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TABLE OF CONTENTS

Financial Summary ...................................................................................... 2-3 Letter to Shareholders ............................................................................. 4-5 Board of Directors and Executive Officers ...................................................... 6 FDIC Insurance and CDARS .............................................................................. 7 Product Innovation .......................................................................................... 8

INDEPENDENT AUDITOR’S REPORT ........................................................... 11-29

Corporate Information ...................................................................................... 30 Locations ......................................................................................................... 31

11


FINANCIAL SUMMARY SUMMARY

Stated in thousands except per share and ratio data.

Total Risk Based Capital

20.0%

Book Value Per Share

$15.00

15.0%

$12.50

"Well Capitalized" = 10%

10.0%

$10.00

5.0%

$7.50

0.0%

$5.00

04

05

06

07

04

08

Total

06

07

08

Excluding�Accumulated�Comprehensive�Income

Dividends Declared Per Common Share

Total Net Revenue

Total Net Revenue

$15,000

05

$0.30

$14,000

$0.25

$13,000

$0.20

$12,000

$0.15

Dividends Declared Per Common Share

$0.10

$11,000 04

05

06

07

04

08

Total Non-Maturity Deposits Total Non-Maturity Deposits

$160,000

$375,000

$140,000

$350,000

$130,000

$325,000

06

07

08

Total Assets Total Assets

$400,000

$150,000

05

$300,000

$120,000 04

05

06

07

04

08

2

05

06

07

08


FINANCIAL SUMMARY FINANCIAL SUMMARY 5-YEAR SUMMARY OF CONSOLIDATED FINANCIAL HIGHLIGHTS Stated in thousands except per share, shares outstanding, and ratio data.

3 30


LETTER TO SHAREHOLDERS

Dear Shareholder: Whew!—we’re glad 2008 is over. It was certainly an interesting and tumultuous year to be bankers. Nevertheless, we are grateful that Town and Country Financial Corporation is a safe and strong banking organization and that we were still profitable in a year where so many economic factors were beyond our control. Many community banks like ours had nothing to do with the practices and excesses that caused some of our industry’s problems. Yet, we bore more than our fair share of the fallout. Misguided “mark-to-market” accounting rules and the federal government’s conservatorship of Fannie Mae and Freddie Mac had a significant impact on banks like Town & Country even though we were never involved in subprime lending. With this as the backdrop, our recorded net income was $113 thousand in 2008. However, when excluding certain nonrecurring items such as mark-to-market and other accounting adjustments, our core net income was actually $936 thousand. This compares to the core net income of $951 thousand that we reported to you last year. The 5-year summary on the Net Interest Margin previous page illustrates our financial results on a pro-forma 3.25% basis so that you can see the year over year comparisons exclusive of certain non-recurring items. 3.00%

Despite the difficult economic environment, we were able to 2.75% move our company forward on several fronts during 2008. Most importantly, after some years of flat or declining revenue, 2.50% we were able to grow our net revenue in 2008 by $0.9 million, or 6.9%, over 2007 levels. We have improved our net interest 2.25% margin—which represents our primary revenue source—from 04 05 06 a low of 2.74% in 2006 to 2.88% in 2007 and 3.00% in 2008. We also increased our mortgage income from $687 thousand in 2007 to over $1 million in 2008. This 52% increase was driven by better pricing practices in addition to a 44% increase in volume – accomplished despite a difficult home purchase market. We are also happy to report that our balance sheet and capital position remain strong. Our consolidated risk-based capital ratio was 15.4% at the end of 2008 and each of our banks is designated as “well-capitalized” according to regulatory standards. We did not participate in any subprime lending programs nor do we hold subprime mortgage assets on our balance sheet. Our allowance for loan losses was 1.39% of total loans, excluding loans held for sale, at December 31, 2008 as compared to 1.34% at the prior year-end. Net charge-offs were 0.14% for 2008 as compared to 0.06% for 2007. Our asset quality metrics are generally better than national and local peer banks. Total assets at December 31, 2008 were $374.6 million compared to $367.2 million at the end of 2007. Total loans excluding held for sale decreased 4.9% to $220.1 million from $231.5 million as a result of weak loan demand. Total deposits increased 3% to $300.1 million, with non-time “core” deposits increasing over $15 million or 10.8%. Total stockholders’ equity ended the year at $28.6 million, down 13.1% mostly due to changes in unrealized gains and mark-to-market accounting. During 2008, we also accomplished several other initiatives: we opened a commercial loan production office in Decatur and originated nearly $9 million in new credit relationships; we completed a major remodel of our MacArthur Boulevard location in Springfield; we launched several new products and raised over $11 million in new core deposits through our High Yield Investment Account; we implemented a more effective retail sales process and significantly deepened existing retail relationships and products per household; we discontinued our third party insurance agency to reduce net overhead in the future; and we made additional investments and improvements to our operations department and compliance program. 4

07

08


LETTER TO SHAREHOLDERS

As you can see from our financial results, our non-interest expenses were higher in 2008 as a result of significant investments made in people and infrastructure to improve our Company’s long-term growth prospects. However, we tempered these investments during the second half when it became apparent that the economic environment might get worse before it gets better. Going forward, our goal is to produce revenue growth at twice the pace of expense growth in order to increase net profits to an acceptable level. We are not satisfied with the profitability of our Company, and we are working diligently to improve our long-term revenue while also controlling the growth in our expenses. The business atmosphere in 2009 will continue to be a challenge. We are forecasting significant increases in FDIC insurance assessments, as healthy institutions like Town & Country are asked to pay more into the deposit insurance fund. We are also guarded in our management of asset quality both in loans and certain types of investments that are more vulnerable in this economic environment.

We believe community banks like ours are now uniquely positioned to take advantage of new growth opportunities.

There is a silver lining in all of the bad news about the impacts to our industry and our Company from the economic and real estate crises: we believe community banks like ours are now uniquely positioned to take advantage of new growth opportunities. For instance, many of the crazy lending practices have collapsed and traditional bank lending products are gaining market share. There is virtually no market for subprime lending so a resurgence in FHA and VA lending products is taking place. We have added resources to take advantage of the new market realities for prudent mortgage lending. Also, larger regional and money center banks are becoming more difficult to deal with by imposing “one size fits all” rules. We are increasingly able to attract creditworthy businesses and consumers away from larger institutions simply by providing competitive products delivered with good service by capable banking professionals.

We want to thank you—our valued shareholders—for your continued confidence and investment in our Company. We also want to thank our customers for their confidence in our products and services and the high-touch way in which we deliver them. We encourage you to tell your friends the Town & Country story—that they too can feel confident banking with professionals who live in their neighborhoods and who keep their best interests at the forefront. We would especially like to thank our employees for their hard work and dedication. Significant efforts have been made to improve our Company and we are very optimistic about our long-term growth Thank you for your support, prospects based on the team of professionals assembled at Town and Country Financial Corporation. We are glad to be a community bank.

Micah R. Bartlett President and COO

5

David E. Kirschner Chairman and CEO


BOARDOF OF DIRECTORS DIRECTORS AND EXECUTIVE BOARD EXECUTIVEOFFICERS OFFICERS

BOARD OF DIRECTORS David E. Kirschner 1,2,3,4,5

John S. Cobb

Micah R. Bartlett

Louis H. Dixon

Chairman & CEO Town and Country Financial Corporation 1,2,3,4,5

President & COO Town and Country Financial Corporation

John E. Staudt

1,2,3,4,5

Vice Chairman Town and Country Financial Corporation

1,3

Attorney Samuels, Miller, Schroeder, Jackson & Fly 1,2,5

Engineer & Senior Vice President Crawford, Murphy & Tilly, Inc.

Mark O. Roberts, Jr. 1,4

President & Chairman of the Board Standard Mutual Insurance Company

Dewey R. Yaeger 1,2,5 Retired Bank President Union Bancorp

Robert L. Evans 1,3

Retired Owner Evans Construction Company

EXECUTIVE OFFICERS David E. Kirschner

Brian K. Ash

Thomas M. Gallagher

Micah R. Bartlett

Nancy J. Bahre

Michael J.A. Shaw

John E. Staudt

John W. Clark

Barbara L. Weatherford

Larry D. Anderson

Dana M. Dow

KEY: 1 Town and Country Financial Corporation 2 Town & Country Bank of Springfield 3 Town & Country Bank 4 Logan County Bank 5 Town & Country Banc Mortgage Services, Inc.

Chairman & CEO 1

President & COO 1 Chairman, President & CEO 2, 3 Vice Chairman 1

Executive Vice President 3

Chairman, President & CEO 4 Senior Vice President & CFO 1

Senior Vice President - Retail Banking 2 Chairman, President & CEO 5

Vice President - Private Client Group 2 Executive Vice President 2

Vice President - Human Resources 1

SPECIAL THANK YOU TO MIKE HOUSTON In January, J. Michael Houston announced his partial-retirement from Town & Country Bank of Springfield where he had served as Chairman, President and CEO since May 2005. He is now serving in a new role as Chairman Emeritus and Director of Business Development. We are extremely grateful for Mr. Houston’s service to the Company. Based on his diverse experience as a small business owner, mayor, and banker in a large financial services organization, he was instrumental in moving Town & Country Bank of Springfield forward by instilling a culture of professionalism and high service expectations. We are also honored that he will remain affiliated with the Company and continue to be active in business development and community activities which are the lifeblood of a community bank.

6


FDIC INSURANCE AND CDARS

NEW FDIC STANDARDS On October 3, 2008, FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009. The FDIC provides separate coverage for deposits held in different account ownership categories. The coverage limits shown in the chart below refer to the total of all deposits that an accountholder has in the same ownership categories at each FDIC-insured bank. The chart shows only the most common ownership categories that apply to individual and family deposits, and assumes that all FDIC requirements are met. These deposit insurance coverage limits refer to the total of all deposits that an accountholder (or accountholders) has at each FDIC-insured Bank. Single Accounts (one person) Joint Accounts (two or more persons) IRAs and certain other retirement accounts Trust Accounts

$250,000 per owner $250,000 per co-owner $250,000 per owner $250,000 per owner per beneficiary subject to specific limitations and requirements

FDIC TEMPORARY LIQUIDITY GUARANTEE PROGRAM Our institution has elected to participate in the FDIC’s Transaction Account Guarantee Program. Under this program, through December 31, 2009, all non-interest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.

CDARS With CDARS, you can access FDIC protection on multi-million dollar CD investments through us. There are few guarantees in life – FDIC insurance is one of them. CDARS can be a valuable cash management or longer-term investment tool for you. Why CDARS? It’s one-stop shopping. With help from CDARS, you can access: Safety – Your money can access multi-million dollar FDIC insurance coverage. Convenience – You work directly with us. You earn one interest rate, receive one monthly statement, and receive one year-end tax form. Community Investment – The full value of your money can support lending opportunities in your local community. CD-Level Rates – Your money earns CD-level returns which may compare favorably with other investment alternatives, including Treasuries, corporate sweep accounts, and money market funds.

7


PRODUCT INNOVATION

During 2008, Town & Country continued its tradition of product innovation.

8


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10


Town and Country Financial Corporation Accountants’ Report and Consolidated Financial Statements December 31, 2008 and 2007

9

11


Townnand Corporation Tow andCountry Countr Financial y Fi nancial Corporation December 31, 2008 and 2007 Contents Independent Accountants’ Report......................................................................................................................................... ...................................................................................................................................... 13 Consolidated Financial Consolidated Financial Statements Statements Balance ...................................................................................................................................................................14 Balance Sheets Sheets.............................................................................................................................................................. Statements ......................................................................................................................................................... Statementsof ofIncome Income ................................................................................................................................................... 15 Statements ockholders’ Equ ity .................................................................................................................................... Statementsof ofSt Stockholders’ Equity ............................................................................................................................ 16 Statements ..................................................................................................................................................17 Statementsof ofCash CashFlows Flows............................................................................................................................................ Notes ...................................................................................................................................... Notes to toFinancial FinancialStatements Statements ................................................................................................................................ 18-29

10

12


13


Town and Country Financial Corporation Consolidated Balance Sheets December 31, 2008 and 2007 Assets 2008 $

Cash and due from banks Interest-bearing demand deposits Federal funds sold

6,035,183 2,743,131 1,725,000

2007 $

6,888,327 1,539,218 9,650,000

10,503,314

18,077,545

111,777,694

92,326,935

Held-to-maturity securities

1,659,125

1,837,654

Loans held for sale

6,940,207

1,862,333

220,106,928

231,528,779

10,116,916

9,372,428

2,132,456

2,132,456

968,622

Cash surrender value of life insurance

4,459,906

4,315,383

Mortgage servicing rights, net of valuation allowance of $320,419 at December 31, 2008

1,855,623

2,197,748

Other

4,079,124

3,520,747

Cash and cash equivalents Available-for-sale securities

Loans, net of allowance for loan losses of $3,102,057 and $3,153,862 at December 31, 2008 and 2007 Premises and equipment, net Federal Reserve and Federal Home Loan Bank stock Deferred income taxes

$

Total assets

374,599,915

$

367,172,008

Liabilities and Stockholders’ Equity 2008

Liabilities Deposits Demand Savings, NOW and money market Time Brokered time deposits Total deposits

2007

$

34,647,831 123,992,326 140,530,496 994,326

$

31,676,753 111,535,682 147,312,671 998,318

$

300,164,979

$

291,523,424

30,650,000 11,856,000 518,215 — 2,798,318

Federal Home Loan Bank advances Junior subordinated debt owed to unconsolidated parties U.S Treasury demand note Deferred income taxes Other liabilities $

Total liabilities Stockholders’ Equity Common stock, no par value; authorized 5,000,000 shares; issued – 2,983,608 shares Additional paid-in capital Retained earnings Accumulated other comprehensive income

$

1,657,560 9,935,098 17,367,547 788,708 $

Treasury stock, at cost Common; 2008 – 190,904 shares, 2007 – 151,139 shares

345,987,512

25,522,600 11,856,000 272,747 1,818,270 3,234,434

29,748,913

334,227,475 1,657,560 9,935,098 17,820,537 4,272,290

$

1,136,510

33,685,485 740,952

Total stockholders’ equity

$

28,612,403

$

32,944,533

Total liabilities and stockholders’ equity

$

374,599,915

$

367,172,008

See Notes to Consolidated Financial Statements 12

14


Town and Country Financial Corporation Consolidated Statements of Income Years Ended December 31, 2008 and 2007 2008

Interest and Dividend Income Loans Securities Taxable Tax-exempt Other Federal funds sold Dividends on Federal Home Loan and Federal Reserve Bank stock Deposits with financial institutions

$

14,317,499

2007 $

3,092,790 983,377 671,182 181,327 18,243 130,479 $

Total interest and dividend income Interest Expense Deposits Other borrowings

19,394,897

1,981,021 1,082,413 682,917 475,418 58,659 82,509 $

7,947,005 1,967,358 $

Total interest expense Net Interest Income Provision for Loan Losses Net Interest Income After Provision for Loan Losses

$

Noninterest Income Fiduciary activities Customer service fees Other service charges and fees Realized gains on sales of available-for-sale securities Gains on loan sales Loan servicing income Fees on loans sold Other

9,914,363

$

$

$

11,928,392

9,480,534

8,876,935

281,000

341,000

9,199,534

$

5,156,768

7,316,291 1,060,751 512,928 543,685 320,419 1,874,691 3,457,883

8,535,935 173,632 1,111,888 809,064 4,293,376 1,050,871 753,857 187,456 417,747

$

2008

Noninterest Expense Salaries and employee benefits Net occupancy expense Equipment expense Amortization of mortgage servicing rights Loss on impairment of mortgage servicing rights Loss on other-than-temporary impairment of securities Other

20,805,327 9,465,660 2,462,732

158,843 1,261,980 801,795 803,965 830,147 738,714 216,842 344,482

Total noninterest income

16,442,390

8,797,891 2007

$

7,744,762 994,283 547,202 522,385 — 50,000 3,362,588

15,086,648

13,221,220

Income (Loss) Before Income Taxes

(730,346)

4,112,606

Provision (Credit) for Income Taxes

(843,400)

992,500

Total noninterest expense

Net Income

$

113,054

$

3,120,106

Basic Earnings Per Share

$

0.04

$

1.10

Weighted Average Shares Outstanding

2,828,070

See Notes to Consolidated Financial Statements

13

15

2,836,460


Town and Country Financial Corporation Consolidated Statements of Stockholders’ Equity December 31, 2008 and 2007 Additional Paid-in Capital

Common Stock Amount Shares Issued Balance, January 1, 2007 Comprehensive loss Net income Change in unrealized appreciation on available-forsale securities, net of taxes

2,983,608

$

1,657,560

$

Accumulated Other Comprehensive Income

Retained Earnings

9,935,098

$

15,493,522 $

11,445,124

Treasury Stock $

Total

(740,952)

$

3,120,106

3,120,106

(7,172,834)

(7,172,834)

Total comprehensive loss Dividends on common stock, $0.28 per share Balance, December 31, 2007 Comprehensive loss Net income Change in unrealized appreciation on available-forsale securities, net of taxes

37,790,352

(4,052,728) —

(793,091)

(793,091)

2,983,608

1,657,560

9,935,098

17,820,537

4,272,290

(740,952)

32,944,533

113,054

113,054

(3,483,582)

(3,483,582)

Total comprehensive loss

(3,370,528)

Dividends on common stock, $0.20 per share

(566,044)

(566,044)

Purchase of treasury stock (39,765 shares)

(395,558)

(395,558)

788,708

$ (1,136,510)

Balance, December 31, 2008

2,983,608

$

1,657,560

$

See Notes to Consolidated Financial Statements

14

16

9,935,098

$

17,367,547 $

$

28,612,403


Town and Country Financial Corporation Consolidated Statements of Cash Flows December 31, 2008 and 2007

Operating Activities Net income Items not requiring (providing) cash Depreciation Provision for loan losses Amortization of premiums and discounts on securities Amortization of loan-servicing rights Loss on impaired mortgage servicing rights Deferred income taxes Net realized gains on available-forsale securities Loss on impairment of securities Gains on loan sales Net loss on foreclosed assets Amortization of intangibles Increase in cash surrender value of life insurance Changes in Other assets Other liabilities Loans originated for sale Proceeds from sales of loans originated for sale Net cash used in operating activities Investing Activities Purchases of available-for-sale securities Proceeds from maturities of available-forsale securities Proceeds from the sales of available-forsale securities Purchases of held-to-maturity securities Proceeds from maturities of held-tomaturity securities Net change in loans Purchase of premises and equipment Proceeds from the sale of foreclosed assets Net cash provided by (used in) investing activities

2008 $

113,054 $

2007

Financing Activities Net increase in demand deposits, money market, NOW and savings accounts Net decrease in certificates of deposit Net increase (decrease) in short-term borrowings Proceeds from issuance of subordinated debt Repayment of subordinated debt Proceeds from Federal Home Loan Bank advance Repayment of Federal Home Loan Bank advances Purchase of treasury stock Dividends paid

3,120,106

709,347 281,000

790,543 341,000

34,600 543,685

32,276 522,385

320,419 (582,605)

— (12,764)

(803,965) 1,874,691 (830,147) 16,038 39,288

(4,293,376) 50,000 (1,050,871) 35,730 39,288

(144,523)

(118,033)

(370,202) (436,116) (67,090,969)

465,204 253,639 (46,808,078)

62,321,263

2008

$

15,427,722 (6,786,167)

2007

$

1,766,721 (4,615,231)

245,468

(2,175,000)

— —

7,500,000 (10,091,000)

9,900,000

8,046,843

(4,772,600) (395,558) (566,044)

(10,134,321) — (793,091)

Net cash provided by (used in) financing activities

13,052,821

(10,495,079)

Increase (Decrease) in Cash and Cash Equivalents

(7,574,231)

8,054,958

45,452,511

Cash and Cash Equivalents, Beginning of Year

18,077,545

10,022,587

(4,005,142)

(1,180,440)

Cash and Cash Equivalents, End of Year

(57,968,467)

(30,858,241)

27,363,158

22,164,164

4,363,884 —

5,295,380 (155,630)

176,000 10,790,266 (1,453,835)

1,149,000 22,381,785 (429,681)

107,084

183,700

(16,621,910)

19,730,477

$

10,503,314

$

18,077,545

Interest paid

$

10,660,866

$

11,870,639

Income taxes paid (net of refunds)

$

766,434

$

1,995,091

Real estate acquired in settlement of loans

$

350,585

$

832,498

Supplemental Cash Flows Information

See Notes to Consolidated Financial Statements

15

17


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 1: Nature of Operations and Summary of Significant Accounting Policies Securities (continued)

Nature of Operations Town and Country Financial Corporation (“Company”) is a multi-bank holding company which through its subsidiaries provides a full range of banking and financial services to individual and corporate customers in Central Illinois. The Company is subject to competition from other financial institutions. The Company and its bank subsidiaries are subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

Held-to-maturity securities, which include any security for which the Company has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.

Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Town & Country Bank of Springfield and its wholly-owned subsidiary Town & Country Banc Mortgage Services, Inc., Logan County Bank, Town & Country Bank, Haley, LLC, and Town & Country Insurance Services, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.

Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Loans

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on non-accrual status at ninety days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, other-than-temporary impairment of investments, valuation of mortgage servicing rights, and Federal Home Loan Bank (FHLB) stock impairment. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties. In connection with the determination of other-than-temporary impairment of investments, management obtains financial information of the issuer and performs an analysis, as assisted by an independent consultant, of the abilities of the issuer to meet the obligations. In connection with mortgage servicing rights, management obtains an independent appraisal of the fair value of the servicing rights. In connection with the determination of FHLB stock impairment, management performs an analysis based on the FHLB’s current activities.

Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2008 and 2007, cash equivalents consisted primarily of noninterest bearing deposits, interest bearing deposits and federal funds sold.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

The financial institutions holding the Company’s cash accounts are participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Effective October 3, 2008, the FDIC’s insurance limits increased to $250,000. The increase in federally insured limits is currently set to expire December 31, 2009. At December 31, 2008, the Company’s interest-bearing cash accounts exceeded federally insured limits by approximately $338,590. Securities Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income. 16

18


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 1: Nature of Operations and Summary of Significant Accounting Policies (continued) Treasury Stock

Allowance for Loan Losses (continued)

Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.

Groups of loans with similar risk characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

Trust Assets and Fees

Premises and Equipment

Assets held in fiduciary or agency capacities are not included in the consolidated balance sheet, since such items are not assets of the Company.

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line and accelerated depreciation methods over the estimated useful lives of the assets.

Fees from trust activities are recorded on the cash basis, for the period in which the service is provided. Fees are a function of the market value of assets managed and administered, the volume of transactions and fees for other services rendered, as set forth in the underlying trust agreements.

Federal Reserve and Federal Home Loan Bank Stock

Income Taxes

Federal Reserve and Federal Home Loan Bank (FHLB) stock are required investments for institutions that are members of the Federal Reserve and FHLB systems. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.

Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. The Company files consolidated income tax returns with its subsidiaries.

The Company owns $1,828,406 of Federal Home Loan Bank (FHLB) stock as of December 31, 2008. During the third quarter of 2007, the FHLB of Chicago received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board. The FHLB will continue to provide liquidity and funding through advances and purchase loans through the MPF program. With regard to dividends, the FHLB will continue to assess their dividend capacity each quarter and make appropriate request for approval. The FHLB did not pay a dividend during 2008, and the stock is considered a non-earning asset as of December 31, 2008 and 2007. Management performed an analysis and deemed the investment in FHLB stock was not other than temporarily impaired.

In accordance with Financial Accounting Standards Board (FASB) Staff Position No. FIN 48-3, the Company has elected to defer the effective date of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, until its fiscal year ending December 31, 2009. The Company has continued to account for any uncertain tax positions in accordance with literature that was authoritative immediately prior to the effective date of FIN 48, such as FASB Statement No. 109, Accounting for Income Taxes, and FASB Statement No. 5, Accounting for Contingencies.

Foreclosed Assets Held for Sale

Earnings Per Share

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

Earnings per share have been computed based upon the weighted-average common shares outstanding during each year. Reclassifications Certain reclassifications have been made to the 2007 financial statements to conform to the 2008 financial statement presentation. These reclassifications had no effect on net income.

Intangible Assets Intangible assets are being amortized on the straight-line basis over a period of 15 years. Such assets are periodically evaluated as to the recoverability of their carrying value.

Note 2: Restriction on Cash and Due From Banks The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank and MoneyGram. The reserve required at December 31, 2008 and 2007, was $480,566 and $3,234,000, respectively.

Mortgage Servicing Rights Mortgage servicing rights on originated loans that have been sold are initially recorded at fair value. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. Impairment of mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic currently used for stratification is type of loan. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

17

19


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 3: Securities The Company held 230,361 and 282,861 shares of SLMA stock with a carrying value of $2,050,213 and $5,696,821 at December 31, 2008 and 2007, respectively. During 2008 and 2007, the Company sold 52,500 and 75,000 shares of SLMA stock resulting in a gain of $758,255 and $4,293,376, respectively.

The amortized cost and approximate fair values of securities are as follows: Amortized Cost Available-for-sale Securities: December 31, 2008: U.S. Government agencies Mortgage-backed securities State and political subdivisions Equity securities Other securities

Gross Unrealized Gains

Gross Unrealized Approximate Losses Fair Value

61,744,125

1,461,082

(1,190)

63,204,017

Available-for-sale other securities consist of investments in corporate bonds and pooled trust preferred securities (PreTSLs). During 2008, the Company recorded an other-than-temporary impairment on one of the PreTSLs of $518,961. As of December 31, 2008, the Company’s investment in PreTSLs was $10,117,278. The PreTSLs had an unrealized loss of $3,199,193 and a market value of $6,918,085 as of December 31, 2008. Management performed an analysis, which included assistance by an independent valuation specialist, and deemed the remaining balance of the PreTSLs were not other than temporarily impaired as of December 31, 2008.

17,594,553 135,121 12,564,507

415,688 2,051,747 69,243

(104,522) (82,779) (3,247,030)

17,905,719 2,104,089 9,386,720

The PreTSL included in held-to-maturity securities was also reviewed by management. The unrealized loss of $170,344 was deemed not other than temporarily impaired as of December 31, 2008.

$ 18,444,333 $

732,816

— $ 19,177,149

$110,482,639 $ 4,730,576 $(3,435,521) $111,777,694 December 31, 2007: U.S. government agencies Mortgage-backed securities State and political subdivisions Equity securities Other securities

$ 19,313,112 $

190,293 $

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(21,788) $ 19,481,617

32,144,522

187,377

(115,040)

32,216,859

20,401,953 1,511,554 11,972,876

819,382 6,346,116 —

— (22,400) (401,022)

21,221,335 7,835,270 11,571,854

Available-for-sale Amortized Fair Cost Value

$ 85,344,017 $ 7,543,168 $ (560,250) $ 92,326,935 Held-to-maturity Securities: December 31, 2008: State and political subdivisions $ 1,185,870 $ Pooled trust preferred security 473,255 $ 1,659,125 $ December 31, 2007: State and political subdivisions Pooled trust preferred security

$

1,364,610 $ 473,044

$ 1,837,654 $

26,628 $ —

(170,344)

Within one year

$ 1,100,208 $

1,128,170 $

145,781 $

148,046

One to five years

7,404,419

7,713,295

396,589

408,390

Five to ten years

20,240,271

20,901,491

479,000

481,193

After ten years

19,858,495

16,726,632

637,755

463,152

48,603,393

46,469,588

1,659,125

1,500,781

61,744,125

63,204,017

135,121

2,104,089

Mortgage-backed securities

(14,628) $ 1,197,870

Equity securities

302,911

Held-to-maturity Amortized Fair Cost Value

26,628 $ (184,972) $ 1,500,781

Totals

10,333 $

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $47,546,000 at December 31, 2008, and $35,288,000 at December 31, 2007.

14,289 24,622 $

(51,413) $ 1,323,530 —

487,333

$110,482,639 $ 111,777,694 $ 1,659,125 $ 1,500,781

Gross gains of $803,965 and $4,293,376 resulting from sales of available-for-sale securities were realized for 2008 and 2007, respectively.

(51,413) $ 1,810,863

Available-for-sale equity securities consist of investments in SLM Corp. (SLMA) stock, FNMA and FHLMC preferred stock, and corporate stock. The Company recorded an other-than-temporary impairment on the FNMA and FHLMC preferred stock of $1,355,730 and $50,000 in 2008 and 2007, respectively. As of December 31, 2008, the Company held investments in FNMA and FHLMC preferred stock with a book value of $118,865. The FNMA and FHLMC preferred stock had an unrealized loss of $77,026 and a market value of $41,839 as of December 31, 2008. The investments in FNMA and FHLMC preferred stock are valued using available market prices. Management performed an analysis and deemed the remaining investment in FNMA and FHLMC preferred stock was not other than temporarily impaired as of December 31, 2008.

18

20


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 3: Securities (continued) Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2008 and 2007, was $12,196,205 and $30,148,719, which is approximately 11% and 32%, respectively, of the Company’s available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from recent changes in market interest rates and failure of certain investments to maintain consistent credit quality ratings. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. Other-than-temporary impairment was recorded during 2008 and 2007 and totaled $1,874,691 and $50,000, respectively as previously described. The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2008 and 2007: December 31, 2008 12 Months or More Unrealized Fair Value Losses

Less than 12 Months Fair Unrealized Value Losses

Description of Securities Mortgage-backed securities $ State and political subdivisions Equity securities Other securities

91,477 3,767,167 37,716 1,880,186

$

(896) $ (104,576) (82,779) (552,217)

160,580 295,426 — 5,963,653

Total temporarily impaired securities

5,776,546

$

(740,468) $

6,419,659

$

U.S. government agencies Mortgage-backed securities State and political subdivisions Equity securities Other securities Total temporarily impaired securities

$

252,057 4,062,593 37,716 7,843,839

$

(1,190) (119,150) (82,779) (3,417,374)

(2,880,025)

$

12,196,205

$

(3,620,493)

— 1,428 19,933 — 9,598,970

$

— $ (3) (66) — (396,313)

5,463,590 13,195,702 734,101 128,000 1,006,995

$

(21,788) (115,037) (51,347) (22,400) (4,709)

$

9,620,331

$

(396,382) $

20,528,388

$

(215,281)

21

Unrealized Losses

$

$

19

Total

(294) (14,574) — (2,865,157)

December 31, 2007 12 Months or More Unrealized Fair Value Losses

Less than 12 Months Fair Unrealized Value Losses

Description of Securities

$

Fair Value

Fair Value $

Total

Unrealized Losses

5,463,590 $ 13,197,130 754,034 128,000 10,605,965

(21,788) (115,040) (51,413) (22,400) (401,022)

$ 30,148,719 $

(611,663)


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 4: Loans and Allowance for Loan Losses

Note 6: Other Intangible Assets

Categories of loans at December 31, include:

The carrying basis and accumulated amortization of recognized intangible assets included in other assets on the consolidated balance sheets, at December 31, 2008 and 2007, were:

2008 Commercial and agricultural Residential real estate Consumer Total loans

$

147,925,926 30,414,028 44,869,031 223,208,985

$ 145,835,786 38,216,630 50,630,225 234,682,641

3,102,057

3,153,862

$ 220,106,928

$ 231,528,779

Less Allowance for loan losses Net loans

2007

Gross Carrying Amount Core deposits

Balance, beginning of year Provision charged to expense Losses charged off, net of recoveries of $70,539 for 2008 and $86,414 for 2007 Balance, end of year

$

$

2,963,070 341,000

(332,805)

(150,208)

3,102,057 $

3,153,862

Less accumulated depreciation Net premises and equipment

$

$

373,014

39,288 39,288 39,288 39,288 39,288 42,868 239,308

Activity in the balance of mortgage servicing rights, measured using the amortization method, was as follows: 2008

2007

$ 10,116,916

$

The aggregate fair value of capitalized mortgage servicing rights at December 31, 2008 and 2007 totaled $1,855,623 and $2,197,748, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.

Major classifications of premises and equipment, stated at cost, are as follows:

$

651,610

Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $1,467,868 and $790,764 at December 31, 2008 and 2007, respectively.

Note 5: Premises and Equipment

2,645,714 8,561,706 — 6,702,745 1,440,260 19,350,425 9,233,509

Accumulated Amortization

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was $289,982,298 and $299,356,183 at December 31, 2008 and 2007, respectively.

At December 31, 2008 and 2007, accruing loans delinquent 90 days or more totaled $227,000 and $293,000, respectively. Non-accruing loans at December 31, 2008 and 2007 were $3,690,000 and $1,210,000, respectively.

$

$

2007

Note 7: Loan Servicing

Interest of $270,434 and $300,920 was recognized on average impaired loans of $6,708,971 and $5,037,186 for 2008 and 2007, respectively. Interest of $289,737 and $306,581 was recognized on impaired loans on a cash basis during 2008 and 2007, respectively.

Land Buildings and improvements Construction in progress Equipment Leasehold improvements

412,302

$

Impaired loans totaled $7,959,392 and $5,038,262 at December 31, 2008 and 2007, respectively. An allowance for loan losses of $1,443,747 and $1,294,746 relates to impaired loans of $6,650,342 and $4,747,881, at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, impaired loans of $1,309,051 and $290,381, respectively, had no related allowance for loan losses.

2008

651,610 $

2009 2010 2011 2012 2013 Thereafter

2007

3,153,862 $ 281,000

Accumulated Amortization

Gross Carrying Amount

Amortization expense for the years ended December 31, 2008 and 2007, was $39,288 for each year. Estimated amortization expense for each of the following five years is:

Activity in the allowance for loan losses was as follows: 2008

$

2008

Balance, beginning of year Servicing rights capitalized Amortization of servicing rights Valuation allowance

2,645,714 7,544,897 79,727 6,201,268 1,426,510 17,898,116 8,525,688

Balance, end of year

2007

$

2,197,748 521,979 (543,685) (320,419)

$

1,765,795 954,338 (522,385) —

$

1,855,623

$

2,197,748

For the purposes of measuring impairment, risk characteristics (including product type, investor type and interest rates) were used to stratify the originated mortgage servicing rights. Activity in the valuation allowance was as follows:

9,372,428

20

22

2008

Balance, Beginning of year Additions

$ $

— 320,419

$ $

Balance, end of year

$

320,419

$

2007

— — —


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 8: Interest-bearing Deposits

Note 9: Junior Subordinated Debentures (continued)

Interest-bearing deposits in denominations of $100,000 or more were $44,543,370 on December 31, 2008, and $51,519,016 on December 31, 2007.

The Company’s obligations with respect to the issuance of the preferred securities constitute a full and unconditional guarantee of Trust II’s and III’s obligations with respect to the preferred securities. Interest on the junior subordinated debentures and distributions on the preferred securities are payable quarterly in arrears. Distributions on the preferred securities are cumulative. The Company has the right, at any time, so long as no event of default has occurred and is continuing, to defer payments of interest on the junior subordinated debentures, which will require deferral of distribution of the preferred securities, for a period not exceeding 20 consecutive quarterly periods, provided that such deferral may not extend beyond the stated maturity of the junior subordinated debentures. The preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption.

At December 31, 2008, the scheduled maturities of time deposits are as follows: 2009 2010 2011 2012 2013 Thereafter

$

58,875,875 36,286,686 11,284,351 13,106,438 14,122,042 7,849,430

$

141,524,822

Note 9: Junior Subordinated Debentures

Interest expense on the junior subordinated debt was $762,343 and $737,813 for the years ended December 31, 2008 and 2007, respectively.

On September 15, 2007, the Company repaid $2,591,000 of subordinated debentures outstanding, which required semi-annual interest payments at 9.50%. The debentures were unsecured to the claims of depositors and certain other creditors of the Company.

Note 10: Federal Home Loan Bank Advances The Federal Home Loan Bank (FHLB) advances totaled $30,650,000 and $25,522,600 as of December 31, 2008 and 2007, respectively. The FHLB advances are secured by mortgage loans and investment securities totaling $65,631,000 at December 31, 2008. Advances, at interest rates from 0.34 to 6.26 percent are subject to restrictions or penalties in the event of prepayment.

On March 26, 2002, Statutory Trust I (“Trust”) was formed and issued $7,732,000 of floating rate Cumulative Trust Preferred Securities. The interest rate, 8.97% at January 1, 2007, was tied to the 3-month LIBOR rate plus 3.60%. The funds raised from the Trust’s issuance of these securities were all passed to the Company. The sole asset of the Trust was a note receivable from the Company. On March 22, 2007, the debt was redeemed with the proceeds from Statutory Trust III.

Aggregate annual maturities of long-term debt at December 31, 2008, are: 2009 2010 2011 2012 2013 Thereafter

The Company has $4,124,000 of junior subordinated debt owed to Statutory Trust II (“Trust II”) as of December 31, 2008 and 2007. Trust II is a wholly owned unconsolidated subsidiary, which was formed on March 17, 2004, to issue cumulative preferred securities. The Company owns all of the securities of Trust II that possess general voting powers. The Company issued shares of the preferred securities through a private placement offering on March 17, 2004, through the trust. Trust II invested the proceeds in the Company’s junior subordinated debentures. The junior subordinated debentures have an interest rate based on a floating rate equal to 3 month LIBOR plus 279 basis points which adjusts quarterly on March 15, June 15, September 15, and December 15. The rate at December 31, 2008 was 4.66%. The junior subordinated debentures mature on March 17, 2034, which the date may be shortened to a date not earlier than March 31, 2009, if certain conditions are met. Trust II’s sole asset is the holding Company’s junior subordinated debt.

$

7,400,000 7,250,000 12,000,000 — — 4,000,000

$

30,650,000

Note 11: Income Taxes The provision (credit) for income taxes includes these components: 2008

The Company has $7,732,000 of junior subordinated debt owed to Statutory Trust III (“Trust III”) as of December 31, 2008 and 2007. Trust III is a wholly owned unconsolidated subsidiary, which was formed on March 22, 2007, to issue cumulative preferred securities. The Company owns all of the securities of Trust III that possess general voting powers. The Company issued shares of the preferred securities through a private placement offering on March 22, 2007, through the trust. Trust III invested the proceeds in the Company’s junior subordinated debentures. The junior subordinated debentures have an interest rate based on a fixed rate for five years of 6.58%, which was the rate at December 31, 2008 and 2007. Commencing March 22, 2012, the rate is equal to 3 month LIBOR plus 168 basis points. The junior subordinated debentures mature on March 22, 2037, which the date may be shortened to a date not earlier than March 22, 2012, if certain conditions are met. Trust III’s sole asset is the holding Company’s junior subordinated debt.

Taxes currently payable Deferred income taxes Income tax expense (credit)

2007

$

(260,795) $ (582,605)

1,005,264 (12,764)

$

(843,400) $

992,500

A reconciliation of income tax expense (credit) at the statutory rate to the Company’s actual income tax expense (credit) is shown below: 2008 Computed at the statutory rate (34%) Increase (decrease) resulting from Tax exempt interest State income taxes Dividends received Cash surrender value of life insurance Other Actual tax expense (credit) 21

23

$

$

2007

(248,400) $

1,398,286

(429,265) 34,082 (22,525) (51,559) (125,733)

(408,437) 142,646 (35,633) (43,896) (60,466)

(843,400) $

992,500


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 11: Income Taxes (continued)

Note 13: Regulatory Matters

The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets were:

The Company and Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

2008 Deferred tax assets Allowance for loan losses Deferred compensation Alternative minimum tax credits Loss on other-than-temporary impairment of securities Other

$

Deferred tax liabilities Depreciation Mortgage servicing rights Deferred loan fees Unrealized gains on available-for-sale securities Other

$

Net deferred tax asset (liability)

2007

1,215,611 $ 183,333 283,015

1,147,343 191,536 456,664

727,718 68,715

— 129,526

2,478,392

1,925,069

(168,961) (710,411) (66,250)

(177,784) (853,122) —

(506,347) (57,801)

(2,710,634) (1,799)

(1,509,770)

(3,743,339)

968,622 $

Quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the table below). As of December 31, 2008 and 2007, the Company and Banks meet all capital adequacy requirements to which they are subject. As of December 31, 2008, the most recent notification from the Company’s and Banks’ regulators categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company’s or Banks’ category.

(1,818,270)

Note 12: Comprehensive Loss Other comprehensive loss components and related taxes were as follows:

Net unrealized loss on securities available-for-sale Reclassification adjustment for loss on otherthan-temporary impairment of securities Reclassification adjustment for realized gains included in income Other comprehensive loss, before tax effect Tax benefit Other comprehensive loss

$

$

2008

2007

(4,617,143)

$ (16,017,141)

(1,874,691)

803,965 (5,687,869) 2,204,287

4,293,376 (11,723,765) 4,550,931

(3,483,582) $

(7,172,834)

The components of accumulated other comprehensive loss, included in stockholders’ equity, are as follows: 2008 Net unrealized gain on securities available-for-sale

$

788,708 $

2007 4,272,290

22

24


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 13: Regulatory Matters (continued) The Company and Banks’ actual and required capital amounts (in thousands) and ratios are also presented in the table:

As of December 31, 2008 Total capital (to risk-weighted assets) Consolidated Town & Country Bank of Springfield Logan County Bank Town & Country Bank

Amount $

Actual

For Capital Adequacy Purposes Amount Ratio

Ratio

22,408 14,699 3,949 3,255

8.0% 8.0 8.0 8.0

— 18,374 4,936 4,069

— 10.0% 10.0 10.0

13.1 11.2 12.8 12.4

11,204 7,349 1,974 1,628

4.0 4.0 4.0 4.0

— 11,024 2,961 2,441

— 6.0 6.0 6.0

36,779 20,597 6,329 5,065

10.0 9.3 8.4 7.0

14,677 8,829 3,029 2,915

4.0 4.0 4.0 4.0

— 11,036 3,786 3,644

— 5.0 5.0 5.0

45,871 25,140 6,702 5,860

15.5% 12.4 14.8 13.8

23,647 16,183 3,619 3,396

8.0% 8.0 8.0 8.0

— 20,229 4,524 4,245

— 10.0% 10.0 10.0

Tier I capital (to risk-weighted assets) Consolidated Town & Country Bank of Springfield Logan County Bank Town & Country Bank

37,858 20,357 6,334 5,327

12.8 10.0 14.0 12.6

11,823 8,092 1,810 1,698

4.0 4.0 4.0 4.0

— 12,137 2,714 2,547

— 6.0 6.0 6.0

Tier I capital (to average assets) Consolidated Town & Country Bank of Springfield Logan County Bank Town & Country Bank

37,858 20,357 6,334 5,327

10.2 8.6 8.7 8.4

14,901 9,492 2,907 2,541

4.0 4.0 4.0 4.0

— 11,865 3,634 3,177

— 5.0 5.0 5.0

43,196 23,629 6,672 5,577

15.4% 12.9 13.5 13.7

Tier I capital (to risk-weighted assets) Consolidated Town & Country Bank of Springfield Logan County Bank Town & Country Bank

36,779 20,597 6,329 5,065

Tier I capital (to average assets) Consolidated Town & Country Bank of Springfield Logan County Bank Town & Country Bank As of December 31, 2007 Total capital (to risk-weighted assets) Consolidated Town & Country Bank of Springfield Logan County Bank Town & Country Bank

$

$

To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio

$

Note 14: Related Party Transactions At December 31, 2008 and 2007, the Company had loans outstanding to executive officers, directors, significant stockholders and their affiliates (related parties), in the amount of $3,182,577 and $2,908,000, respectively. In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features.

23

25


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 15: Employee Benefits

Note 17: Disclosures About Fair Value of Assets and Liabilities

The Company has an Employee Stock Ownership Plan (ESOP) to provide retirement benefits for substantially all employees. All full time employees who meet certain age and length of service requirements are eligible to participate in the ESOP. Dividends on allocated shares of common stock are allocated directly to the participant’s account. All shares held by the ESOP have been allocated to the Plan participants and are included in the computation of weighted average common shares outstanding.

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the year. FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

The Plan owned 95,605 and 89,855 shares of the Company’s common stock as of December 31, 2008 and 2007, respectively. The fair market value of those shares totaled $717,038 and $1,257,970 as of December 31, 2008 and 2007, respectively. In the event a terminated Plan participant desires to sell his or her shares of the Company’s stock, the Company would be required to purchase the shares from the participant at their fair market value as determined by an independent appraiser.

Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

The Bank’s expense for the Plan was approximately $5,000 for each of the years ended December 31, 2008 and 2007. The Company makes contributions to a savings investment plan established for the benefit of substantially all of the Company’s employees. A portion of the Company’s contribution is based upon the employees’ contributions and another portion of the Company’s contribution is at the discretion of the Board of Directors. Contributions by the Company to the plan were $155,549 and $142,458 for the years ended December 31, 2008 and 2007, respectively.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Also, the Company has a non-qualified executive incentive retirement plan (Plan) that covers select members of management. Contributions to the Plan are based upon the Company meeting certain financial performance measures and are deferred until the employee reaches the normal retirement age of 65. Retirement benefits are paid out of the general assets of the Company. The retirement benefit is paid out in monthly installments for a 13 year period and equals the deferral account balance. The liability recorded was $329,633 and $394,683 at December 31, 2008 and 2007, respectively. The Company’s expense for the plan was $7,610 and $14,034 for 2008 and 2007, respectively.

Available-for-sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include SLMA stock, FNMA and FHLMC preferred stock and corporate stock. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. government agencies, mortgage-backed securities and municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include investments in pooled trust preferred securities (PreTSLs).

Note 16: Leases The Company has several noncancellable operating leases, primarily for branch offices, that expire through 2015. These leases generally contain renewal options for periods ranging from 2 to 5 years and require the Company to pay all executory costs such as taxes, maintenance and insurance. Rental expense for these leases was $92,127 and $83,895 for the years ended December 31, 2008 and 2007, respectively.

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008:

Future minimum lease payments under operating leases are: 2009 2010 2011 2012 2013 Thereafter Total minimum lease payments

$

52,725 49,737 50,284 50,284 50,284 54,474

Fair Value Available-forsale securities

$ 307,788

24

26

Fair Value Measurements Using Quoted Prices Significant Significant Other in Active Markets for Observable Unobservable Inputs Inputs Identical Assets (Level 3) (Level 2) (Level 1)

$ 111,777,694 $

2,104,089 $102,755,520 $

6,918,085


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 17: Disclosures About Fair Value of Assets and Liabilities (continued)

Mortgage Servicing Rights Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs: Pooled Trust Preferred Securities Balance, January 1, 2008

$

10,554,431

Total realized and unrealized losses Included in net income Included in other comprehensive loss Purchases, issuances and settlements

(518,961) (2,795,355) (322,030)

Balance, December 31, 2008

$6,918,085

Total losses for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008:

$

Fair Value Measurements Using Quoted Prices Significant in Active Significant Other Markets for Observable Unobservable Identical Inputs Inputs Assets (Level 3) (Level 2) (Level 1) Fair Value Impaired loans Mortgage servicing rights

(518,961)

Change in unrealized losses relating to assets still held at the balance sheet date

(518,961)

$

(518,961)

1,855,623

— —

$

— $

5,839,193

1,855,623

Cash and Cash Equivalents, Federal Reserve and Federal Home Loan Bank Stock, U.S Treasury Demand Note, Interest Receivable and Interest Payable

Noninterest Expense $

$

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.

Realized and unrealized gains and losses included in net income for the period from January 1, 2008, through December 31, 2008, are reported in the consolidated statements of income as follows:

Total losses

$ 5,839,193

The carrying amount approximates fair value. Securities Fair values equal quoted market prices, if available. If quoted market prices are not available, fair value is estimated based on quoted market prices of similar securities.

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Loans Held for Sale

Impaired Loans

For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with the provisions of Financial Accounting Standard No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

Loans The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Deposits

If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums or discount existing at origination or acquisition of the loan.

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Impaired loans are classified within Level 3 of the fair value hierarchy. 25

27


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 17: Disclosures About Fair Value of Assets and Liabilities (continued) Long-term Debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Commitments to Originate Loans, Letters of Credit and Lines of Credit The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

Financial assets Cash and cash equivalents Available-for-sale securities Held-to-maturity securities Loans held for sale Loans, net of allowance for loan losses Federal Reserve and Federal Home Loan Bank stock Interest receivable Financial liabilities Deposits Junior subordinated debentures Federal Home Loan Bank advances U.S. Treasury demand note Interest payable

December 31, 2008 Carrying Amount Fair Value $

10,503,314 111,777,694 1,659,125 6,940,208 220,106,928 2,132,456 1,873,788

$

December 31, 2007 Carrying Amount Fair Value

10,503,314 111,777,694 1,500,781 7,066,830 221,945,469 2,132,456 1,873,788

$

18,077,545 92,326,935 1,837,654 1,862,333 231,528,779 2,132,456 1,909,799

$

18,077,545 92,326,935 1,810,863 1,872,517 230,754,748 2,132,456 1,909,799

300,164,979 11,856,000 30,650,000 518,215 997,385

300,910,976 11,856,000 31,250,525 518,215 997,385

291,523,424 11,856,000 25,522,600 272,747 1,743,888

292,779,628 11,856,000 26,691,337 272,747 1,743,888

0 0 0

0 0 0

0 0 0

0 0 0

Unrecognized financial instruments (net of contract amount) Commitments to originate loans Letters of credit Lines of credit

Note 18: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk. Estimates related to other-than-temporary impairment of securities, FHLB stock impairment and valuation of mortgage servicing rights are described in Note 1. Other significant estimates and concentrations not discussed in those footnotes include: Current Economic Conditions The current economic environment presents financial institutions with unprecedented circumstances and challenges which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company. Given the volatility of current economic conditions, the value of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

26

28


Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007 Note 19: Commitments and Credit Risk

Lines of Credit

The Company grants commercial, mortgage and consumer loans and receives deposits from customers primarily located within Central Illinois. The Company’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon the economic conditions within Central Illinois.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

Commitments to Originate Loans Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

At December 31, 2008, the Company had granted unused lines of credit to borrowers aggregating approximately $28,831,646 and $18,011,760 for commercial lines and open-end consumer lines, respectively. At December 31, 2007, unused lines of credit to borrowers aggregated approximately $23,677,340 for commercial lines and $17,017,667 for open-end consumer lines.

Note 20: FDIC Assessment On February 27, 2009, the FDIC announced it had adopted an interim rule to impose a 20 basis point emergency special assessment on June 30, 2009 which will be collected on September 30, 2009. The interim rule also provides that an additional emergency assessment of up to 10 basis points may be imposed if the reserve ratio of the Deposit Insurance Fund is estimated to fall to a level that the Board believes would adversely affect public confidence or to a level which shall be close to zero or negative at the end of a calendar quarter. The 20 basis point assessment is based on the institution’s assessment base which is total deposits. If the June 30, 2009 assessment base is consistent with December 31, 2008, the assessment would approximate $600,000.

At December 31, 2008 and 2007, the Company had outstanding commitments to originate loans aggregating approximately $764,000 and $788,000, respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period. Loan commitments at fixed rates of interest amounted to $414,000 and $417,000 at December 31, 2008 and 2007, respectively, with the remainder at floating market rates. Standby Letters of Credit Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should the Company be obligated to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid. The Company had total outstanding standby letters of credit amounting to $1,223,929 and $1,969,785, at December 31, 2008 and 2007, respectively, with terms ranging from 1 day to 25 months. At December 31, 2008 and 2007, the Company’s deferred revenue under standby letter of credit agreements was nominal.

27

29


CORPORATE INFORMATION CORPORATE INFORMATION

MARKET MAKERS Town and Country Financial Corporation shares are quoted on the OTC Bulletin Board under the symbol TWCF. If you are interested in purchasing shares of Town and Country Financial Corporation, you may contact the following Market Makers: Automated Desk Services, LLC Automated TradingTrading Desk Financial Domestic Securities, Inc. Howe Barnes Investments, Inc. Ferris, Baker Watts Inc. Hudson Securities, Inc. Securities, KnightHudson Equity Markets, L.P. Inc. Hill, Thompson, McAdams Wright Ragan,Magid Inc. and Co. Howe Barnes Investments Inc. Monroe Securities, Inc. Monroe Securities Inc. Pershing Trading Company, L.P. McAdams Wright RBC Capital Markets Corp& Ragan Knight Equity Markets, L.P. Pershing LLC

866.283.2831 866.283.2831 732.661.0300 800.621.2364 800.436.2000 800.624.0050 800.624.0050 800.232.3684 201.434.8100 503.922.4888 800.621.2364 800.766.5560 800.766.5560 866.880.9410 503.922.4888 800.862.8029 800.544.7508 866.880.9410

TRANSFER AGENT Town and Country Financial Corporation acts as its own Transfer Agent. Contact us by calling 866.770.3100 with questions on registrations or stock transfer instructions. Mail requests to our Corporate Office at the address on the following page.

COMMUNITY INVOLVEMENT We value teamwork. Together, we can achieve more than we could on our own. Town & Country community support is a classic example of the power of teamwork. Our employee-volunteers reach out to our communities and beyond. We also provide financial support to a number of local charities as diverse as our employee base. Town and Country Financial Corporation is dedicated to leveraging our financial and human resources to better our communities. That’s what community banking is all about.

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LOCATIONS AND LOCATIONS AND CONTACT CONTACTINFORMATION INFORMATION

CORPORATE OFFICE

3601 Wabash Avenue, Springfield, IL 62711 Phone 217.787.3100

Town & Country Bank of Springfield

Town & Country Bank

Town & Country Banc Mortgage Services, Inc.

Logan County Bank

3601 Wabash Avenue, Springfield, IL 62711 2401 Wabash Avenue, Springfield, IL 62704 1925 South MacArthur Blvd., Springfield, IL 62704 2601 North Dirksen Parkway, Springfield, IL 62702 Phone 217.787.3100

100 Elm Street, Buffalo, IL 62515, Phone 217.364.4406 107 East Highland Drive, Forsyth, IL 62535, Phone 217.872.1326 1645 State Highway 121, Mt. Zion, IL 62549, Phone 217.864.2311 Loan Office: 445 North Franklin, Decatur, IL 62523, Phone 217.424.0960

3601 Wabash Avenue, Springfield, IL 62711 Phone 217.787.3100

303 Pulaski Street, Lincoln, IL 62656 809 Woodlawn Road, Lincoln, IL 62656 Phone 217.732.3151

Additional Contact Information

Toll Free 866.770.3100 Telephone Banking Line 800.505.5124 E-mail: support@townandcountrybank.com www.townandcountrybank.com www.logancountybank.com

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