SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB40
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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)
Virginia 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-KSB40 or any
amendment to this Form 10-KSB40. /X/
The Issuer had $13,296,729 in gross income for the year ended March 31,
1997.
<PAGE>
As of May 31, 1997, there were issued and outstanding 1,275,348 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, 1997, was approximately
$23,300,000. (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-KSB40 -- Proxy Statement for the 1997 Annual Meeting
of Stockholders.
Transitional Small Business Disclosure Format
Yes / /; No /X/
2
<PAGE>
PART I
Item 1. Description of Business
- --------------------------------
General
- -------
Community Financial Corporation ("Community" or the "Company") is a
Virginia corporation which owns Community Bank (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 trades 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") to the
maximum extent permitted by the FDIC.
At March 31, 1997, Community had $167.7 million in assets, deposits of
$116.6 million and stockholders' equity of $23.3 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 Stuart Drafts, Virginia. An additional office was
opened in Virginia Beach, Virginia in April, 1997.
Like all financial 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.
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 with an emphasis on multi-family
housing. The Company makes construction loans secured
3
<PAGE>
by commercial real estate and one- to four-family residential
properties.Additionally, the Company makes consumer loans in order to increase
the diversification and decrease interest rate sensitivity of its loan portfolio
and to increase interest income. 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.
The Company opened an office in Virginia Beach, Virginia in April, 1997 which
will expand the Bank's market to the Hampton Roads area.
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. One-to four-family and commercial
real estate loans in the amount of $150,000 or less may be approved by the
Vice-President/Director of Lending. Loans in excess of $150,000 but less than
$250,000 must be approved by a majority of the Company's Loan Committee. All
mortgage loans in excess of $250,000 must be approved by the Board of Directors.
Consumer loans in excess of $100,000 on a secured basis and $50,000 on an
unsecured basis require the approval of the President of the Company with the
concurrence of another member of senior management. 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, is limited to
the greater of 15% of unimpaired capital and surplus or $500,000. At March 31,
1997, 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 $3.0 million. At March 31, 1997, the Bank's largest lending
relationship to a single borrower, or group of related borrowers, consisted of
six loans totaling $2.4 million. At such date, all of these loans were
performing in accordance with their repayment terms. At March 31 1997, the Bank
had seven other loans with an outstanding balance in excess of $1.0 million, all
of which were performing in accordance with their repayment terms at March 31,
1997.
4
<PAGE>
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,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------------
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 $ 96,968 63.83% $ 91,212 62.92% $ 86,331 62.90% $ 77,485 61.59% $ 70,904 62.45%
Commercial 37,508 24.69 38,433 26.51 39,667 28.90 41,144 32.71 36,839 32.45
Construction 5,204 3.42 6,415 4.43 4,336 3.15 2,992 2.38 2,407 2.12
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate 139,680 91.94 136,060 93.86 130,334 94.95 121,621 96.68 110,150 97.02
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Other Loans:
- --------------
Consumer:
Unsecured personal 4,418 2.91 3,616 2.50 3,600 2.62 1,922 1.53 1,205 1.06
Automobile 1,646 1.08 1,470 1.01 1,072 .78 687 .55 534 .47
Home equity 1,630 1.07 380 .26 412 .30 505 .40 442 .39
Deposit account 339 .22 234 .16 267 .20 259 .21 316 .28
Other 622 .41 496 .34 1,577 1.15 809 .63 887 .78
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer 8,655 5.69 6,196 4.27 6,928 5.05 4,182 3.32 3,384 2.98
Commercial business 3,588 2.37 2,709 1.87 --- --- --- --- --- ---
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans
receivable $151,923 100.00% $144,965 100.00% $137,262 100.00% $125,803 100.00% $113,534 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loans in
process 1,619 1,830 1,477 1,330 1,201
Deferred fees and
unearned discounts 361 396 507 625 603
Allowance for losses 1,038 1,000 763 703 655
-------- -------- -------- -------- --------
Total net items 3,018 3,226 2,747 2,658 2,459
-------- -------- -------- -------- --------
Total loans
receivable, net $148,905 $141,739 $134,515 $123,145 $111,075
======== ======== ======== ======== ========
</TABLE>
5
<PAGE>
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,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------------
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 $ 11,161 7.34% $ 12,863 8.87% $ 12,896 9.40% $ 14,880 11.83% $ 9,350 8.24%
Commercial 6,223 4.10 5,548 3.83 2,765 2.01 3,832 3.05 4,054 3.57
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real
estate loans(1) 17,384 11.44 18,411 12.70 15,661 11.41 18,712 14.88 13,404 11.81
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer 8,114 5.33 5,902 4.07 6,516 4.75 3,677 2.92 2,942 2.59
Commercial business 3,588 2.37 2,709 1.87 --- --- --- --- --- ---
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed-rate
loans 29,086 19.14 27,022 18.64 22,177 16.16 22,389 17.80 16,346 14.40
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Adjustable-Rate
Loans:
Real Estate:
Residential 87,336 57.49 80,773 55.72 75,023 54.66 64,532 51.30 62,371 54.93
Commercial 34,960 23.01 36,876 25.44 39,650 28.88 38,377 30.50 34,375 30.28
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate
loans 122,296 80.50 117,649 81.16 114,673 83.54 102,909 81.80 96,746 85.21
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer 541 .36 294 .20 412 .30 505 .40 442 .39
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable-
rate loans 122,837 80.86 117,943 81.36 115,085 83.84 103,414 82.20 97,188 85.60
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans
receivable $151,923 100.00% $144,965 100.00% $137,262 100.00% $125,803 100.00% $113,534 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
</TABLE>
CONTINUED NEXT PAGE
6
<PAGE>
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------
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 1,619 1,830 1,477 1,330 1,201
Deferred fees and
unearned discounts 361 396 507 625 603
Allowance for losses 1,038 1,000 763 703 655
-------- -------- -------- -------- --------
Total net items 3,018 3,226 2,747 2,658 2,459
-------- -------- -------- -------- --------
Total loans
receivable, net $148,905 $141,739 $134,515 $123,145 $111,075
======== ======== ======== ======== ========
<FN>
- ------------
(1) Includes residential real estate construction loans of $1,529,000,
$2,424,000, $1,588,000, $1,927,000 and $817,000 and commercial real estate
construction loans of $3,675,000, $3,991,000, $2,748,000, $1,065,000 and
$1,590,000 at March 31, 1997, 1996, 1995, 1994 and 1993, respectively.
</FN>
</TABLE>
7
<PAGE>
Loan Maturity and Repricing
- ---------------------------
The following table illustrates the contractual maturity of the Company's
loan portfolio at March 31, 1997. 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
--------------------------
Mortgage(1) Construction Consumer Total
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Due During Years Ended
- ----------------------
04/01/97 - 03/31/98 $ 3,767 $ 5,204 $ 7,875 $ 16,846
04/01/98 - 03/31/02 17,657 0 3,765 21,422
04/01/02 and following 113,052 0 603 113,655
-------- -------- -------- --------
Total $134,476 $ 5,204 $ 12,243 $151,923
======== ======== ======== ========
<FN>
- ----------
(1) Includes residential and commercial real estate loans.
</FN>
</TABLE>
The total amount of loans due after March 31, 1998 which have predetermined
interest rates is $13.6 million, while the total amount of loans due after such
date which have floating or adjustable interest rates is $121.5 million.
8
<PAGE>
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, substantially 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 in an amount to
reduce the Company's exposure to 80% or less.
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 is
generally 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, 1997, 90.1% of all one-to-four-family residential loans
(excluding residential construction 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 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, 1997, $9.7 million (excluding $1.5 million of
residential construction loans) or 9.9%, 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 primarily every year,
generally in accordance with the rates on one-year U.S. Treasury Bills. Although
the Company's primary one- to four-family residential loan is the one year
adjustable, the Company has begun to offer a residential loan which adjusts
every three years generally in accordance with the rates on three 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. To compete with
other lenders in its market area, Community makes one and three-year ARMs at
interest rates which, for the initial period, are below the index rate which
would otherwise apply to these loans. Borrowers are qualified, however, at the
fully indexed interest rate. At March 31, 1997, one- to four-family ARM loans
totaled $87.3 million, or 57.5%, 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.
9
<PAGE>
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-rated 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
generally does not require escrows for taxes and insurance.
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. The Company
has in recent years placed more emphasis on multi-family housing loans for its
commercial real estate loan portfolio. At March 31, 1997, commercial real estate
and construction loans aggregated $41.2 million or 27.1% of the Company's total
loans receivable before net items. The Company's commercial real estate and
construction loans are secured by properties located in the Company's market
area.
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, 1997, the Company had $6.2 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.
At March 31, 1997, the Company had $3.7 million or 2.4% of its total loans
receivable before net items invested in commercial construction loans compared
to $4.0 million or 2.8% at March 31, 1996. At March 31, 1997, the Company had
six commercial construction loans, the largest one having an outstanding balance
of $900,000 at March 31, 1997. All of these construction loans are presently
performing in accordance with their terms. 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
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<PAGE>
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.
At March 31, 1997, the Company had 10 commercial real estate loans (or
multiple loans to one borrower) in excess of $1.0 million with an aggregate
balance of $17.8 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, single family rental houses and a
restaurant.
The following table presents information as to Community's commercial real
estate and construction lending portfolio as of March 31, 1997 by type of
project.
<TABLE>
<CAPTION>
Number
of Principal
Loans Balance
------ -----------
(Dollars in Thousands)
<S> <C> <C>
Permanent financing:
Multi-family residential
building 52 $18,788
Hotel and motel 4 384
Commercial and industrial building 77 18,239
Raw land 6 93
Church 1 4
--- -------
140 37,508
--- -------
Acquisition and construction
financing:
Commercial and industrial building 6 3,675
--- -------
Total 146 $41,183
=== =======
</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
11
<PAGE>
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.
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, and home equity loans and credit card receivables. At March
31, 1997, the Company had $8.7 million or 5.7% of its total loans receivable
before net items invested in consumer loans. With the exception of $541,000 of
home equity loans at March 31, 1997, the Company's consumer loans have fixed
interest rates and generally have terms ranging from 90 days to five years. The
largest component of consumer loans are unsecured personal loans. 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, 1997, 1,099
credit card accounts had been issued, with an aggregate outstanding balance of
$361,402 and unused credit available of $2.8 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
12
<PAGE>
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. Accordingly, although the level of non-performing assets in the
Company's consumer loan portfolio has generally been low ($400,000 at March 31,
1997), there can be no assurance that delinquencies will not increase in the
future.
Commercial Business Lending
- ---------------------------
The Company also originates commercial business loans. At March 31, 1997,
the Company had 3.6 million in commercial business loans outstanding,
representing 2.4% of the Company's gross loan portfolio. The Company offers
commercial business loans to service existing customers, to consolidate its
banking relationships with these customers, and to further its asset/liability
management goals.
Unlike residential mortgage loans which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be dependent upon the success of the
business itself. The Company's commercial business loans almost always include
personal guarantees and are usually, but not always, secured by business assets.
However, the collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business. At March 31, 1997, the Company had $2.3 million of secured commercial
business loans and $1.3 million of unsecured commercial business loans.
The Company recognizes the generally increased credit risk associated
with commercial business lending. The Company's commercial business lending
practice emphasizes credit file documentation and analysis of the borrower's
character, management capabilities, capacity to repay the loan, the adequacy of
the borrower's capital and collateral. Analysis of the borrower's past, present
and future cash flows is also an important aspect of the Company's credit
analysis.
13
<PAGE>
Loan Originations, Purchases and Sales
- --------------------------------------
Federal regulations authorize the Company to make real estate loans
anywhere in the United States. However, at March 31, 1997, 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.
Generally, the Company originates fixed-rate residential mortgage loans for
sale in the secondary market and retains adjustable-rate mortgage loans for the
Company's portfolio. Prior to fiscal 1997 the Company retained the servicing for
mortgage loans sold. During fiscal 1997 the Company began to sell loans with
servicing released to be more competitive in that market.
14
<PAGE>
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,
-------------------------------
1997 1996 1995
-------------------------------
(In Thousands)
<S> <C> <C> <C>
Origination by Type:
- -------------------
Adjustable Rate:
Real estate - one- to four-family
residential $21,687 $16,132 $18,425
- commercial 5,974 1,449 1,957
- home equity 230 311 184
------- ------- -------
Total adjustable rate 27,891 17,892 20,566
------- ------- -------
Fixed Rate:
- ----------
Real estate - one- to four-family
residential 3,280 4,636 3,383
- commercial 1,092 2,109 1,867
Non-real estate - consumer(1) 10,857 8,163 4,089
------- ------- -------
Total fixed rate 15,229 14,908 9,339
------- ------- -------
Sales:
- -----
Real estate loans 1,418 1,085 1,008
------- ------- -------
Principal repayments 23,836 19,750 15,112
------- ------- -------
Total reductions 25,254 20,835 16,120
------- ------- -------
Increase (decrease) in other
items, net (10,699) (4,741) (2,238)
------- ------- -------
Net increase (decrease) $ 7,167 $ 7,224 $11,321
======= ======= =======
<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 $4.1 million, $3.6 million and $3.5 million at March
31, 1997, 1996 and 1995, respectively, which would have increased fixed-rate
consumer loans to $14.9 million, $12.2 million and $10.1 million at such dates,
respectively.
</FN>
</TABLE>
15
<PAGE>
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 97.2% of the Company's total
revenues for the year ended March 31, 1997. 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.
Loan fees and loan origination cost are deferred and amortized over the
life of the loans to which they relate. 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 $359,993 at March 31, 1997.
Delinquent and Problem Loans
- ----------------------------
When a borrower fails to make a required payment on a loan, the Company
attempts to cause the deficiency 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, deficiencies are
cured promptly.
The following table sets forth information concerning delinquent mortgage
and other loans at March 31, 1997. 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 Commercial
Real Estate Real Estate Consumer
------------------ ------------------ ------------------
Number Amount Number Amount Number Amount
------------------ ------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans Delinquent for:
- --------------------
30-59 days 7 $355 1 $900 6 $ 52
60-89 days 1 60 0 0 6 32
90 days and over 2 103 0 0 7 400
-- ---- -- ---- -- ----
Total delinquent loans 10 $518 1 $900 19 $484
== ==== == ==== == ====
</TABLE>
16
<PAGE>
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
for 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, 1997, the Company had classified
$249,000 of its assets as substandard, $195,000 as doubtful and none as loss.
All assets of the Company that have been classified are included below in either
the table of non-performing assets or under "Other Loans of Concern." In
addition, the Company had $1,334,000 in special mention assets. See "-
Non-Performing Assets."
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 as to principal or interest
payments and real estate acquired through foreclosure, which include assets
acquired in settlement of loans. Typically, a loan becomes nonaccruing when it
is 90 days delinquent. Accruing mortgage loans delinquent more than 90 days are
loans that the Company considers to be well secured and in the process of
collection. All consumer loans more than 120 days delinquent are charged against
the consumer loan allowance for loan losses. 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).
17
<PAGE>
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Consumer $400 $--- $ 3 $--- $---
Real Estate 103 --- --- --- ---
Accruing Loans Delinquent
More Than 90 Days:
Residential --- 52 --- 15 24
Commercial --- --- --- 23 689
Consumer --- 541 --- 18 ---
Real estate acquired
through foreclosure 173 148 350 380 500
---- ---- ---- ---- ----
Total $676 $741 $353 $436 $1,213
==== ==== ==== ==== ======
Total as a percentage
of total assets .40% .46% .23% .32% .98%
==== ==== ==== ==== ======
Unallocated allowance for
loan losses $783 $791 $728 $628 $ 580
==== ==== ==== ==== ======
</TABLE>
At March 31, 1997, the Company's non-performing assets were comprised of
two single family residential properties which were more than ninety days past
due, real estate acquired through foreclosure of a single family dwelling, two
automobiles which were repossessed and various consumer loans which includes one
loan relationship of approximately $388,000 for which an allowance of $195,000
has been established. Based on current market values of the properties securing
these loans, management anticipates no significant losses in excess of the
reserves for losses previously recorded.
Other Loans Of Concern
- ----------------------
As of March 31, 1997, there were $1.3 million 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.
18
<PAGE>
The $1.3 million in other loans of concern referred to above is comprised
of two loans. The first has a balance of $734,000 and is secured by a first
mortgage on a combination condominium/office complex. The complex has a low
occupancy rate but is current in payment. 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 for
sale. The loan was made to individuals with substantial aggregate net worth and
is current in payment. The Company is closely monitoring the status of these
loans.
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.
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 1997, the Company
increased its allowance for losses on loans by $39,000 due primarily to the
increase in the allowance for one borrower of $50,000 to $195,000. At March 31,
1997, the Company had an allowance for loan losses of $1.0 million which is
predominantly a general allowance of $783,700.
19
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning
of period $1,000 $ 763 $ 661 $ 613 $ 477
------ ------ ------ ------ ------
Provision charged to
operations 181 307 109 74 153
------ ------ ------ ------ ------
Charge-offs:
- -----------
Residential real
estate 59 --- --- --- ---
Consumer 110 71 7 28 19
Recoveries:
Consumer 27 1 --- 2 2
------ ------ ------ ------ ------
Net charge-offs 142 70 7 26 17
------ ------ ------ ------ ------
Balance at end
of period $1,039 $1,000 $ 763 $ 661 $ 613
====== ====== ====== ====== ======
Ratio of net charge-
offs during the
period to average
loans outstanding
during the period .01% .01% .01% .01% .01%
=== === === === ===
</TABLE>
20
<PAGE>
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, 1997
- --------------
Amount of loan loss
allowance $ 385 $ 140 $ 78 $ 436 $ 1,039
Loan amounts by 96,968 37,508 5,204 12,243 151,923
category
Percent of loans in
each category to
total loans 63.83% 24.69% 3.42% 8.06% 100.0%
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%
</TABLE>
21
<PAGE>
Subsidiary Activities
- ---------------------
The Bank has not established any service corporation subsidiaries as of
March 31, 1997.
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, however, various restrictions on the foregoing investments.
As a member of the FHLB System, Community Bank must maintain minimum levels
of investments that are liquid assets as specified by the OTS. See "Regulation
- -Liquidating." Liquidity may increase or decrease depending upon the
availability of funds and comparative yields on investments in relation to the
return on loans. See "Regulation - Liquidity."
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, 1997, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings and current borrowings) was 7.2%. See "Regulation Federal Home Loan Bank
System."
22
<PAGE>
The contractual maturities and weighted average yields of the investment
securities portfolio, excluding FHLB of Atlanta stock and FHLMC common stock,
are indicated in the following table.
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------
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 $ 1,500 $ 3,376 $ 4,876 $ 4,856
Floating-rate notes
and commercial
paper --- 321 321 321
------ ------- -------- -------
Total investment
securities $ 1,500 $ 3,697 $ 5,197 $ 5,177
====== ======= ======= ========
Weighted average
yield 7.49% 6.30% 6.64% 6.67%
==== ==== ==== ====
</TABLE>
23
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
March 31,
----------------------------------------------
1997 1996 1995
----------------------------------------------
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 $1,015 100.0% $1,147 100.0% $2,166 100.0%
Federal funds sold --- --- --- ---
------ ----- ------ ----- ------ -----
Total $1,015 100.0% $1,147 100.0% $2,166 100.0%
====== ===== ====== ===== ====== =====
Investment securities:
U.S. government
securities $ --- ---% $ --- --- % $1,245 22.3%
Federal agency
obligations 4,876 55.2 5,749 62.7 2,498 44.6
Floating-rate notes
and commercial
paper 321 3.6 319 3.5 525 9.4
FHLMC common
stock 2,243 25.4 1,754 19.1 525 1.4
----- ----- ----- ----- ----- -----
Subtotal 7,440 84.2 7,822 85.3 4,793 77.7
FHLB stock 1,400 15.8 1,350 14.7 1,250 22.3
----- ----- ----- ----- ----- -----
Total investment
securities and
FHLB stock $8,840 100.0% $9,172 100.0% $6,043 100.0%
====== ===== ====== ===== ====== =====
Average remaining life
or term to repricing,
excluding FHLMC common
stock, FHLB stock and
other marketable
equity securities 2 years 2 years 1 year
</TABLE>
During fiscal 1997 the market rates paid on investment securities were
relatively stable. During fiscal 1997 the Company invested primarily in
24
<PAGE>
federal agency securities with maturities of one to five years some of which are
callable within three months to two years 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 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.
25
<PAGE>
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>
OPTION> At March 31,
----------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Passbook and statement accounts $12,578 $ 12,179 $ 12,170
NOW and Super NOW accounts 15,576 13,583 12,380
Money market accounts 9,935 10,232 11,620
One- to five-year fixed-rate
certificates 73,817 66,649 62,019
Six-month money market certificates 4,059 6,403 6,295
Jumbo certificates 614 435 500
91-day certificates 16 21 30
-------- -------- --------
Total $116,595 $109,502 $105,014
======== ======== ========
</TABLE>
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,
----------------------------
1997 1996 1995
--------- --------- --------
(In Thousands)
<S> <C> <C> <C>
Passbook and statement accounts $ 399 $ 9 $(1,805)
NOW and Super NOW accounts 1,993 1,203 978
Money market accounts (297) (1,388) (7,331)
One-to five-year fixed-rate
certificates 7,168 4,630 12,886
Six-month money market certificates (2,344) 108 (2,165)
Jumbo certificates 179 (65) 230
91-day certificates (5) (9) (62)
-------- ------- -------
Total increase $ 7,093 $ 4,488 $ 2,731
======== ======= =======
</TABLE>
26
<PAGE>
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,
-------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
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 $ 2,145 ---% $ 2,653 ---% $ 1,754 ---%
Interest bearing
demand deposits 21,412 3.03 20,486 3.05 28,877 3.08
Savings deposits 12,063 2.98 11,808 3.00 13,230 2.99
Time deposits 75,687 5.34 72,934 5.48 61,434 4.52
-------- -------- -------
Total deposits $111,307 4.54% $107,881 4.61% $105,295 3.84%
======== ======== ========
</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 institution 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.
27
<PAGE>
The following table sets forth the deposit flows of the Company during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------
1997 1996 1995
--------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $109,502 $105,014 $102,283
Net deposits (withdrawals) 2,983 (248) (856)
Interest credited 4,110 4,736 3,587
-------- -------- --------
Ending balance $116,595 $109,502 $105,014
-------- -------- --------
Net increase $ 7,411 $ 4,488 $ 2,731
-------- -------- --------
Percent increase 6.77% 4.27% 2.67%
==== ==== ====
</TABLE>
In prior years, the Company has had a savings deposit outflow before interest
credited due to a pricing policy attributable to management's decision that
additional savings deposits were not needed during those periods and borrowings
were available at a lower overall cost to the Company. During the fiscal year
ended March 31, 1997 the Company increased marketing efforts and was more
competitive in regard to rates which contributed to the increase in deposits.
The Company experienced an increase in both demand and time deposits during
fiscal March 31, 1997. 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."
28
<PAGE>
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, 1997 $ 68 $17,980 $52,466 $ 7,992 $ --- $ --- $78,506
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
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of March 31, 1997.
<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 $11,701 $16,655 $25,706 $17,850 $71,912
Certificates of deposit
of $100,000 or more. 627 1,838 2,245 1,884 6,594
------- ------ ------- ------- -------
Total certificates
of deposit $12,328 $18,493 $27,951 $19,734 $78,506
======= ====== ======= ======= =======
</TABLE>
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 6 of the Notes to
Consolidated Financial Statements contained in Part II, Item 7 of this report
for information regarding the maturities and rate structure of the Company's
FHLB advances.
29
<PAGE>
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, 1997, the Company had no securities
sold under agreements to repurchase.
The Company generally 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,
---------------------------------------------
1997 1996 1995
-------------- ------------- --------------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB $28,000 $27,000 $25,000
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Average Balance:
FHLB advances $26,542 5.6% $25,347 6.1% $20,121 4.8%
</TABLE>
The following table sets forth information as to the Company's borrowings
and the weighted average interest rate paid on such borrowings at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
-------------------------
1997 1996 1995
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances $26,000 $27,000 $25,000
------- ------- -------
Total borrowings $26,000 $27,000 $25,000
======= ======= =======
Weighted average interest
rate of FHLB advances 6.85% 5.88% 6.31%
</TABLE>
30
<PAGE>
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, 1997,
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%. The
opening of an office by the Bank in April, 1997 in Virginia Beach, Virginia will
expand the Bank's market area to the Hampton Roads area of Virginia in the
fiscal year March 31, 1998.
Regulation
- ----------
General. Community Bank is a federally chartered financial institution, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, Community Bank 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 Bank, 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 Bank is a member of the Savings Association Insurance
Fund ("SAIF") which together with the Bank Insurance Fund (the "BIF") are the
two deposit insurance funds administered by the FDIC, and the deposits of
Community Bank are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over the Bank.
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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, 1997, was
$51,197.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Community Bank 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 of
the Bank (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired capital
and surplus). At March 31, 1997, the Company's lending limit under this
restriction was $3.0 million.
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, asset quality, earnings standards, 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
32
<PAGE>
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 Bank is a
member of the SAIF, which is 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. Deposit insurance premiums are assessed
based upon the institution's risk classification, which is a function of its
capital level and supervisory rating. 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 SAIF or the BIF. 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.
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, 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 ratio the FDIC revised the
premium schedule for BIF insured institutions. The SAIF rates, however, were not
adjusted. At the time the FDIC revised the BIF premium schedule, it noted that,
absent legislative action (as discussed below),the SAIF would not attain its
designated reserve ratio until the year 2002. As a result, SAIF insured members
would continue to be generally subject to higher deposit insurance premiums than
BIF insured institutions until, all things being equal, the SAIF attained its
required reserve ratio.
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In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits (as of March 31, 1995) insured by the FDIC,
which resulted in an assessment of $670,765 being paid by the Bank in November
1996. This special assessment significantly increased noninterest expense and
adversely affected Bank's and the Company's results of operations for the year
ended March 31, 1997. As a result of the special assessment, the Bank's deposit
insurance premiums was reduced to zero based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are a 6.48 basis points assessment
on SAIF deposits and 1.3 basis points on BIF deposits until BIF insured
institutions participate fully in the assessment.
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. See Note 8 of the Notes to Consolidated Financial Statements
contained in Part II, Item 7 of this report for information on the Bank's
regulatory capital levels and applicable OTS requirements.
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
34
<PAGE>
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.
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, savings 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
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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 their 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.
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"
contained in Part II, Item 6 of this report.
Qualified Thrift Lender Test. All savings associations, including Community
Bank, 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. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At March 31, 1997,
Community Bank met the test and has always met the test since its effectiveness.
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
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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, 1997, Community Bank 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.
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
October, 1996 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
Bank 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
37
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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 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.
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Federal and State Taxation
- --------------------------
Federal 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"), had
been permitted to establish reserves for bad debts and to make annual additions
thereto which could, 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" was 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) could 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 was 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 was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was 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 permitted 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).
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.
In August 1996, legislation was enacted that repeals the above-described
reserve method of accounting (including the percentage of taxable income method)
used by many thrift institutions to calculate their bad debt reserve for federal
income tax purposes. Thrift institutions with $500 million or less in assets
may, however, continue to use the experience method. As a result, the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. At March 31,
1997, the Bank's post-1987 excess reserves amounted to approximately $1,248,000.
The recapture will occur over a six-year period, the commencement of which will
be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
legislation also requires thrift institutions to account for bad debts for
federal income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995.
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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, 1997, the Bank's Excess for tax purposes
totaled approximately $3.5 million.
The Company and the Bank file consolidated federal income tax returns on a
calendar year basis. 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 federal income tax returns of the Company and its consolidated
subsidiary for the last three years are open to possible audit by the Internal
Revenue Service (the "IRS"). No returns are being audited by the IRS at the
current time. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, Community Bank) would not result in a deficiency which could have a
material adverse effect on the financial condition of Community Federal and its
consolidated subsidiaries.
Virginia Taxation. Community conducts its business in Virginia and
consequently is subject to the Virginia corporate income 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.
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Executive Officers
- ------------------
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 52, is the Company's President and
Chief Executive Officer. He was elected in October 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 48, 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 58, 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 50, 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 33, is the Company's Vice President of
Administration, a position he has held since March 31, 1997, 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 63, 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 57, 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.
P. Douglas Richard. Mr. Richard, age 52, is the Company's Vice
President and Regional President, a position he has held since January, 1997.
Prior to joining the Company Mr. Richard was Chief Executive Officer of Seaboard
Savings Bank in Virginia Beach, Virginia.
Chris P. Kyriakides. Mr. Kyriakides, age 34, is the Company's Vice
President and Regional Executive Vice President, a position he has held since
January, 1997. Prior to joining the Company Mr. Kyriakides was Chief Operations
Officer of Seaboard Savings Bank in Virginia Beach, Virginia.
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Employees
- ---------
At March 31, 1997, the Company had a total of 46 employees, including eight
hourly employees. None of the Company's employees are represented by any
collective bargaining group. Management considers its employee relations to be
good.
Item 2. Description of Property
- ---------------------------------
The following table sets forth information at March 31, 1997, 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, 1997
- ----------------------------------------------------------------------------
38 North Central Avenue 1956 Owned 17,000 $2,136,000
Staunton, Virginia
Rte. 250 West 1989 Owned 5,300 1,006,000
Waynesboro, Virginia
Routes 340 and 608 1993 Owned 2,074 334,000
Stuart's Draft, Virginia
5300 Kemps River Drive(1) 1997 2002(2) 2,400 66,000
Virginia Beach, Virginia
- ------------------------
(1) Opened April 1997
(2) Contains one five-year option.
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, 1997 was $66,790.
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, 1997.
42
<PAGE>
PART II
Item 5. Market for Common Equity and Related Security Holder Matters
- ----------------------------------------------------------------------
As of May 31, 1997, there were approximately 585 holders of record of
Community Common Stock. Community's stock is quoted on the Nasdaq Stock Market
under the symbol "CFFC." As of May 31, 1997, the bid and asked prices for the
Company's Common Stock as reported on the Nasdaq Stock Market were $21.50 and
$23.50, 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
and the dividends declared by the Corporation for the stated periods.
<TABLE>
<CAPTION>
Bid Ask
---------------- ----------------
1997 High Low High Low Dividend Declared
- -------------- ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
June 1996 $19.13 $19.00 $21.00 $21.00 $.13
September 1996 20.50 19.00 22.50 21.00 .13
December 1996 20.50 20.50 22.50 22.50 .13
March 1997 22.50 20.50 23.50 22.50 .14
</TABLE>
<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 21.00 15.00 20.00 18.00 .11
</TABLE>
Dividend payment decisions are made with consideration of a variety of
factors, including earnings, financial condition, market considerations and
regulatory restrictions. The ability of the Corporation to pay dividends is
limited by restrictions imposed by the Virginia Stock Corporation Act, and
indirectly, by the Office of Thrift Supervision. In general, dividends paid by
Virginia corporations may be paid only if, after giving effect to the
distribution the corporation is still able to pay its debts as they become due
in the usual course of business, or the corporation's total assets are
43
<PAGE>
greater than or equal to the sum of its total liabilities plus the amount that
would be needed (if the corporation were to be dissolved at the time of the
distribution) to satisfy the preferential rights, upon the dissolution, of
stockholders whose preferential rights are superior to those receiving the
distribution. Restrictions on dividend payments from the Bank to the Corporation
(the Corporation's primary source of funds for the payment of dividends to its
stockholders) are described in Note 8 of the Notes to Consolidated Financial
Statements contained in this Annual Report.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -----------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Introduction
Community Financial Corporation ("Community" or the "Corporation") is a
Virginia corporation. Certain of the information presented herein relates to
Community Bank (the "Bank"), a wholly owned subsidiary of the Corporation.
The Corporation and the Bank, like all thrift institutions and their
holding companies, are subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision, Department of the Treasury
("OTS") and the Federal Deposit Insurance Corporation ("FDIC").
The Corporation'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 Corporation, like other financial 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
Corporation'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 Corporation'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 Corporation'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 financial
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. Financial 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. The regulation, however, will not become
effective until the OTS evaluates the process by which its financial
institutions may appeal an interest rate deduction determination. Nevertheless,
utilizing this measurement concept, at March 31, 1997, Community's interest rate
risk was consistent with the amount treated as "normal" under the OTS
regulations.
Presented in the following table, as of March 31, 1997 and 1996, 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. The Board limits have been established with consideration of
the dollar impact of various rate changes and the Corporation'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 decline due to both the rate increase and slowing
prepayments. When rates decline, the Corporation does not experience a
significant rise in market value for these loans because borrowers prepay at
relatively high rates. The value of the Corporation's deposits and borrowings
change in approximately the same proportion in rising or falling rate scenarios.
44
<PAGE>
March 31, 1997 March 31, 1996
Change in -------------------- -------------------
Interest Rate Board Limit $ Change % Change $ Change % Change
(Basis Points) % Change in NPV in NPV in NPV in NPV
-------------- -------- ------ ------ ------ ------
(Dollars in Thousands)
+300 -25% $-4,294 -15% $-2,324 -10%
+200 -15 -2,301 -8 -1,025 -4
+100 -10 -833 -3 -240 -1
-0- --- --- --- --- ---
-100 -10 198 +1 -130 -1
-200 -15 74 0 -155 -1
-300 -25 280 +1 154 +1
Management continually works to maintain a neutral position regarding
interest rate risk. In the current interest 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
Corporation's interest earning assets. As of March 31, 1997, approximately 82%
of the Corporation's gross loan portfolio consisted of loans which reprice
during the life of the loan. The Corporation emphasizes adjustable rate mortgage
loans 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 Corporation 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-interest bearing or low interest
deposit products and maintaining competitive pricing on longer term certificates
of deposit. The Corporation has also used Federal Home Loan Bank 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 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.
45
<PAGE>
Average Balances, Interest Rates and Yields
The following table sets forth certain information relating to
categories of the Corporation's interest-earning assets and its interest-bearing
liabilities for the periods indicated. All average balances are computed on
monthly basis. Non-accruing loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- -------------------------
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 .................................. $144,409 $12,189 8.44% $138,127 $11,816 8.55% $128,830 $ 9,711 7.54%
Investment securities and
other investments ...................... 10,700 589 5.51 9,254 571 6.17 8,800 457 5.18
-------- ------- -------- ------- -------- -------
Total interest-earning assets ........ 155,109 12,778 8.24 147,381 12,387 8.41 137,630 10,168 7.39
-------- ------- -------- ------- -------- -------
Interest-Bearing Liabilities
- ----------------------------
Deposits ............................... 111,307 5,055 4.54 105,093 4,977 4.74 101,575 3,995 3.93
FHLB advances and other borrowings ..... 26,321 1,481 5.63 25,349 1,538 6.07 22,250 968 4.35
-------- ------- -------- ------ ------- ------
Total interest-bearing liabilities ..... 137,628 6,536 4.75 130,442 6,515 4.99 123,825 4,963 4.01
-------- ------- -------- ------ ------- ------
Net interest income/interest
rate spread ........................... $ 6,242 3.49 $ 5,872 3.42 $ 5,205 3.38
======= ======= =======
Net interest-earning assets/net yield on
interest-earning assets ............... $ 17,481 3.57 $ 16,939 3.47 $13,805 3.77
======== ======== =======
Percentage of interest-earning assets
to interest-bearing liabilities ....... 112.70% 112.99% 111.15%
</TABLE>
46
<PAGE>
The following table sets forth the Corporation's interest rate spread
at the dates indicated.
March 31,
---------------------------
1997 1996 1995
------ ------ ------
Yield On
- --------
Loans ......................................... 8.15% 8.32% 7.95%
Investment securities and
other investments ............................ 6.08% 5.60% 6.26%
Total interest-earning assets ............... 8.03% 8.14% 7.87%
Cost Of
- -------
Deposits ...................................... 4.54% 4.62% 4.39%
FHLB of Atlanta advances and
other borrowings ............................. 6.85% 5.88% 6.31%
Total interest-bearing liabilities .......... 4.96% 4.87% 4.77%
Interest rate spread .......................... 3.07% 3.27% 3.10%
Rate/Volume Analysis
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,
-------------------------------------------------------------------------
1997 v. 1996 1996 v. 1995
----------------------------------- ---------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------ Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
- -----------------------
Loans .............................................. $532 $(159) $ 373 $737 $1,368 $2,105
Investments securities and other
investments ....................................... 83 (65) 18 25 90 115
-- --- -- -- -- ---
Total interest-earnings assets ................... $ 615 $ (224) 391 $762 $1,458 2,220
===== ------- ----- ==== ------ -----
Interest-Bearing Liabilities
- ----------------------------
Deposits ........................................... $298 (220) 78 $141 $ 841 $ 982
FHLB advances and other borrowings ................. 59 (116) (57) 149 421 570
-- ---- --- --- --- ---
Total interest-bearing liabilities .............. $357 $(336) 21 $290 $1,262 1,552
===== ======= ----- ==== ====== -----
Net interest income ................................ $370 $ 668
===== =====
</TABLE>
47
<PAGE>
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 Corporation 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, 1997, the Corporation's total non-performing assets were
$676,000 or .40% of total assets compared to $741,000 or .46% at March 31, 1996.
Non-performing assets at March 31, 1997 were comprised of two single family
residential properties which were more than ninety-days past due, real estate
acquired through foreclosure of a single family dwelling, two automobiles which
were repossessed and various consumer loans which includes one loan relationship
of approximately $388,000 for which an allowance of $195,000 has been
established. 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 Corporation 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 fiscal 1997, the Corporation increased its
allowance for losses on loans $39,000 to $1,039,000 due to the delinquency of a
consumer loan described above, and the Corporation's increased loan volume,
especially in commercial real estate, multi-family and consumer loans. See
"Asset/Liability Management." Management believes that the loan loss reserve is
adequate. The Corporation has had net charge-offs to its loan loss reserve of
$142,000, $70,000, and $7,000, for the years ended March 31, 1997, 1996 and
1995, respectively. The increase in net charge-offs is related primarily to the
Corporation's increased activity in consumer loan lending. While consumer loans
provide a greater yield they generally have a higher rate of charge-offs than
mortgage loans. Although management believes it uses the best information
available, future adjustments to reserves may be necessary. See "Results of
Operations Comparison of Years Ended March 31, 1997 and 1996 - Provision for
Loan Losses."
Financial Condition
The Corporation's total assets increased $7.9 million to $167.7 million
at March 31, 1997 primarily as a result of loans receivable which increased $7.2
million. The increase in loans receivable was funded by an increase in deposits
of $7.1 million. The increase in deposits can be attributed to both an increase
in time deposits of $5.0 million and an increase in checking accounts of $2.1
million. Management believes the increase in time deposits is primarily
attributable to a special time deposit promotion and the increase in checking
accounts is related to an increased marketing effort. The increase in loans
receivable was due to the origination of primarily variable-rate loans of
residential real estate and more competitive pricing on consumer loans.
The Corporation's principal use of funds is to originate loans. The
principal source of funds for loan disbursements is loan principal repayments,
net growth in deposits and borrowings. In fiscal 1997 net loans increased by
$7.2 million. While borrowings for fiscal 1997 decreased by $1.0 million, the
increase in the loan portfolio was funded through increased deposits of $7.1
million.
Stockholders' equity increased $1.4 million to $23.3 million at March
31, 1997 compared to March 31, 1996. The increase was the result of $1.7 million
of net income in fiscal 1997 and net unrealized gains of $311,000 on available
for sale securities, partially offset by dividends paid to stockholders of
$674,000.
Results of Operations
The Corporation'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, 1997 and 1996
General. Net income for the year ended March 31, 1997 was $1,734,735 or
$1.36 per share compared to $2,011,538 or $1.60 per share for the year ended
March 31, 1996. Net income decreased due to a special one-time
48
<PAGE>
assessment by the FDIC of $670,765 which had a tax affected effect of
approximately $416,000. Net income for the year ended March 31, 1997, excluding
the special assessment, would have been approximately $2,150,000 or $1.69 per
share.
Interest Income. Total interest income increased to $12,777,987 for the
year ended March 31, 1997 as compared to $12,387,722 for the year ended March
31, 1996. The increase in total interest income can be attributed to an increase
in the dollar volume of interest-earning assets, primarily $7.2 million in
mortgage and consumer loans which was offset by a decrease in the yield on
interest earning assets. Average yields on total interest-earning assets
decreased from 8.41% in fiscal 1996 to 8.24% for the current fiscal year due
primarily to a more competitive and lower rate environment.
Interest Expense. Total interest expense increased to $6,535,631 for
the year ended March 31, 1997 from $6,515,234 for the year ended March 31, 1996.
The increase in total interest expense is attributable to an increase in the
average balances of interest-bearing liabilities, primarily $7.1 million in
deposits, which was offset by a decrease in the cost of funds. The cost of funds
for the current fiscal year decreased to 4.75% as compared to 4.99% for the year
ended March 31, 1996 due a lower interest rate environment and maintaining
shorter maturities on borrowings.
Provision for Loan Losses. The provision decreased to $180,561 for the
fiscal ended March 31, 1997 from $307,361 for the fiscal year ended March 31,
1996. The Corporation 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, 1997, the total allowance for loan
losses amounted to $1,039,013 of which $783,700 was not specifically allocated
to identified problem loans. At March 31, 1997, the Corporation's total
allowance as a percentage of total loans receivable was .69% and as a percentage
of total non-performing loans was 154%. See "Asset Quality."
Noninterest Income. Noninterest income increased to $518,742 in fiscal
1997 as compared to $455,706 for the year ended March 31, 1996, primarily due to
an increase in the number of checking accounts and the related charges. The
Corporation increased marketing in regard to 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, 1997.
Noninterest Expense. Total noninterest expense increased to $3,805,739
during the year ended March 31, 1997 from $2,808,924 for the year March 31, 1996
due primarily to the special one-time assessment by the FDIC. The increase in
noninterest expenses other than the special one-time assessment relates to
preparation for the opening of a branch in Virginia Beach , Virginia in April,
1997 and the general growth of the Corporation.
Taxes. Total taxes decreased to $1,040,064 during the year ended March
31, 1997 from $1,200,371 during fiscal 1996. The effective tax rate for the year
ended March 31, 1997 was 37.5% as compared to 37.4% for the year ended March 31,
1996. The decrease in taxes is attributable to a decrease in income before
income taxes.
Comparison of Years Ended March 31, 1996 and 1995
General. Net income for the year ended 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. The increase in the average cost of funds was
attributable to improving economic conditions locally and nationally for most of
fiscal 1996.
49
<PAGE>
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 increase in the provision was attributable primarily to one loan
relationship for which an $145,000 allowance was established. 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 the number of checking accounts and the related charges. The
Corporation 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 noninterest expenses is generally in proportion to the
asset growth of the Corporation.
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.
Liquidity and Capital Resources
The Corporation'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 Corporation maintains investments in liquid assets based upon its
assessment of (i) the Corporation's need for funds, (ii) expected deposit flows,
(iii) the yields available on short-term liquid assets, (iv) the liquidity of
the Corporation's loan portfolio and (v) the objectives of the Corporation's
asset/liability management program.
Liquidity represents the ability of the Corporation to meet its
on-going funding 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. OTS
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, 1997, the Bank's liquid asset ratio was 7.2%.
The Corporation's dominant source of funds during the year ended March
31, 1997 was from deposits which increased by $7.1 million due primarily to an
increase in time deposits of $5.0 million and a $2.2 million increase in demand
deposits. FHLB advances decreased for the year ended March 31, 1997 by $1.0
million. 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 and the increase in demand deposits was due to increased marketing
of the Corporation's free checking account.
The Corporation's cash increased $1.2 million from $3.7 million at
March 31, 1996 to $4.9 million at March 31, 1997. The increase in cash was
related to the increase in deposits and a decrease in securities held to
maturity of $900,000.
At March 31, 1997, the Corporation had commitments to purchase or
originate $1.6 million of loans. Certificates of deposit scheduled to mature in
one year or less at March 31, 1997 totaled $58.8 million. Based on its
historical experience, management believes that a significant portion of such
deposits will remain with the Corporation. Management further believes that loan
repayments and other sources of funds will be adequate to meet the Corporation's
foreseeable short- and long-term liquidity needs.
At March 31, 1997, the Bank had tangible and core capital of 11.9% 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 18.5% of risk weighted
assets, which also exceeded its requirement of 8.0%. See Note 8 of the Notes to
Consolidated Financial Statements.
50
<PAGE>
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
Corporation's assets and liabilities are critical to the maintenance of
acceptable performance levels.
Accounting Pronouncements
For a discussion of certain accounting pronouncements implemented by
the Corporation during fiscal 1997 and new pronouncements which will be
implemented in the future, see Summary of Accounting Policies to Consolidated
Financial Statements.
51
<PAGE>
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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.
/s/ BDO Seidman, L.L.P.
April 24, 1997
Richmond, Virginia
<PAGE>
Community Financial Corporation
and Subsidiary
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, 1997 1996
- --------- ---- ----
<S> <C> <C>
Assets
Cash (including interest bearing deposits of
approximately ($1,015,000 and $1,147,000) $ 4,922,213 $ 3,673,085
Securities (Note 1)
Held to maturity 5,197,437 6,067,778
Available for sale 2,243,220 1,754,445
Investment in Federal Home Loan Bank stock, at cost (Note 6) 1,400,000 1,350,000
Loans receivable, net (Notes 2 and 6) 148,905,485 141,738,895
Real estate owned, net 173,245 123,322
Property and equipment, net (Note 3) 3,542,108 3,692,043
Accrued interest receivable 989,438 1,020,417
Prepaid expenses and other assets 334,036 372,636
------------ ------------
$167,707,182 $159,792,621
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 4) $116,594,885 $109,501,461
Advances from Federal Home Loan Bank (Note 6) 26,000,000 27,000,000
Advance payments by borrowers for taxes and insurance 135,561 142,737
Other liabilities (Notes 7 and 9) 1,639,740 1,248,443
------------ ------------
Total liabilities 144,370,186 137,892,641
------------ ------------
Commitments and Contingencies (Notes 9, 10 and 11)
- --------------------------------------------------
Stockholders' Equity (Notes 8 and 10)
Preferred stock, $.01 par value, authorized
3,000,000 shares, none outstanding -- --
Common stock, $.01 par value, 10,000,000 authorized
shares, 1,275,348 and 1,269,698 shares outstanding 12,753 12,697
Additional paid-in capital 4,716,677 4,651,634
Retained earnings 17,266,745 16,206,237
Net unrealized gain on securities available for sale (Note 1) 1,340,821 1,029,412
------------ ------------
Total stockholders' equity 23,336,996 21,899,980
------------ ------------
$167,707,182 $159,792,621
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
<PAGE>
Community Financial Corporation
and Subsidiary
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Year Ended March 31, 1997 1996 1995
- -------------------- ---- ---- ----
Interest income
Loans $12,188,714 $11,816,368 $ 9,711,238
Investment securities 471,864 447,619 238,272
Other investments 117,409 123,735 218,105
----------- ----------- -----------
Total interest income 12,777,987 12,387,722 10,167,615
----------- ----------- -----------
Interest expense
Deposits (Note 4) 5,054,884 4,977,188 3,994,663
Borrowed money 1,480,747 1,538,046 968,167
----------- ----------- -----------
Total interest expense 6,535,631 6,515,234 4,962,830
----------- ----------- -----------
Net interest income 6,242,356 5,872,488 5,204,785
Provision for loan losses (Note 2) 180,561 307,361 108,946
----------- ----------- -----------
Net interest income after provision for
loan losses 6,061,795 5,565,127 5,095,839
----------- ----------- -----------
Noninterest income
Service charges, fees and commissions 509,748 430,945 364,738
Other 8,994 24,761 34,077
----------- ----------- -----------
Total noninterest income 518,742 455,706 398,815
----------- ----------- -----------
Noninterest expense
Compensation and employee benefits
(Notes 9 and 10) 1,333,550 1,183,016 1,110,412
Occupancy 399,290 372,560 352,472
Data processing (Note 11) 349,150 308,814 273,057
BIF/SAIF premium disparity
assessment (Note 8) 670,765 -- --
Insurance 189,143 242,076 237,037
Other 863,841 702,458 666,407
----------- ----------- -----------
Total noninterest expense 3,805,739 2,808,924 2,639,385
----------- ----------- -----------
Income before income taxes 2,774,798 3,211,909 2,855,269
----------- ----------- -----------
Income taxes (Note 7)
Current 971,179 1,139,733 968,721
Deferred 68,885 60,638 115,067
----------- ----------- -----------
Total income taxes 1,040,064 1,200,371 1,083,788
----------- ----------- -----------
Net income $ 1,734,734 $ 2,011,538 $ 1,771,481
=========== =========== ===========
Earnings per share $ 1.36 $ 1.60 $ 1.44
=========== =========== ===========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
<PAGE>
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, 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
Net income -- -- 1,734,734 -- 1,734,734
Cash dividends, $.53 per share -- -- (674,226) -- (674,226)
Exercise of stock options
(Note 10) 56 65,043 -- -- 65,099
Net unrealized gain on
securities available for sale
(Note 1) -- -- -- 311,409 311,409
------- ---------- ------------ ---------- ------------
Balance, March 31, 1997 $12,753 $4,716,677 $ 17,266,745 $1,340,821 $ 23,336,996
======= ========== ============ ========== ============
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
<PAGE>
Community Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended March 31, 1997 1996 1995
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $ 1,734,734 $ 2,011,538 $ 1,771,481
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 180,561 307,361 108,946
Provision for real estate losses -- 25,000 30,000
Depreciation 216,462 212,750 207,452
Amortization of premium and accretion
of discount on securities, net (3,683) (351) (13,903)
Decrease in net deferred loan
origination fees (33,289) (110,561) (118,420)
Loans originated for resale (1,587,470) (1,422,000) (1,008,000)
Proceeds from loan sales 1,568,470 1,299,000 1,008,000
Increase in deferred income taxes 66,316 62,327 115,067
Loss on sale of real estate 4,274 -- --
Increase (decrease) in other assets 69,579 (298,374) (98,465)
Increase (decrease) in other liabilities 317,805 (13,929) 74,957
------------ ------------ ------------
Net cash provided by operating activities 2,533,759 2,072,761 2,077,115
------------ ------------ ------------
Investing activities
Proceeds from maturities of held to maturity
securities 2,071,892 2,979,871 3,432,760
Purchase of held to maturity securities (1,375,234) (4,791,147) (6,204,980)
Net increase in loans (7,494,061) (7,068,723) (11,320,566)
Purchases of property and equipment (66,527) (72,735) (463,564)
Proceeds from sale of real estate owned 145,002 -- --
Redemption of FHLB stock 150,000 -- 180,000
Purchase of FHLB stock (200,000) (100,000) (435,000)
------------ ------------ ------------
Net cash absorbed by investing activities (6,768,928) (9,052,734) (14,811,350)
============ ============ ============
</TABLE>
<PAGE>
Community Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended March 31, 1997 1996 1995
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Financing activities
Net increase in certificates of
deposit $ 4,998,000 $ 4,665,694 $ 10,887,840
Net increase (decrease) in savings and
checking deposits 2,095,424 (177,799) (8,156,816)
Proceeds from issuance of common stock 65,099 111,280 134,376
Dividends paid (674,226) (529,100) (436,612)
Proceeds from advances 33,000,000 78,000,000 69,500,000
Repayments of advances (34,000,000) (76,000,000) (64,000,000)
------------ ------------ ------------
Net cash provided by financing activities 5,484,297 6,070,075 7,928,788
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents 1,249,128 (909,898) (4,805,447)
Cash and cash equivalents - beginning of year 3,673,085 4,582,983 9,388,430
------------ ------------ ------------
Cash and cash equivalents - end of year $ 4,922,213 $ 3,673,085 $ 4,582,983
============ ============ ============
Supplemental Disclosures of Cash
Flow Information
Cash payments of interest expense $ 6,553,835 $ 6,482,210 $ 4,917,080
------------ ------------ ------------
Cash payments of income taxes $ 852,296 $ 1,151,092 $ 892,829
============ ============ ============
Supplemental Schedule of Non-Cash
Investing and Financing Activities
- ------------------------------------
Transfers from loans to real estate
acquired through foreclosure $ 131,718 $ 298,334 $ --
============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
<PAGE>
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 Bank (the "Bank"). All material intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Business and Regulatory Environment
The 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 Bank's deposits are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF"), which is administered by the Federal
Deposit Insurance Corporation ("FDIC"). The FDIC has specific 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 SAIF.
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
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 separate component of stockholders' equity, net of
tax effect, until realized.
<PAGE>
Community Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Securities (continued)
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 income.
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, to accrual status.
<PAGE>
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.
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.
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>
Community Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Sale of Loans and Participation 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.
Effective April 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing
Rights an Amendment of FASB Statement No. 65". The implementation of the
pronouncement did not have a material effect on the consolidated financial
statements. 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.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those servicing rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
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.
For tax years beginning prior to January 1, 1996, savings banks that met certain
definitional tests and other conditions prescribed by the Internal Revenue Code
were allowed, within limitations, to deduct from taxable income an allowance for
bad debts using the "percentage of taxable income" method. The cumulative bad
debt reserve, upon which no taxes have been paid, was approximately $1,056,000
at March 31, 1997.
Section 1616 of the Small Business Job Protection Act of 1996 (the "Act")
repealed the percentage of taxable income method of computing bad debt reserves,
and required the recapture into taxable income of "excess
<PAGE>
Community Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Income Taxes (continued)
reserves", on a ratable basis over the next six years. Excess reserves are
defined in general, as the excess of the balance of the tax bad debt reserve
(using the percentage of taxable income method) as of the close of the last tax
year beginning before January 1, 1996 over the balance of the reserve as of the
close of the last tax year beginning before January 1, 1988. The recapture of
the reserves is deferred if the Corporation meets the "residential loan
requirement" exception, during either or both of the first two years beginning
after December 31, 1995. The residential loan requirement is met, in general, if
the principal amount of residential loans made by the Corporation during the
year is not less than the Corporation's "base amount". The base amount is
defined as the average of the principal amounts of residential loans made during
the six most recent tax years beginning before January 1, 1996.
As a result of the Act, the Corporation must recapture into taxable income
approximately $1,267,000 ratably over the next six years, beginning with the
year ending March 31, 1997. If the residential loan requirement exception is
met, as discussed above, the income will be includable over the third through
eighth years following the year ended March 31, 1997.
New Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). 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 was adopted by the Corporation
prospectively beginning April 1, 1996. Disclosures required by SFAS 123 are
presented in Note 10.
Effective January 1, 1997 the Corporation adopted Statement of Financial
Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. After a transfer of financial assets,
an entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. In addition, a
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is to be
applied prospectively. The application of this pronouncement did not have a
material effect on the financial statements of the Corporation.
<PAGE>
Community Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
- --------------------------------------------------------------------------------
New Accounting Pronouncements (continued)
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 is effective for financial
statements, including interim periods issued for periods ending after December
15, 1997. SFAS 128 provides a different method for calculating earnings per
share than is currently used in accordance with APB 15, "Earnings per Share."
SFAS 128 provides for the calculation of basic and diluted earnings per share.
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in earnings of an entity, similar to
fully diluted earnings per share. 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. The weighted average number of shares of common stock outstanding
for the years ended March 31, 1997, 1996 and 1995 were 1,272,085, 1,258,068 and
1,227,690, 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, 1997 presentation.
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Securities (continued)
A summary of the amortized cost and estimated market values of securities is as
follows:
<TABLE>
<CAPTION>
March 31, 1997
- --------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Held to Maturity
United States government
and agency obligations $4,876,286 $ 14,235 $ 34,287 $4,856,234
Corporate obligations 296,128 -- 628 295,500
Other 25,023 460 -- 25,483
---------- ---------- ---------- ----------
5,197,437 14,695 34,915 5,177,217
Available for Sale
Federal Home Loan Mortgage
Corporation stock 80,605 2,162,615 -- 2,243,220
---------- ---------- ---------- ----------
$5,278,042 $2,177,310 $ 34,915 $7,420,437
========== ========== ========== ==========
</TABLE>
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
1. Securities (continued)
A summary of the amortized cost and estimated market values of investment
securities is as follows:
<TABLE>
<CAPTION>
March 31, 1996
- --------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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
========== ========== ======= ==========
</TABLE>
<PAGE>
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, 1997,
by contractual maturity, are shown below:
March 31, 1997
- --------------
Estimated
Amortized Market
Cost Value
--------- ---------
Held to Maturity
Due in one year or less $1,500,258 $1,514,493
Due in one through five years 3,672,156 3,637,241
Other 25,023 25,483
---------- ----------
5,197,437 5,177,217
---------- ----------
Available for Sale
Federal Home Loan Mortgage
Corporation stock 80,605 2,243,220
---------- ----------
$5,278,042 $7,420,437
========== ==========
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
2. Loans Receivable
Loans receivable are summarized as follows:
March 31, 1997 1996
- --------- ---- ----
Real estate loans
First mortgage conventional
One to four family $ 96,968,331 $ 91,031,523
Multi-family 18,787,851 20,453,598
Commercial 18,720,436 18,160,142
Short-term construction 5,204,235 6,415,254
------------ ------------
Total real estate loans 139,680,853 136,060,517
Less
Loans in process 1,619,476 1,830,271
Deferred loan fees, net 372,460 411,371
Allowance for loan losses 602,910 706,755
------------ ------------
Net real estate loans 137,086,007 133,112,120
------------ ------------
Consumer loans
Deposit account 338,976 234,093
Unsecured personal 4,417,470 3,615,716
Automobile 1,645,893 1,469,633
Home equity 1,630,347 379,605
Other 4,210,428 3,206,164
------------ ------------
Total consumer loans 12,243,114 8,905,211
Less
Deferred loan fees (origination costs), net (12,467) (15,087)
Allowance for loan losses 436,103 293,523
------------ ------------
Net consumer loans 11,819,478 8,626,775
------------ ------------
$148,905,485 $141,738,895
============ ============
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
2. Loans Receivable (continued)
Loans serviced for others amounted to approximately $10,513,000, $11,264,000 and
$11,782,000 at March 31, 1997, 1996 and 1995, respectively. The loans were not
included in the accompanying consolidated statements of financial condition.
The weighted average interest rate on loans receivable was approximately 8.15%
and 8.32% at March 31, 1997 and 1996, respectively.
A summary of the allowance for loan losses is as follows:
Year Ended March 31, 1997 1996 1995
- -------------------- ---- ---- ----
Balance at beginning of year $1,000,278 $ 762,621 $660,652
Provision charged to expense 180,561 307,361 108,946
Losses charged to the allowance,
net of recoveries (141,826) (69,704) (6,977)
---------- ---------- --------
Balance at end of year $1,039,013 $1,000,278 $762,621
========== ========== ========
Of the total allowance for loan losses at March 31, 1997 and 1996, approximately
$783,700 and $791,300, 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, 1997 1996
- -------------------------------------- ---- ----
Impaired loans with a specific allowance $416,882 $425,030
Impaired loans with no specific allowance -- --
-------- --------
Total impaired loans $416,882 $425,030
======== ========
Total allowance related to impaired loans $195,270 $145,270
Average balance of impaired loans for the year $420,956 $425,030
Interest income on impaired loans for the year
recorded on a cash basis $ 4,004 $ --
======== ========
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
3. Property and Equipment
Property and equipment are summarized as follows:
March 31, 1997 1996
- --------- ---- ----
Buildings $3,201,387 $3,174,401
Land and improvements 876,276 873,244
Furniture and equipment 757,018 745,391
---------- ----------
4,834,681 4,793,036
Less accumulated depreciation 1,292,573 1,100,993
---------- ----------
$3,542,108 $3,692,043
========== ==========
4. Deposits
March 31, 1997 1996
- --------- ---- ----
Demand deposits
Savings accounts $ 12,577,540 $ 12,178,293
NOW accounts 15,576,036 13,371,037
Money market deposit
accounts 9,935,309 10,444,131
------------ ------------
Total demand deposits 38,088,885 35,993,461
Time deposits 78,506,000 73,508,000
------------ ------------
$116,594,885 $109,501,461
============ ============
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
4. Deposits (continued)
The aggregate amount of time deposit accounts with a minimum denomination of
$100,000 was approximately $6,594,000 and $5,285,000 at March 31, 1997 and 1996,
respectively.
Time deposits mature as follows:
March 31, 1997 1996
- --------- ---- ----
Within one year $58,772,000 $47,197,000
One to two years 10,715,000 15,478,000
More than two years 9,019,000 10,833,000
----------- -----------
$78,506,000 $73,508,000
=========== ===========
Interest expense on deposits is summarized as follows:
Year Ended March 31, 1997 1996 1995
- -------------------- ---- ---- ----
Time deposits $4,045,717 $3,999,200 $2,755,991
Money market deposit and NOW accounts 649,194 624,182 842,809
Savings 359,973 353,806 395,863
---------- ---------- ----------
$5,054,884 $4,977,188 $3,994,663
========== ========== ==========
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
5. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
March 31, 1997 1996
- --------- --------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $ 4,922,213 $ 4,922,000 $ 3,673,085 $ 3,673,000
Securities 7,440,657 7,420,000 7,822,223 7,845,000
Loans, net of allowance for
loan losses 148,905,485 148,253,000 141,738,895 141,443,000
Financial liabilities
Deposits $116,594,885 $116,795,000 $109,501,461 $109,467,000
Advances from Federal Home
Loan Bank 26,000,000 26,000,000 27,000,000 27,000,000
Notional Fair Notional Fair
Amount Value Amount Value
------------ ------------- ------------- -------------
Unrecognized financial instruments
Commitments to extend credit $ 11,179,000 $ 11,179,000 $ 9,294,000 $ 9,294,000
</TABLE>
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.
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.
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Statements
(continued)
- --------------------------------------------------------------------------------
5. Fair Market Value of Financial Instruments (continued)
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.
6. Advances From Federal Home Loan Bank
The advances to the Corporation at March 31, 1997 and 1996 mature within twelve
months. The weighted average interest rate on advances was 6.85% and 5.88% at
March 31, 1997 and 1996, 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.
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
6. Advances From Federal Home Loan Bank (continued)
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
Year Ended March 31, 1997 1996 1995
- -------------------- ---- ---- ----
Maximum amount outstanding
during the year $28,000,000 $27,000,000 $25,000,000
=========== =========== ===========
Average amount outstanding
during the year $26,541,667 $25,346,995 $20,120,548
=========== =========== ===========
Average interest rate during
the year 5.58% 6.07% 4.81%
=========== =========== ===========
7. Income Taxes
Deferred tax assets (liabilities), included in "Other liabilities" in the
consolidated balance sheets are as follows:
March 31, 1997 1996
- --------- ---- ----
Deferred tax assets
Deferred loan fees $ 6,522 $ 27,674
Other 7,364 10,158
----------- ---------
13,886 37,832
----------- ---------
Deferred tax liabilities
Depreciable assets (143,335) (136,997)
FHLMC stock (821,794) (644,428)
FHLB stock (90,852) (90,852)
Allowance for losses (6,351) (40,679)
Other (93,965) (23,605)
----------- ---------
(1,156,297) (936,561)
----------- ---------
Net deferred tax liability $(1,142,411) $(898,729)
=========== =========
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
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.
The following table presents the Bank's regulatory capital levels at March 31,
1997, relative to the OTS requirements applicable at that date:
Amount Percent Actual Actual Excess
Required Required Amount Percent Amount
-------- -------- ------ ------- ------
Tangible Capital $2,498,000 1.50% $19,779,000 11.88% $17,281,000
Core Capital 4,996,000 3.00 19,779,000 11.88 14,783,000
Risk-based Capital 8,908,000 8.00 20,562,000 18.46 11,654,000
The 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 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 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
Bank did not pay any dividends to the Corporation during the year ended March
31, 1997.
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
8. Stockholders' Equity and Regulatory Capital Requirements (continued)
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of September 30, 1996. Based on the
Corporation's deposits as of March 31, 1995, the date for measuring the amount
of the special assessment, the Corporation paid a special assessment of
approximately $671,000. Excluding this special assessment, net of tax effect,
net income and earnings per share for the year ended March 31, 1997 would have
been approximately $2,151,000 and $1.69, respectively. The FDIC has lowered the
premium for deposit insurance from that prior to the special assessment to a
level necessary to maintain the SAIF at its required reserve level.
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, 1997 1996 1995
- -------------------- ---- ---- ----
Net periodic pension cost
Service cost - benefits earned
during the period $ 30,176 $ 27,872 $ 31,633
Interest cost on projected benefit
obligations 34,077 38,884 37,054
Actual return on plan assets (37,684) (29,905) (30,625)
Net amortization and deferral (6,695) (15,502) (11,117)
-------- -------- --------
$ 19,874 $ 21,349 $ 26,945
======== ======== ========
Accumulated benefit obligation
Vested benefits $441,077 $393,678 $334,321
Non-vested benefits 5,743 27,792 47,105
-------- -------- --------
$446,820 $421,470 $381,426
======== ======== ========
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
9. Employee Benefit Plans (continued)
Year Ended March 31, 1997 1996
- -------------------- ---- ----
Accrued pension cost
Projected benefit obligation $537,272 $540,141
Fair value of plan assets, primarily
IPG insurance contracts 546,708 539,114
-------- --------
Assets in excess (deficit) of projected
benefit obligation 9,436 (1,027)
Unrecognized prior service cost 18,604 21,704
Unrecognized net (gain) loss (47,270) (11,766)
Unrecognized net asset (57,864) (66,131)
-------- --------
$(77,094) $(57,220)
======== ========
The following assumed rates were used in determining the projected benefit
obligations:
Year Ended March 31, 1997 1996
- -------------------- ---- ----
Weighted average discount rate 7.0% 7.0%
==== ====
Expected long-term rate of return on
plan assets 7.5% 7.5%
==== ====
Increase in future compensation levels 5.0% 5.5%
==== ====
The measurement date used to value the plan assets was December 31, 1996, and
1995.
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
9. Employee Benefit Plans (continued)
Employee Stock Ownership Plan
The 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
---------- -------- ------------ -----
1995 $44,556 $6,996 $51,552
1996 38,325 1,749 40,074
1997 43,513 -- 43,513
*For a former executive officer, amounts are authorized annually.
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
10. Stock Option Plan
Under the terms of the Employee Stock Ownership Plan ("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:
<TABLE>
<CAPTION>
Year Ending March 31, 1997 1996 1995
- --------------------- ------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 36,000 $16.04 49,630 $ 5.66 80,224 $ 4.69
Options granted 30,500 21.37 28,100 18.47 3,000 13.00
Options exercised (5,650) 11.52 (27,820) 4.00 (33,594) 4.00
Options forfeited (200) 20.00 (13,910) 8.00 -- --
------ ------ ------- ------ ------- ------
Options outstanding at
end of year 60,650 $17.13 36,000 $16.04 49,630 $ 5.66
------ ------ ------- ------ ------- ------
</TABLE>
All options are exercisable upon date of grant. The remaining contractual lives
of the options granted in 1997, 1996 and 1995 are 9.2 years, 8.8 years and 8.0
years, respectively, at March 31, 1997. The weighted average remaining
contractual life of total options is 8.5 years at March 31, 1997.
The Corporation applies APB Opinion 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Corporation's stock option plan been determined based
on the fair value at the grant date consistent with the methods of SFAS 123, the
Corporation's net income and net income per share would have been reduced to the
pro forma amounts indicated below. In accordance with the transition provisions
of SFAS 123, the pro forma amounts reflect options with grant dates subsequent
to April 1, 1995.
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
10. Stock Option Plan (continued)
Year Ended March 31 1997 1996
- ------------------- ---- ----
Net income:
As reported $1,734,734 $2,011,538
Pro forma 1,611,900 1,914,873
Net income per share:
As reported $1.36 $1.60
Pro forma 1.27 1.52
For purposes of computing the pro forma amounts indicated above, the fair value
of each option on the date of grant is estimated using the Black-Scholes option
pricing model with the following assumptions for the grant in 1997: dividend
yield of 2%, expected volatility of 18%, risk-free interest rate of 7% and an
expected option life of 10 years.
11. Commitments and Contingencies
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, 1997, the Corporation had outstanding
commitments to originate loans with variable interest rates of approximately
$5,510,000 and loans with fixed rates of approximately $1,570,000. In addition,
unused lines of credit amounted to approximately $4,099,000 at March 31, 1997.
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
11. Commitments and Contingencies (continued)
Leases
The Corporation is obligated under a noncancellable operating lease beginning
April 1, 1997. Future minimum annual rental commitments under the lease is as
follows:
Year Ending
March 31 Amount
----------- ------
1998 $ 28,800
1999 31,200
2000 33,600
2001 36,000
2002 38,400
--------
$168,000
========
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 Bank.
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
12. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly financial data is shown as follows:
(Dollars in thousands except per share data)
Year Ended March 31, 1997
- -------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total interest income $3,144 $3,151 $3,232 $3,251
Total interest expense 1,633 1,600 1,653 1,650
------ ------ ------ ------
Net interest income 1,511 1,551 1,579 1,601
Provision for loan losses 33 70 53 25
------ ------ ------ ------
Net interest income after provision
for loan losses 1,478 1,481 1,526 1,576
Other income 118 130 136 135
Other expenses 716 1,462 734 893
------ ------ ------ ------
Income before income taxes 880 149 928 818
Income taxes 330 54 349 307
------ ------ ------ ------
Net income $ 550 $ 95 $ 579 $ 511
====== ====== ====== ======
Earnings per share $ .43 $ .08 $ .46 $ .39
====== ====== ====== ======
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
12. 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>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
13. 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, 1997 1996
- --------- ---- ----
Assets
Investment in the Bank, at equity $19,905,521 $18,122,381
Cash 2,071,134 2,505,783
Investment securities -- 249,931
Prepaid expenses and other assets 19,520 9,296
----------- -----------
$21,996,175 $20,887,391
=========== ===========
Liabilities and Stockholders' Equity
Liabilities $ -- $ 16,823
Stockholders' Equity
Common stock 12,753 12,697
Additional paid-in capital 4,716,677 4,651,634
Retained earnings 17,266,745 16,206,237
----------- -----------
Total stockholders' equity 21,996,175 20,870,568
----------- -----------
$21,996,175 $20,887,391
=========== ===========
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
13. Condensed Financial Information of the Corporation (Parent Company Only)
(continued)
Condensed Statements of Income
Year Ended March 31, 1997 1996 1995
- -------------------- ---- ---- ----
Income
Interest income $ 4,900 $ 34,224 $ 129,049
Dividends received from Bank -- -- 201,472
---------- ---------- ----------
Total income 4,900 34,224 330,521
---------- ---------- ----------
Noninterest expenses (83,187) (62,755) (53,084)
---------- ---------- ----------
Income (loss) before equity in
undistributed net income of the Bank (78,287) (28,531) 277,437
Equity in undistributed net income of
the Bank 1,783,140 2,028,221 1,525,064
---------- ---------- ----------
Income before income taxes 1,704,853 1,999,690 1,802,501
Income taxes (29,881) (11,848) 31,020
---------- ---------- ----------
Net income $1,734,734 $2,011,538 $1,771,481
========== ========== ==========
<PAGE>
Community Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
13. Condensed Financial Information of the Corporation (Parent Company Only)
(continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended March 31, 1997 1996 1995
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $ 1,734,734 $ 2,011,538 $ 1,771,481
Adjustments
Equity in income of the Bank (1,783,140) (2,028,221) (1,726,536)
(Increase) decrease in prepaid and other assets (10,224) 12,189 (4,239)
Increase (decrease) in other liabilities (16,823) 654 9,935
----------- ----------- -----------
Net cash provided (absorbed) by operating activities (75,453) (3,840) 50,641
----------- ----------- -----------
Investing activities
Proceeds from maturities of investment securities 249,931 996,776 984,738
Purchase of investment securities -- -- (2,231,445)
Dividends received from Bank -- -- 201,472
----------- ----------- -----------
Net cash provided (absorbed) by investing activities 249,931 996,776 (1,045,235)
----------- ----------- -----------
Financing activities
Cash dividends paid on common stock (674,226) (529,100) (436,612)
Stock options exercised 65,099 111,280 134,376
----------- ----------- -----------
Net cash absorbed by financing activities (609,127) (417,820) (302,236)
----------- ----------- -----------
Increase (decrease) in cash (434,649) 575,116 (1,296,830)
Cash, beginning of year 2,505,783 1,930,667 3,227,497
----------- ----------- -----------
Cash, end of year $ 2,071,134 $ 2,505,783 $ 1,930,667
=========== =========== ===========
</TABLE>
<PAGE>
Report of Independent Certified Public
Accountants on Supplemental Material
Our audits of the basic consolidated financial statements included in the
preceding section of this report were performed for the purpose of forming an
opinion on those consolidated financial statements taken as a whole. The
supplemental material presented in the following section of this report is
presented for purposes of additional analysis and is not a required part of the
basic consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
Certified Public Accountants
Richmond, Virginia
April 24, 1997
<PAGE>
Community Financial Corporation
and Subsidiary
Consolidating Balance Sheet
March 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Community
Community Financial
Community Financial Corporation
Bank Corporation Eliminations Consolidated
--------- ----------- ------------ ------------
Assets
<S> <C> <C> <C> <C>
Cash, including interest-
bearing deposits $ 4,922,213 $ 2,071,134 $ 2,071,134 $ 4,922,213
Securities
Held to maturity 5,197,437 -- -- 5,197,437
Available for sale 2,243,220 -- -- 2,243,220
Investment in Federal
Home Loan Bank stock 1,400,000 -- -- 1,400,000
Loans receivable, net 148,905,485 -- -- 148,905,485
Real estate owned, net 173,245 -- -- 173,245
Property and equipment,
net 3,542,108 -- -- 3,542,108
Accrued interest
receivable 989,438 -- -- 989,438
Prepaid expenses and
other assets 314,516 19,520 -- 334,036
Investment in subsidiary -- 19,905,521 19,905,521 --
------------ ----------- ------------ ------------
$167,687,662 $21,996,175 $ 21,976,655 $167,707,182
============ =========== ============ ============
</TABLE>
<PAGE>
Community Financial Corporation
and Subsidiary
Consolidating Balance Sheet
March 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Community
Community Financial
Community Financial Corporation
Bank Corporation Eliminations Consolidated
--------- ----------- ------------ ------------
Liabilities and Stockholders' Equity
Liabilities
<S> <C> <C> <C> <C>
Deposits $118,666,019 $ -- $ 2,071,134 $116,594,885
Advances from Federal Home
Loan Bank 26,000,000 -- -- 26,000,000
Advance payments by borrowers
for taxes and insurance 135,561 -- -- 135,561
Other liabilities 1,639,740 -- -- 1,639,740
------------ ----------- ------------ ------------
146,441,320 -- 2,071,134 144,370,186
------------ ----------- ------------ ------------
Stockholders' Equity
Common stock 6,678 12,753 6,678 12,753
Additional paid-in
capital 4,869,248 4,716,677 4,869,248 4,716,677
Retained earnings 15,029,595 17,266,745 15,029,595 17,266,745
Net unrealized gain on
securities available
for sale 1,340,821 -- -- 1,340,821
------------ ----------- ------------ ------------
21,246,342 21,996,175 19,905,521 23,336,996
------------ ----------- ------------ ------------
$167,687,662 $21,996,175 $21,976,655 $167,707,182
============ =========== ============ ============
</TABLE>
<PAGE>
Community Financial Corporation
and Subsidiary
Consolidating Statement of Income
Year Ended March 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Community
Community Financial
Community Financial Corporation
Bank Corporation Eliminations Consolidated
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income
Loans $12,188,714 $ -- $ -- $12,188,714
Investment securities 467,728 4,136 -- 471,864
Other investments 116,645 764 -- 117,409
----------- ----------- ---------- -----------
Total interest income 12,773,087 4,900 -- 12,777,987
----------- ----------- ---------- -----------
Interest expense
Deposits 5,054,884 -- -- 5,054,884
Borrowed money 1,480,747 -- -- 1,480,747
----------- ----------- ---------- -----------
Total interest expense 6,535,631 -- -- 6,535,631
----------- ----------- ---------- -----------
Net interest income 6,237,456 4,900 -- 6,242,356
Provision for loan losses 180,561 -- -- 180,561
----------- ----------- ---------- -----------
Net interest income
after provision for
loan losses 6,056,895 4,900 -- 6,061,795
----------- ----------- ---------- -----------
Noninterest income
Service charges, fees
and commissions 509,748 -- -- 509,748
Other 8,994 -- -- 8,994
----------- ----------- ---------- -----------
Total noninterest income 518,742 -- -- 518,742
----------- ----------- ---------- -----------
</TABLE>
<PAGE>
Community Financial Corporation
and Subsidiary
Consolidating Statement of Income
Year Ended March 31, 1997
(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Community
Community Financial
Community Financial Corporation
Bank Corporation Eliminations Consolidated
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Noninterest expenses
Compensation and employee $ 1,333,550 $ -- $ -- $ 1,333,550
benefits
Occupancy 399,290 -- -- 399,290
Data processing 349,150 -- -- 349,150
BIF/SAIF premium disparity
assessment 670,765 -- -- 670,765
Insurance 189,143 -- -- 189,143
Other 780,654 83,187 -- 863,841
----------- ----------- ---------- -----------
Total noninterest expenses 3,722,552 83,187 -- 3,805,739
----------- ----------- ---------- -----------
Income (loss) before equity
in net income of subsidiary
and income taxes 2,853,085 (78,287) -- 2,774,798
Equity in net income of
subsidiary -- 1,783,140 1,783,140 --
----------- ----------- ---------- -----------
Income before income taxes 2,853,085 1,704,853 1,783,140 2,774,798
Income taxes 1,069,945 (29,881) -- 1,040,064
----------- ----------- ---------- -----------
Net income $ 1,783,140 $ 1,734,734 $1,783,140 $ 1,734,734
=========== =========== ========== ===========
</TABLE>
<PAGE>
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.
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.
Information concerning executive officers as set forth in Part I of this
report under the caption "Executive Officers."
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
52
<PAGE>
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.
Item 10. Executive Compensation
- --------------------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders, 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 1997 Annual Meeting of Stockholders, 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 1997 Annual Meeting of Stockholders, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
PART IV
Item 13. Exhibits and Reports on 8-K
- -------------------------------------
(a) Exhibits:
See Exhibit Index.
(B) Reports on Form 8-K
No reports on Form 8-K have been filed during the three month period
ended March 31, 1997.
53
<PAGE>
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 27, 1997 By:/s/ Thomas W. White
-------------------
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/ James R. Cooke, Jr.
--------------------- -----------------------
Thomas W. Winfree James R. Cooke, Jr.
President and Chief Chairman of the Board
Executive Officer and Director
(Principal Executive Officer)
Date: June 27, 1997 Date: June 27, 1997
By:/s/ Jane C. Hickok By:/s/ Charles F. Andersen
------------------ -----------------------
Jane C. Hickok Charles F. Andersen
Vice Chairman of the Board Director
and Director
Date: June 27, 1997 Date: June 27, 1997
By:/s/ Dale C. Smith By:/s/ Kenneth L. Elmore
----------------- ---------------------
Dale C. Smith Kenneth L. Elmore
Director Director
Date: June 27, 1997 Date: June 27, 1997
By:/s/ R. Jerry Giles By:/s/ Charles W. Fairchilds
------------------ -------------------------
R. Jerry Giles Charles W. Fairchilds
Chief Financial Officer Director
(Principal Financial and
Accounting Officer)
Date: June 27, 1997 Date: June 27, 1997
54
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
3.1 Registrant's Articles of Incorporation, as currently in effect, filed as a
exhibit to Registrant's Report on Form S- 4 (File No. 33-28817) dated May
19, 1989, is incorporated herein by reference.
3.2 Registrant's Bylaw, as currently in effect, filed as a exhibit to
Registrant's Report on Form S-4 (File No. 33- 28817) dated May 19, 1989, is
incorporated herein by reference.
10.1 Registrant' 1987 Stock Option and Incentive Plan, filed as an exhibit to
Registrant's Report on Form S-4 (File No. 33- 28817) dated May 19, 1989, is
incorporated herein by reference.
10.2 Employee Stock Ownership Plan, filed on June 28, 1993 as Exhibit 10 to the
Annual Report on Form 10-KSB40 for the fiscal year ended March 31, 1993, is
incorporated herein by reference.
10.3 Registrant' 1996 Stock Option and Incentive Plan, filed as Exhibit E to
Registrant's Proxy Statement on Schedule 14A for the annual meeting of
shareholders held on July 31, 1996, is incorporated herein by reference.
10.4 Employment Agreement between Community Bank and Mr. Winfree
21.1 Subsidiaries of Registrant
23.1 Consents of Experts and Counsel
27.1 Financial Data Schedule
55
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of April, 1997, by and
between COMMUNITY BANK, a federally chartered savings bank, (the "Corporation"),
and THOMAS W. WINFREE(the "Executive").
WITNESSETH:
WHEREAS, the Corporation is a wholly-owned subsidiary of Community
Financial Corporation, a Virginia corporation ("CFC");
WHEREAS, the Corporation desires to retain the services of Executive on the
terms and conditions set forth herein and, for purpose of effecting the same,
the Boards of Directors of the Corporation and CFC each has approved this
Employment Agreement and authorized its execution and delivery on the
Corporation's behalf to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting President
and Chief Executive Officer of the Corporation and, as such, is a key executive
officer of the Corporation whose continued dedication, availability, advice and
counsel to the Corporation is deemed important to the Board of Directors of the
Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of the
affairs of the Corporation, and his reputation and contacts in the industry are
valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such well-qualified
executives and it is in the best interests of the Corporation and of the
Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of a
sound management to be part of its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Corporation and
its stockholders; and
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agree as follows:
<PAGE>
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on March 31, 2000, which
period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
2. ANNUAL REVIEWS-EXTENTIONS OF TERM:
The Corporation's fiscal year begins on April 1 and ends on March 31.
Within thirty days after the end of each fiscal year, beginning with the year
that ends March 31, 1997, the Board of Directors of the Corporation shall review
the Executive's performance for the immediately preceding fiscal year. After
each such review, this Agreement may be extended for successive terms of twelve
(12) months each by an appropriate written instrument executed by the Executive
and on behalf of the Corporation. Any decision by the Corporation to extend this
Agreement shall not bind the Corporation unless such decision is reviewed and
approved by the Board of Directors of the Corporation. If this Agreement is not
extended in writing before the end of its term (as such term may have been
extended) nor expressly terminated, it shall automatically terminate at the end
of its term (as such term may have been extended).
3. EXECUTIVE DUTIES: Executive agrees that, during the term of his
employment under this Agreement and in his capacity as President and Chief
Executive Officer, he will devote his full business time and energy to the
business, affairs and interests of the Corporation and serve it diligently and
to the best of his ability. The services and duties to be performed by Executive
shall be those appropriate to his office and title as currently and from time to
time hereafter specified in the Corporation's By-laws or otherwise specified by
its Board of Directors.
4. COMPENSATION: The Corporation agrees to pay Executive, and Executive
agrees to accept, as compensation for all services rendered by him to the
Corporation during the period of his employment under this Agreement, base
salary at the annual rate of One Hundred Fifteen Thousand Dollars ($115,000.00),
which shall be payable in monthly, semi-monthly or bi-weekly installments in
conformity with Corporation's policy relating to salaried employees. Such salary
may be increased in the sole and absolute discretion of the Corporation's Board
of Directors or Committee thereof duly authorized by the Board to so act. The
Board of Directors, in its discretion, may cause the Corporation
2
<PAGE>
to pay bonuses to the Executive from time to time.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS EXPENSES AND
OTHER BENEFITS: (i) During the term of employment under this Agreement,
Executive shall be entitled to participate in any pension, group insurance,
hospitalization, deferred compensation or other benefit, bonus or incentive
plans of the Corporation and CFC presently in effect (including, without
limitation, CFC's stock option plans) or hereafter adopted by the Corporation or
CFC and generally available to any employees of senior executive status, and,
additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
(ii) During the term of this Agreement, to the extent that such
expenditures are substantiated by the Executive as required by the Internal
Revenue Service and policies of the Corporation, the Corporation shall reimburse
the Executive promptly for all expenditures (including travel, entertainment,
parking, business meetings, and the monthly costs, including dues, of
maintaining memberships at appropriate clubs) made in accordance with rules and
policies established from time to time by the Board of Directors of the
Corporation in pursuance and furtherance of the Corporation's business and good
will.
(iii) The Corporation shall provide an automobile for the Executive's
personal and business use (for which Executive will pay $100.00 per month) and
pay the Executive's dues for membership at the Staunton Country Club.
6. ILLNESS: In the event Executive is unable to perform his duties under
this Agreement on a full-time basis for a period of six (6) consecutive months
by reason of illness or other physical or mental disability, and at or before
the end of such period he does not return to work on a full-time basis, the
Corporation may terminate this Agreement without further or additional
compensation payment being due the Executive from the Corporation pursuant to
this Agreement, except benefits accrued through the date of such termination
under employee benefit plans of the Corporation. These benefits shall include
long-term disability and other insurance or other benefits then regularly
provided by the Corporation to disabled employees, as well as any other
insurance benefits so provided.
7. DEATH: In the event of Executive's death during the
3
<PAGE>
term of this Agreement, this Agreement shall terminate as of the end of the
month in which Executive dies. This Section 7 shall not affect the rights of any
person under other contract between the Executive and either the Corporation or
CFC or under any life insurance policy.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON:
(a) Notwithstanding the provisions of Section 1 hereof, the Board of
Directors of the Corporation may, without Cause (as hereafter defined),
terminate the Executive's employment under this Agreement at any time in any
lawful manner by giving not less than thirty (30) days written notice to the
Executive. The Executive may resign for Good Reason (as hereafter defined) at
any time by giving not less than thirty (30) days written notice to the
Corporation. If the Corporation terminates the Executive's employment without
Cause or the Executive resigns for Good Reason, then in either event:
(i) The Executive shall be paid for the remainder of the then current
term of this Agreement, at such times as payment was theretofore made, the
salary required under Section 4 that the Executive would have been entitled
to receive during the remainder of the then current term of this Agreement
had such termination not occurred; and
(ii) The Corporation shall maintain in full force and effect for the
continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or
arrangements in which the Executive was entitled to participate immediately
prior to such termination, provided that continued participation is
possible under the general terms and provisions of such plans and programs.
In the event that Executive's participation in any such plan or program is
barred, the Corporation shall arrange to provide the Executive with
benefits substantially similar to those which the Executive was entitled to
receive under such plans and program.
(b) For purposes of this Agreement, "Good Reason" shall mean:
(i) The assignment of duties to the Executive by the Corporation which
(A) are materially different from the Executive's duties on the date
hereof, or (B) result in the Executive having significantly less authority
and/or responsibility than he has on the date hereof, without his
4
<PAGE>
express written consent;
(ii) The removal of the Executive from or any failure to re-elect him
to the position of President and Chief Executive Officer of the
Corporation, except in connection with a termination of his employment by
the Corporation for Cause or by reason of the Executive's disability;
(iii) A reduction by the Corporation of the Executive's base salary to
less than One Hundred Fifteen Thousand Dollars ($115,000.00) per year;
(iv) The failure of the Corporation to provide the Executive with
substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof; or
(v) The failure of the Corporation to obtain the assumption of and
agreement to perform this Agreement by any successor as contemplated in
Section 11(c) hereof.
(c) Resignation by the Executive for Good Reason shall be communicated by a
written Notice of Resignation to the Corporation. A "Notice of Resignation"
shall mean a notice which shall indicate the specific provision(s) in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for a resignation for Good Reason.
(d) If within thirty (30) days after any Notice of Resignation is given the
Corporation notifies the Executive that a dispute exists concerning the
resignation for Good Reason and that it is requesting arbitration pursuant to
Section 18, the Corporation shall continue to pay the Executive his full salary
and benefits as described in Sections 4 and 5, as and when due and payable, at
least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for resignation by the Executive is ultimately
determined not to exist, then all sums paid by the Corporation to the Executive,
including but not limited to the cost to the Corporation of providing the
Executive such fringe benefits, from the date of such resignation to the date of
the resolution of such dispute shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
5
<PAGE>
A failure by the Corporation to notify the Executive that a dispute exists
concerning the resignation for Good Reason within thirty (30) days after any
Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
(e) If the Executive's employment terminates after a Change of Control (as
defined in Section 10 hereof), the payments to which he is entitled pursuant to
Section 10 shall be in lieu of any payment to which he might otherwise be
entitled under the terms of Section 8(a)(i). The benefits to which the Executive
is entitled under Section 8(a)(ii) shall be payable whether or not his
employment terminates after a Change of Control.
9. RESIGNATION - TERMINATION FOR CAUSE - REGULATORY TERMINATION:
(a) Notwithstanding the provisions of Section 1 of this Agreement, the
Board of Directors of the Corporation may, in its sole discretion, terminate the
Executive's employment for Cause. For the purposes of this Agreement, "Cause"
shall mean personal dishonesty, incompetence, willful misconduct, breach of
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 omission to act by the Executive in reliance upon an opinion of
counsel to the Corporation shall be deemed to be willful.
(b) Termination of the Executive's employment by the Corporation for Cause
pursuant to Section 9(a) shall be communicated by written Notice of Termination
to the Executive. A "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision(s) in this Agreement relied upon and
shall set forth with particularity the facts and circumstances claimed to
provide a basis for termination of employment for Cause under the provision so
indicated.
If within ninety (90) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is
6
<PAGE>
requesting arbitration pursuant to Section 18, the Corporation shall continue to
pay the Executive his full salary and benefits as described in Sections 4 and 5,
as and when due and payable, at least until such time as a final decision is
reached by the panel of arbitrators. If a termination for Cause by the
Corporation is challenged by the Executive and the termination is ultimately
determined to be justified, then all sums paid by the Corporation to the
Executive pursuant to this Section 9(b), plus the cost to the Corporation of
providing the Executive such fringe benefits from the date of such termination
to the date of the resolution of such dispute, shall be promptly repaid by the
Executive to the Corporation with interest at the rate charged from time to time
by the Corporation, to its most substantial customers for unsecured lines of
credit. Should it ultimately be determined that a termination by the Corporation
pursuant Section 9(a) was not justified, then the Executive shall be entitled to
retain all sums paid to him pending the resolution of such dispute and he shall
be entitled to receive, in addition, the payments and other benefits provided
for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute exists
concerning the termination for Cause within ninety (90) days after the Notice of
Termination is given shall constitute a final waiver by the Executive of his
right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise voluntarily
terminates his employment by the Corporation at any time (except a termination
for Good Reason pursuant to Section 8 hereof), or if the Corporation rightfully
terminates the Executive's employment for Cause, this Agreement shall terminate
upon the date of such resignation or termination of employment for Cause, and
(subject to Section 9(b) the Corporation thereafter shall have no obligation to
make any further payments under this Agreement, provided that the Executive
shall be entitled to receive any benefits, insured or otherwise, that he would
otherwise be eligible to receive under any benefit plans of the Corporation or
CFC or any affiliate of the Corporation or CFC.
(d) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Corporation's affairs by a notice served
under Sections 8(e)(3) or 8(g)(1) [12 U.S.C. ss.ss. 1818(e)(3) and 1818(g)(1)]
of the Federal Deposit Insurance Act, 12 U.S.C. ss.1811 et seq. (the "Federal
Deposit
7
<PAGE>
Insurance Act"), the Corporation'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 Corporation may in its discretion
(i) pay Executive all or part of the compensation withheld while its contract
obligations were suspended, and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
If Executive is removed and/or permanently prohibited from participating in
the conduct of the Corporation's affairs by an order issued under Sections
8(e)(4)or 8(g)(1) of the Federal Deposit Insurance Act [12 U.S.C. ss.ss.
1818(e)(4) or 1818(g)(1)], all obligations of the Corporation under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
If the Corporation is in default [as default is defined in Section 3(x)(1)
of the Federal Deposit Insurance Act], all obligations under this Agreement
shall terminate as of the date of default, but this paragraph shall not affect
any vested rights of the contracting parties.
Except to the extent it is determined that continuation of this Agreement
is necessary for the continued operation of the Corporation, all obligations
under this Agreement shall be terminated:
(i) by the Director (as Director is defined in the Federal Deposit
Insurance Act) or his or her designee, at the time the Federal Deposit
Insurance enters into an agreement to provide assistance to or on behalf of
the Corporation under the authority contained in Section 13(c) of the
Federal Deposit Insurance Act; 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 Corporation or when the Corporation 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 such action.
8
<PAGE>
10. CHANGE OF CONTROL:
(a) If the Executive's employment terminates for any reason other than for
Cause during the term of this Agreement and any renewal term following a Change
of Control of CFC, on or before the Executive's last day of employment with the
Corporation (in addition to all other payments and benefits to which the
Executive is entitled under any other contract) the Corporation shall pay to the
Executive as compensation for services rendered to it a cash amount (subject to
any applicable payroll or other taxes required to be withheld) equal to 2.99
times the Executive's salary and bonus received during the twelve (12) months
ending with the termination of the Executive's employment, provided that, at the
option of the Executive, the cash amount required to be paid hereby shall be
paid by the Corporation in equal monthly installments over the thirty-six (36)
months succeeding the date of termination, payable on the first day of each such
month.
(b) For purposes of this Agreement, a Change of Control of CFC occurs in
any of the following events: (i) The acquisition by any "person" or "group" (as
defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934
("Exchange Act")), other than CFC, any subsidiary of CFC or any CFC or
subsidiary's employee benefit plan, directly or indirectly, as "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of CFC
representing twenty percent (20%) or more of either the then outstanding shares
or the combined voting power of the then outstanding securities of CFC; (ii)
Either a majority of the directors of CFC elected at CFC's annual stockholders
meeting shall have been nominated for election other than by or at the direction
of the "incumbent directors" of CFC, or the "incumbent directors" shall cease to
constitute a majority of the directors of CFC. The term "incumbent director"
shall mean any director who was a director of CFC on April 1, 1997 and any
individual who becomes a director of CFC subsequent to April 1, 1997 and who is
elected or nominated by or at the direction of at least two-thirds of the then
incumbent directors; (iii) The shareholders of CFC approve (x) a merger,
consolidation or other business combination of CFC with any other "person" or
"group" (as defined in Sections 13(d) and 14(d) of the Exchange Act) or
affiliate thereof, other than a merger or consolidation that would result in the
outstanding common stock of CFC immediately prior thereto continuing to
represent either by remaining outstanding or by being converted into common
stock of the
9
<PAGE>
surviving entity or a parent or affiliate therof) at least fifty percent (50%)
of the outstanding common stock of CFC or such surviving entity or a parent or
affiliate therof outstanding immediately after such merger, consolidation or
other business combination, or (y) a plan of complete liquidation of CFC or an
agreement for the sale or disposition by CFC of all or substantially all of
CFC's assets; or (iv) Any other event or circumstance which is not covered by
the foregoing subsections but which the Board of Directors of CFC determines to
affect control of CFC and with respect to which the Board of Directors adopts a
resolution that the event or circumstance constitutes a Change of Control for
purposes of the Agreement.
The Control Change Date is the date on which an event described in (i),
(ii), (iii) or (iv) occurs.
10
<PAGE>
11. LITIGATION - OBLIGATIONS - SUCCESSORS:
(a) If litigation shall be brought or arbitration commenced to challenge,
enforce or interpret any provision of this Agreement, and such litigation or
arbitration does not end with judgment in favor of the Corporation, the
Corporation hereby agrees to indemnify the Executive for his reasonable
attorney's fees and disbursements incurred in such litigation or arbitration.
(b) The Corporation's obligation to pay the Executive the compensation and
benefits and to make the arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against him or anyone else. All amounts payable by the
Corporation hereunder shall be paid without notice or demand. Except as
expressly provided in Sections 8(d) and 9(b), each and every payment made
hereunder by the Corporation shall be final and the Corporation will not seek to
recover all or any part of such payment from the Executive or from whosoever may
be entitled thereto, for any reason whatsoever. The Executive shall not be
required to mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise; provided, if Executive secures other full
time employment after a termination without Cause or a resignation for Good
Reason (other than self employment or employment by an entity he owns or
controls), the obligations of the Corporation under Section 8(a) shall be
reduced dollar for dollar by the cash compensation received by the Executive
from such other employment. This Section 11(b) shall not be interpreted to
require or permit any reduction of benefits to which the Executive may be
entitled under Section 10.
(c) The Corporation will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Corporation, or either one of them, by
agreement in form and substance satisfactory to the Executive, to expressly
assume and agree to perform this Agreement in its entirety. Failure of the
Corporation to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to the compensation described in Section 8(a) or Section 10, as appropriate. As
used in this Agreement, "Corporation" shall mean Community Federal Savings Bank
and any successor to its
11
<PAGE>
business and/or assets as aforesaid which executes and delivers the agreement
provided for in this Section 11(c) or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
12. LIMITATION OF BENEFITS:
It is the intention of the parties that no payment be made or benefit
provided to the Executive that would constitute an ""excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the Code) and any regulations thereunder, thereby resulting in a loss
of an income tax deduction by the Corporation or the imposition of an excise tax
on Executive under Section 4999 of the Code. If the independent accountants
serving as auditors for the Corporation immediately prior to the date of a
Change of Control determine that some or all of the payments or benefits
scheduled under this Agreement, when combined with any other payments or
benefits provided to the Executive on a Change of Control by CFC, the
Corporation and any affiliate of CFC or the Corporation required to be
aggregated with CFC or the Corporation under Section 280G of the Code, would
constitute nondeductible excess parachute payments by the Corporation under
Section 280G of the Code, then the payments or benefits scheduled under this
Agreement will be reduced to one dollar less than the maximum amount which may
be paid or provided without causing any such payments or benefits scheduled
under this Agreement or otherwise provided on a Change of Control to be
nondeductible. The determination made as to the reduction of benefits or
payments required hereunder by the independent accountants shall be binding on
the parties. The Executive shall have the right to designate within a reasonable
period which payments or benefits scheduled under this Agreement will be
reduced; provided, however, that if no direction is received from the Executive,
the Corporation shall implement the reductions under this Agreement in its
discretion.
12
<PAGE>
13. NOTICES: For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: Thomas W. Winfree
#6 Waverly Green
Staunton, VA 24401
If to the Corporation: Community Federal Savings Bank
38 N. Central Avenue
P. O. Box 1209
Staunton, VA 24402-1209
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing, signed by the Executive and on behalf of
the Corporation by such officer as may be specifically designated by the Board
of Directors of the Corporation. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provision or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability of any
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect. Any provision in this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or
13
<PAGE>
unenforceability without invalidating or affecting the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amounts would still be payable to him hereunder,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to his executor or, if there is no such
executor, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any provision hereof.
18. ARBITRATION: Any dispute, controversy or claim arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Staunton, Virginia in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. The Corporation shall pay all administrative fees
associated with such arbitration. Judgment may be entered on the arbitrator's
award in any court having jurisdiction. Subject to Section 11(a), unless
otherwise provided in the rules of the American Arbitration Association, the
arbitrators shall, in their award, allocate between the parties the costs of
arbitration, which shall include reasonable attorneys' fees and expenses of the
parties, as well as the arbitrator's fees and expenses, in such proportions as
the arbitrators deem just.
19. CONFIDENTIALITY-NONSOLICITATION:
(a) The Executive acknowledges that the Corporation may disclose certain
confidential information to the Executive during the term of this Agreement to
enable him to perform his duties hereunder. The Executive hereby covenants and
agrees that he will not, without the prior written consent of the Corporation,
during the term of this Agreement or at any time thereafter, disclose or permit
to be disclosed to any third party by any method whatsoever any of the
confidential information of the Corporation. For purposes of this Agreement,
"confidential
14
<PAGE>
information" shall include, but not be limited to, any and all records, notes,
memoranda, data, ideas, processes, methods, techniques, systems, formulas,
patents, models, devices, programs, computer software, writings, research,
personnel information, customer information, the Corporation's financial
information, plans, or any other information of whatever nature in the
possession or control of the Corporation which has not been published or
disclosed to the general public, or which gives to the Corporation an
opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent the
Executive is required to testify in a judicial or regulatory proceeding pursuant
to an order of a judge or administrative law judge issued after the Executive
and his legal counsel urge that the aforementioned confidentiality be preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
(b) Subject to Section 19(c), during the term of this Agreement and
throughout any further period that he is an officer or employee of the
Corporation, and for a period of twelve (12) months from and after the
termination of the last such position held by the Executive, or for a period of
twelve (12) months from the date of entry by a court of competent jurisdiction
of a final judgment enforcing this covenant in the event of a breach by
Executive, whichever is later, Employee covenants and agrees that he will not,
without the prior written consent of the Corporation, solicit any existing or
former customer or employee of the Corporation for any competing business
regardless of its location.
(c) If the Corporation terminates the employment of the Executive without
Cause or this Agreement terminates pursuant to Section 9(d), the covenant set
forth in Section 19(b) shall not apply.
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first above written.
"EXECUTIVE"
ATTEST: ____________________ /s/ Thomas W. Winfree
-------------------------------
Thomas W. Winfree
COMMUNITY BANK ("CORPORATION")
ATTEST: ____________________ By:
------------------------------
AUTHORIZED OFFICER
16
EXHIBIT 21
Subsidiaries of the Registrant
Parent Subsidiary Ownership Organization
- ------ ---------- --------- ------------
Community Financial Community Bank 100% Federal
Corporation
The financial statements of the Registrant are consolidated with those
of its subsidiaries.
EXHIBIT 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Community Financial Corporation
Staunton, Virginia
We hereby consent to the incorporation by reference in the Company's
previously filed Registration Statements on Form S-8 (File #33-36124 and File
#33-73844) of our reports dated April 24, 1997 relating to the consolidated
financial statements and schedules of Community Financial Corporation appearing
in the Company's 1997 Annual Report to Stockholders and in the Company's Annual
Report on Form 10-K for the year ended March 31, 1997, respectively.
/s/ BDO Seidman, L.L.P.
----------------------
BDO Seidman, L.L.P.
Richmond, Virginia
June 26, 1997
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<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-END> Mar-31-1997
<CASH> 4,922,213
<INT-BEARING-DEPOSITS> 1,015,000
<FED-FUNDS-SOLD> 0
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<TOTAL-ASSETS> 167,707,182
<DEPOSITS> 116,594,885
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0
0
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