<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended March 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ______ to _______
Commission file number 0-18265.
COMMUNITY FINANCIAL CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 54-1532044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
38 North Central Avenue, Staunton, Virginia 24401
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (540) 886-0796
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past twelve months
(or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such requirements for the past 90
days. YES /X/ NO / /
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of Issuer's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. / /
The Issuer had $12,843,428 in gross income for the year ended March
31, 1996.
As of May 31, 1996, there were issued and outstanding 1,271,198
shares of the Issuer's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Issuer, computed by reference
to the average of the closing bid and asked price of such stock as of May 31,
1996, was approximately $20,200,000. (The exclusion from such
amount of the market value of the shares owned by any person shall not
be deemed an admission by the Issuer that such person is an affiliate
of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-KSB--Proxy Statement for the 1996 Annual Meeting of
Stockholders.
<PAGE>
<PAGE> 2
PART I
Item 1. Description of Business
- --------------------------------
General
- -------
Community Financial Corporation ("Community" or the "Company") is a
Delaware corporation which owns Community Federal Savings Bank
("Community Federal" or the "Bank"). The Bank was organized in 1928 as a
Virginia-chartered building and loan association, converted to a
federally-chartered savings and loan association in 1955 and to a
federally-chartered savings bank in 1983. In 1988, the Bank converted
to the stock form of organization through the sale and issuance of
shares of its Common Stock. The Company effected a two-for-one stock
split in the form of a 100% stock dividend in November 1994.
The principal asset of the Company is the outstanding stock of the
Bank, its wholly owned subsidiary. The Company presently has no
separate operations and its business consists only of the business of
the Bank. The Company's Common Stock is quoted on The Nasdaq Stock
Market under the symbol "CFFC."
The Company and the Bank are subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision,
Department of the Treasury ("OTS") and by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Home Loan
Bank ("FHLB") System and its deposits are backed by the full faith and
credit of the United States Government and are insured by the Savings
Association Insurance Fund ("SAIF") which is part of the FDIC, the maximum
extent permitted by the FDIC.
At March 31, 1996, Community had $159.8 million in assets, deposits
of $109.5 million and stockholders' equity of $21.9 million.
Community's primary business consists of attracting deposits from the
general public and originating real estate loans and other types of
investments through its offices located in Staunton, Waynesboro, and
Stuarts Drafts, Virginia.
Like all thrift institutions, Community's operations are materially
affected by general economic conditions, the monetary and fiscal
policies of the federal government and the policies of the various
regulatory authorities, including the OTS and the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"). Its results of
operations are largely dependent upon its net interest income, which is
the difference between the interest it receives on its loan portfolio
and its investment securities portfolio and the interest it pays on its
deposit accounts and borrowings.
Community's main office is located at 38 North Central Avenue,
Staunton, Virginia 24401. The Company's telephone number is (540) 886-0796.
<PAGE>
<PAGE> 3
Lending Activities
- ------------------
General. The Company, like most other thrift institutions,
concentrates its lending activities on first mortgage conventional loans
secured by residential and, to a lesser extent, commercial real estate.
The Company makes construction loans secured by commercial real estate
and one- to four-family residential properties and permanent loans
secured by commercial real estate, with an emphasis on multi-family
housing. Additionally, the Company makes consumer loans in order to
increase the diversification and decrease interest rate sensitivity of the
loan portfolio and to increase interest income. The Company's construction
loans are predominantly made only where a commitment for permanent
financing, either from another lender or from the Company, has been
obtained. Substantially, all of the Company's loans are originated within its
market area which includes Shenandoah, Rockingham, Page, Highland, Augusta,
Albemarle, Bath, Rockbridge and Nelson Counties in Virginia.
Regulations permit, among other things, mortgage loans to be written for
shorter terms or with adjustable interest rates as compared to long-term,
fixed-rate mortgage loans. At March 31, 1996, $117.9 million or 81.4%
of the Company's total loans receivable before net items consisted
of loans which permit periodic interest rate adjustments.
Residential loan originations come primarily from walk-in
customers, real estate brokers and builders. Commercial real estate
loan originations are obtained through broker referrals, direct
solicitation of developers and continued business from customers. All
completed loan applications are reviewed by the Company's salaried loan
officers. As part of the application process, information is obtained
concerning the income, financial condition, employment and credit
history of the applicant. If commercial real estate is involved,
information is also obtained concerning cash flow after debt service.
The quality of loans is analyzed based on Company experience and on the
Company's guidelines with respect to credit underwriting as well as the
guidelines issued by the Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA") and other
purchasers of loans, depending on the type of loans involved. The one-
to four-family adjustable-rate mortgage loans originated by the Company,
however, are not readily saleable in the secondary market due to the
fact that the Company does not typically require surveys, title
insurance or written verifications of employment history and deposit
relationships. All real estate is appraised by independent fee
appraisers who have been pre-approved by the Board of Directors.
The Company's loan commitments are approved at different levels,
depending on the size and type of the loan being sought. Certain one- to
four-family and commercial real estate loans may be approved by the Vice-
President/Director of Lending. Certain larger loans must be approved by a
majority of the Company's Loan Committee or the Board of Directors.
Regardless of the individual loan approval authority, the Board of Directors
generally approves or ratifies all loans.
The aggregate amount of loans that the Bank is permitted to make to
any one borrower, including related entities, and the aggregate amount
that the Bank may invest in any one real estate project, with certain
exceptions, has been reduced to the greater of 15% of unimpaired capital
and surplus or $500,000. At March 31, 1996, the maximum amount which
the Bank could have loaned to one borrower and the borrower's related
entities and invested in any one project was approximately $2.7 million.
At March 31, 1996, the Bank had no borrower, or groups of borrowers,
with loans outstanding in excess of $2.7 million.
<PAGE>
<PAGE> 4
Loan Portfolio Composition. The following table sets forth the
composition of the Company's total loan portfolio in dollars and
percentages as of the dates indicated.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- -----------------
Residential $ 91,212 62.92% $ 86,331 62.90% $ 77,485 61.59% $ 70,904 62.45% $ 71,358 65.38%
Commercial 38,433 26.51 39,667 28.90 41,144 32.71 36,839 32.45 32,091 29.40
Construction 6,415 4.43 4,336 3.15 2,992 2.38 2,407 2.12 2,657 2.44
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate 136,060 93.86 130,334 94.95 121,621 96.68 110,150 97.02 106,106 97.22
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer Loans:
- --------------
Deposit account 234 .16 267 .20 259 .21 316 .28 385 .35
Unsecured personal 3,616 2.50 3,600 2.62 1,922 1.53 1,205 1.06 858 .79
Automobile 1,470 1.01 1,072 .78 687 .55 534 .47 502 .46
Home equity 380 .26 412 .30 505 .40 442 .39 324 .30
Other 3,206 2.21 1,577 1.15 809 .63 887 .78 965 .88
-------- ----- -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans 8,905 6.14 6,928 5.05 4,182 3.32 3,384 2.98 3,034 2.78
-------- ----- -------- ------ -------- ------ -------- ------ -------- ------
Total loans
receivable $144,965 100.00% $137,262 100.00% $125,803 100.00% $113,534 100.00% $109,140 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loans in
process 1,830 1,477 1,330 1,201 864
Deferred fees and
unearned discounts 396 507 625 603 634
Allowance for losses 1,000 763 703 655 520
-------- -------- -------- -------- --------
Total net items 3,226 2,747 2,658 2,459 2,018
-------- -------- -------- -------- --------
Total loans
receivable,net $141,739 $134,515 $123,145 $111,075 $107,122
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<PAGE> 5
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ----------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate:
Residential $ 12,863 8.87% $ 12,896 9.40% $ 14,880 11.83% $ 9,350 8.24% $ 12,970 11.88%
Commercial 5,548 3.83 2,765 2.01 3,832 3.05 4,054 3.57 3,885 3.56
-------- ------ -------- ------ -------- ------ --------- ------ -------- ------
Total real
estate loans(1) 18,411 12.70 15,661 11.41 18,712 14.88 13,404 11.81 16,855 15.44
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer 8,611 5.94 6,516 4.75 3,677 2.92 2,942 2.59 2,710 2.49
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate
loans 27,022 18.64 22,177 16.16 22,389 17.80 16,346 14.40 19,565 17.93
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Adjustable-Rate
Loans:
Real Estate:
Residential 80,773 55.72 75,023 54.66 64,532 51.30 62,371 54.93 60,132 55.10
Commercial 36,876 25.44 39,650 28.88 38,377 30.50 34,375 30.28 29,119 26.68
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate
loans 117,649 81.16 114,673 83.54 102,909 81.80 96,746 85.21 89,251 81.78
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer 294 .20 412 .30 505 .40 442 .39 324 .29
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-
rate loans 117,943 81.36 115,085 83.84 103,414 82.20 97,188 85.60 89,575 82.07
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans
receivable $144,965 100.00% $137,262 100.00% $125,803 100.00% $113,534 100.00% $109,140 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
</TABLE>
<PAGE>
<PAGE> 6
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ----------------- ---------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less:
Undisbursed loans
in process 1,830 1,477 1,330 1,201 864
Deferred fees and
unearned discounts 396 507 625 603 634
Allowance for losses 1,000 763 703 655 520
-------- -------- -------- -------- --------
Total net items 3,226 2,747 2,658 2,459 2,018
-------- -------- -------- -------- --------
Total loans
receivable, net $141,739 $134,515 $123,145 $111,075 $107,122
======== ======== ======== ======== ========
- ----------------
<FN>
(1) Includes residential real estate construction loans of
$2,424,000, $1,588,000 and $1,927,000 and commercial real estate
construction loans of $3,991,000, $2,748,000 and $1,065,000 at March
31, 1996, 1995 and 1994, respectively.
</TABLE>
<PAGE>
<PAGE> 7
Loan Maturity and Repricing
- ---------------------------
The following schedule illustrates the interest rate sensitivity of
the Company's loan portfolio at March 31, 1996. Mortgages which have
adjustable interest rates are shown as maturing based on contractual
maturity and demand loans are shown as maturing in one year or less.
This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------
Residential Commercial Consumer Total
----------- ---------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Due During Years Ended
- ----------------------
04/01/96 - 03/31/97(1) $ 4,395 $ 5,569 $ 6,694 $ 16,658
04/01/97 - 03/31/98 2,585 1,137 850 4,572
04/01/98 - 03/31/99 2,681 1,068 559 4,308
04/01/99 - 03/31/01 5,731 2,394 654 8,779
04/01/01 - 03/31/06 16,468 7,409 61 23,938
04/01/06 - 03/31/11 18,032 9,030 87 27,149
04/01/11 and following 43,744 15,817 --- 59,561
-------- -------- -------- --------
Total $ 93,636 $ 42,424 $ 8,905 $144,965
======== ======== ======== ========
- ----------------------
<FN>
(1) Includes $2,424,000 of residential real estate construction
loans and $3,991,000 of commercial real estate construction loans.
</TABLE>
The total amount of loans due after March 31, 1997 which have
predetermined interest rates is $12,221,295, while the total amount of
loans due after such date which have floating or adjustable interest
rates is $116,086,000.
<PAGE>
<PAGE> 8
One- to Four-Family Residential Real Estate Lending
- ---------------------------------------------------
The Company's primary lending program is the origination of loans
secured by one- to four-family residences, all of which are located in
the Company's market area. The Company evaluates both the borrower's
ability to make principal and interest payments and the value of the
property that will secure the loan. Although federal law permits the
Company to make loans in amounts of up to 100% of the appraised value of
the underlying real estate, the Company generally makes one- to four-
family residential real estate loans in amounts of 80% or less of the
appraised value thereof. In certain instances, the Company will lend up
to 90% of the appraised value of the underlying real estate and requires
the borrower to purchase private mortgage insurance.
Most savings institutions, including Community, historically made one-
to four-family residential mortgage loans on a 30-year fixed-rate basis. Due
to prepayments and refinancings, the average actual maturity of
30-year loans in the past has been substantially shorter.
In order to reduce its exposure to changes in interest rates, the
Company has de-emphasized the origination of 30-year fixed-rate one- to
four-family residential mortgage loans for retention in its own
portfolio. For the year ended March 31, 1996, 85.3% of all one- to
four-family residential loans originated by the Company had adjustable
interest rates. Although, due to competitive market pressures, the
Company does originate fixed-rate mortgage loans, it currently
underwrites and documents substantially all such loans to permit their
sale in the secondary mortgage market, with a third-party purchase commitment
for the loan being required prior to origination. At March 31, 1996,
$12.9 million, or 14.1%, of the Company's one- to four-family
residential mortgage loan portfolio consisted of fixed-rate mortgage
loans.
The Company's current one- to four-family residential adjustable-rate
mortgages ("ARMs") have interest rates that adjust every year, generally
in accordance with the rates on one-year U.S. Treasury Bills. The
Company's ARMs generally limit interest rate increases to 2% each rate
adjustment period and have an established ceiling rate at the time the
loans are made of up to 6% over the original interest rate. Borrowers
are qualified at the fully indexed interest rate. To compete with other
lenders in its market area, Community makes one-year ARMs at interest
rates which, for the first year, are below the index rate which would
otherwise apply to these loans. At March 31, 1996, ARMs totaled $117.9
million, or 81.4%, of the Company's total loans receivable before net
items. There are unquantifiable risks resulting from potential
increased costs to the borrower as a result of repricing. It is
possible, therefore, that during periods of rising interest rates, the
risk of defaults on ARMs may increase due to the upward adjustment of
interest costs to borrowers.
All one- to four-family real estate mortgage loans being originated
by the Company contain a "due-on-sale" clause providing that the Company
may declare the unpaid principal balance due and payable upon the sale
of the mortgaged property. It is the Company's policy to enforce these
due-on-sale clauses concerning fixed-rate loan and to permit
assumptions of ARMs, for a fee, by qualified borrowers.
The Company requires, in connection with the origination of
residential real estate loans, title opinions and fire and casualty
insurance coverage, as well as flood insurance where appropriate, to
protect the Company's interest. The cost of this insurance coverage is
paid by the borrower. The Company does not require escrows for taxes
and insurance.
<PAGE> 9
Commercial Real Estate and Construction Lending
- -----------------------------------------------
The Company has originated and, in the past has purchased, commercial
real estate loans and loan participations. The Company also makes
commercial real estate construction loans. The Company's commercial
real estate and construction loans are secured by various types of
commercial real estate, including multi-family residential buildings,
hotels and motels, convenience stores, commercial and industrial
buildings, shopping centers and churches. At March 31, 1996, commercial
real estate and construction loans aggregated $44.8 million or 30.9% of
the Company's total loans receivable before net items. The Company has
in recent years placed more emphasis on multi-family housing loans for
its commercial real estate loan portfolio. The Company's commercial
real estate loans are generally made at interest rates that adjust based
on yields for one-year U.S. Treasury securities, with a 2% annual cap on
rate adjustments and a 6% cap on interest rates over the life of the
loan. Typically, the Company charges fees ranging from 1% to 2% on
these loans. At March 31, 1996, the Company had $5.3 million in fixed-rate
commercial real estate and construction loans. Commercial real
estate loans made by the Company are fully amortizing with maturities
ranging from five to 30 years. The Company's commercial real estate and
construction loans are secured by properties located in the Company's
market area.
At March 31, 1996, the Company had $4.0 million or 2.8% of its total
loans receivable before net items invested in commercial construction
loans compared to $2.7 million or 2.0% at March 31, 1995. The Company's
commercial construction loans are generally made for a one year term or less,
with a requirement that the borrower have a commitment for permanent financing
prior to funding the construction loan. The Company's construction loans
generally provide for a fixed rate of interest at the prevailing prime rate or
slightly above. Such loans are secured by the personal guarantees of the
borrowers and by first mortgages on the projects.
In its underwriting of commercial real estate and construction loans,
the Company may lend, under federal regulations, up to 100% of the
security property's appraised value, although the Company's loan to
original appraised value ratio on such properties is generally 80% or
less. The Company's commercial real estate and construction loan
underwriting criteria require an examination of debt service coverage
ratios, the borrower's creditworthiness and prior credit history and
reputation, and the Company generally requires personal guarantees or
endorsements of borrowers. The Company also carefully considers the
location of the security property and obtains an appraisal of the property.
At March 31, 1996, the Company had 12 commercial real estate loans (or
multiple loans to one borrower) in excess of $1.0 million with an
aggregate balance of $20.4 million, all of which were current in
interest and principal payments. The largest was a group of loans to a
single borrower for $2.3 million secured primarily by multi-unit
apartments and single family rental houses.
<PAGE>
<PAGE> 10
The following table presents information as to Community's commercial
real estate and construction lending portfolio as of March 31, 1996 by
type of project.
<TABLE>
<CAPTION>
Number
of Principal
Loans Balance
------ -----------
(Dollars in Thousands)
<S> <C> <C>
Permanent financing:
Multi-family residential
building 57 $20,447
Hotel and motel 4 679
Commercial and industrial building 75 17,247
Raw land 3 53
Church 1 7
--- -------
140 38,433
--- -------
Acquisition and construction
financing:
Multi-family 1 526
Mini warehouse 1 240
Retail store 1 900
Office building 1 135
Combination fast food restaurant
and convenience store 3 2,190
--- -------
7 3,991
--- -------
Total 147 $42,424
=== =======
</TABLE>
Commercial real estate and construction lending is generally
considered to involve a higher level of credit risk than one- to
four-family residential lending due to the concentration of
principal in a limited number of loans and borrowers and the effects of
general economic conditions on real estate developers and managers. The
Company's risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's sell out value
upon completion of the project and the estimated cost of the project.
If the estimated cost of construction or development proves to be
inaccurate, the Company may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the
estimate of value proves to be inaccurate, the Company may be
confronted, at or prior to the maturity of the loan, with a project with
value which is insufficient to assure full repayment. Because the
Company usually provides loans to a developer for the entire estimated
cost and interest of the project, defaults in repayment generally do not
occur during the construction period and it is therefore difficult to
identify problem loans at an early stage. When loan payments become
due, borrowers may experience cash flow from the project which is not
adequate to service total debt. This cash flow shortage can result in
the failure to make loan payments. In such cases, the Company may be
compelled to modify the terms of the loan. In addition, the nature of
these loans is such that they are generally less predictable and more
difficult to evaluate and monitor.
<PAGE>
<PAGE> 11
Consumer Lending
- ----------------
Federal thrift institutions are permitted to make both secured and
unsecured consumer loans reasonably incident to personal or household
purposes. In general, loans made under these investment powers may not
exceed 30% of a federally-chartered thrift institution's total assets.
The Company offers various secured and unsecured consumer loans,
including unsecured personal loans, automobile loans, deposit account
loans, installment and demand loans, home equity loans, and credit
card receivables. At March 31, 1996, the Company had $8.9 million or
6.1% of its total loans receivable before net items invested in consumer
loans. With the exception of certain of home equity loans at March 31,
1996, the Company's consumer loans have fixed interest rates and
generally have terms ranging from 90 days to five years. During fiscal
1995 and 1996, the Company increased its level of unsecured consumer loans
compared to prior years. Such loans were generally made to customers with
which the Company had pre-existing relationships in amounts generally under
$75,000. Community originates all of its consumer loans in its market area
and intends to continue its consumer lending in this geographic area.
The Company offers VISA credit card accounts. At March 31, 1996,
1,097 credit card accounts had been issued, with an aggregate
outstanding balance of $390,525 and unused credit available of $2.4
million. The Company presently charges no annual membership fee and an
annual rate of interest of 15.98%.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other
debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. The stability of the applicant's monthly
income may be determined by verification of gross monthly income from
primary employment, and additionally from any verifiable secondary
income. Although creditworthiness of the applicant is of primary
consideration, the underwriting process also includes a comparison of
the value of the security in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured,
such as credit card receivables, or secured by rapidly depreciable
assets such as automobiles. In such cases, any repossessed collateral
for a defaulted consumer loan 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 of such loan such as the Company, and a borrower may
be able to assert against such assignee claims and defenses which it has
against the seller of the underlying collateral. The Company adds
general provisions to its loan loss allowance, in amounts determined in
accordance with industry standards, at the time the loans are
originated. Consumer loan delinquencies often increase over time as the
loans age. At March 31, 1996, the Company had $541,000 in non-performing
consumer loans. See "Non-Performing Assets".
<PAGE>
<PAGE> 12
Loan Originations, Purchases and Sales
- --------------------------------------
Federal regulations authorize the Company to make real estate loans
anywhere in the United States. However, at March 31, 1996, substantially
all of the Company's real estate loans were secured by real estate located
in the Company's market area.
Management believes that purchases of loans and loan participations
are generally desirable only when local mortgage demand is less than the
supply of funds available for local mortgage origination. Since fiscal
1985 the Company has not purchased any loans or loan participations.
<PAGE>
<PAGE> 13
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated. For the
periods shown, the Company did not purchase any loans.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1996 1995 1994
-------- ------- ---------
(In Thousands)
<S> <C> <C> <C>
Origination by Type:
- -------------------
Adjustable Rate:
Real estate - one- to four-family
residential $16,132 $18,425 $15,200
- commercial 1,449 1,957 8,083
- home equity 311 184 93
------- ------- -------
Total adjustable rate 17,892 20,566 23,376
------- ------- -------
Fixed Rate:
- ----------
Real estate - one- to four-family
residential 4,636 3,383 9,237
- commercial 2,109 1,867 1,065
Non-real estate - consumer(1) 8,163 4,089 4,473
------- ------- -------
Total fixed rate 14,908 9,339 14,775
------- ------- -------
Sales:
- -----
Real estate loans 1,299 1,008 1,540
------- ------- -------
Principal repayments 19,750 15,112 15,755
------- ------- -------
Total reductions 21,049 16,120 17,295
------- ------- -------
Increase (decrease) in other
items, net (4,682) (2,238) (8,786)
------- ------- -------
Net increase (decrease) $ 7,069 $11,321 $12,070
======= ======= =======
- ---------------------
<FN>
(1) Consumer loans include the amounts outstanding on credit card
accounts opened by the Company and outstanding lines of credit on home
equity loans. The total credit available was $2.5 million at March 31,
1994 which would have increased fixed-rate consumer loans to $6,971,000.
At March 31, 1995, the total credit available was $3.5 million which
would have increased fixed-rate consumer loans to $10,049,000. At March
31, 1996, the total credit available was $3.6 million which would have
increased fixed-rate consumer loans to $12,185,000.
</TABLE>
<PAGE>
<PAGE> 14
Income From Lending Activities
- ------------------------------
Community realizes interest and loan fee income from its lending
activities. The Company receives loan fees on both commercial real
estate and one- to four-family residential loans. The Company receives
loan fees and charges related to existing loans, which include late
charges. Interest on loans, loan fees and service charges together
comprised 97.4% of the Company's total revenues for the year ended
March 31, 1996. Income from loan fees and other fees is a volatile
source of income, varying with the volume and type of loans and
commitments made and with competitive and economic conditions.
Generally accepted accounting principles ("GAAP") allow the inclusion
of loan fees in current income to an amount limited to the Company's
loan underwriting and closing costs. The remaining deferred fees are
amortized into income over the estimated remaining lives of the loans to
which they relate, using a method which approximates level yield. The
Company had deferred fees net of direct underwriting costs of $396,284
at March 31, 1996.
Delinquent and Problem Loans
- ----------------------------
When a borrower fails to make a required payment on a loan, the
Company attempts to cause the delinquency to be cured by contacting the
borrower. A notice is mailed to the borrower after a payment is 16 days
past due and again when the loan is 28 days past due. For most loans,
if the delinquency is not cured within 30 days the Company issues a
notice of intent to foreclose on the property and if the delinquency is
not cured within 60 days, the Company may institute foreclosure action.
If foreclosed on, real property is sold at a public sale and may be
purchased by the Company. In most cases, delinquencies are cured
promptly.
<PAGE>
<PAGE> 15
The following table sets forth information concerning delinquent
mortgage and other loans at March 31, 1996. The amounts presented
represent the total remaining principal balances of the related loans,
rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Residential
Real Estate Commercial Consumer
------------------ ------------------ -----------------
Number Amount Number Amount Number Amount
------- ------- ------ ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans Delinquent for:
- --------------------
30-59 days 7 $476 1 $ 12 25 $178
60-89 days --- --- --- --- 16 129
90 days and over 1 52 --- --- 51 541
---- ---- ---- ---- --- ----
Total delinquent loans 8 $528 1 $ 12 92 $848
==== ==== ==== ==== === ====
</TABLE>
Federal regulations provide for the classification of loans, debt,
equity securities and other assets considered to be of lesser quality as
"substandard," "doubtful" or "loss" assets. The regulations require
insured institutions to classify their own assets and to establish
prudent general allowances for losses on assets classified
"substandard" or "doubtful." For the portion of assets classified as
"loss," an institution is required to either establish specific
allowances of 100% of the amount classified or charge such amount off
its books. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the
aforementioned categories but possess potential weaknesses are required
to be designated "special mention" by management. In addition, the OTS
may require the establishment of a general allowance for losses based on
assets classified as "substandard" and "doubtful" or based on the
general quality of the asset portfolio of an institution. In connection
with the filing of its periodic reports with the OTS and in accordance
with its classification of assets policy, the Company regularly reviews
the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis
of management's review of its assets, at March 31, 1996, the Company had
classified $632,000 of its assets as substandard, and none as loss or
doubtful. All assets of the Company that have been classified are
included in the table below of non-performing assets and assets for
which repayment by the borrower may be in doubt. In addition, the
Company had $1,342,000 in special mention assets. See "- Non-Performing
Assets."
<PAGE>
<PAGE> 16
Non-Performing Assets
- ---------------------
The table below sets forth the amounts and categories of non-
performing assets in the Company's loan portfolio. Non-performing assets
include non-accruing loans, accruing loans delinquent 90 days or more and
real estate acquired through foreclosure, which include assets acquired in
settlement of loans. All consumer loans more than 120 days delinquent
are charged against the consumer loan allowance for loan losses. Accruing
mortgage loans delinquent more than 90 days are loans that the Company
considers to be well secured and in the process of collection. For the
years presented, the Company has had no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans
or making loans at a rate materially less than that of market rates).
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------
1996 1995 1994 1993 1992
------- -------- ------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Consumer $ --- $ 3 $ --- $ --- $ ---
Accruing Loans Delinquent
More Than 90 Days:
Residential 52 --- 15 24 25
Commercial --- --- 23 689 ---
Consumer 541 --- 18 --- 16
Real estate acquired
through foreclosure 148 350 380 500 553
------ ------ ------- ------ ------
Total $ 741 $ 353 $ 436 $1,213 $ 594
====== ====== ======= ====== ======
Total as a percentage
of total assets .46% .23% .32% .98% .47%
====== ====== ======= ====== ======
Unallocated allowance for
loan losses $ 791 $ 728 $ 628 $ 580 $ 475
====== ====== ======= ====== ======
</TABLE>
At March 31, 1996, the Company's non-performing assets were comprised
of one single family residential property which was more than ninety days
past due, real estate acquired through foreclosure of a single family
dwelling which is currently rented and various consumer loans which includes
one loan relationship of approximately $430,000 secured by classic automobiles
and a second mortgage on real estate for which an allowance of $145,000 has
been made. Based on current market values of the collateral securing these
loans, management anticipates no significant losses in excess of the reserves
for losses previously recorded.
As of March 31, 1996, there were $1,342,000 in loans with respect to
which known information about the possible credit problems of the
borrowers or the cash flows of the security properties have caused
management to have doubts as to the ability of the borrowers to comply
with present loan repayment terms and which may result in the future
inclusion of such items in the non-performing asset categories.
<PAGE>
<PAGE> 17
Although management believes that these loans are adequately secured
and no material loss is expected, certain circumstances may cause the
borrower to be unable to comply with the present loan repayment terms at
some future date.
The $1,342,000 in special mention loans referred to above is
comprised of two loans. The first has a balance of $742,031 and
is secured by a first mortgage on a combination condominium/office
complex. The complex has a low occupancy rate but is current in
payments. The second loan has a balance of $600,000 and is
secured by a first deed of trust on land which was originally intended
for the construction of a fast food restaurant but which is now under
contract for sale. The loan was made to individuals with substantial net
worth and is current in payment. The Company is closely monitoring the
status of these loans.
Allowance for Losses on Loans and Real Estate
- ---------------------------------------------
The Company provides valuation reserves for anticipated losses on
loans and real estate when its management determines that a significant
decline in the value of the collateral has occurred, as a result of
which the value of the collateral is less than the amount of the unpaid
principal of the related loan plus estimated costs of acquisition and
sale. In addition, the Company also provides reserves based on the
dollar amount and type of collateral securing its loans, in order to
protect against unanticipated losses. Although management believes that
it uses the best information available to make such determinations,
future adjustments to reserves may be necessary, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations. During 1996, the
Company increased its allowance for losses on loans by $237,657 due
primarily to the allowance for one delinquent consumer loan borrower of
$145,000. At March 31, 1996, the Company had an allowance for loan
losses of $1,000,278 which is predominantly a general allowance.
<PAGE>
<PAGE> 18
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning
of period $ 763 $ 661 $ 613 $ 477 $ 283
------ ------- ------- ------- -------
Provision charged to
operations 307 109 74 153 205
------ ------- ------- ------- -------
Charge-offs:
- -----------
Residential real
estate --- --- --- --- ---
Consumer 71 7 28 19 17
Recoveries:
Consumer 1 --- 2 2 6
------ ------- ------- ------- -------
Net charge-offs 70 7 26 17 11
------ ------- ------- ------- -------
Balance at end
of period $1,000 $ 763 $ 661 $ 613 $ 477
====== ======= ======= ======= =======
Ratio of net charge-
offs during the
period to average
loans outstanding
during the period .01% .01% .01% .01% .01%
====== ======= ======= ======= =======
</TABLE>
<PAGE>
<PAGE> 19
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
Commercial
Residential Real Estate Construction Consumer Total
----------- ----------- ------------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
March 31, 1996
- --------------
Amount of loan loss
allowance $ 381 $ 242 $ 83 $ 294 $ 1,000
Loan amounts by
category 91,212 38,433 6,415 8,905 144,965
Percent of loans in
each category to
total loans 62.9% 26.5% 4.5% 6.1% 100.0%
March 31, 1995
- --------------
Amount of loan loss
allowance $ 216 $ 374 $ 72 $ 101 $ 763
Loan amounts by
category 86,331 39,667 4,336 6,928 137,262
Percent of loans in
each category to
total loans 62.9% 28.9% 3.2% 5.0% 100.0%
March 31, 1994
- --------------
Amount of loan loss
allowance $ 193 $ 408 $ 23 $ 79 $ 703
Loan amounts by
category 77,583 41,046 2,992 4,182 125,803
Percent of loans in
each category to
total loans 61.7% 32.6% 2.4% 3.3% 100.0%
March 31, 1993
- --------------
Amount of loan loss
allowance $ 180 $ 364 $ 36 $ 75 $ 655
Loan amounts by
category 70,904 36,839 2,407 3,384 113,534
Percent of loans in
each category to
total loans 62.5% 32.4% 2.1% 3.0% 100.0%
March 31, 1992
- --------------
Amount of loan loss
allowance $ 177 $ 238 $ 17 $ 87 $ 519
Loan amounts by
category 71,358 32,091 2,657 3,034 109,140
Percent of loans in
each category to
total loans 65.4% 29.4% 2.4% 2.8% 100.0%
</TABLE>
<PAGE>
<PAGE> 20
Subsidiary Activities
- ---------------------
Federal regulations permit federal savings banks to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans
to such subsidiaries, and joint ventures in which such subsidiaries are
participants, in an aggregate amount not exceeding 2% of an
institution's assets, plus an additional 1% of assets if the amount over
2% is used for specified community or inner-city development purposes.
In addition, federal regulations permit institutions to make specified
types of loans to such subsidiaries (other than special-purpose finance
subsidiaries), in which the institution owns more than 10% of the stock,
in an aggregate amount not exceeding 50% of the institution's
loans-to-one-borrower limit if the institution's regulatory capital is in
compliance with applicable regulations. When an institution fails to
meet that standard, such loans must be included in amounts invested
under the general limit, unless a waiver is obtained from the OTS.
Federal institutions may also invest up to 30% of assets in special-
purpose finance subsidiaries established and operated in accordance with
OTS regulations.
The Bank has not established any other service corporation
subsidiaries as of March 31, 1996.
Investment Activities
- ---------------------
Federal thrift institutions have authority to invest in various types
of liquid assets, including U.S. Treasury obligations and securities of
various federal agencies, certificates of deposit at insured
institutions, bankers' acceptances and federal funds.
Federal thrift institutions may also invest a portion of their assets
in certain commercial paper and corporate debt securities. Federal
thrift institutions are also authorized to invest in mutual funds whose
assets conform to the investments that a federal thrift institution is
authorized to make directly. There are various restrictions on the
foregoing investments. For example, the commercial paper must be
appropriately rated by at least two nationally recognized investment
rating services and the corporate debt securities must be appropriately
rated by at least one such service. In addition, the average maturity
of an institution's portfolio of corporate debt securities may not, at
any one time, exceed six years, and the commercial paper must mature
within nine months of issuance. Moreover, an institution's total
investment in the commercial paper and corporate debt securities of any
one issuer may not exceed 1% of the institution's assets except that an
institution may invest 5% of its assets in the shares of any appropriate
mutual fund. As a member of the FHLB System, Community Federal must
maintain minimum levels of investments that are liquid assets as
specified by the OTS. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in
relation to the return on loans.
Historically, the Bank has maintained its liquid assets above the
minimum requirements imposed by federal regulations and at a level
believed adequate to meet requirements of normal daily activities,
repayment of maturing debt and potential deposit outflows. Cash flow
projections are regularly reviewed and updated to assure that adequate
liquidity is provided. As of March 31, 1996, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings and current
borrowings) was 6.9%. See "Regulation - Federal Home Loan Bank
System."
<PAGE>
<PAGE> 21
The contractual maturities and weighted average yields of the
investment securities portfolio, excluding FHLB of Atlanta stock and
FHLMC preferred stock, are indicated in the following table.
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------------------
Within 1 to 5 Total Investment
1 Year Years Securities
---------- ---------- -------------------------
Book Value Book Value Book Value Market Value
---------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Federal agency
obligations $750 $4,999 $5,749 $5,771
Floating-rate notes
and commercial
paper --- 319 319 319
---- ------ ------ ------
Total investment
securities $750 $5,318 $6,068 $6,091
==== ====== ====== ======
Weighted average
yield 6.81% 6.69% 6.70% 6.67%
==== ==== ==== ====
</TABLE>
<PAGE>
<PAGE> 22
The following table sets forth the composition of the Company's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
March 31,
----------------------------------------------
1996 1995 1994
-------------- ------------- -------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits with
banks $1,147 100.0% $2,166 100.0% $8,073 100.0%
Federal funds sold --- --- --- --- --- ---
------ ----- ------ ----- ----- -----
Total $1,147 100.0% $2,166 100.0% $8,073 100.0%
====== ===== ====== ===== ====== =====
Investment securities:
U.S. government
securities $ --- ---% $1,245 20.6% $ 500 19.6%
Federal agency
obligations 5,749 62.7 2,498 41.3 --- ---
Floating-rate notes
and commercial
paper 319 3.5 525 8.7 980 38.3
FHLMC preferred
stock 1,754 19.1 525 8.7 81 3.2
----- ----- ----- ----- ----- -----
Subtotal 7,822 85.3 4,793 79.3 1,561 61.1
FHLB stock 1,350 14.7 1,250 20.7 995 38.9
----- ----- ----- ----- ----- -----
Total investment
securities and
FHLB stock $9,172 100.0% $6,043 100.0% $2,556 100.0%
====== ===== ====== ===== ====== =====
Average remaining life
or term to repricing,
excluding FHLMC pre-
ferred stock, FHLB
stock and other
marketable equity
securities 2 years 1 year 1 year
</TABLE>
During 1995 the market rates paid on investment securities increased.
As a result, the Company changed its mix of investments from overnight
funds to two and three year U.S. government securities and federal
agency obligations in order to take advantage of the higher rates.
During 1996 the Company invested primarily in federal agency securities
with maturities of one to five years some of which are callable within three
months to one year from date of purchase.
Sources of Funds
General. Deposit accounts have traditionally been the principal
source of the Company's funds for use in lending and for other general
business purposes. In addition to deposits, the Company derives funds
<PAGE>
<PAGE> 23
from loan repayments, cash flows generated from operations, which
includes interest credited to deposit accounts, repurchase agreements
entered into with commercial banks and FHLB of Atlanta advances.
Contractual loan payments are a relatively stable source of funds,
while deposit inflows and outflows and the related cost of such funds have
varied widely. Borrowings may be used on a short-term basis to
compensate for reductions in deposits or deposit inflows at less than
projected levels and may be used on a longer-term basis to support
expanded lending activities.
Deposits. The Company attracts both short-term and long-term
deposits from the general public by offering a wide assortment of accounts
and rates. The Company has been required by market conditions to rely on
short-term accounts and other deposit alternatives that are more
responsive to market interest rates than the passbook accounts and fixed
interest rate, fixed-term certificates that were the Company's primary
source of deposits in the past. The Company offers regular passbook
accounts, checking accounts, various money market accounts, fixed-rate
certificates with varying maturities, $100,000 or above jumbo
certificates of deposit and individual retirement accounts. Certain of
the Company's jumbo certificates which have matured revert to a passbook
rate and are reflected in the tables as passbook accounts. The Company
does not solicit brokered deposits.
The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered by the Company at the
periods indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Passbook and statement accounts $ 12,179 $ 12,170 $ 13,975
NOW and Super NOW checking accounts 13,583 12,380 11,402
Money market accounts 10,232 11,620 18,951
One- to five-year fixed-rate
certificates 66,649 62,019 49,133
Six-month money market certificates 6,403 6,295 8,460
Jumbo certificates 435 500 270
7- to 31-day certificates --- --- ---
91-day certificates 21 30 92
-------- -------- --------
Total $109,502 $105,014 $102,283
======== ======== ========
</TABLE>
<PAGE>
<PAGE> 24
The following table sets forth the change in the dollar amount of
savings deposits in the various types of deposit programs offered by the
Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1996 1995 1994
--------- --------- --------
(In Thousands)
<S> <C> <C> <C>
Passbook and statement accounts $ 9 $(1,805) $ 1,096
NOW and Super NOW accounts 1,203 978 3,160
Money market accounts (1,388) (7,331) 2,045
One- to five-year fixed-rate
certificates 4,630 12,886 (440)
Six-month money market certificates 108 (2,165) (671)
Jumbo certificates (65) 230 (955)
7- to 31-day certificates --- --- (216)
91-day certificates (9) (62) (48)
------- ------- -------
Total increase $ 4,488 $ 2,731 $ 3,971
======= ======= =======
</TABLE>
The following table contains information pertaining to the average
amount of and the average rate paid on each of the following deposit
categories for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
1996 1995 1994
----------------- ---------------- -----------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposit Category
- ----------------
Noninterest bearing
demand deposits $ 2,653 ---% $ 1,754 ---% $ 1,367 ---%
Interest bearing
demand deposits 20,486 3.05 28,877 3.08 27,094 3.17
Savings deposits 11,808 3.00 13,230 2.99 13,425 3.03
Time deposits 72,934 5.48 61,434 4.52 58,809 4.64
-------- ----- -------- ----- -------- ----
Total deposits $107,881 4.61% $105,295 3.84% $100,695 3.97%
======== ===== ======== ===== ======== ====
</TABLE>
The variety of deposit accounts offered by the Company has allowed it
to be competitive in obtaining funds and has allowed it to respond with
flexibility (by paying rates of interest more closely approximating
market rates of interest) to, although not eliminate the threat of,
disintermediation (the flow of funds away from depository institutions
<PAGE>
<PAGE> 25
such as thrift institutions into direct investment vehicles such as
government and corporate securities). In addition, the Company has
become much more subject to short-term fluctuations in deposit flows, as
customers have become more interest rate conscious. The ability of the
Company to attract and maintain deposits, and its cost of funds, has
been, and will continue to be, significantly affected by money market
conditions.
The following table sets forth the deposit flows of the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------
1996 1995 1994
--------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $105,014 $102,283 $ 98,312
Net deposits (withdrawals) (248) (856) 589
Interest credited 4,736 3,587 3,382
-------- -------- --------
Ending balance $109,502 $105,014 $102,283
-------- -------- --------
Net increase $ 4,488 $ 2,731 $ 3,971
-------- -------- --------
Percent increase 4.27% 2.67% 4.04%
==== ==== ====
</TABLE>
To the extent that the Company may rely on sources of funds other
than deposits, the Company's earnings may be adversely affected. The
Company may use borrowings as an alternative source of funds. See "--
Borrowings."
The following table shows rate information for the Company's
certificates of deposit as indicated.
<TABLE>
<CAPTION>
2.00- 3.00- 5.00- 6.01- 7.01- 8.01-
3.00% 5.00% 6.00% 7.00% 8.00% 9.00% Total
------- -------- -------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1996 $ 159 $15,948 $40,512 $16,572 $ 317 $ --- $73,508
March 31, 1995 166 31,241 27,050 8,351 1,615 419 68,842
March 31, 1994 92 42,449 8,891 1,465 2,284 2,773 57,954
</TABLE>
<PAGE>
<PAGE> 26
The following table shows rate and maturity information for
the Company's certificates of deposit as of March 31, 1996.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
------- -------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate Accounts
Maturing in
Quarter Ending:
- --------------------
June 30, 1996 $ 127 $ 4,817 $10,632 $15,576 21.19%
September 30, 1996 12 9,536 3,747 13,295 18.09
December 31, 1996 --- 5,736 239 5,975 8.13
March 31, 1997 --- 11,439 915 12,354 16.81
June 30, 1997 --- 1,616 1,996 3,612 4.91
September 30, 1997 --- 2,594 3,395 5,989 8.15
December 31, 1997 --- 2,465 229 2,694 3.67
March 31, 1998 --- 3,164 19 3,183 4.33
June 30, 1998 --- 1,002 16 1,018 1.39
September 30, 1998 --- 1,415 --- 1,415 1.92
December 31, 1998 --- 893 --- 893 1.21
March 31, 1999 --- 1,079 --- 1,079 1.46
Thereafter 138 2,955 3,332 6,425 8.74
------- ------- ------- ------- ------
Total $ 277 $48,711 $24,520 $73,508 100.00%
======= ======= ======= ======= ======
</TABLE>
The following table indicates the amount of the Company's
certificates of deposit by time remaining until maturity as of March 31,
1996.
<TABLE>
<CAPTION>
Maturity
3 Months Over Over Over
or 3 to 6 6 to 12 12
less Months Months Months Total
-------- -------- --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit
less than $100,000 $14,874 $12,107 $17,025 $24,216 $68,222
Certificates of deposit
of $100,000 or more. 841 1,188 1,304 1,953 5,286
------- ------- ------- ------- -------
Total certificates
of deposit $15,715 $13,295 $18,329 $26,169 $73,508
======= ======= ======= ======= =======
</TABLE>
<PAGE>
<PAGE> 27
Borrowings
- ----------
As a member of the FHLB of Atlanta, the Company is required to own
capital stock in the FHLB of Atlanta and is authorized to apply for
advances from the FHLB of Atlanta. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and range of maturities.
The FHLB of Atlanta may prescribe the acceptable uses to which these
advances may be put, as well as limitations on the size of the advances
and repayment provisions. See Note 5 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders filed as
Exhibit 13 hereto for information regarding the maturities and rate
structure of the Company's FHLB advances.
The Company's borrowings, from time to time, also include securities
sold under agreements to repurchase, with mortgage-backed securities or
other securities pledged as collateral. The proceeds are utilized by
the Company for general corporate purposes. At March 31, 1996, the
Company had no securities sold under agreements to repurchase.
The Company utilizes borrowings to supplement deposits when they are
available at a lower overall cost to the Company or they can be invested
at a positive rate of return.
The following table sets forth the maximum month-end balance, and
average balance and weighted average rate, of FHLB advances for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------
1996 1995 1994
-------------- ------------- --------------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB $27,000 $25,000 $19,500
======= ======= =======
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Average Balance:
FHLB advances $25,347 6.1% $20,121 4.8% $14,440 3.4%
======= === ======= === ======= ===
</TABLE>
<PAGE>
<PAGE> 28
The following table sets forth information as to the Company's
short-term borrowings at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
-------------------------
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances $27,000 $25,000 $19,500
------- ------- -------
Total borrowings $27,000 $25,000 $19,500
======= ======= =======
Weighted average interest
rate of FHLB advances 5.88% 6.27% 3.94%
==== ==== ====
</TABLE>
Competition
- -----------
Community faces strong competition both in originating real estate
loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other thrift institutions, commercial
banks and mortgage bankers who also make loans secured by real estate
located in the Company's market area. The Company competes for real
estate loans principally on the basis of the interest rates and loan
fees it charges, the types of loans it originates and the quality of
services it provides to borrowers.
The Company faces substantial competition in attracting deposits from
other thrift institutions, commercial banks, money market and mutual
funds, credit unions and other investment vehicles. The ability of the
Company to attract and retain deposits depends on its ability to provide
an investment opportunity that satisfies the requirements of investors
as to rate of return, liquidity, risk and other factors. The Company
competes for these deposits by offering a variety of deposit accounts at
competitive rates and convenient business hours.
The authority to offer money market deposits, and expanded lending and
other powers authorized for thrift institutions by federal legislation,
have resulted in increased competition for both deposits and loans
between thrift institutions and other financial institutions such as
commercial banks.
The Company considers its primary market for savings to be Augusta
County and for mortgage loans to be Augusta and Rockingham Counties. At
March 31, 1996, there was one thrift institution and twelve commercial
banks with offices in the Company's two-county primary market area. The
Company estimates that its market share of savings deposits in Augusta
County is approximately 10% and its share of mortgage loans in Augusta
and Rockingham Counties is less than 10%.
<PAGE>
<PAGE> 29
REGULATION
General
- -------
Community Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and
credit of the United States Government. Accordingly, Community Federal is
subject to broad federal regulation and oversight extending to all its
operations. The Bank is a member of the FHLB of Atlanta and is subject
to certain limited regulation by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of Community Federal, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the
Company and other holding companies is to protect subsidiary savings
associations. Community Federal is a member of the Savings Association
Insurance Fund ("SAIF") and the deposits of Community Federal are
insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Bank.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
Federal Regulation of Savings Associations
- ------------------------------------------
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Community is required to file
periodic reports with the OTS and is subject to periodic examinations by
the OTS and the FDIC. When these examinations are conducted by the OTS
and the FDIC, the examiners may require the Company to provide for
higher general or specific loan loss reserves. The last regular OTS
examination of Community was in April, 1996 and the examiners did not require
the Company to provide for higher general or specific loan loss reserves.
All savings associations are subject to a semi-annual assessment,
based upon the savings association's total assets, to fund the
operations of the OTS. The Company's OTS assessment for the fiscal year
ended March 31, 1996, was $46,024.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Community Federal
and the Company. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-
desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of
laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS
is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws, and it is prohibited from engaging
in any activities not permitted by such laws. For instance, no savings
institution may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not
exceed 400% of total capital, except with approval of the OTS. Federal
savings associations are also generally authorized to branch nationwide.
Community is in compliance with the noted restrictions.
The Company's general permissible lending limit for loans-to-
one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
<PAGE>
<PAGE> 30
unimpaired capital and surplus). At March 31, 1996, the Company's
lending limit under this restriction was $2.7 million. See "Business -
Lending Activities - General" for a discussion of the impact of this
regulation on the Company.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters
as loan underwriting and documentation, internal controls and audit
systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards
must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further
enforcement action. The OTS and other federal banking agencies have
also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the
proposed regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
- ------------------------------------------------
Community Federal is a member of the SAIF, which is part of and
administered by the FDIC. Deposits are insured up to applicable limits
by the FDIC and such insurance is backed by the full faith and credit of
the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against
savings associations, after giving the OTS an opportunity to take
such action, and may terminate the deposit insurance if it determines
that the institution has engaged in unsafe or unsound practices, or is
in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system, under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums, based upon
their level of capital and supervisory evaluation. Under the system,
institutions classified as well capitalized (i.e., a core capital ratio
of at least 5%, a ratio of Tier 1 or core capital to risk-weighted
assets ("Tier 1 risk-based capital") of at least 6% and a risk-based
capital ratio of at least 10%) and considered healthy pay the lowest
premium while institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all
insured institutions will be made by the FDIC for each semi-annual
assessment period. For the first six months of 1995, the assessment
schedule for Bank Insurance Fund ("BIF") members and SAIF members ranged
from .23% to .31% of deposits.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less
than the designated reserve ratio of 1.25% of SAIF insured deposits. In
setting these increased assessments, the FDIC must seek to restore the
reserve ratio to that designated reserve level, or such higher reserve
ratio as established by the FDIC. The FDIC may also impose special
assessments on SAIF members to repay amounts borrowed from the United
States Treasury or for any other reason deemed necessary by the FDIC.
As is the case with the SAIF as a part of the FDIC, the FDIC is
authorized to adjust the insurance premium rates for banks that are insured
by the BIF of the FDIC in order to maintain the reserve ratio of the BIF at
1.25% of BIF insured deposits. As a result of the BIF reaching its statutory
reserve the FDIC revised the premium schedule for the BIF insured institutions
<PAGE>
<PAGE> 31
to provide a range of .04% to .31% of deposits. The revisions became
effective in the third quarter of 1995. In addition, the BIF rates were
further revised, effective January 1996, to provide a range of 0% to
.27% with a minimum annual assessment of $2,000. The SAIF rates,
however, were not adjusted. As a result of these revisions, the BIF
members will generally pay lower premiums
The SAIF is not expected to attain the designated reserve ratio until
the year 2002, due to the shrinking deposit base for SAIF assessments
and the requirement that SAIF premiums be used to make the interest
payments on bonds issued by the Financing Corporation ("FICO") in order
to finance the costs of resolving thrift failures in the 1980s members
will generally be subject to higher deposit insurance premiums than BIF
members until, all things being equal, the SAIF attains the required
reserve ratio.
The effect of this disparity on the Bank and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF
insured institutions to offer loan and deposit products on more
attractive terms than SAIF members due to the cost savings achieved
through lower deposit premiums, thereby placing SAIF members at a
competitive disadvantage. In order to eliminate this disparity a number
of proposals to recapitalize the SAIF have been recently considered by
the United States Congress. The plan under current consideration
provides for a one-time assessment, anticipated to range from .80% to
.90%, to be imposed on all deposits assessed at the SAIF rates as of
March 31, 1995, including those held by commercial banks, and for BIF
deposit insurance premiums to be used to pay the FICO bond interest on a
pro rata basis together with SAIF premiums. The BIF and SAIF would be
merged into one fund as soon as practicable, but no later than January
1, 1998. There can be no assurance that any particular proposal will be
enacted or that premiums for either BIF or SAIF members will not be
adjusted in the future by the FDIC.
Regulatory Capital Requirements
- -------------------------------
Federally insured savings associations, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose
capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital
generally includes common stockholders' equity and retained income, and
certain noncumulative perpetual preferred stock and related income. In
addition, all intangible assets, other than a limited amount of
purchased mortgage servicing rights, must be deducted from tangible
capital. As of March 31, 1996, the Company did not have any purchased
mortgage servicing rights.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance
with the capital requirements, all subsidiaries engaged solely in
activities permissible for national banks or engaged in certain other
activities solely as agent for its customers are "includable"
subsidiaries that are consolidated for capital purposes in proportion to
the association's level of ownership. For excludable subsidiaries the
debt and equity investments in such subsidiaries are deducted from
<PAGE>
<PAGE> 32
assets and capital. At March 31, 1996, the Bank did not have any
subsidiaries.
At March 31, 1996 the Bank had tangible capital of $18.0 million, or
11.3% of adjusted total assets, which is approximately $15.6 million
above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.
The capital standards also require core capital equal to at least 3%
of adjusted total assets. Core capital generally consists of tangible
capital plus certain intangible assets, including a limited amount of
purchased credit card relationships. As a result of the prompt
corrective action provisions discussed below, however, a savings
association must maintain a core capital ratio of at least 4% to be
considered adequately capitalized unless its supervisory condition is
such to allow it to maintain a 3% ratio. At March 31, 1996, the Bank
had no intangibles which were subject to these tests.
At March 31, 1996, the Bank had core capital equal to $18.0
million, or 11.3% of adjusted total assets, which is $13.2 million above
the minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation
loan and lease loss allowances up to a maximum of 1.25% of risk-weighted
assets. Supplementary capital may be used to satisfy the risk-based
requirement only to the extent of core capital. The OTS is also
authorized to require a savings association to maintain an additional
amount of total capital to account for concentration of credit risk and
the risk of non-traditional activities. At March 31, 1996, Community
Federal had $791,000 that qualified as supplementary capital (consisting
primarily of general loss reserves) the total of which was less than
1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of
equity investments (as defined by regulation) and that portion of land
loans and nonresidential construction loans in excess of an 80% loan-to-
value ratio and reciprocal holdings of qualifying capital instruments.
Community Federal had no such exclusions from capital and assets at
March 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk
weight, ranging from 0% to 100%, based on the risk inherent in the type
of asset. For example, the OTS has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage
loans not more than 90 days delinquent and having a loan to value ratio
of not more than 80% at origination unless insured to such ratio by an
insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct
from its total capital, for purposes of determining compliance with such
requirement, an amount equal to 50% of its interest-rate risk exposure
multiplied by the present value of its assets. This exposure is a
measure of the potential decline in the net portfolio value of a savings
association, greater than 2% of the present value of its assets, based
upon a hypothetical 200 basis point increase or decrease in interest
rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule provides for a two quarter lag
<PAGE>
<PAGE> 33
between calculating interest rate risk and recognizing any deduction
from capital. The rule wil not become effective until the OTS evaluates
the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation
may be completed. Any savings association with less than $300 million in
assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise.
On March 31, 1996, the Bank had total capital of $19.2 million
(including $18.0 million in core capital and $792,000 in qualifying
supplementary capital) and risk-weighted assets of $109.3 million; or
total capital of 17.2% of risk-weighted assets. This amount was $10.0
million above the 8.0% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that
fail to meet their capital requirements. The OTS is generally required
to take action to restrict the activities of an "undercapitalized
association" (generally defined to be one with less than either a 4%
core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8%
risk-based capital ratio). Any such association must submit a capital
restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it
will enter into a limited capital maintenance guarantee with respect to
the institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less
than 6%) must be made subject to one or more of additional specified
actions and operating restrictions which may cover all aspects of its
operations and include a forced merger or acquisition of the
association.
An association that becomes "critically undercapitalized" (i.e., a
tangible capital ratio of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to
significantly undercapitalized associations. In addition, the OTS must
appoint a receiver (or conservator with the concurrence of the FDIC) for
a savings association, with certain limited exceptions, within 90 days
after it becomes critically undercapitalized.
Any undercapitalized association is also subject to the general
enforcement authority of the OTS and the FDIC, including the appointment
of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company may have a substantial adverse effect on the Company's
operations and profitability and the value of its Common Stock. Company
shareholders do not have preemptive rights, and therefore, if the
Company is directed by the OTS or the FDIC to issue additional shares of
Common Stock, such issuance may result in the dilution in the percentage
of ownership of the Company by stockholders.
<PAGE>
<PAGE> 34
Limitations on Dividends and Other Capital Distributions
- --------------------------------------------------------
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which
include dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account. OTS regulations
also prohibit a savings association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the amount
required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, associations, such as Community that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds
its capital requirement for such capital component, as measured at the
beginning of the calendar year, or 75% of its net income for the most
recent four quarter period. However, an association deemed to be in
need of more than normal supervision by the OTS may have its dividend
authority restricted by the OTS. Community may pay dividends in
accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such
distribution. Savings associations that do not, or would not meet their
current minimum capital requirements following a proposed capital
distribution, however, must obtain OTS approval prior to making such
distribution. The OTS may object to the distribution during that 30-day
period notice based on safety and soundness concerns. See "- Regulatory
Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may
make a capital distribution without notice to the OTS (unless it is a
subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not of supervisory concern and would remain adequately
capitalized (as defined in the OTS prompt corrective action regulations)
following the proposed distribution. Savings associations that would
remain adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days prior
to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not
exceed 50% of the institution's excess regulatory capital plus net
income to date during the calendar year. A savings association may not
make a capital distribution without prior approval of the OTS and the
FDIC if it is undercapitalized before, or as a result of, such a
distribution. As under the current rule, the OTS may object to a
capital distribution if it would constitute an unsafe or unsound
practice. No assurance may be given as to whether or in what form the
regulations may be adopted.
Liquidity
- ---------
All savings associations, including Community, are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a
discussion of what the Company includes in liquid assets, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources" in the Annual Report to
<PAGE>
<PAGE> 35
Stockholders filed as Exhibit 13 hereto. This liquid asset ratio
requirement may vary from time to time (between 4% and 10%) depending
upon economic conditions and savings flows of all savings associations.
At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States
Treasury obligations) currently must constitute at least 1% of the
association's average daily balance of net withdrawable deposit accounts
and current borrowings. Penalties may be imposed upon associations for
violations of either liquid asset ratio requirement. At March 31, 1996,
the Bank was in compliance with both requirements, with an overall
liquid asset ratio of 6.9%.
Qualified Thrift Lender Test
- ----------------------------
All savings associations, including Community Federal, are required to
meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for
nine out of every 12 months on a rolling basis. Such assets primarily
consist of residential housing related loans and investments.
Any savings association that fails to meet the QTL test must convert
to a national bank charter, unless it requalifies as a QTL and
thereafter remains a QTL. If an association does not requalify and
converts to a national bank charter, it must remain SAIF-insured until
the FDIC permits it to transfer to the BIF. If such an association has
not yet requalified or converted to a national bank, its new investments
and activities are limited to those permissible for both a savings
association and a national bank, and it is limited to national bank
branching rights in its home state. In addition, the association is
immediately ineligible to receive any new FHLB borrowings and is subject
to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years
after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB borrowings, which may result in
prepayment penalties. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure,
the holding company must register as a bank holding company and become
subject to all restrictions on bank holding companies. At March 31,
1996, Community Federal met the test and has always met the test since
its effectiveness. See "- Holding Company Regulation."
Community Reinvestment Act
- --------------------------
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with
safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best
suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to
assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch,
by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
<PAGE>
<PAGE> 36
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to
the CRA in the past few years, the Bank may be required to devote
additional funds for investment and lending in its local community. The
Bank was examined for CRA compliance in August, 1994 and received a rating
of satisfactory.
Transactions with Affiliates
- ----------------------------
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable
to the association as transactions with non-affiliates. In addition,
certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of
Community Federal include the Company and any company which is under
common control with the Bank. In addition, a savings association may
not lend to any affiliate engaged in activities not permissible for a
bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings associations as affiliates
on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the
OTS. These conflict of interest regulations and other statutes also
impose restrictions on loans to such persons and their related
interests. Among other things, such loans must be made on terms
substantially the same as for loans to unaffiliated individuals.
Holding Company Regulation
- --------------------------
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority
over the Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally
is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the
activities of the Company and any of its subsidiaries (other than the
Bank or any other SAIF-insured savings association) would become subject
to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries.
In addition, within one year of such failure the Company must register
as, and will become subject to, the restrictions applicable to bank
holding companies. The activities authorized for a bank holding company
are more limited than are the activities authorized for a unitary or
multiple savings and loan holding company. See "--Qualified Thrift
Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
<PAGE>
<PAGE> 37
interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings
association.
Federal Securities Law
- ----------------------
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the
Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System
- ----------------------
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking
accounts). At March 31, 1996, the Company was in compliance with these
reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve
Bank.
Federal Home Loan Bank System
- -----------------------------
The Bank is a member of the FHLB of Atlanta, which is one of 12
regional FHLBs, that administers the home financing credit function of
savings associations. Each FHLB serves as a reserve or central bank for
its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the
FHLB, which are subject to the oversight of the Federal Housing Finance
Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-
term advances are required to provide funds for residential home
financing.
As a member, Community Federal is required to purchase and maintain
stock in the FHLB of Atlanta. At March 31, 1996, Community Federal had
$1.4 million in FHLB stock, which was in compliance with this
requirement. In past years, the Bank has received substantial dividends
on its FHLB stock. Over the past five years such dividends have
averaged 6.34% and were 7.25% for fiscal year 1996.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low-
and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
<PAGE>
<PAGE> 38
moderate-income housing projects. These contributions have affected
adversely the level of FHLB dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on
the value of FHLB stock in the future. A reduction in value of the
Bank's FHLB stock may result in a corresponding reduction in Community
Federal's capital.
For the year ended March 31, 1996, dividends paid by the FHLB of
Atlanta to Community Federal totaled $92,069, which constitute a $21,190
increase over the amount of dividends received in fiscal year 1995. The
$23,790 dividend received for the quarter ended March 31, 1996, reflects
an annualized rate of 7.0%, or .12% above the rate for fiscal year
1995.
Federal and State Taxation
- --------------------------
Savings associations such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be
taken as a deduction in computing taxable income for federal income tax
purposes. The amount of the bad debt reserve deduction for
"non-qualifying loans" is computed under the experience method. The
amount of the bad debt reserve deduction for "qualifying real property
loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable
income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts
actually sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt
deduction") is 8%. The percentage bad debt deduction thus computed is
reduced by the amount permitted as a deduction for non-qualifying loans
under the experience method. The availability of the percentage of
taxable income method permits qualifying savings associations to be
taxed at a lower effective federal income tax rate than that applicable
to corporations generally (approximately 31.3% assuming the maximum
percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets,
the association may not deduct any addition to a bad debt reserve and
generally must include existing reserves in income over a four year
period. No representation can be made as to whether the Bank will meet
the 60% test for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in
the reserve for "qualifying real property loans" to an amount equal to
6% of such loans outstanding at the end of the taxable year or the
greater of (i) the amount deductible under the experience method or (ii)
the amount which when added to the bad debt deduction for "non-qualifying
loans" equals the amount by which 12% of the amount
comprising savings accounts at year-end exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year. At
March 31, 1996, the 6% and 12% limitations did not restrict the
percentage bad debt deduction available to the Bank. It is not expected
<PAGE>
<PAGE> 39
that these limitations would be a limiting factor in the foreseeable
future.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax.
An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference
items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax
and net operating losses can offset no more than 90% of alternative
minimum taxable income. For taxable years beginning after 1986 and
before 1996, corporations, including savings associations such as the
Bank, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for
the environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad
debt reserves for "qualifying real property loans" and deducted for
federal income tax purposes exceed the allowable amount of such reserves
computed under the experience method and to the extent of the
association's supplemental reserves for losses on loans ("Excess"), such
excess may not, without adverse tax consequences, be utilized for the
payment of cash dividends or other distributions to a shareholder
(including distributions on redemption, dissolution or liquidation) or
for any other purpose (except to absorb bad debt losses). As of March
31, 1996, the Bank's Excess for tax purposes totaled approximately $4.9
million.
The Company and the Bank file consolidated federal income tax returns
on a calendar year basis. The Company has elected to use the percentage
of taxable income method in years in which it has taxable income, the
experience method in other years, and has taken no bad debt deduction in
some years. Savings associations, such as the Bank, that file federal
income tax returns as part of a consolidated group are required by
applicable Treasury regulations to reduce their taxable income for
purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of
the savings association member.
The Company and its consolidated subsidiary have not been audited by the
IRS with respect to consolidated federal income tax returns for nearly ten
years.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an
annual report with and pay an annual fee to the State of Delaware. The
Company is also subject to an annual franchise tax imposed by the State
of Delaware.
Virginia Taxation. Community conducts its business in Virginia and
consequently is subject to the Virginia corporate franchise tax. The
Commonwealth of Virginia imposes a corporate income tax on a basis
similar to federal income tax as adjusted by deducting the federal bad
debt deduction but adding back a state bad debt deduction. The tax rate
is 6% of Virginia taxable income.
Executive Officers
<PAGE>
<PAGE> 40
The following information as to the business experience during the
past five years is supplied with respect to executive officers of the
Company. Except as otherwise indicated, the persons named have served
as officers of Community since it became the holding company of the
Bank, and all offices and positions described below are also with the
Bank. There are no arrangements or understandings between the persons
named and any other person pursuant to which such officers were
selected.
Thomas W. Winfree. Mr. Winfree, age 51, is the Company's President
and Chief Executive Officer. He was elected in November 1995. Prior to
joining the Company, Mr. Winfree was President and Chief Executive
Officer of Jefferson Savings and Loan in Warrenton, Virginia.
R. Jerry Giles. Mr. Giles, age 47, is the Company's Chief Financial
Officer. He was elected in April 1994. Prior to joining the Company,
Mr. Giles was a Certified Public Accountant in public accounting and the
Chief Financial Officer with a savings bank for eleven years.
Shirley V. Lovegrove. Ms. Lovegrove, age 57, is the Company's Vice
President, Operations and Savings, a position she has held since 1985.
Ms. Lovegrove has been employed by the Company since 1974 and was
previously an Assistant Vice President of the Company.
Angel Negron, Jr. Mr. Negron, age 49, is the Company's Vice President
and Chief Lending Officer, a position he has held since February, 1996.
Prior to his employment by the Company, Mr. Negron was a commercial loan
officer with a commercial bank for 21 years.
Paul K. Martin. Mr. Martin, age 32, is the Company's Vice President of
Administration, a position he has held since March 31, 1996, and was Assistant
Vice-President and Branch Manager of the Company and of the Bank from October
1991 to March, 1996.
Sarah A. Ralston. Ms. Ralston, age 62, has been the Company's
Secretary and Treasurer for the past 17 years. Ms. Ralston has been
employed by the Company in various capacities since 1956.
Patsy Clem. Ms. Clem, age 56, is the Company's Controller, a position
she has held since July, 1986. Ms. Clem has been employed by the
Company since 1983 in the Accounting Department.
Employees
- ---------
At March 31, 1996, the Company had a total of 35 employees, including
seven part-time employees. None of the Company's employees are
represented by any collective bargaining group. Management considers
its employee relations to be good.
Computer Equipment
- ------------------
The Company's accounting and record-keeping activities are maintained
on an on-line basis with an independent service bureau. The net book
value of the Company's computer equipment at March 31, 1996 was $90,079.
<PAGE>
<PAGE> 41
Item 2. Description of Property
- ---------------------------------
The following table sets forth information at March 31, 1996, with
respect to the Company's offices, furniture and equipment.
Owned
or Gross Net Book
Leased Square Value at
Location Opened Expiration Footage March 31, 1996
- ------------------------ ------ ---------- ------- ---------------
38 North Central Avenue 1956 Owned 17,000 $2,272,004
Staunton, Virginia
Rte. 250 West 1989 Owned 5,300 1,065,487
Waynesboro, Virginia
Routes 340 and 608 1993 Owned 2,074 354,553
Stuart's Draft, Virginia
Item 3. Legal Proceedings
- ---------------------------
There are no material pending legal proceedings to which the Company
or its subsidiary is a party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31,
1996.
<PAGE>
<PAGE> 42
PART II
Item 5. Market for Common Equity and Related Security
Holder Matters
- -------------------------------------------------------
As of May 31, 1996, there were approximately 551 holders of
record of Community Common Stock. Community's stock is quoted on the
National Association of Securities Dealer's Automated Quotation ("Nasdaq")
Stock Market under the symbol "CFFC." As of May 31, 1996, the
bid and asked prices for the Company's Common Stock as reported on the
Nasdaq Stock Market were $19.00 and $21.00, respectively.
The following tables present the Corporation's high and low, bid and
ask prices as reported by the Nasdaq Stock Market during the last two fiscal
years, which have been adjusted to reflect the Corporation's two-for-one
stock split effective in the form of a stock dividend payable to
stockholders as of November 14, 1994.
<TABLE>
<CAPTION>
Bid Ask
---------------- ----------------
1996 High Low High Low Dividend Declared
- -------------- ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
June 1995 $13.50 $12.00 $16.00 $14.00 $.10
September 1995 15.13 13.50 18.00 16.00 .10
December 1995 15.00 14.00 18.00 18.00 .11
March 1996 19.00 15.00 21.00 18.00 .11
</TABLE>
<TABLE>
<CAPTION>
Bid Ask
---------------- ----------------
1995 High Low High Low Dividend Declared
- -------------- ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
June 1994 $11.00 $10.13 $12.50 $11.63 $ .085
September 1994 12.00 11.00 13.50 12.50 .085
December 1994 12.50 12.00 13.50 13.50 .085
March 1995 12.00 12.00 14.00 14.00 .100
</TABLE>
In connection with regulatory approval of the holding company
structure, the OTS imposed a customary condition restricting the Bank
from paying cash dividends to the Corporation, at any time when it meets
its regulatory capital requirement, to 100% of its cumulative net income for
the prior eight quarters, and requiring prior regulatory approval for the
payment of dividends if the Bank does not meet its capital requirement or if
payment of the dividend would cause it not to meet its capital requirement.
The Bank currently exceeds its capital requirement. The Corporation is
subject to Delaware law which limits dividends to an amount equal to the
excess of a corporation's net assets over paid-in capital or, if there is no
excess, to its net profits for the current and immediately preceding fiscal
year.
<PAGE>
<PAGE> 43
Item 6. Management's Discussion and Analysis or Plan of Operation
- -----------------------------------------------------------------
Introduction
- ------------
Community is a Delaware corporation. Certain of the information
presented herein relates to the Bank, a wholly owned subsidiary and
predecessor of the Company.
The Company and the Bank, like all thrift institutions and their
holding companies, are subject to comprehensive regulation, examination
and supervision by the OTS and the FDIC.
The Company's net income is primarily dependent on the difference or
spread between the average yield earned on loans and investments and the
average rate paid on deposits and borrowings, as well as the relative
amounts of such assets and liabilities. The interest rate spread is
affected by regulatory, economic, and competitive factors that influence
interest rates, loan demand and deposit flows. The Company, like other
thrift institutions, is subject to interest rate risk to the degree that
its interest-bearing liabilities, primarily deposits and borrowings with
short- and medium-term maturities, mature or reprice more rapidly, or on
a different basis, than its interest-earning assets. While having
liabilities that mature or reprice more frequently on average than
assets may be beneficial in times of declining interest rates, such an
asset/liability structure may result in lower net income or net losses
during periods of rising interest rates, unless offset by other
noninterest income. The Company's net income is also affected by, among
other things, gains on sale of loans, mortgage-backed securities and
investment securities, fee income, provision for loan and real estate
losses, operating expenses and income taxes.
Asset/Liability Management
- --------------------------
Management of Community believes it is critical to manage the
relationship between interest rates and the effect on the Company's net
portfolio value ("NPV"). This approach calculates the difference
between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash
flows from off-balance sheet contracts. Management of the Company's
assets and liabilities is done within the context of the marketplace,
but also within limits established by the Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate
changes.
OTS issued a regulation, effective January 1, 1994, which uses a net
market value methodology to measure the interest rate risk exposure of
thrift institutions. Under OTS regulations, an institution's "normal"
level of interest rate risk in the event of an assumed change in
interest rates is a decrease in the institution's NPV in an amount not
exceeding 2% of the present value of its assets. Beginning July 1,
1994, thrift institutions with greater than "normal" interest rate
exposure must take a deduction from their total capital available to
meet their risk based capital requirement. The amount of that deduction
is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV)
and (b) its "normal" level of exposure which is 2% of the present value
of its assets. Utilizing this measurement concept, at December 31, 1995
(the latest available date), there was no decrease in the Company's NPV
as a percent of the present value of its assets. On this basis,
<PAGE>
<PAGE> 44
Community believes that its interest rate risk was consistent with the
amount treated as "normal" under the OTS regulations.
Presented below, as of December 31, 1995 and 1994, is an analysis of
the Bank's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100
basis point increments, up and down 300 basis points and compared to
Board policy limits and in accordance with OTS regulations, based on the
assumptions described below. Such limits have been established with
consideration of the dollar impact of various rate changes and the
Company's strong capital position. As illustrated in the table, NPV is
more sensitive to rising rates than declining rates. This occurs
principally because, as rates rise, the market value of fixed-rate loans
declines due to both the rate increase and slowing prepayments. When
rates decline, the Company does not experience a significant rise in
market value for these loans because borrowers prepay at relatively high
rates. The value of the Company's deposits and borrowings change in
approximately the same proportion in rising or falling rate scenarios.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Change in --------------------- ---------------------
Interest Rate Board Limit $ Change % Change $ Change % Change
(Basis Points) % Change in NPV in NPV in NPV in NPV
- --------------- ----------- -------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+300 -25% -$1,615 -7% -$5,393 -17%
+200 -15 -593 -3 - 3,661 -10
+100 -10 -70 0 - 2,117 -4
--- --- --- --- --- ---
-100 -10 -26 +1 156 +1
-200 -15 237 +3 -189 -1
-300 -25 725 +7 -848 -4
</TABLE>
Management continually works to maintain a neutral position
regarding interest rate risk. In the current low rate environment,
Community customers are interested in obtaining long term credit products
and short term savings products. Management has taken action to counter
this trend. A significant effort has been made to reduce the duration
and average life of the Bank's earning assets. As of March 31, 1996,
approximately 81% of the Company's gross loan portfolio consists of
loans which reprice during the life of the loan. The Bank emphasizes
adjustable rate mortgages and has increased its portfolio of short term
consumer loans. Longer term fixed-rate mortgage loans, 20 to 30 years,
are generally sold in the secondary market. The Company is currently
originating fixed-rate loans for immediate sale only.
On the deposit side, management has worked to reduce the impact of
interest rate changes by emphasizing non-interesting bearing or low
interest deposit products and maintaining competitive pricing on longer
term certificates of deposit. The Company has also used FHLB advances
to provide funding for loan originations and provide liquidity.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in
<PAGE>
<PAGE> 45
different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on
other types may lag behind changes in market rates. Additionally,
certain assets, such as ARM loans, have features which restrict changes
in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could
likely deviate significantly from those assumed in calculating the
table.
<PAGE>
<PAGE> 46
The following table sets forth certain information relating to
categories of the Company's interest-earning assets and its interest-
bearing liabilities for the periods indicated based on monthly
computations.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets
Loans and mortgage-
backed securities $138,127 $ 11,816 8.55% $128,830 $ 9,711 7.54% $117,157 $ 8,362 7.14%
Investment
securities and
other investments 9,254 517 6.17 8,800 457 5.18 13,120 375 2.86
-------- ------- -------- ------- -------- -------
Total interest-
earning assets 147,381 12,387 8.41 137,630 10,168 7.39 130,277 8,737 6.71
-------- ------- -------- ------- -------- -------
Interest-Bearing
Liabilities
Deposits 105,093 4,977 4.74 101,575 3,995 3.93 98,611 3,901 3.96
FHLB advances and
other borrowings 25,349 1,538 6.07 22,250 968 4.35 14,400 493 3.42
-------- ------- -------- ------- -------- -------
Total interest-
bearing
liabilities 130,440 6,515 4.99 123,825 4,963 4.01 113,011 4,394 3.89
-------- ------- -------- ------- -------- -------
Net interest
income/interest
rate spread $ 5,872 3.42% $ 5,205 3.38% $ 4,343 2.82%
======= ==== ======== ==== ======= ====
Net interest-
earning assets/net
yield on interest-
earning assets $ 16,941 3.47% $ 13,805 3.77% $ 17,266 3.33%
======== ==== ======== ==== ======== ====
Ratio of interest-
earnings assets
to interest-bearing
liabilities 112.99% 111.68% 115.28%
====== ====== ======
</TABLE>
<PAGE>
<PAGE> 47
The following table sets forth the Company's interest rate spread at
the dates indicated.
<TABLE>
<CAPTION>
March 31,
---------------------------
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Yield On
--------
Loans 8.32% 7.95% 6.77%
Investment securities and
other investments 5.60% 6.26% 4.01%
Total interest-earning
assets 8.14% 7.87% 6.57%
Cost Of
-------
Deposits 4.62% 4.39% 3.78%
FHLB of Atlanta advances
and other borrowings 5.88% 6.31% 3.94%
Total interest-bearing
liabilities 4.87% 4.77% 3.81%
Interest rate spread 3.27% 3.10% 2.76%
</TABLE>
<PAGE>
<PAGE> 48
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities
have affected Community's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate),
(ii) changes in rate (change in rate multiplied by prior year volume),
and (iii) total changes in rate and volume. The combined effect of
changes in both volume and rate, which cannot be separately identified,
has been allocated proportionately to the change due to volume and the
change due to rate.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------------------------
1996 v. 1995 1995 v. 1994 1994 v. 1993
-------------------------------- ------------------------------- ----------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
------------------- Increase --------------------- Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ----------- ------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans and mortgage-
backed securities $ 737 $1,368 $2,105 $ 863 $ 486 $ 1,349 $ 561 $(1,254) $ (693)
Investments 25 90 115 (171) 253 82 85 (331) (246)
------ ------ ------ ----- ------ ------- ------ ------- -------
Total interest-
earnings assets $ 762 1,458 2,220 $ 692 739 1,431 $ 646 (1,585) $ (939)
====== ------ ------ ===== ------ ------- ====== ------- =======
Interest-Bearing
Liabilities
Deposits $ 141 841 982 $ 122 (28) 94 $ (42) (890) (932)
FHLB advances and
other borrowings 149 421 570 317 158 475 199 (73) 126
------ ------ ------ ----- ------ ------- ------ ------- -------
Total interest-
bearing liabilities $ 290 $1,262 1,552 $ 439 $ 130 569 $ 157 $ (963) (806)
====== ====== ------ ===== ====== ------- ====== ======= -------
Net interest income $ 668 $ 862 $ (133)
====== ======= =======
</TABLE>
<PAGE>
<PAGE> 49
Asset Quality
- -------------
Asset quality is an important factor in the successful operation of a
financial institution. The loss of interest income and principal that
may result from non-performing assets has an adverse effect on earnings,
while the resolution of those assets requires the use of capital and
managerial resources. The Company maintains strict underwriting
guidelines, loan quality monitoring policies and systems that require
detailed monthly and quarterly analyses of delinquencies and non-performing
assets.
At March 31, 1996, the Company's total non-performing assets were
$741,000 or .46% of total assets compared to $350,308 or .23% at March 31,
1995. At March 31, 1996, the Company's non-performing assets were comprised of
one single family residential property which was more than ninety days past
due, real estate acquired through foreclosure of a single family dwelling
which is currently rented and various consumer loans which includes one loan
relationship of approximately $430,000 for which an allowance of $145,000 has
been made. Based on current market values of the collateral securing these
loans, management anticipates no significant losses in excess of the reserves
for losses previously recorded. Due to an uncertain real estate market and the
economy in general no assurances can be given that the Corporation's level of
non-performing assets may not increase in the future.
The Company maintains an allowance for loan losses to provide for
estimated potential losses in its loan portfolio. Management determines
the level of reserves based on loan performance, the value of the
collateral, economic and market conditions, and previous experience.
Management reviews the adequacy of the allowance at least quarterly,
utilizing its internal loan classifications system. During 1996, the
Company increased its allowance for losses on loans by $237,657 to
$1,000,278 due to the delinquency of a consumer loan described above, and the
Company's increased loan volume, especially in commercial real estate,
multi-family and consumer loans. See "Asset/Liability Management." The total
allowance of $1,000,278 is predominantly a general allowance with only
approximately $208,900 reserved against specific loans. Management believes
that the loan loss reserve is adequate. The Company has had net charge-offs to
its loan loss reserve of $70,000, $7,000 and $29,000, for the years ended
March 31, 1996, 1995 and 1994, respectively. Although management believes it
uses the best information available, future adjustments to reserves may be
necessary.
Financial Condition
- -------------------
The Company's total assets increased $9,359,666 to $159,792,621 at
March 31, 1996, loans receivable increased by $7,223,237 and
stockholders' equity increased by $2,347,546. The increase in loans
receivable was funded primarily by increases in Federal Home Loan Bank
advances of $2,000,000 and deposits of $4,487,895. The increase in
deposits can be attributed to a $4,666,000 increase in time deposits
offset by a decrease in demand deposits of $178,105 which management
believes is primarily related to a time deposit promotion during the fiscal
year where depositors transferred demand deposits into time deposits. The
increase in loans receivable was due to the origination of primarily
adjustable-rate loans secured by residential real estate.
The Bank's principal use of funds is to originate loans. The
principal source of funds for loan disbursements is loan principal
repayments, borrowings and net growth in deposits. In fiscal 1996 net
loans increased by $7.2 million as compared to an increase of $11.3
million in fiscal 1995. While borrowings for fiscal 1996 increased by
$2.0 million, the increase in the loan portfolio was also funded
through increased deposits of $4.5 million.
<PAGE>
<PAGE> 50
Results of Operations
- ---------------------
The Company's results of operations depend primarily on the level of
its net interest income and noninterest income and the level of its
operating expenses. Net interest income depends upon the value of
interest-earning assets and interest-bearing liabilities and the
interest rate earned or paid on them.
Comparison of Years Ended March 31, 1996 and 1995
-------------------------------------------------
General. Net income for the year March 31, 1996 was $2,011,538 or $1.60
per share compared to $1,771,481 or $1.44 per share for the year March 31,
1995. Net income increased primarily due to the increase in net interest
income of $667,703 during the year ended March 31, 1996.
Interest Income. Total interest income increased to $12,387,722 for the
year ended March 31, 1996 as compared to $10,167,615 for the year ended March
31, 1995. The increase in total interest income can be attributed to increases
in both dollar volume of interest earning assets and yields on interest
earning assets. Average yields on total interest-earning assets increased form
7.39% in fiscal 1995 to 8.41% for the current fiscal year due primarily to
adjustable rate loans repricing at higher rates and an increase in market
rates on investments.
Interest Expense. Total interest expense increased to $6,515,234 for the
year ended March 31, 1996 from $4,962,830 for the year ended March 31, 1995.
While average balances for both deposits and borrowings increased during the
fiscal year, the increase in interest expense is attributable primarily to an
increase in the cost of funds from 4.01% for the year ended March 31, 1995 to
4.99% for the current fiscal year. Although management believes the increase
in the average cost of funds is attributable to improving economic conditions
locally and nationally for most of fiscal 1996, no prediction can be made as
to the future trend in the cost of funds.
Provision for Loan Losses. The provision increased to $307,361 for the
fiscal ended March 31, 1996 from $108,946 for the fiscal year ended March 31,
1995. The Company monitors its loan loss reserve on a quarterly basis and
makes allocations as necessary. Management believes that the level of its loan
loss reserve is adequate. As of March 31, 1996, the total allowance for loan
losses amounted to $1,000,278 of which $791,378 was not specifically allocated
to identified problem loans. See "Asset Quality."
Noninterest Income. Noninterest income increased to $455,706 in fiscal
1996 as compared to $398,815 for the year ended March 31, 1995, primarily due
to an increase in th number of checking accounts and the related charges. The
Company continued offering a package of checking account products which was
initiated in fiscal 1993 and increased its checking account base by
approximately 800 accounts during the year ended March 31, 1996.
Noninterest Expense. Total noninterest expense increased to $2,808,924
during the year ended March 31, 1996 from $2,639,385 for the year March 31,
1995. The increase in interest expenses is generally in proportion to the
asset growth of the Company.
Taxes. Total taxes increased to $1,200,371 during the year ended March
31, 1996 from $1,083,788 during fiscal 1995. The effective tax rate for the
year ended March 31, 1996 was 37.4% as compared to 38.0% for the year ended
March 31, 1995. The increase in taxes is attributable to an increase in income
before income taxes.
<PAGE>
<PAGE> 51
Comparison of Years Ended March 31, 1995 and 1994
-------------------------------------------------
General. Net income for the year ended March 31, 1995 was $1,771,481
or $1.44 per share compared to $1,576,760 or $1.26 per share for the
year March 31, 1994. Net income increased primarily due to the increase
in net interest income of $861,808 during the year ended March 31, 1995.
Interest Income. Total interest income increased to $10,167,615 for
the year ended March 31, 1995 as compared to $8,736,959 for the year
ended March 31, 1994. The increase in total interest income can be
attributed to increases in both dollar volume of interest earning assets
and yields on interest earning assets. Average yields increased from
6.71% in fiscal 1994 to 7.39% for the current fiscal year due primarily
to adjustable rate loans repricing at higher rates and an increase in
market rates on investments.
Interest expense. Total interest expense increased to $4,962,830 for
the year ended March 31, 1995 from $4,393,982 for the year ended March
31, 1994. While the average cost of funds did increase to 4.01% for the
year ended March 31, 1995 from 3.89% for fiscal 1994, the increase in
interest expense is attributable primarily to the increase in average
interest bearing liabilities. Although management believes the increase
in the average cost of funds is attributable to improving economic
conditions locally and nationally for most of fiscal 1995, no prediction
can be made as to the future trend in the cost of funds.
Provision for Loan Losses. The provision for loan losses increased to
$108,946 for the fiscal year ended March 31, 1995 from $73,899 for the
fiscal year ended March 31, 1994. The Company monitors its loan loss
reserve on a quarterly basis and makes allocations as necessary.
Management believes that the level of its loan loss reserve is adequate.
As of March 31, 1995, the total allowance for loan losses amounted to
$762,621 of which $727,621 was not specifically allocated to identified
problem loans. See "Asset Quality."
Noninterest Income. Noninterest income increased to $398,815 in fiscal
1995 as compared to $369,503 for the year ended March 31, 1994,
primarily due to an increase in the number of checking accounts and the
related charges. The Company continued offering a package of checking
account products which was initiated in fiscal 1993 and increased its
checking account base by approximately 1,000 accounts during the year
ended March 31, 1995.
Noninterest Expenses. Total noninterest expense increased to
$2,639,385 during the year ended March 31, 1995 from $2,148,621 for the
year ended March 31, 1994. The increase in noninterest expenses is
related to the branch acquisition and the expansion of the main office.
Taxes. Total taxes increased to $1,083,788 during the year ended March
31, 1995 from $913,200 during fiscal 1994. The effective tax rate for
the year ended March 31, 1995 was 38.0% as compared to 36.7% for the
year ended March 31, 1994. The increase in taxes is attributable to an
increase in income before income taxes.
<PAGE>
<PAGE> 52
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of funds are customer deposits,
advances from the FHLB of Atlanta, amortization and prepayment of loans,
proceeds from the sale of loans and funds provided from operations.
Management of the Company maintains investments in liquid assets based
upon its assessment of (i) the Company's needs for funds, (ii) expected
deposit flows, (iii) the yields available on short-term liquid assets,
(iv) the liquidity of the Company's loan portfolio, and (v) the
objectives of the Company's asset/liability management program.
Liquidity represents the ability to meet on-going funds requirements
for contractual obligations, the credit needs of customers, withdrawal
of customers' deposits and operating expenses. Savings associations are
required to maintain minimum levels of liquid assets. The regulations
currently require the Bank to maintain an average daily balance of
liquid assets equal to at least 5% of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in
one year or less. At March 31, 1996 the Bank's liquid asset ratio was
6.9%.
The Company's dominant source of funds during the year ended March 31,
1996 was from deposits which increased by $4,500,000 due primarily to an
increase in time deposits of $4,700,000 offset by a $200,000 decrease in
demand deposits. FHLB advances also increased for the year ended March 31,
1996 by $2,000,000. Management believes this shift in deposit categories is
attributable primarily to a time deposit promotion during the fiscal year
which permitted the customer to adjust the rate on the certificate during the
term of the certificate. The decrease in demand deposits was due in part to
depositors transferring funds into time deposits.
The Company's cash decreased by $900,000 from $4,600,000 at March 31,
1996 to $3,700,000 at March 31, 1995. The decrease in cash is related to a
$1,800,000 increase in securities held to maturity and the increase in loans
receivable.
At March 31, 1996, the Company had commitments to purchase or
originate $4,890,000 of adjustable-rate mortgage loans and commitments to
purchase or originate $830,000 of fixed-rate mortgage loans.
At March 31, 1996, the Bank had tangible and core capital of 11.3% of
adjusted total assets, which were in excess of their respective
requirements of 1.5% and 3.0%. The Bank also had risk-based capital of
17.2% of risk weighted assets, which also exceeded its requirement of 8%.
See Note 8 of the Notes to Consolidated Financial Statements.
Impact of Inflation and Changing Prices
- ---------------------------------------
The consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial
position and results of operations in terms of historical dollars
without considering changes in the relative purchasing power of money
over time because of inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or the same magnitude as the
price of goods and services. In the current interest-rate environment,
equity, maturity structure and quality of the Company's assets and
liabilities are critical to the maintenance of acceptable performance
levels.
<PAGE>
<PAGE> 53
Accounting Pronouncements
- -------------------------
The following summaries are of certain accounting pronouncements
implemented by the Company during fiscal 1996. For a discussion of certain
new pronouncements which will be implemented in the future, see Note 1 of the
Notes to Consolidated Financial Statements.
In December 1991, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 107 ("SFAS 107")
"Disclosures About Fair Value of Financial Instruments." SFAS 107
requires all entities to disclose the fair value of financial
instruments, both assets and liabilities recognized and not recognized
in the statement of financial condition, for which it is practicable to
estimate fair value. SFAS 107 is effective for fiscal years ending
after December 15, 1995, for entities with less than $150 million in
total assets, as of its December 1991 issuance date. See Note 5 of the Notes
to Consolidated Financial Statements in regard to this statement.
In October, 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." SFAS No. 118 amends Statement No. 114 to allow a creditor
to use existing methods for recognizing interest income on impaired
loans and also amends the disclosure requirements of Statement No. 114
to require information about the recorded investment in certain impaired
loans and about how a creditor recognizes interest income related to
these impaired loans. SFAS No. 118 is effective concurrent with the
effective date of Statement 114, that is, for financial statements for
fiscal years beginning after December 15, 1994. This statement was
implemented in the current fiscal year and is disclosed in Note 2 of the Notes
to Consolidated Financial Statements.
Also issued in October, 1994 is SFAS No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial
Instruments." This statement requires improved disclosures about
derivative financial instruments - futures, forward, swap, or option
contracts, or other derivative financial instruments with similar
characteristics. SFAS No. 119 is effective for fiscal years ending
after December 15, 1994, except for entities with less than $150 million
in total assets. For those entities, the effective date would be for
financial statements issued for fiscal years ending after December 15,
1995. Since the Company does not engage in any activities with
derivative financial instruments, this statement did not have a
significant impact on its financial statements.
<PAGE>
<PAGE> 54
Item 7. Financial Statements
- ------------------------------
Report of Independent Certified Public Accountants
To the Board of Directors of
Community Financial Corporation
Staunton, Virginia
We have audited the accompanying consolidated balance sheets of Community
Financial Corporation and subsidiary as of March 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1996. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Community Financial Corporation and subsidiary at March 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 1996 in conformity with generally
accepted accounting principles.
April 24, 1996
<PAGE>
<PAGE> 55
Community Financial Corporation and Subsidiary
Balance Sheets
<TABLE>
<CAPTION>
March 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Assets
Cash (including interest bearing deposits of
approximately $1,147,000 and $2,166,000) $ 3,673,085 $ 4,582,983
Securities (Note 1)
Held to maturity 6,067,778 4,268,530
Available for sale 1,754,445 524,790
Investment in Federal Home Loan Bank
stock, at cost (Note 6) 1,350,000 1,250,000
Loans receivable, net (Notes 2 and 6) 141,738,895 134,515,658
Real estate owned, net 123,322 350,308
Property and equipment, net (Note 3) 3,692,043 3,846,007
Accrued interest receivable 1,020,417 769,019
Prepaid expenses and other assets 372,636 325,660
------------ ------------
$159,792,621 $150,432,955
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 4) $109,501,461 $105,013,566
Advances from Federal Home Loan Bank (Note 6) 27,000,000 25,000,000
Advance payments by borrowers for taxes
and insurance 142,737 152,197
Other liabilities (Notes 7 and 9) 1,248,443 714,758
------------ ------------
Total liabilities 137,892,641 130,880,521
------------ ------------
Commitments and Contingencies
(Notes 9, 10 and 11)
Stockholders' Equity (Notes 8 and 10)
Preferred stock, $.01 par value, authorized
1,000,000 shares, none outstanding --- ---
Common stock, $.01 par value, 3,000,000
authorized shares, 1,269,698 and 1,241,878
shares outstanding 12,697 12,419
Additional paid-in capital 4,651,634 4,540,632
Retained earnings 16,206,237 14,723,799
Net unrealized gain on securities available
for sale (Note 1) 1,029,412 275,584
------------ ------------
Total stockholders' equity 21,899,980 19,552,434
------------ ------------
$159,792,621 $150,432,955
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
<PAGE> 56
Community Financial Corporation and Subsidiary
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Interest income
Loans $11,816,368 $ 9,711,238 $8,362,005
Investment securities 447,619 238,272 133,825
Other investments 123,735 218,105 241,129
----------- ----------- ----------
Total interest income 12,387,722 10,167,615 8,736,959
----------- ----------- ----------
Interest expense
Deposits (Note 4) 4,977,188 3,994,663 3,900,740
Borrowed money 1,538,046 968,167 493,242
----------- ----------- ----------
Total interest expense 6,515,234 4,962,830 4,393,982
----------- ----------- ----------
Net interest income 5,872,488 5,204,785 4,342,977
Provision for loan losses (Note 2) 307,361 108,946 73,899
----------- ----------- ----------
Net interest income after provision for
loan losses 5,565,127 5,095,839 4,269,078
----------- ----------- ----------
Noninterest income
Service charges, fees and commissions 430,945 364,738 299,809
Other 24,761 34,077 69,694
----------- ----------- ----------
Total noninterest income 455,706 398,815 369,503
----------- ----------- ----------
Noninterest expense
Compensation and employee benefits
(Notes 9 and 10) 1,183,016 1,110,412 907,006
Occupancy 372,560 352,472 254,352
Data processing (Note 11) 308,814 273,057 204,438
Insurance 242,076 237,037 190,466
Other 702,458 666,407 592,359
----------- ----------- ----------
Total noninterest expense 2,808,924 2,639,385 2,148,621
----------- ----------- ----------
</TABLE>
continued...
<PAGE>
<PAGE> 57
Community Financial Corporation and Subsidiary
Consolidated Statements of Income
(continued)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Income before income taxes $3,211,909 $2,855,269 $2,489,960
----------- ----------- ----------
Income taxes (Note 7)
Current 1,139,733 968,721 779,300
Deferred 60,638 115,067 133,900
----------- ----------- ----------
Total income taxes 1,200,371 1,083,788 913,200
----------- ----------- ----------
Net income $2,011,538 $1,771,481 $1,576,760
=========== =========== ==========
Earnings per share $ 1.60 $ 1.44 $ 1.26
=========== =========== ==========
</TABLE>
See accompanying summary of accounting policies and notes
to consolidated financial statements.
<PAGE>
<PAGE> 58
Community Financial Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Gain on
Additional Securities Total
Common Paid-in Retained Available Stockholders'
Stock Capital Earnings For Sale Equity
------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1993 $ 6,041 $4,406,478 $12,221,207 $ --- $16,633,726
Net income --- --- 1,576,760 --- 1,576,760
Cash dividends, $.34 per
share --- --- (410,816) --- (410,816)
Appropriation of retained
earnings, employee stock
ownership plan (Note 8) --- --- 7,935 --- 7,935
------- ---------- ---------- --------- ----------
Balance, March 31, 1994 6,041 4,406,478 13,395,086 --- 17,807,605
Net income --- --- 1,771,481 --- 1,771,481
Cash dividends, $.35 per share (436,612) (436,612)
Stock dividend 6,156 --- (6,156) ---
Exercise of stock options
(Note 10) 222 134,154 --- --- 134,376
Net unrealized gain on
securities available for sale
(Note 1) --- --- --- 275,584 275,584
------- ---------- ---------- --------- ----------
Balance, March 31, 1995 12,419 4,540,632 14,723,799 275,584 19,552,434
Net income --- --- 2,011,538 --- 2,011,538
Cash dividends, $.43 per share --- --- (529,100) --- (529,100)
Exercise of stock options
(Note 10) 278 111,002 --- --- 111,280
Net unrealized gain on
securities available for sale
(Note 1) --- --- --- 753,828 753,828
------- ---------- ----------- --------- ----------
Balance, March 31, 1996 $12,697 $4,651,634 $16,206,237 $1,029,412 $21,899,980
======= ========== =========== ========= ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
<PAGE> 59
Community Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Operating activities
Net income $ 2,011,538 $ 1,771,481 $ 1,576,760
Adjustments to reconcile net income
to net cash provided by operating
activities
Provision for loan losses 307,361 108,946 73,899
Provision for real estate losses 25,000 30,000 ---
Depreciation 212,750 207,452 129,013
Amortization of premium and
accretion of discount on
securities, net (351) (13,903) 13,428
Increase (decrease) in net
deferred loan origination fees (110,561) (118,420) 22,255
Loans originated for resale (1,422,000) (1,008,000) (3,001,500)
Proceeds from loan sales 1,299,000 1,008,000 2,731,138
Increase in deferred income taxes 62,327 115,067 133,900
Loss on sale of real estate --- --- 4,299
Increase in other assets (298,374) (98,465) (312,718)
Increase (decrease) in other
liabilities (13,929) 74,957 7,947
FHLB stock dividends received --- --- (79,100)
----------- ----------- -----------
Net cash provided by operating
activities 2,072,761 2,077,115 1,299,321
----------- ----------- -----------
Investing activities
Proceeds from maturities of held
to maturity securities 2,979,871 3,432,760 1,600,000
Purchase of held to maturity
securities (4,791,147) (6,204,980) (25,000)
Net increase in loans (7,068,723) (11,320,566) (12,607,709)
Purchases of property and equipment (72,735) (463,564) (1,689,716)
Proceeds from sale of real
estate owned 800,606
Redemption of FHLB stock 180,000 480,300
Purchase of FHLB stock (100,000) (435,000)
----------- ----------- -----------
Net cash absorbed by investing
activities (9,052,734) (14,811,350) (11,441,519)
=========== =========== ===========
</TABLE>
continued...
<PAGE>
<PAGE> 60
Community Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Financing activities
Net increase (decrease) in
certificates of deposit $ 4,665,694 $10,887,840 $(2,330,933)
Net increase (decrease) in savings
and checking deposits (177,799) (8,156,816) 6,301,534
Proceeds from issuance of
common stock 111,280 134,376
Dividends paid (529,100) (436,612) (410,816)
Proceeds from advances 78,000,000 69,500,000 19,500,000
Repayments of advances (76,000,000) (64,000,000) (9,000,000)
----------- ----------- -----------
Net cash provided by financing
activities 6,070,075 7,928,788 14,059,785
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents (909,898) (4,805,447) 3,917,587
Cash and cash equivalents -
beginning of year 4,582,983 9,388,430 5,470,843
----------- ----------- -----------
Cash and cash equivalents -
end of year $ 3,673,085 $ 4,582,983 $ 9,388,430
=========== =========== ===========
Supplemental Disclosures of Cash
Flow Information
Cash payments of interest expense $ 6,482,210 $ 4,917,080 $ 4,363,538
----------- ----------- -----------
Cash payments of income taxes $ 1,151,092 $ 892,829 $ 856,826
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities
- ------------------------------------
Transfers from loans to real estate
acquired through foreclosure $ 298,334 $ --- $ 727,016
=========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
<PAGE> 61
Community Financial Corporation and Subsidiary
Summary of Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Community Financial Corporation (the "Corporation") and its wholly-owned
subsidiary, Community Federal Savings Bank (the "Savings Bank"). All material
intercompany accounts and transactions have been eliminated in consolidation.
Nature of Business and Regulatory Environment
The Savings Bank is a federally chartered thrift and the primary asset of the
Corporation. The Corporation provides a full range of banking services to
individual and corporate customers through its wholly-owned subsidiary.
The Office of Thrift Supervision ("OTS"), is the primary regulator for
federally chartered savings associations, as well as savings and loan holding
companies.
The Federal Deposit Insurance Corporation ("FDIC") is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the Savings Association Insurance
Fund.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
was effective January 1, 1993. FDICIA contained provisions which allow
regulators to impose prompt corrective action on undercapitalized institutions
in accordance with a categorized capital-based system.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of 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.
Securities
Effective April 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments
in Debt and Equity Securities". SFAS 115 addresses the accounting and
reporting of investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Investments in
securities are to be classified as either held-to-maturity, trading, or
available for sale. Upon adoption of SFAS 115, the Corporation recorded an
unrealized gain on available-for-sale securities of $275,584, net of tax
effect of $168,601, as an increase to stockholders' equity. The adoption of
this statement had no effect on the Corporation's statement of income.
<PAGE>
<PAGE> 62
Community Financial Corporation and Subsidiary
Summary of Accounting Policies
(continued)
Securities (continued)
Investments in debt securities classified as held-to-maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts using
the level yield method. Management has a positive intent and ability to hold
these securities to maturity and, accordingly, adjustments are not made for
temporary declines in their market value below amortized cost. Investment in
Federal Home Loan Bank stock is stated at cost.
Investments in debt and equity securities classified as available-for-sale are
stated at market value with unrealized holding gains and losses excluded from
earnings and reported as a net amount (net of tax effect) as a separate
component of stockholders' equity until realized.
Investments in debt and equity securities classified as trading are stated at
market value. Unrealized holding gains and losses for trading securities are
included in the statement of operations.
Gains and losses on the sale of securities are determined using the specific
identification method.
Loans Receivable
Loans receivable consists primarily of long-term real estate loans secured by
first deeds of trust on single family residences, other residential property,
commercial property and land located primarily in the state of Virginia.
Interest income on mortgage loans is recorded when earned and is recognized
based on the level yield method. The Corporation provides an allowance for
accrued interest deemed to be uncollectible, which is netted against accrued
interest receivable in the consolidated balance sheets.
The Corporation defers loan origination and commitment fees, net of certain
direct loan origination costs, and the net deferred fees are amortized into
interest income over the lives of the related loans as yield adjustments. Any
unamortized net fees on loans fully repaid or sold are recognized as income in
the year of repayment or sale.
The Corporation places loans on nonaccrual status after being delinquent
greater than 90 days or earlier if the Corporation becomes aware that the
borrower has entered bankruptcy proceedings, or in situations in which the
loans have developed inherent problems prior to being 90 days delinquent that
indicate payments of principal or interest will not be made in full. Whenever
the accrual of interest is stopped, previously accrued but uncollected
interest income is reversed. Thereafter, interest is recognized only as cash
is received until the loan is reinstated.
<PAGE>
<PAGE> 63
Community Financial Corporation and Subsidiary
Summary of Accounting Policies
(continued)
Loans Receivable (continued)
The allowance for loan losses is maintained at a level considered by
management to be adequate to absorb future loan losses currently inherent in
the loan portfolio. Management's assessment of the adequacy of the allowance
is based upon type and volume of the loan portfolio, past loan loss
experience, existing and anticipated economic conditions, and other factors
which deserve current recognition in estimating future loan losses. Additions
to the allowance are charged to operations. Loans are charged-off partially
or wholly at the time management determines collectibility is not probable.
Management's assessment of the adequacy of the allowance is subject to
evaluation and adjustment by the Corporation's regulators.
Effective April 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for
Impairment of a Loan (as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures). The effect of
adopting these new accounting standards were immaterial to the operating
results of the Corporation for the year ended March 31, 1996.
Under the new accounting standard, a loan is considered to be impaired when it
is probable that the Corporation will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
performing loan may be considered impaired. The allowance for loan losses
related to loans identified as impaired is primarily based on the excess of
the loan's current outstanding principal balance over the estimated fair
market value of the related collateral. For a loan that is not collateral-
dependent, the allowance is recorded at the amount by which the outstanding
principal balance exceeds the current best estimate of the future cash flows
on the loan discounted at the loan's original effective interest rate. Prior
to 1995, the allowance for loan losses for all loans which would have
qualified as impaired under the new accounting standards was primarily based
upon the estimated fair market value of the related collateral.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all
or a portion of a cash payment received on a nonaccrual loan may be recognized
as interest income to the extent allowed by the loan contract, assuming
management expects to fully collect the remaining principal balance on the
loan.
Real Estate Owned
Real estate acquired through foreclosure is initially recorded at the lower of
fair value, less selling costs, or the balance of the loan on the property at
date of foreclosure. Costs relating to the development and improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value.
<PAGE>
<PAGE> 64
Community Financial Corporation and Subsidiary
Summary of Accounting Policies
(continued)
Sale of Loans and Participations in Loans
The Corporation is able to generate funds by selling loans and participations
in loans to the Federal Home Loan Mortgage Corporation and other investors.
Under participation service agreements, the Corporation continues to service
the loans and the participant is paid its share of principal and interest
collections.
Gain or loss on loan participations is recognized at the time of the sale.
The gain or loss recorded is equal to the present value of the estimated
future interest receipts, net of allowance for estimated servicing costs and a
normal servicing profit on the portion sold less the present value of interest
payments to be remitted to the buyers. The resulting deferred premium or
discount is amortized or accreted to income using the level yield method.
Loan servicing income is recorded when earned. Loan servicing costs are
charged to expense as incurred.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Provisions for depreciation are computed using the straight-line method over
the estimated useful lives of the individual assets. Expenditures for
betterments and major renewals are capitalized and ordinary maintenance and
repairs are charged to operations as incurred. Estimated useful lives are
five to ten years for furniture and equipment and five to fifty years for
buildings and improvements.
Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities.
In computing Federal income taxes, savings banks that meet certain
definitional tests and other conditions prescribed by the Internal Revenue
Code are allowed, within limitations, to deduct from taxable income an
allowance for bad debts based on actual loss experience, a percentage of
taxable income (8%) before such deduction or an amount based on a percentage
of eligible loans. The cumulative bad debt reserve, upon which no taxes have
been paid, was approximately $4,861,000 as of March 31, 1996.
Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued its Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of".
SFAS 121 requires that long-lived assets and certain intangibles to be held
and used by an entity be reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
addition, SFAS 121 requires long-lived assets and certain intangibles to be
disposed of to be reported at the lower of carrying amount or fair value less
costs to sell. SFAS 121 is effective for fiscal years beginning after
December 15, 1995. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of the
Corporation.
<PAGE>
<PAGE> 65
Community Financial Corporation and Subsidiary
Summary of Accounting Policies
(continued)
Accounting Pronouncements (continued)
In May 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage
Servicing Rights an Amendment of FASB Statement No. 65". SFAS 122 requires
entities to allocate the cost of acquiring or originating mortgage loans
between the mortgage servicing rights and the loans, based on their relative
fair values, if the bank sells or securitizes the loans and retains the
mortgage servicing rights. In addition, SFAS 122 requires entities to assess
its capitalized mortgage servicing rights for impairment based on the fair
value of those rights. SFAS 122 is effective for fiscal years beginning after
December 15, 1995. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of the
Corporation.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." SFAS No. 123 allows companies to continue to account for their
stock option plans in accordance with APB Opinion 25 but encourages the
adoption of a new accounting method based on the estimated fair value of
employee stock options. Companies electing not to follow the new fair value
based method are required to provide expanded footnote disclosures, including
pro forma net income and earnings per share, determined as if the company had
applied the new method. SFAS No. 123 is required to be adopted by the
Corporation prospectively beginning April 1, 1996. Management does not expect
the application of this pronouncement to have a material effect on the
financial statements of the Corporation.
Earnings Per Share
Earnings per share is computed based on the weighted average number of shares
of common stock outstanding during each period including the assumed exercise
of dilutive stock options, and is retroactively adjusted for stock dividends
and stock splits. Existing stock options are considered dilutive for the year
ended March 31, 1994 and are included in the computation as common stock
equivalents. The weighted average number of shares of common stock
outstanding for the years ended March 31, 1996, 1995 and 1994 including common
stock equivalents for the year 1994 were 1,258,068, 1,227,690 and 1,250,528,
respectively.
Statement of Cash Flows
For purposes of this presentation, cash equivalents include federal funds
sold.
Other
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the March 31, 1996 presentation.
<PAGE>
<PAGE> 66
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Securities
A summary of the amortized cost and estimated market values of investment
securities is as follows:
March 31, 1996
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
Held to Maturity
- ----------------
United States government
and agency obligations $5,749,143 $ 43,821 $ 21,194 $5,771,770
Corporate obligations 293,612 13 --- 293,625
Other 25,023 360 --- 25,383
---------- ---------- -------- ----------
6,067,778 44,194 21,194 6,090,778
---------- ---------- -------- ----------
Available for Sale
- ------------------
Federal Home Loan Mortgage
Corporation stock 80,605 1,673,840 --- 1,754,445
---------- ---------- -------- ----------
$6,148,383 $1,718,034 $ 21,194 $7,845,223
========== ========== ======== ==========
<PAGE>
<PAGE> 67
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
1. Securities (continued)
March 31, 1995
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
Held to Maturity
- ----------------
United States government
and agency obligations $3,743,318 $ 10,960 $ --- $3,754,278
Corporate obligations 500,189 --- 501 499,688
Other 25,023 221 --- 25,244
---------- ---------- -------- ----------
4,268,530 11,181 501 4,279,210
---------- ---------- -------- ----------
Available for Sale
- ------------------
Federal Home Loan Mortgage
Corporation stock 80,605 444,185 --- 524,790
---------- ---------- -------- ----------
$4,349,135 $ 455,366 $ 501 $4,804,000
========== ========== ======== ==========
<PAGE>
<PAGE> 68
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
1. Securities (continued)
The amortized cost and estimated market value of securities at March 31, 1996,
by contractual maturity, are shown below:
March 31, 1996
---------------------
Estimated
Amortized Market
Cost Value
--------- ---------
Held to Maturity
- ----------------
Due in one year or less $ 749,857 $ 755,706
Due in one through five years 5,292,898 5,309,689
Other 25,023 25,383
---------- ----------
6,067,778 6,090,778
---------- ----------
Available for Sale
- ------------------
Federal Home Loan Mortgage Corporation stock 80,605 1,754,445
---------- ----------
$6,148,383 $7,845,223
========== ==========
<PAGE>
<PAGE> 69
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
2. Loans Receivable
Loans receivable are summarized as follows:
March 31,
---------------------------
1996 1995
------------ ------------
Real estate loans
First mortgage conventional
One to four family $ 91,031,523 $ 86,331,019
Multi-family 20,453,598 20,614,621
Commercial 18,160,142 19,052,183
Short-term construction 6,415,254 4,336,066
------------ ------------
Total real estate loans 136,060,517 130,333,889
Less
Loans in process 1,830,271 1,476,628
Deferred loan fees, net 411,371 506,844
Allowance for loan losses 706,755 661,524
------------ ------------
Net real estate loans 133,112,120 127,688,893
------------ ------------
Consumer loans
Deposit account 234,093 266,760
Unsecured personal 3,615,716 3,599,679
Automobile 1,469,633 1,071,805
Home equity 379,605 412,530
Other 3,206,164 1,577,088
------------ ------------
Total consumer loans 8,905,211 6,927,862
Less
Deferred loan fees (origination costs), net (15,087) ---
Allowance for loan losses 293,523 101,097
------------ ------------
Net consumer loans 8,626,775 6,826,765
------------ ------------
$141,738,895 $134,515,658
============ ============
<PAGE>
<PAGE> 70
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
2. Loans Receivable (continued)
Loans serviced for others amounted to approximately $11,264,000, $11,782,000
and $12,261,000 at March 31, 1996, 1995 and 1994, respectively. The loans
were not included in the accompanying consolidated statements of financial
condition.
The weighted average interest rate on loans receivable was approximately 8.32%
and 7.95% at March 31, 1996 and 1995, respectively.
A summary of the allowance for loan losses is as follows:
Year Ended March 31,
------------------------------------------
1996 1995 1994
---------- ------- -------
Balance at beginning of year $ 762,621 $660,652 $613,159
Provision charged to expense 307,361 108,946 73,899
Losses charged to the allowance,
net of recoveries (69,704) (6,977) (26,406)
---------- -------- --------
Balance at end of year $1,000,278 $762,621 $660,652
========== ======== ========
Of the total allowance for loan losses at March 31, 1996 and 1995,
approximately $791,300 and $727,700, respectively, is not specifically
allocated to identified problem loans.
The following information relates to the Corporation's impaired loans which
includes troubled debt restructurings that meet the definition of impaired
loans as of and for the year ended March 31, 1996:
Impaired loans with a specific allowance $425,030
Impaired loans with no specific allowance ---
--------
Total impaired loans $425,030
========
Total allowance related to impaired loans $145,270
Average balance of impaired loans for the period $425,030
Interest income on impaired loans for the period
recorded on a cash basis $ ---
<PAGE>
<PAGE> 71
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
3. Property and Equipment
Property and equipment are summarized as follows:
March 31,
------------------------------
1996 1995
---------- ----------
Buildings $3,174,401 $3,178,438
Land and improvements 873,244 873,244
Furniture and equipment 745,391 695,172
---------- ----------
4,793,036 4,746,854
Less accumulated depreciation 1,100,993 900,847
---------- ----------
$3,692,043 $3,846,007
========== ==========
4. Deposits
Deposits are summarized below:
March 31, 1996
--------------------------------------
Weighted
Average
Amount Rate Percent
------------ -------- ---------
Demand deposits
Savings accounts $ 12,178,293 3.00% 11.1%
NOW accounts 13,371,037 2.26 12.2
Money market deposit accounts 10,444,131 3.24 9.6
------------ ---- -----
Total demand deposits 35,993,461 2.79 32.9
Time deposits 73,508,000 5.52 67.1
------------ ---- -----
$109,501,461 4.62% 100.0%
============ ==== =====
<PAGE>
<PAGE> 72
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
4. Deposits (continued)
March 31, 1995
--------------------------------------
Weighted
Average
Amount Rate Percent
------------ -------- ---------
Demand deposits
Savings accounts $ 12,170,286 3.00% 11.6%
NOW accounts 12,380,414 2.22 11.8
Money market deposit
accounts 11,620,866 3.25 11.1
------------ ---- -----
Total demand deposits 36,171,566 2.81 34.5
Time deposits 68,842,000 5.06 65.5
------------ ---- -----
$105,013,566 4.29% 100.0%
============ ==== =====
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $5,285,000 and $5,105,000 at March
31, 1996 and 1995, respectively.
Time deposits mature as follows:
Year Ending March 31,
---------------------------
1996 1995
----------- -----------
Within one year $47,197,000 $43,689,000
One to two years 15,478,000 14,060,000
More than two years 10,833,000 11,093,000
----------- -----------
$73,508,000 $68,842,000
=========== ===========
<PAGE>
<PAGE> 73
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
4. Deposits (continued)
Interest expense on deposits is summarized as follows:
Year Ended March 31,
------------------------------------------
1996 1995 1994
---------- ---------- ----------
Time deposits $3,999,200 $2,755,991 $2,693,475
Money market deposit and
NOW accounts 624,182 842,809 814,878
Savings 353,806 395,863 392,387
---------- ---------- ----------
$4,977,188 $3,994,663 $3,900,740
========== ========== ==========
5. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments as of
March 31, 1996, are as follows:
Carrying Fair
Amount Value
------------ ------------
Financial assets
- ----------------
Cash and short-term investments $ 3,673,085 $ 3,673,000
Securities 7,822,223 7,845,000
Loans, net of allowance for loan losses 141,738,895 141,443,000
Financial liabilities
- ---------------------
Deposits 109,501,461 109,467,000
Advances from Federal Home Loan Bank 27,000,000 27,000,000
Unrecognized financial instruments
- ----------------------------------
Commitments to extend credit N/A N/A
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
Cash and short-term investments
- -------------------------------
For those short-term investments, the carrying amount is a reasonable estimate
of fair value.
<PAGE>
<PAGE> 74
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
5. Fair Value of Financial Instruments (continued)
Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loan receivables
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 remaining maturities. This calculation ignores loan fees and certain
factors affecting the interest rates charged on various loans such as the
borrower's creditworthiness and compensating balances and dissimilar types of
real estate held as collateral.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the balance sheet date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
All advances from Federal Home Loan Bank are due within approximately ninety
days from the balance sheet date. Therefore, the carrying amount approximates
fair value.
Commitments to extend credit
The fair value of commitments 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 borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace loan fees vary greatly with no fees charged in many
cases. Therefore, management has concluded no value should be assigned.
<PAGE>
<PAGE> 75
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
6. Advances From Federal Home Loan Bank
The advances to the Corporation at March 31, 1996 and 1995 mature within
twelve months. The weighted average interest rate on advances was 5.88% and
6.27% at March 31, 1996 and 1995, respectively. These advances are
collateralized by the investment in FHLB stock and the Corporation's portfolio
of first mortgage loans under a Blanket Floating Lien Agreement.
Information related to borrowing activity from the Federal Home Loan Bank is
as follows:
Year Ending March 31,
------------------------------------------
1996 1995 1994
----------- ----------- -----------
Maximum amount outstanding
during the year $27,000,000 $25,000,000 $19,500,000
=========== =========== ===========
Average amount outstanding
during the year $25,346,995 $20,120,548 $14,400,000
=========== =========== ===========
Average interest rate during
the year 6.07% 4.81% 3.42%
=========== =========== ===========
<PAGE>
<PAGE> 76
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
7. Income Taxes
Deferred tax assets (liabilities), included in "Other liabilities" in the
consolidated balance sheets are as follows:
Year Ended March 31,
-----------------------------
1996 1995
--------- ---------
Deferred tax assets
Deferred loan fees $ 27,674 $ 192,601
Other 10,158 12,221
--------- ---------
37,832 204,822
--------- ---------
Deferred tax liabilities
Depreciable assets (136,997) (226,255)
FHLMC stock (644,428) (168,601)
FHLB stock (90,852) (90,852)
Allowance for losses (40,679) (65,193)
Other (23,605) (14,496)
--------- ---------
(936,561) (565,397)
--------- ---------
Net deferred tax liability $(898,729) $(360,575)
========= =========
8. Stockholders' Equity and Regulatory Capital Requirements
Savings institutions must maintain specific capital standards that are no less
stringent than the capital standards applicable to national banks. The OTS
regulations currently have three capital standards including (i) a tangible
capital requirement, (ii) a core capital requirement, and (iii) a risk-based
capital requirement. The tangible capital standard requires savings
institutions to maintain tangible capital of not less than 1.5% of adjusted
total assets. The core capital standard requires a savings institution to
maintain core capital of not less than 3.0% of adjusted total assets. The
risk-based capital standard requires risk-based capital of not less than 8.0%
of risk-weighted assets.
<PAGE>
<PAGE> 77
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
8. Stockholders' Equity and Regulatory Capital Requirements (continued)
The following table presents the Savings Bank's regulatory capital levels at
March 31, 1996, relative to the OTS requirements applicable at that date:
Amount Percent Actual Actual Excess
Required Required Amount Percent Amount
---------- -------- ----------- ------- -----------
Tangible Capital $2,375,000 1.50% $17,994,000 11.28% $15,619,000
Core Capital 4,750,000 3.00 17,994,000 11.28 13,244,000
Risk-based Capital 8,743,000 8.00 18,785,000 17.19 10,042,000
The Savings Bank may not declare or pay a cash dividend, or repurchase any of
its capital stock if the effect thereof would cause the net worth of the
Savings Bank to be reduced below certain requirements imposed by federal
regulations.
Capital distributions by OTS-regulated savings associations are limited by
regulation ("Capital Distribution Regulation"). Capital distributions are
defined to include, in part, dividends, stock repurchases and cash-out
mergers. The Capital Distribution Regulation permits a "Tier 1" association
to make capital distributions during a calendar year up to 100% of its net
income to date plus the amount that would reduce by one-half its surplus
capital ratio at the beginning of the calendar year. Any distributions in
excess of that amount require prior OTS notice, with the opportunity for OTS
to object to the distribution. A Tier 1 association is defined as an
association that has, on a pro forma basis after the proposed distribution,
capital equal to or greater than the OTS fully phased-in capital requirement
and has not been deemed by the OTS to be "in need of more than normal
supervision". The Savings Bank is currently classified as a Tier 1
institution for these purposes. The Capital Distribution Regulation requires
that associations provide the applicable OTS District Director with a 30-day
advance written notice of all proposed capital distributions whether or not
advance approval is required by the regulation. The Savings Bank did not pay
any dividends to the Corporation during the year ended March 31, 1996.
<PAGE>
<PAGE> 78
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
9. Employee Benefit Plans
Pension Plan
The Corporation has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and final average compensation. The Corporation's funding policy is to
contribute amounts to the pension trust at least equal to the minimum funding
requirements of the Employee Retirement Income Security Act of 1974 (ERISA),
but not in excess of the maximum tax deductible amount. Contributions are
intended to provide not only for benefits attributed to service to date but
also for those expected to be earned in the future. The following is a
summary of information with respect to the plan:
Year Ended March 31,
------------------------------------------
1996 1995 1994
---------- --------- ---------
Net periodic pension cost
Service cost - benefits earned
during the period $ 27,872 $ 31,633 $ 27,165
Interest cost on projected
benefit obligations 38,884 37,054 32,602
Actual return on plan assets (29,905) (30,625) (30,002)
Net amortization and deferral (15,502) (11,117) (11,789)
-------- -------- --------
$ 21,349 $ 26,945 $ 17,976
======== ======== ========
Accumulated benefit obligation
Vested benefits $393,678 $334,321 $285,169
Non-vested benefits 27,792 47,105 39,757
-------- -------- --------
$421,470 $381,426 $324,926
======== ======== ========
<PAGE>
<PAGE> 79
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
9. Employee Benefit Plans (continued)
Year Ended March 31,
--------------------------
1996 1995
-------- --------
Accrued pension cost
Projected benefit obligation $540,141 $530,154
Fair value of plan assets, primarily
IPG insurance contracts 539,114 548,223
-------- --------
Assets in excess (deficit) of projected
benefit obligation (1,027) 18,069
Unrecognized prior service cost 21,704 24,804
Unrecognized net (gain) loss (11,766) (4,346)
Unrecognized net asset (66,131) (74,398)
-------- --------
$(57,220) $(35,871)
======== ========
The following assumed rates were used in determining the projected benefit
obligations:
Year Ended March 31,
----------------------
1996 1995
---- ----
Weighted average discount rate 7.0% 7.5%
=== ===
Expected long-term rate of return on
plan assets 7.5% 7.5%
=== ===
Increase in future compensation levels 5.5% 5.5%
=== ===
The measurement date used to value the plan assets was December 31, 1995.
<PAGE>
<PAGE> 80
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
9. Employee Benefit Plans (continued)
Employee Stock Ownership Plan
During the fiscal year ended March 31, 1994, the Corporation amended and
restated its Employee Stock Ownership Plan and Profit Sharing Trust effective
April 1, 1987, in order to bring it into conformity with certain tax laws.
The new plan, renamed Employee Stock Ownership and 401(k) Profit Sharing Plan
(the "Plan") is a combination of a profit sharing plan with 401(k) and a stock
bonus plan. The Plan provides for retirement, death, and disability benefits
for all eligible employees.
An employee becomes eligible for participation after completion of one year of
service. After meeting the eligibility requirements, an employee becomes a
member of the Plan on the earliest January 1, April 1, July 1, or September 1
occurring on or after his qualification.
The contributions to the Plan are discretionary and are determined by the
Board of Directors. The contributions are limited annually to the maximum
amount permitted as a tax deduction under the applicable Internal Revenue
Code provisions.
Profit-sharing, pension plan, and retirement expenses were as follows:
ESOP and Supplemental
Year Ended Pension Unfunded
March 31, Plan Retirement* Total
---------- --------- ------------ -------
1994 $37,489 $6,996 $44,485
1995 44,556 6,996 51,552
1996 38,325 6,996 45,321
*For a former executive officer, amounts are authorized annually.
<PAGE>
<PAGE> 81
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
10. Stock Option Plan
Under the terms of the plan, the Stock Option Committee may grant options for
the purchase of shares up to 10% of total stock issued in the conversion of
the Bank from mutual to the stock form. Incentive stock options may
be granted to full-time employees at a price equal to the market value at the
date of the grant, and the aggregate fair market value cannot exceed $100,000
per employee the first year that the employee is granted an incentive
stock option. Non-incentive stock options may be granted to directors,
officers and key employees at a price of not less than the market value per
share at the date of grant of such option. All stock options granted to
owners of less than 10% of the Corporation's stock must be exercised within 10
years. The following table represents options outstanding under the Plan:
Year Ended March 31,
------------------------------------------
Option Price 1996 1995 1994
--------------- ------- -------- ------
Outstanding at beginning of year $ 4.00 - $13.00 49,630 80,224 80,224
Options granted 13.00 - 20.00 28,100 3,000 ---
Options exercised 4.00 (27,820) (33,594) ---
Options forfeited 8.00 (13,910) --- ---
------- ------- ------
Outstanding at end of year $ 4.00 - $20.00 36,000 49,630 80,224
======= ====== ======
11. Commitments and Contingencies
Continuing uncertainty exists as to the sufficiency of the Federal Deposit
Insurance Corporation's ("FDIC") Savings Association Insurance Fund ("SAIF").
Legislators and thrift regulators are considering alternative methods of
strengthening this fund. Virtually all of the existing proposals will require
additional funding from the thrifts whose deposits are insured by the FDIC.
At March 31, 1996, possible future increases in FDIC insurance costs for the
Savings Bank cannot be estimated.
<PAGE>
<PAGE> 82
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
11. Commitments and Contingencies (continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies
but may include single family residences, other residential property,
commercial property and land. At March 31, 1996, the Corporation had
outstanding commitments to originate loans with variable interest rates of
approximately $4,890,000 and loans with fixed rates of approximately $830,000.
In addition, unused lines of credit amounted to approximately $3,574,000 at
March 31, 1996.
The Corporation has entered into an agreement with a data service center which
requires minimum annual payments of approximately $115,000 through September
1997.
In the normal course of business, the Corporation has entered into employment
agreements with certain officers of the Savings Bank.
<PAGE>
<PAGE> 83
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
11. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly financial data is shown as follows: (Dollars in thousands
except per share data)
Year Ended March 31, 1996
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total interest income $2,973 $3,095 $3,159 $3,160
Total interest expense 1,552 1,637 1,678 1,648
------ ------ ------ ------
Net interest income 1,421 1,458 1,481 1,512
Provision for loan losses 25 43 32 207
------ ------ ------ ------
Net interest income after
provision for loan losses 1,396 1,415 1,449 1,305
Other income 109 115 114 118
Other expenses 696 686 705 722
------ ------ ------ ------
Income before income taxes 809 844 858 701
Income taxes 304 316 322 258
------ ------ ------ ------
Net income $ 505 $ 528 $ 536 $ 443
====== ====== ====== ======
Earnings per share $ .41 $ .42 $ .42 $ .35
====== ====== ====== ======
<PAGE>
<PAGE> 84
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
11. Selected Quarterly Financial Data (Unaudited) (continued)
Year Ended March 31, 1995
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total interest income $2,329 $2,453 $2,591 $2,795
Total interest expense 1,148 1,190 1,262 1,363
------ ------ ------ ------
Net interest income 1,181 1,263 1,329 1,432
Provision for loan losses 26 25 25 33
------ ------ ------ ------
Net interest income after
provision for loan losses 1,155 1,238 1,304 1,399
Other income 94 100 102 102
Other expenses 647 626 628 738
------ ------ ------ ------
Income before income taxes 602 712 778 763
Income taxes 228 269 295 292
------ ------ ------ ------
Net income $ 374 $ 443 $ 483 $ 471
====== ====== ====== ======
Earnings per share $ .30 $ .36 $ .39 $ .39
====== ====== ====== ======
<PAGE>
<PAGE> 85
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
12. Condensed Financial Information of the Corporation (Parent Company Only)
Condensed financial information is shown for the parent company only as
follows:
Condensed Statements of Financial Condition
March 31,
----------------------------
1996 1995
----------- -----------
Assets
Investment in the Savings Bank, at equity $18,122,381 $16,094,160
Cash 2,505,783 1,930,667
Investment securities 249,931 1,246,707
Prepaid expenses and other assets 9,296 21,485
----------- -----------
$20,887,391 $19,293,019
=========== ===========
Liabilities and Stockholders' Equity
Liabilities $ 16,823 $ 16,169
----------- -----------
Stockholders' Equity
Common stock 12,697 12,419
Additional paid-in capital 4,651,634 4,540,632
Retained earnings 16,206,237 14,723,799
----------- -----------
Total stockholders' equity 20,870,568 19,276,850
----------- -----------
$20,887,391 $19,293,019
=========== ===========
<PAGE>
<PAGE> 86
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
12. Condensed Financial Information of the Corporation (Parent Company Only)
(continued)
Condensed Statements of Income
Year Ended March 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Income
Interest income $ 34,224 $ 129,049 $ 85,283
Dividends received from
Savings Bank --- 201,472 744,083
---------- ---------- ----------
Total income 34,224 330,521 829,366
---------- ---------- ----------
Noninterest expenses (62,755) (53,084) (47,062)
---------- ---------- ----------
Income (loss) before equity
in undistributed net income
of the Savings Bank (28,531) 277,437 782,304
Equity in undistributed net
income of the Savings Bank 2,028,221 1,525,064 808,956
---------- ---------- ----------
Income before income taxes 1,999,690 1,802,501 1,591,260
Income taxes (11,848) 31,020 14,500
---------- ---------- ----------
Net income $2,011,538 $1,771,481 $1,576,760
=========== ========== ==========
<PAGE>
<PAGE> 87
Community Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(continued)
12. Condensed Financial Information of the Corporation (Parent Company Only)
(continued)
Condensed Statements of Cash Flows
Year Ended March 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Operating activities
Net income $2,011,538 $1,771,481 $1,576,760
Adjustments
Equity in income of the
Savings Bank (2,028,221) (1,726,536) (1,533,039)
(Increase) decrease in
prepaid and other assets 12,189 (4,239) (9,427)
Increase in other
liabilities 654 9,935 2,856
---------- ---------- ----------
Net cash provided (absorbed)
by operating activities (3,840) 50,641 17,150
---------- ---------- ----------
Investing activities
Proceeds from maturities of
investment securities 996,776 984,738 ---
Purchase of investment
securities --- (2,231,445) ---
Dividends received from
Savings Bank --- 201,472 744,083
---------- ---------- ----------
Net cash provided (absorbed)
by investing activities 996,776 (1,045,235) 744,083
---------- ---------- ----------
Financing activities
Cash dividends paid on
common stock (529,100) (436,612) (410,816)
Stock options exercised 111,280 134,376 ---
---------- ---------- ----------
Net cash absorbed by
financing activities (417,820) (302,236) (410,816)
---------- ---------- ----------
Increase (decrease) in cash 575,116 (1,296,830) 350,417
Cash, beginning of year 1,930,667 3,227,497 2,877,080
---------- ---------- ----------
Cash, end of year $2,505,783 $1,930,667 $3,227,497
========== ========== ==========
<PAGE>
<PAGE> 88
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
- ----------------------------------------------------------
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a
change in accountants and/or reporting disagreements on any matter of
accounting principle or financial statement disclosure.
<PAGE>
<PAGE> 89
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------------------------
Information concerning directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for
the 1996 Annual Meeting of Stockholders, except for the information
contained under the heading "Compensation Committee Report" and
"Stockholder Return Performance Presentation," a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more
than 10% of a registered class of the Company's equity securities, to
file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a)
forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that
no other reports were required, during the last fiscal year ended March
31, 1996, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were
complied with except that two reports, covering two transactions were filed
late by L. F. (Nick) Smith, a former executive officer of the Company.
Item 10. Executive Compensation
- --------------------------------
Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement for the 1996
Annual Meeting of Stockholders, except for the information contained
under the heading "Compensation Committee Report" and "Stockholder
Return Performance Presentation," a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
- -------------------------------------------------------------
Information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the
Company's definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders, except for the information contained under the heading
"Compensation Committee Report" and "Stockholder Return Performance
Presentation," a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy
Statement for the 1996 Annual Meeting of Stockholders, except for the
information contained under the heading "Compensation Committee Report"
and "Stockholder Return Performance Presentation," a copy of which will
be filed not later than 120 days after the close of the fiscal year.
<PAGE>
<PAGE> 90
PART IV
Item 13. Exhibits and Reports on 8-K
- -------------------------------------
(a) Exhibits:
<TABLE>
<CAPTION>
Sequential
Page Number
Where
Reference to Attached
Prior Filing Exhibits
or Exhibit Are Located
Regulation Number in This
S-K Exhibit Attached Annual Report
Number Document Hereto on Form 10-KSB
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
2 Plan of acquisition, reorganization,
arrangement, liquid, or succession None Not applicable
3 Articles of Incorporation and Bylaws * Not applicable
4 Instruments defining the rights of
security holders, including indentures:
Common Stock Certificate * Not applicable
9 Voting trust agreement None Not applicable
10 Material contracts:
Stock Option and Incentive Plan * Not applicable
Employment Agreement:
Thomas W. Winfree 10a Page 93
Employee Stock Ownership Plan ** Not applicable
11 Statement re computation of per
share earnings None Not applicable
13 Annual Report to Security Holders Not required Not applicable
16 Letter on change in certifying
accountant None Not applicable
18 Letter on change in accounting
principles None Not applicable
19 Previously unfiled documents None Not applicable
21 Subsidiaries of Registrant *** Not applicable
22 Published report regarding matters
submitted to vote of security
holders None Not applicable
23 Consent of Experts and Counsel 23 Page 98
24 Power of Attorney Not required Not applicable
27 Financial Data Schedule 27 Page 99
28 Information from reports furnished
to state insurance regulatory
authorities None Not applicable
99 Additional exhibits None Not applicable
____________________
<FN>
*Filed on May 19, 1989 as exhibits to the Registrant's
Registration Statement No. 33-28817 on Form S-4. All of such previously
filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-B.
**Filed on June 28, 1993, as Exhibit 10 to the Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1993. Such previously
filed document is hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-B.
***Filed on June 26, 1991, as Exhibit 22 to the Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1991. Such previously
filed document is hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-B.
</TABLE>
<PAGE>
<PAGE> 91
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period
ended March 31, 1996.
<PAGE>
<PAGE> 92
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.
COMMUNITY FINANCIAL CORPORATION
Date: June 21, 1996 By: /s/ Thomas W. Winfree
------------------------------
Thomas W. Winfree
(Duly Authorized Representative)
Pursuant to the requirements 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/ Thomas W. Winfree By: /s/ Richard E. Bonin
----------------------------- ------------------------------
Thomas W. Winfree Richard E. Bonin
President and Chief Chairman of the Board
Executive Officer and Director
(Principal Executive Officer)
Date: June 21, 1996 Date: June 21, 1996
By: /s/ Jane C. Hickok By: /s/ Charles F. Andersen
----------------------------- ------------------------------
Jane C. Hickok Charles F. Andersen
Vice Chairman Director
Date: June 21, 1996 Date: June 21, 1996
By: /s/ James R. Cooke, Jr. By: /s/ Kenneth L. Elmore
----------------------------- ------------------------------
James R. Cooke, Jr. Kenneth L. Elmore
Director Director
Date: June 21, 1996 Date: June 21, 1996
By: /s/ Dale C. Smith By: /s/ R. Jerry Giles
----------------------------- ------------------------------
Dale C. Smith R. Jerry Giles
Director Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: June 21, 1996 Date: June 21, 1996
<PAGE> 93
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement") is made and entered into
this 1st day of October, 1995, by and between Community Federal Savings
Bank (the "Bank"), and Thomas W. Winfree (the "Employee").
WHEREAS, the Bank has offered the Employee employment as the Bank's
President and Chief Executive Officer;
WHEREAS, the parties desire to enter into this Severance Agreement
("Agreement") setting forth the terms and conditions of the severance
relationship which may arise under certain defined circumstances between
the Bank and the Employee at some future date;
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in
order to afford the Employee protection against termination of employment
due to a change in control of the Bank. The Board of Directors believes
such protection is necessary and appropriate to induce the Employee to
accept his position with the Bank;
WHEREAS, this Agreement is not intended to apply to the severance
relationship between the Bank and the Employee where no change in control
of the Bank has occurred, which situation will continue to be governed by
the Bank's employee manual;
WHEREAS, this Agreement is not intended to apply to the employment
relationship of the parties hereto;
WHEREAS, the Board of Directors of the Bank has approved and
authorized the execution of this Agreement with the Employee to take effect
as stated in Paragraph 1 hereof and such approval is set forth in the
minutes of the meeting of the Board of Directors;
NOW THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
------------
The term "Cause" shall mean the Employee's personal dishonesty,
incompetence, willful misconduct, breach of a fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of
any provision of this Agreement. No act or failure to act by the Employee
shall be considered willful unless the Employee acted or failed to act with
an absence of good faith and without a reasonable belief that his action or
failure to act was in the best interest of the Company.
The term "Involuntary Termination" shall mean (i) termination of
employment of the Employee without Cause such that the Employee is no
longer employed by the Bank or any affiliate thereof; (ii) a reduction in
the amount of the Employee's base salary compared to the amount of
Employee's base salary as of the date of this Agreement; (iii) a material
adverse change in the Employee's benefits, contingent benefits or vacation,
other than as part of an overall program applied uniformly and with
equitable effect on all senior officers of the Bank; (iv) a requirement
that the Employee perform services principally at a location more than 50
miles from Staunton, Virginia; or (v) a material demotion of the Employee,
including, but not limited to, a material diminution of the Employee's
title, duties or responsibilities.
<PAGE>
<PAGE> 94
The term "Change in Control" shall mean the acquisition of 25 percent
or more of the voting securities of the Bank or Holding Company, or the
election or control, or ability to elect or control a majority of the Board
of Directors of the Bank or Holding Company, by any person or persons
acting as a group within the meaning of Section 13(d) of the Securities
Exchange Act of 1934, or to such acquisition of a percentage between 10
percent and 25 percent if the Board of Directors of the Bank, or the Office
of Thrift Supervision has made a determination that such acquisition
constitutes or will constitute control of the Bank.
The term "person" refers to an individual, corporation, company or
other entity.
The term "Holding Company" shall mean any corporation which owns or
controls 25% or more of the outstanding common stock of the Bank.
2. Change in Control.
------------------
If there is a Change in Control of the Bank or of the Holding Company
during the term of this Agreement, Employee shall be entitled to a
severance payment in the event the Employee suffers an Involuntary
Termination in connection with or within 12 months after the Change in
Control, unless such termination is for Cause. The amount of such
severance payment shall equal 18 months of Employee's then current salary.
3. Reduction of Compensation and Benefits.
---------------------------------------
Notwithstanding any other provision of this Agreement, if amounts and
the value of benefits under this Agreement, together with any other amounts
and the value of benefits received or to be received by the Employee in
connection with a Change in Control would cause any amount to be
nondeductible by the Bank or any of its affiliates for federal income tax
purposes pursuant to or by reason of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), then benefits under this Agreement
shall be reduced (not less than zero) to the extent necessary so as to
maximize amounts and the value of benefits to the Employee without causing
any amount to become nondeductible by the Bank or any of its affiliates
pursuant to or by reason of such Section 280G. The Employee shall
determine the allocation of such reduction among payments and benefits to
the Employee.
4. Notice of Involuntary Termination.
----------------------------------
In the event that the Employee determines in good faith that he has
experienced an Involuntary Termination, the Employee shall send a written
notice to the Bank stating the circumstances that constitute such
Involuntary Termination and the date of such Involuntary Termination.
5. Term of this Agreement.
-----------------------
The term of this Agreement shall be for a period of 18 months from the
date of this Agreement written above.
6. Attorneys Fees.
---------------
In the event the Bank or any subsidiary thereof purports to terminate
the employment of the Employee for Cause, but it is determined by a court
of competent jurisdiction or by an arbitrator pursuant to Section 15 of
this Agreement that Cause did not exist for such termination, or if in any
<PAGE>
<PAGE> 95
event it is determined by any such court or arbitrator that the Bank has
failed to make timely payment of any amounts owed to the Employee under
this Agreement, the Employee shall be entitled to reimbursement for all
reasonable costs, including attorneys' fees, incurred in challenging such
termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under
this Agreement.
7. Successors and Assigns.
-----------------------
This Agreement is personal to each of the parties hereto, and neither
party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank shall require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Bank, as applicable, would be required to
perform it if no such succession or assignment had taken place. Failure of
the Bank to obtain such an assumption agreement prior to the effectiveness
of any such succession or assignment shall be a breach of this Agreement
and shall entitle the Employee to compensation and benefits from the Bank
pursuant to Section 2 of this Agreement as if Involuntary Termination had
occurred. For purposes of implementing the provisions of this Section 7,
the date on which any such succession becomes effective shall be deemed the
date of Involuntary Termination.
This Agreement and all rights of the Employee hereunder shall inure to
the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
8. Regulatory Provisions.
----------------------
(1) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct
of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of
the Federal Deposit Insurance Act (the "FDIA"), 12 U.S.C. Section
1818(e)(3) and (g)(1), the Company's and the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Bank may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate in whole or in part any of its obligations
which were suspended.
(2) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of
the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of
the FDIA, 12 U.S.C. Section 1818(e)(4) and (g)(1), all obligations of
the Company and the Bank under this Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(3) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect
any vested rights of the contracting parties.
(4) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that
continuation of this Agreement is necessary for the continued operation of
the Bank: (i) by the Director of the Office of Thrift Supervision (the
"Director") or his or her designee, at the time the Federal Deposit
<PAGE>
<PAGE> 96
Insurance Corporation or the Resolution Trust Corporation enters into
anagreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the FDIA; or (ii) by the Director
or his or her designee, at the time the Director or his or her designee
approves a supervisory merger to resolve problems related to operation of
the Bank or when the Bank is determined by the Director to be in an unsafe
or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
(5) Prohibited Payments. Any payments made to the Employee
pursuant to this Agreement, or otherwise, are subject to and conditioned
upon their compliance with 12 U.S.C. 1828(k) and any regulations
promulgated thereunder.
9. Notices.
--------
For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when personally delivered or sent by
certified mail, return receipt requested, postage prepaid, to the Bank at
the Bank's home office, to the attention of the Bank's Chairman of the
Board, or, if to the Employee, to such home or other address as the
Employee has most recently provided in writing to the Bank.
10. Amendments.
-----------
No amendments or additions to this Agreement shall be binding unless
in writing and signed by both parties.
11. Headings.
---------
The headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
12. Severability.
-------------
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof.
13. Governing Law.
--------------
This Agreement shall be governed the laws of the State of Virginia.
14. Arbitration.
------------
Any dispute or controversy arising under or in connection with this
Agreement, including but not limited to whether the Employee was properly
terminated for Cause, shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction.
<PAGE>
<PAGE> 97
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
COMMUNITY FEDERAL SAVINGS BANK
/s/ Richard E. Bonin
----------------------------
Richard E. Bonin
Chairman of the Board
EMPLOYEE
/s/ Thomas W. Winfree
----------------------------
Thomas W. Winfree
<PAGE> 98
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Community Financial Corporation
38 North Central Avenue
Staunton, Virginia 24401
Gentlemen:
We consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement on Form S-8 our
report dated April 24, 1996, relating to the consolidated financial
statements of Community Financial Corporation and subsidiary
appearing in the Company's Annual Report on Form 10-K for the year
ended March 31, 1996.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Richmond, Virginia
June 20, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,673,085
<INT-BEARING-DEPOSITS> 1,147,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,754,445
<INVESTMENTS-CARRYING> 7,417,778
<INVESTMENTS-MARKET> 7,845,223
<LOANS> 141,738,895
<ALLOWANCE> 1,000,278
<TOTAL-ASSETS> 159,792,621
<DEPOSITS> 109,501,461
<SHORT-TERM> 27,000,000
<LIABILITIES-OTHER> 1,391,180
<LONG-TERM> 0
0
0
<COMMON> 12,697
<OTHER-SE> 21,887,283
<TOTAL-LIABILITIES-AND-EQUITY> 159,792,621
<INTEREST-LOAN> 11,816,368
<INTEREST-INVEST> 447,619
<INTEREST-OTHER> 123,735
<INTEREST-TOTAL> 12,387,722
<INTEREST-DEPOSIT> 4,977,188
<INTEREST-EXPENSE> 6,515,234
<INTEREST-INCOME-NET> 5,872,488
<LOAN-LOSSES> 307,361
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,808,924
<INCOME-PRETAX> 3,211,909
<INCOME-PRE-EXTRAORDINARY> 3,211,909
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,011,538
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 3.47
<LOANS-NON> 0
<LOANS-PAST> 593,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,342,000
<ALLOWANCE-OPEN> 763,000
<CHARGE-OFFS> 71,000
<RECOVERIES> 1,000
<ALLOWANCE-CLOSE> 1,000,000
<ALLOWANCE-DOMESTIC> 1,000,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
