-term 1.15% 0.89% 1.83%
Maximum outstanding short-term debt at any month end 40,000 6,500 15,725
Average outstanding short-term debt 7,568 680 6,213
Approximate average rate paid on short term debt 1.26% 1.04% 5.75%
14
For more information regarding the Bank's borrowings, see Note 8 of Notes
to Consolidated Financial Statements.
SUBSIDIARY ACTIVITIES
Under the Maryland Financial Institutions Code, commercial banks may invest
in service corporations and in other subsidiaries that offer the public a
financial, fiduciary or insurance service. In April 1997, the Bank formed a
wholly owned subsidiary, Community Mortgage Corporation of Tri-County, to offer
mortgage banking, brokerage, and other services to the public. This corporation
was inactive until 2001. At that time, the Bank transferred a property which was
acquired by deed in lieu of foreclosure to this subsidiary in order to complete
development of this parcel. In August 1999, the Bank formed a wholly owned
subsidiary, Tri-County Investment Corporation to hold and manage a portion of
the Bank's investment portfolio.
COMPETITION
The Bank faces strong competition in the attraction of deposits and in the
origination of loans. Its most direct competition for deposits and loans comes
from other banks, savings and loan associations, and federal and state credit
unions located in its primary market area. There are currently 15 FDIC-insured
depository institutions operating in the Tri-County area including subsidiaries
of several regional and super-regional bank holding companies. According to
statistics compiled by the FDIC, the Bank was ranked sixth in deposit market
share in the Tri-County area as of June 30, 2002, the latest date for which such
data is available. The Bank faces additional significant competition for
investors' funds from mutual funds, brokerage firms, and other financial
institutions.
The Bank competes for loans by providing competitive rates, flexibility of
terms, and service. It competes for deposits by offering depositors a wide
variety of account types, convenient office locations, and competitive rates.
Other services offered include tax-deferred retirement programs, brokerage
services, safe deposit boxes, and miscellaneous services. The Bank has used
direct mail, billboard and newspaper advertising to increase its market share of
deposits, loans and other services in its market area. It provides ongoing
training for its staff in an attempt to ensure high quality service.
SUPERVISION AND REGULATION
REGULATION OF THE COMPANY
GENERAL. The Company is a public company registered with the Securities and
Exchange Commission (the "SEC") and, as the sole shareholder of the Bank, it is
a bank holding company and registered as such with the Board of Governors of the
Federal Reserve System (the "FRB"). Bank holding companies are subject to
comprehensive regulation by the FRB under the Bank Holding Company Act of 1956,
as amended (the "BHCA"), and the regulations of the FRB. As a public company the
Company is required to file annual, quarterly and current reports with the SEC,
and as a bank holding company, the Company is required to file with the FRB
annual reports and such additional information as the FRB may require, and is
subject to regular examinations by the FRB. The FRB also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain FRB approval before: (i)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
15
Effective September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency of 1994 (the "Riegle-Neal Act") authorized the FRB to
approve an application of an adequately capitalized and adequately managed bank
holding company to acquire control of, or acquire all or substantially all of
the assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The FRB may not approve the acquisition of a bank that has not been
in existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Riegle-Neal Act also prohibits the FRB
from approving such an application if the applicant (and its depository
institution affiliates) controls or would control more than 10% of the insured
deposits in the United States or 30% or more of the deposits in the target
bank's home state or in any state in which the target bank maintains a branch.
The Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state which may be held or
controlled by a bank or bank holding company to the extent such limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% state-wide concentration limit
contained in the Riegle-Neal Act. Under Maryland law, a bank holding company is
prohibited from acquiring control of any bank if the bank holding company would
control more than 30% of the total deposits of all depository institutions in
the State of Maryland unless waived by the Commissioner of Financial Regulation.
Additionally, the federal banking agencies are authorized to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state, unless the home state of one of the banks
opted out of the Riegle-Neal Act by adopting a law after the date of enactment
of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. The State of Maryland did not pass such a law during this
period. Interstate acquisitions of branches will be permitted only if the law of
the state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution, mortgage company, finance company, credit card
company or factoring company; performing certain data processing operations;
providing certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing property
on a full-payout, non-operating basis; selling money orders, travelers' checks
and United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers.
Effective with the enactment of the Gramm-Leach-Bliley Act (the "G-L-B
Act") on November 12, 1999, bank holding companies whose financial institution
subsidiaries are well capitalized and well managed and have satisfactory
Community Reinvestment Act records can elect to become "financial holding
companies" which are permitted to engage in a broader range of financial
activities than are permitted to bank holding companies. Financial holding
companies are authorized to engage in, directly or indirectly, financial
activities. A financial activity is an activity that is: (i) financial in
nature; (ii) incidental to an activity that is financial in nature; or (iii)
complementary to a financial activity and that does not pose a safety and
soundness risk. The G-L-B Act includes a list of activities that are deemed to
be financial in nature. Other activities also may be decided by the FRB to be
financial in nature or incidental thereto if they meet specified criteria. A
financial holding company that intends to engage in a new activity to acquire a
company to engage in such an activity is required to give prior notice to the
FRB. If the activity is not either specified in the G-L-B Act as being a
financial activity or one that the FRB has determined by rule or regulation to
be financial in nature, the prior approval of the FRB is required.
The Maryland Financial Institutions Code prohibits a bank holding company
from acquiring more than 5% of any class of voting stock of a bank or bank
holding company without the approval of the Commissioner of Financial
Regulation, except as otherwise expressly permitted by federal law or in certain
other limited situations. The Maryland Financial Institutions Code additionally
prohibits any person from acquiring voting stock in a bank or
16
bank holding company without 60 days' prior notice to the Commissioner if such
acquisition will give the person control of 25% or more of the voting stock of
the bank or bank holding company or will affect the power to direct or to cause
the direction of the policy or management of the bank or bank holding company.
Any doubt whether the stock acquisition will affect the power to direct or cause
the direction of policy or management shall be resolved in favor of reporting to
the Commissioner. The Commissioner may deny approval of the acquisition if the
Commissioner determines it to be anti-competitive or to threaten the safety or
soundness of a banking institution. Voting stock acquired in violation of this
statute may not be voted for five years.
DIVIDENDS. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earning retention that is consistent with the company's capital needs,
asset quality and overall financial condition. The FRB also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB pursuant to FDICIA ("Federal Deposit Insurance
Corporation Improvement Act"), the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized".
STOCK REPURCHASES. Bank holding companies are required to give the FRB
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the their
consolidated retained earnings. The FRB may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, FRB order, or any
condition imposed by, or written agreement with, the FRB.
CAPITAL REQUIREMENTS. The FRB has established capital requirements, similar
to the capital requirements for state member banks, for bank holding companies
with consolidated assets of $150 million or more. As of December 31, 2003, the
Company's levels of consolidated regulatory capital exceeded the FRB's minimum
requirements.
SARBANES-OXLEY ACT OF 2002 AND RELATED REGULATIONS. On July 30, 2002, the
Sarbanes-Oxley Act of 2002 ("SOX") was signed into law. SOX contains provisions
addressing corporate and accounting fraud which both amended the Securities
Exchange Act of 1934, as amended (the "Act") and directed the SEC to promulgate
rules. SOX provided for the establishment of a new Public Company Accounting
Oversight Board ("PCAOB"), to enforce auditing, quality control and independence
standards for firms that audit public reporting companies and will be funded by
fees from all public reporting companies. It is unlawful for any person that is
not a registered public accounting firm ("RPAF") to audit a public reporting
company. Under the Act, a RPAF is prohibited from performing statutorily
mandated audit services for a company if such company's chief executive officer,
chief financial officer, comptroller, chief accounting officer or any person
serving in equivalent positions has been employed by such firm and participated
in the audit of such company during the one-year period preceding the audit
initiation date. The SEC has prescribed rules requiring inclusion of an internal
control report and assessment by management in the annual report to
shareholders. SOX requires the RPAF that issues the audit report to attest to
and report on management's assessment of the Company's internal controls. In
addition, SOX requires that each financial report required to be prepared in
accordance with (or reconciled to) generally accepted accounting principles and
filed with the SEC reflect all material correcting adjustments that are
identified by a RPAF in accordance with generally accepted accounting principles
and the rules and regulations of the SEC. SOX requires chief executive officers
and chief financial officers, or their equivalent, to certify to the accuracy of
periodic reports filed with the SEC, subject to civil and criminal penalties if
they knowingly or willfully violate this certification requirement.
SOX also increases the oversight and authority of audit committees of
publicly traded companies. SOX imposed higher standards for auditor independence
and restricts provisions of consulting services by auditing firms to companies
they audit. Any non-audit services (subject to a 5% de minimis exception) being
provided to an audit client require pre-approval by the Company's audit
committee members. Audit committee members must be independent and are barred
from accepting consulting, advisory or other compensatory fees from the issuer.
In
17
addition, all public reporting companies must disclose whether at least one
member of the committee is an audit committee "financial expert" (as such terms
is defined by the SEC rules) and if not, why not.
Due to SOX, longer prison terms will be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited in a fund for the benefit of harmed investors.
Although the Company anticipates it will incur additional expense in
complying with the provisions of the Act and the related rules, management does
not expect that such compliance will have a material impact on the Company's
financial condition or results of operations.
REGULATION OF THE BANK
GENERAL. The Bank is a Maryland commercial bank and its deposit accounts
are insured by the SAIF of the FDIC. The Bank is a member of the Federal Reserve
and FHLB Systems. The Bank is subject to supervision, examination and regulation
by Commissioner of Financial Regulation of the State of Maryland (the
"Commissioner") and the FRB and to Maryland and federal statutory and regulatory
provisions governing such matters as capital standards, mergers and
establishment of branch offices. The Bank is required to file reports with the
Commissioner and the FRB concerning its activities and financial condition and
will be required to obtain regulatory approvals prior to entering into certain
transactions, including mergers with, or acquisitions of, other depository
institutions.
As an institution with federally insured deposits, the Bank is subject to
various regulations promulgated by the FRB, including Regulation B (Equal Credit
Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund
Transfers), Regulation P (Privacy), Regulation W (Transactions Between Member
Banks and Their Affiliates), Regulation Z (Truth in Lending), Regulation CC
(Availability of Funds and Collection of Checks) and Regulation DD (Truth in
Savings).
The system of regulation and supervision applicable to the Bank establishes
a comprehensive framework for the operations of the Bank and is intended
primarily for the protection of the FDIC and the depositors of the Bank. Changes
in the regulatory framework could have a material effect on the Bank and its
respective operations that in turn, could have a material effect on the Company.
CAPITAL ADEQUACY. The FRB has established guidelines with respect to the
maintenance of appropriate levels of capital by bank holding companies and state
member banks, respectively. The regulations impose two sets of capital adequacy
requirements: minimum leverage rules, which require bank holding companies and
member banks to maintain a specified minimum ratio of capital to total assets,
and risk-based capital rules, which require the maintenance of specified minimum
ratios of capital to "risk-weighted" assets.
The regulations of the FRB require bank holding companies and state member
banks, respectively, to maintain a minimum leverage ratio of "Tier 1 capital"
(as defined in the risk-based capital guidelines discussed in the following
paragraphs) to total assets of 3.0%. Although setting a minimum 3.0% leverage
ratio, the capital regulations state that only the strongest bank holding
companies and banks, with composite examination ratings of 1 under the rating
system used by the federal bank regulators, would be permitted to operate at or
near such minimum level of capital. All other bank holding companies and banks
are expected to maintain a leverage ratio of at least 1% to 2% above the minimum
ratio, depending on the assessment of an individual organization's capital
adequacy by its primary regulator. Any bank or bank holding company experiencing
or anticipating significant growth would be expected to maintain capital well
above the minimum levels. In addition, the FRB has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
18
The risk-based capital rules of the FRB require bank holding companies and
state member banks, respectively, to maintain minimum regulatory capital levels
based upon a weighting of their assets and off-balance sheet obligations
according to risk. Risk-based capital is composed of two elements: Tier 1
capital and Tier 2 capital. Tier 1 capital consists primarily of common
stockholders' equity, certain perpetual preferred stock (which must be
noncumulative in the case of banks), and minority interests in the equity
accounts of consolidated subsidiaries; less all intangible assets, except for
certain servicing assets, purchased credit card relationships, deferred tax
assets and credit enhancing interest-only strips. Tier 2 capital elements
include, subject to certain limitations, the allowance for losses on loans and
leases; perpetual preferred stock that does not qualify as Tier 1 capital and
long-term preferred stock with an original maturity of at least 20 years from
issuance; hybrid capital instruments, including perpetual debt and mandatory
convertible securities; and subordinated debt and intermediate-term preferred
stock.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets. The risk-based capital regulations require all banks and
bank holding companies to maintain a minimum ratio of total capital (Tier 1
capital plus Tier 2 capital) to total risk-weighted assets of 8%, with at least
4% as Tier 1 capital. For the purpose of calculating these ratios: (i) Tier 2
capital is limited to no more than 100% of Tier 1 capital; and (ii) the
aggregate amount of certain types of Tier 2 capital is limited. In addition, the
risk-based capital regulations limit the allowance for loan losses includable as
capital to 1.25% of total risk-weighted assets.
FRB regulations and guidelines additionally specify that state member banks
with significant exposure to declines in the economic value of their capital due
to changes in interest rates may be required to maintain higher risk-based
capital ratios. The federal banking agencies, including the FRB, have proposed a
system for measuring and assessing the exposure of a bank's net economic value
to changes in interest rates. The federal banking agencies, including the FRB,
have stated their intention to propose a rule establishing an explicit capital
charge for interest rate risk based upon the level of a bank's measured interest
rate risk exposure after more experience has been gained with the proposed
measurement process. FRB regulations do not specifically take into account
interest rate risk in measuring the capital adequacy of bank holding companies.
The FRB has issued regulations which classify state member banks by capital
levels and which authorize the FRB to take various prompt corrective actions to
resolve the problems of any bank that fails to satisfy the capital standards.
Under such regulations, a well capitalized bank is one that is not subject to
any regulatory order or directive to meet any specific capital level and that
has or exceeds the following capital levels: a total risk-based capital ratio of
10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. An
adequately capitalized bank is one that does not qualify as well capitalized but
meets or exceeds the following capital requirements: a total risk-based capital
ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of
either (i) 4% or (ii) 3% if the bank has the highest composite examination
rating. A bank not meeting these criteria is treated as undercapitalized,
significantly undercapitalized, or critically undercapitalized depending on the
extent to which the bank's capital levels are below these standards. A state
member bank that falls within any of the three undercapitalized categories
established by the prompt corrective action regulation will be subject to severe
regulatory sanctions. As of December 31, 2003, the Bank was well capitalized as
defined by the FRB's regulations.
BRANCHING. Maryland law provides that, with the approval of the
Commissioner, Maryland banks may establish branches within the State of Maryland
without geographic restriction and may establish branches in other states by any
means permitted by the laws of such state or by federal law. The Riegle-Neal Act
authorizes the FRB to approve interstate branching de novo by state banks, only
in states which specifically allow for such branching. The Riegle-Neal Act also
required the appropriate federal banking agencies to prescribe regulations which
prohibit any out-of-state bank from using the interstate branching authority
primarily for the purpose of deposit production. These regulations include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to meet the credit needs of the
communities which they serve.
DIVIDEND LIMITATIONS. Pursuant to the Maryland Financial Institutions Code,
Maryland banks may only pay dividends from undivided profits or, with the prior
approval of the Commissioner, their surplus in excess of 100% of required
capital stock. The Maryland Financial Institutions Code further restricts the
payment of dividends
19
by prohibiting a Maryland bank from declaring a dividend on its shares of common
stock until its surplus fund equals the amount of required capital stock or, if
the surplus fund does not equal the amount of capital stock, in an amount in
excess of 90% of net earnings.
Without the approval of the FRB, a state member bank may not declare or pay
a dividend if the total of all dividends declared during the year exceeds its
net income during the current calendar year and retained net income for the
prior two years. The Bank is further prohibited from making a capital
distribution if it would not be adequately capitalized thereafter. In addition,
the Bank may not make a capital distribution that would reduce its net worth
below the amount required to maintain the liquidation account established for
the benefit of its depositors at the time of its conversion to stock form.
DEPOSIT INSURANCE. The Bank is required to pay semi-annual assessments
based on a percentage of its insured deposits to the FDIC for insurance of its
deposits by the Savings Association Insurance Fund ("SAIF"). Under the Federal
Deposit Insurance Act, the FDIC is required to set semi-annual assessments for
SAIF-insured institutions to maintain the designated reserve ratio of the SAIF
at 1.25% of estimated insured deposits or at a higher percentage of estimated
insured deposits that the FDIC determines to be justified for that year by
circumstances raising a significant risk of substantial future losses to the
SAIF. In the event that the SAIF should fail to meet its statutory reserve
ratio, the FDIC would be required to set semi-annual assessment rates for SAIF
members that are sufficient to increase the reserve ratio to 1.25% within one
year or in accordance with such other schedule that the FDIC adopts by
regulation to restore the reserve ratio in not more than 15 years.
Under the risk-based deposit insurance assessment system adopted by the
FDIC, the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations. Based
on the data reported to regulators for the date closest to the last day of the
fourth month preceding the semi-annual assessment period, institutions are
assigned to one of three capital groups -- "well capitalized, adequately
capitalized or undercapitalized." Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund. Under the current assessment
schedule, well capitalized banks with the best supervisory ratings are not
required to pay any premium for deposit insurance. All SAIF-insured banks,
however, are required to pay assessments to the FDIC to help fund interest
payments on certain bonds issued by the Financing Corporation, an agency
established by the federal government to finance takeovers of insolvent thrifts.
TRANSACTIONS WITH AFFILIATES. A state member bank or its subsidiaries may
not engage in "covered transactions" with any one affiliate in an amount greater
than 10% of such bank's capital stock and surplus, and for all such transactions
with all affiliates a state member bank is limited to an amount equal to 20% of
capital stock and surplus. All such transactions must also be on terms
substantially the same, or at least as favorable, to the bank or subsidiary as
those provided to a non-affiliate. The term "covered transaction" includes the
making of loans, purchase of assets, issuance of a guarantee and similar other
types of transactions. An affiliate of a state member bank is any company or
entity which controls or is under common control with the state member bank and,
for purposes of the aggregate limit on transactions with affiliates, any
subsidiary that would be deemed a financial subsidiary of a national bank. In a
holding company context, the parent holding company of a state member bank (such
as the Company) and any companies which are controlled by such parent holding
company are affiliates of the state member bank. The BHCA further prohibits a
depository institution from extending credit to or offering any other services,
or fixing or varying the consideration for such extension of credit or service,
on the condition that the customer obtain some additional service from the
institution or certain of its affiliates or not obtain services of a competitor
of the institution, subject to certain limited exceptions.
LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. Loans to
directors, executive officers and principal stockholders of a state member bank
must be made on substantially the same terms as those prevailing for comparable
transactions with persons who are not executive officers, directors, principal
stockholders or employees of the bank unless the loan is made pursuant to a
compensation or benefit plan that is widely available to employees and does not
favor insiders. Loans to any executive officer, director and principal
stockholder together with all other outstanding loans to such person and
affiliated interests generally may not exceed 15% of the bank's unimpaired
capital and surplus and all loans to such persons may not exceed the
institution's unimpaired capital and
20
unimpaired surplus. Loans to directors, executive officers and principal
stockholders, and their respective affiliates, in excess of the greater of
$25,000 or 5% of capital and surplus (up to $500,000) must be approved in
advance by a majority of the board of directors of the bank with any
"interested" director not participating in the voting. State member banks are
prohibited from paying the overdrafts of any of their executive officers or
directors unless payment is made pursuant to a written, pre-authorized
interest-bearing extension of credit plan that specifies a method of repayment
or transfer of funds from another account at the bank. In addition, loans to
executive officers may not be made on terms more favorable than those afforded
other borrowers and are restricted as to type, amount and terms of credit.
U.S.A. PATRIOT ACT. The Patriot Act is intended to strengthen U.S. law
enforcement's and the intelligence communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and financial transparency
laws and imposes various regulations including standards for verifying client
identification at account opening, 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.
PERSONNEL
As of December 31, 2003, the Bank had 94 full-time employees and 14
part-time employees. The employees are not represented by a collective
bargaining agreement. The Bank believes its employee relations are good.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
MICHAEL L. MIDDLETON (56 years old) is President and Chief Executive
Officer of the Company and the Bank. He joined the Bank in 1973 and served in
various management positions until 1979 when he became president of the Bank.
Mr. Middleton is a Certified Public Accountant and holds a Masters of Business
Administration. As President and Chief Executive Officer of the Bank, Mr.
Middleton is responsible for the overall operation of the Bank pursuant to the
policies and procedures established by the Board of Directors. Since January
1996, Mr. Middleton has served on the Board of Directors of the Federal Home
Loan Bank of Atlanta, and currently serves as its Chairman, and also serves as
its Board Representative to the Council of Federal Home Loan Banks. Mr.
Middleton also serves on the board of the Baltimore Branch of the Federal
Reserve Bank of Richmond.
C. MARIE BROWN (61 years old) has been employed with the Bank since 1972
and has served as Chief Operating Officer since 1999. Prior to her appointment
as Chief Operating Officer, Ms. Brown served as Senior Vice President of the
Bank. She is a supporter of the Handicapped and Retarded Citizens of Charles
County, of Zonta and serves on various administrative committees of the
Hughesville Baptist Church and the board of the Charles County Chapter of the
American Red Cross.
H. BEAMAN SMITH (58 years old) was the Treasurer of the Company in 1998 and
became Secretary-Treasurer in January 1999 and has been the president of
Accoware, a computer software company, since 1989. Prior to that time, Mr. Smith
was a majority owner of the Smith's Family Honey Company in Bryans Road,
Maryland. Mr. Smith is a Vice President of Fry Plumbing Company of Washington,
D.C., a Trustee of the Ferguson Foundation, a member of the Bryans Road Sports
Council and the Treasurer of the Moyaone Association.
GREGORY C. COCKERHAM (49 years old) joined the Bank in November 1988 and
has served as Chief Lending Officer since 1996. Prior to his appointment as
Senior Vice President, Mr. Cockerham served as Vice President of the Bank. Mr.
Cockerham has been in banking for 22 years. He is a Paul Harris Fellow with the
Rotary Club of Charles County and serves on various civic boards in the County.
WILLIAM J. PASENELLI (45 years old) joined the Bank as Chief Financial
Officer in April 2000. Prior to joining the Bank, Mr. Pasenelli had been Chief
Financial Officer of Acacia Federal Savings Bank, Annandale,
21
Virginia since 1987. Mr. Pasenelli is a member of the American Institute of
Certified Public Accountants, the DC Institute of Certified Public Accountants,
and other civic groups.
ITEM 2. PROPERTY
- ------------------
The following table sets forth the location of the Bank's offices, as well
as certain additional information relating to these offices as of December 31,
2003.
Year
Facility Leased Approximate
Office Commenced or Square
Location Operation Owned Footage
- --------- --------- ------ -----------
MAIN OFFICE
3035 Leonardtown Road 1974 Owned 16,500
Waldorf, Maryland
BRANCH OFFICES
22730 Three Notch Road 1992 Owned 2,500
Lexington Park, Maryland
25395 Point Lookout Rd. 1961 Owned 2,500
Leonardtown, Maryland
101 Drury Drive 2001 Owned 2,645
La Plata, Maryland
10321 Southern Md. Blvd. 1991 Leased 1,400
Dunkirk, Maryland
8010 Matthews Road 1996 Owned 2,500
Bryans Road, Maryland
20 St. Patrick's Drive 1998 Leased (Land) 2,840
Waldorf, Maryland Owned (Building)
30165 Three Notch Road 2001 Leased (Land) 2,500
Charlotte Hall, Maryland Owned (Building)
- ----------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Neither the Company, the Bank, nor company and any subsidiary is engaged in
any legal proceedings of a material nature at the present time. From time to
time the Bank is a party to legal proceedings in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2003.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SECURITY HOLDER
MATTERS SMALL BUSINESS
- --------------------------------------------------------------------------------
The information contained under the section captioned "Market and Dividend
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended December 31, 2003 (the "Annual Report") filed as Exhibit 13 hereto is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information contained under the section captioned "Selected Financial
Data" in the Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND FINANCIAL CONDITION AND RESULTS OF OPERATION
- --------------------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition" of the Annual Report is incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
Not applicable since the registrant qualified as a small business issuer.
ITEM 8. FINANCIAL STATEMENTS
- -----------------------------
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Independent Auditors' Report in the Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
As of the end of the period covered by this report, management of the
Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. It should be noted that the design of the
Company's disclosure controls and procedures is based in part upon certain
reasonable assumptions about the likelihood of future events, and there can be
no reasonable assurance that any design of disclosure controls and procedures
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote, but the Company's principal executive and
financial officers have concluded that the Company's disclosure controls and
procedures are, in fact, effective at a reasonable assurance level.
There have been no changes in the Company's internal control over financial
reporting (to the extent that elements of internal control over financial
reporting are subsumed within disclosure controls and procedures) identified in
connection with the evaluation described in the above paragraph that occurred
during the Company's last fiscal quarter, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
For information concerning the Company's directors, the identification of
the Audit Committee and the audit committee financial expert, the information
contained under the section captioned "Proposal I -- Election of Directors" in
the Company's definitive proxy statement for the Company's 2004 Annual Meeting
of Stockholders (the "Proxy Statement") is incorporated herein by reference. For
information concerning the executive officers of the Company, see "Item 1 -
Business - Executive Officers" under Part I of this Annual Report, which is
incorporated herein by reference.
For information regarding compliance with Section 16(a) of the Exchange
Act, the information contained under the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement is
incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer and Controller, as well as all of its officer directors and employees,
which is included herewith as Exhibit 14.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation, and "-- Directors'
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
(a) SECURITY OWNERSHIP OF CERTAIN OWNERS
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" and "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by reference to
the section captioned "Proposal I -- Election of Directors" in the Proxy
Statement.
(c) CHANGES IN CONTROL
Management of the Company knows of no arrangements, including any pledge by
any person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the registrant.
24
(d) EQUITY COMPENSATION PLANS
The Company has adopted a variety of compensation plans pursuant to which
equity may be awarded to participants including the Company's 1995 Stock Option
and Incentive Plan and the 1995 Stock Option Plan for Non-Employee Directors.
The Bank's Executive Incentive Compensation Plan provides for grants of options
under the 1995 Stock Option and Incentive Plan if certain performance criteria
are met. The following table sets forth certain information with respect to the
Company's Equity Compensation Plans as of December 31, 2003.
(a) (b) (c)
Number of securities
remaining available
for future issuance
Number of securities to be Weighted-average exercise under equity compensation
issued upon exercise price of outstanding plans (excluding securities
Plan Category options, warrants, and rights options, warrants and rights reflected in column (a)
- ------------- ----------------------------- ---------------------------- --------------------------
Equity compensation
plans approved by
security holders 92,396 $ 25.18 30,024
Equity compensation plans
not approved by security
holders (1) 10,400 $ 25.49 6,642
------- ----------------- ------
Total 102,796 $ 25.21 36,666 (2)
======= ================= ======
(1) Consists of the 1995 Stock Option Plan for Non-Employee Directors which
provides grants of non-incentive options to directors who are not employees
of the Company or its subsidiaries. Options are granted under the plan at
an exercise price equal to their fair market value at the date of grant and
have a term of ten years. Options are generally exercisable while an
optionee serves as a director or within one year thereafter.
(2) The 1995 Stock Option and Incentive Plan and 1995 Stock Option Plan for
Non-Employee Directors each provide for a proportionate adjustment to the
number of shares reserved thereunder in the event of a stock split, stock
dividend reclassification, recapitalization or similar event.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" and "Transactions
with the Company and the Bank" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Relationship with Independent Auditors" in the Proxy
Statement.
25
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements. The following consolidated financial statements
---------------------
are incorporated by reference from Item 7 hereof:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the Years Ended December 31,
2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which provision is
---------------------------------
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this
---------
Annual Report on Form 10-K and is also the Exhibit Index.
No. Description
--- -----------
3.1 Articles of Incorporation of Tri-County Financial Corporation*
3.2 Amended and Restated Bylaws of Tri-County Financial Corporation ****
10.1 + Tri-County Financial Corporation 1995 Stock Option and Incentive
Plan, as amended **
10.2 + Tri-County Financial Corporation 1995 Stock Option Plan for
Non-Employee Directors, as amended ***
10.3 + Employment Agreements with C. Marie Brown, as amended, and Gregory
C. Cockerham ****
10.4 + Restated Employment Agreement with Michael L. Middleton.
10.5 + Guaranty Agreements with Michael L. Middleton, C. Marie Brown and
Gregory C. Cockerham **
10.6 + Executive Incentive Compensation Plan **
10.7 + Executive Compensation Plan 2003 Amendment
10.8 + Employment Agreement with William J. Pasenelli **
10.9 + Retirement Plan for Directors **
10.10+ Split Dollar Agreements with Michael L. Middleton and C. Marie
Brown **
10.11+ Guaranty Agreement with William J. Pasenelli *****
10.12+ Split Dollar Agreement with William J. Pasenelli *****
10.13+ Salary Continuation Agreement with Michael L. Middleton
10.14+ Salary Continuation Agreement with C. Marie Brown
10.15+ Salary Continuation Agreement with Gregory C. Cockerham
10.16+ Salary Continuation Agreement with William J. Pasenelli
13 Annual Report to Stockholders for fiscal year ended December 31,
2003
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of Stegman & Company
31.1 Rule 13a-14a Certification of Chief Executive Officer
31.2 Rule 13a-14a Certification of Chief Financial Officer
32 Certification pursuant to 18 U.S.C. Section 1350
-------------------
26
+ Management contract or compensatory plan required to be filed as an
exhibit pursuant to Item 14(c).
* Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (No. 33-31287).
** Incorporated by reference to the Registrant's Form 10-K for the
fiscal year ended December 31, 2000.
*** Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (File No. 333-70800).
**** Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998
***** Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2001
(b) REPORTS ON FORM 8-K. No reports on Form 8-K have been filed
--------------------
during the last quarter of the fiscal year covered by this
report.
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
---------
either filed as part of this Annual Report on Form 10-K or
incorporated by reference herein.
(d) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT.
-----------------------------------------------------------------
There are no other financial statements and financial statement
schedules which were excluded from the Annual Report pursuant to
Rule 14a-3(b)(1) which are required to be included herein.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRI-COUNTY FINANCIAL CORPORATION
Date: March 22, 2004 By: /s/ Michael L. Middleton
------------------------------------------
Michael L. Middleton
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Michael L. Middleton By: /s/ William J. Pasenelli
------------------------------------- ----------------------------
Michael L. Middleton William J. Pasenelli
(Director, President and Chief (Chief Financial and
Executive Officer) Accounting Officer)
Date: March 22, 2004 Date: March 22, 2004
By: /s/ C. Marie Brown By: /s/ Herbert N. Redmond, Jr.
------------------------------------- ---------------------------
C. Marie Brown Herbert N. Redmond, Jr.
(Director and Chief Operating Officer) (Director)
Date: March 22, 2004 Date: March 22, 2004
By: /s/ H. Beaman Smith By: /s/ A. Joseph Slater
------------------------------------- ---------------------------
H. Beaman Smith A. Joseph Slater
(Director and Secretary/Treasurer) (Director)
Date: March 22, 2004 Date: March 22, 2004
By: /s/ Louis P. Jenkins, Jr. By: /s/ James R. Shepard
------------------------------------- ----------------------------
Louis P. Jenkins, Jr. James R. Shepard
(Director) (Director)
Date: March 22, 2004 Date: March 22, 2004