UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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 0-18261
COMMUNITY FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
VIRGINIA 54-1532044
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
38 North Central Ave., Staunton, Va. 24401
(Address of principal executive offices zip code)
(540) 886-0796
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
Number of shares of Common Stock, par value $.01 per share, outstanding at the
close of business on August 7, 1998: 2,570,446.
Transitional Small Business Disclosure Format (Check one)
Yes No X
----- -----
<PAGE>
COMMUNITY FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Statements of Financial
Condition at June 30, 1998 (unaudited)
and March 31, 1998................................................ 1
Consolidated Statements of Income for the
Three Months Ended June 30, 1998 and 1997 (unaudited)............. 2
Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 1998 and
1997 (unaudited).................................................. 3
Notes to Unaudited Interim Consolidated
Financial Statements.............................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 5
PART II. OTHER INFORMATION................................................. 8
<PAGE>
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, March 31,
1998 1998
------------ ------------
(Unaudited)
ASSETS
Cash (including interest bearing
deposits of approximately
$2,452,000 and $2,866,000) ................. $ 6,610,010 $ 7,266,145
Securities
Held to maturity ........................... 2,970,484 3,184,241
Available for sale ......................... 3,775,354 3,905,055
Investment in Federal Home Loan
Bank stock, at cost ........................ 1,600,000 1,600,000
Loans receivable, net ........................ 162,355,632 162,471,219
Real estate owned ............................ 427,217 303,365
Property and equipment, net .................. 3,861,936 3,634,223
Accrued interest receivable
Loans ...................................... 975,644 945,365
Investments ................................ 102,393 86,424
Prepaid expenses and other assets ............ 551,194 498,137
------------ ------------
Total Assets ........................... $183,229,864 $183,894,174
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits ..................................... $137,158,660 $138,164,173
Advances from Federal Home Loan
Bank ....................................... 18,000,000 18,000,000
Advance payments by borrowers for
taxes and insurance ........................ 94,324 175,053
Other liabilities ............................ 2,159,625 2,040,188
------------ ------------
Total Liabilities ...................... 157,412,609 158,379,414
Stockholders' Equity
Preferred stock $.01 par value,
authorized 3,000,000 shares,
none outstanding
Common stock, $.01 par value,
authorized 10,000,000 shares,
2,568,946 and 2,559,446 shares
outstanding .............................. 25,689 25,594
Additional paid in capital ................. 4,865,039 4,773,634
Retained earnings .......................... 18,671,502 18,344,373
Net unrealized gain on securities
available for sale ....................... 2,255,025 2,371,159
Total Stockholders' Equity ............. 25,817,255 25,514,760
------------ ------------
Total Liabilities and
Shareholders' Equity ................. $183,229,864 $183,894,174
============ ============
See accompanying notes to consolidated financial statements.
<PAGE>
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30,
----------------------------
1998 1997
---------- ----------
(Unaudited)
INTEREST INCOME
Loans .................................... $3,434,030 $3,211,542
Investment securities .................... 66,967 122,595
Other .................................... 50,360 29,148
---------- ----------
Total interest income .................. 3,551,357 3,363,285
INTEREST EXPENSE
Deposits ................................. 1,538,624 1,310,796
Borrowed money ........................... 276,405 418,361
---------- ----------
Total interest expense ................. 1,815,029 1,729,157
NET INTEREST INCOME ........................ 1,736,328 1,634,128
PROVISION FOR LOAN LOSSES .................. 75,000 25,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ................ 1,661,328 1,609,128
NONINTEREST INCOME
Service charges, fees
and commissions ........................ 295,264 168,309
Gain on sale of securities ............... 99,174 --
Miscellaneous ............................ 811 402
---------- ----------
Total noninterest income ............... 395,248 168,711
NONINTEREST EXPENSE
Compensation & benefits .................. 616,784 424,217
Occupancy ................................ 149,970 114,802
Data processing .......................... 113,469 101,854
Federal insurance premium ................ 20,359 18,269
Miscellaneous ............................ 273,226 326,882
---------- ----------
Total noninterest expense .............. 1,173,808 986,024
INCOME BEFORE TAXES ........................ 882,768 791,815
INCOME TAXES ............................... 376,408 296,641
NET INCOME ................................. $ 506,360 $ 495,174
BASIC EARNINGS PER SHARE ................... $ 0.20 $ 0.20
DILUTED EARNINGS PER SHARE ................. $ 0.19 $ 0.20
DIVIDENDS PER SHARE ........................ $ 0.07 $ 0.07
See accompanying notes to consolidated financial statements.
<PAGE>
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
June 30,
----------------------------
1998 1997
---------- ----------
(Unaudited)
OPERATING ACTIVITIES
Net income ..................................... $ 506,360 $ 495,174
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses .................. 75,000 25,000
Depreciation ............................... 68,576 59,747
Amortization of premium and accretion
of discount on securities, net ........... (580) 13
(Decrease) in net deferred loan fees ....... (17,475) (13,848)
Increase in deferred income taxes .......... 5,718 15,945
Decrease (increase) in other assets ........ (99,305) (93,496)
Increase (decrease) in other liabilities ... 44,544 324,900
(Gain)loss on sale of loans ................ (11,164) 4,606
Proceeds from sale of loans ................ 7,148,350 723,500
Loans originated for resale ................ (7,187,850) 786,500
Gain on sale of available for sale
securities ............................... (99,174) --
Net cash provided by operating activities ...... 433,000 755,041
INVESTING ACTIVITIES
Proceeds from maturities of held to
maturity securities .......................... 250,000 250,000
Proceeds from sale of available for
sale securities .............................. 101,187 --
Purchases of investment securities ............. -- (1,759,375)
Net decrease (increase) in loans ............... 73,063 (5,837,844)
Purchases of property and equipment ............ (296,289) (82,901)
Redemption (purchase) of FHLB stock ............ -- (200,000)
Increasing Real Estate Owned ................... (123,852) --
Net cash provided (absorbed) by
investing activities ....................... 4,109 (7,630,120)
FINANCING ACTIVITIES
Dividends paid ................................. (179,231) (178,549)
Net increase (decrease) in deposits ............ (1,005,513) 653,410
Proceeds from advances and other
borrowed money ................................ 4,000,000 8,000,000
Repayments of advances and other
borrowed money ................................ (4,000,000) (2,000,000)
Proceeds from issuance of common stock ......... 91,500 500
Net cash provided (absorbed) by
financing activities ........................... (1,093,244) 6,475,361
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .................................... (656,135) (399,718)
CASH AND CASH EQUIVALENTS-beginning of period .... 7,266,145 4,922,213
CASH AND CASH EQUIVALENTS-end of period .......... $ 6,610,010 $ 4,522,495
See accompanying notes to consolidated financial statements.
<PAGE>
COMMUNITY FINANCIAL CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1. - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying consolidated financial statements include the accounts of
Community Financial Corporation ("Community" or the "Company"),its wholly-owned
subsidiary, Community Bank (the "Bank") and Community First Mortgage
Corporation, a wholly-owned subsidiary of the Bank ("First Mortgage"). All
significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentation have been included.
Operating results for the three months ended June 30, 1998, are not necessarily
indicative of the results that may be expected for the year ending March 31,
1999.
NOTE 2. - EARNINGS PER SHARE
Basic and diluted earnings per share for the periods presented in 1998 and 1997
are computed under a new accounting standard effective in the quarter ended
December 31, 1997. All prior amounts have been restated to be comparable. Basic
earnings per share is based on net income divided by the weighted average number
of common shares outstanding during the period. Diluted earnings per share shows
the dilutive effect of additional common shares issuable under stock option
plans. Basic earnings per share for the three months ended June 30, 1998 and
1997 have been determined by dividing net income by the weighted average number
of shares of common stock outstanding during these periods (2,564,495 and
2,550,710, respectively).The number of shares used to determine diluted earnings
per share for the same three month periods was 2,610,156 and 2,572,790,
respectively.
NOTE 3. - STOCKHOLDERS' EQUITY
The following table presents the Bank's capital levels at June 30, 1998 relative
to the requirements applicable under the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ('FIRREA'):
Amount Percent Actual Actual Excess
Required Required Amount Percent Amount
----------- --------- ----------- ------- -----------
Tangible Capital $ 2,736,000 1.50% $22,147,000 12.14% $19,411,000
Core Capital 7,295,000 4.00 22,147,000 12.14 14,852,000
Risk-based Capital 10,831,000 8.00 23,270,000 17.19 12,439,000
<PAGE>
Capital distributions by the Bank are limited by federal regulations ("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" institution 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 notice to the Office of Thrift Supervision ("OTS") with the
opportunity for the OTS to object to the distribution. A Tier 1 institution is
defined as an institution 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
institutions 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.
NOTE 4. - SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS
Total interest paid for the three months ended June 30, 1998 and 1997 was
$1,822,582 and $1,723,894, respectively. There were no income taxes paid for the
three months ended June 30, 1998 and 1997.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL CONDITION
The Company's total assets decreased $644,000 to $183.2 million at June 30,
1998, due primarily to a decrease in cash of $656,000. The decrease in cash was
related to a decrease in deposits. Deposits decreased $1.0 million to $137.2
million at June 30, 1998, from $138.2 million at March 31, 1998. The decrease in
deposits was due to the maturity of higher rate certificates of deposit
originally offered by the Company in connection with a promotion to attract
deposits which were not reinvested by depositors. However, approximately 94% of
such deposits rolled over into new certificates of deposits at market rates.
Stockholders' equity increased to $25.8 million at June 30, 1998, from $25.5
million at March 31, 1998, due primarily to earnings for the three month period
ended June 30, 1998, which was partially offset by a payment of $0.07 per share
in cash dividends.
At June 30, 1998, the Bank's non-performing assets totaled approximately
$444,000 or .24% of assets compared to $938,000 or .51% of assets at March 31,
1998. Real estate acquired through foreclosure included in nonperforming assets
totals $427,000 and is comprised of three single family residential properties,
a three unit rental property and a residential lot. In addition to the
nonperforming loans, at June 30, 1998, the Company had other loans of concern
consisting of two real estate loans to one borrower with a total balance of $1.5
million, secured primarily by commercial and rental property,
<PAGE>
and three consumer loans with a total balance of approximately $66,000. These
loans were current at June 30, 1998 but due to previous delinquencies by the
borrower are being monitored by the Company. At June 30, 1998, the Company's
allowance for loan losses to non-performing assets was 259% and to total assets
was .63%.
The Company maintains an allowance for loan losses to provide for estimated
potential losses in its loan portfolio. Management determines the level of
reserves based on loan performance, the value of the collateral, economic and
market conditions, and previous experience. Management reviews the adequacy of
the allowance at least quarterly, utilizing its internal loan classifications
system. Management believes that the loan loss reserve is adequate at June 30,
1998. Although management believes it uses the best information available,
future adjustments to reserves may be necessary.
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 June 30, 1998, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings and current borrowings) was 7.46%, which exceeds the regulatory
requirement.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997.
- ------------------------------------------
General. Net income for the three months ended June 30, 1998 was $506,000
compared to $495,000 for the three months ended June 30, 1997, due primarily to
an increase in net interest income and a gain realized on the sale of investment
securities, which was offset in part by an increase in noninterest expenses.
Income before taxes increased to $883,000 for the three months ended June 30,
1998 from $792,000 for the three months ended June 30, 1997.
Interest Income. Total interest income increased to $3.6 million for the three
months ended June 30, 1998, from $3.4 million for the three months ended June
30, 1997, due to an increase in the average balance of loans outstanding for the
three months ended June 30, 1998 as compared to the period ended June 30,1997.
The average yield earned on interest-earning assets was 8.22% for the three
months ended June 30, 1998 compared to 8.25% for the three months ended June 30,
1997.
Interest Expense. Total interest expense increased to $1.8 million for the
quarter ended June 30, 1998, from $1.7 million for the quarter ended June 30,
1997. Interest on deposits increased to $1.5 million for the quarter ended June
30, 1998 from $1.3 million for the quarter ended June 30, 1997 due primarily to
an increase in deposits. Interest expense on borrowed money decreased to
$276,000 for the quarter ended June 30, 1998, from $418,000 for the quarter
ended June 30, 1997, due to a decrease in average borrowings. The average rate
paid on interest-bearing liabilities was 4.69% for the three months ended June
30, 1998 compared to 4.74% for the three months ended June 30, 1997.
<PAGE>
Provision for Loan Losses. The provision for loan losses increased to $75,000
for the three months ended June 30, 1998, from $25,000 for the three months
ended June 30, 1997 due to both charge-off's of $33,000 and a shift in the
composition of the Bank's loan portfolio during the quarter ended June 30, 1998
to higher yielding consumer and commercial business loans.
Noninterest Income. Noninterest income increased to $395,000 for the three
months ended June 30, 1998, from $169,000 for the three months ended June 30,
1997, due primarily to gains realized on the sale of securities and an increase
in fees received in connection with the organization of loans for sale in the
secondary market.
Noninterest Expenses. Noninterest expense increased to $1.2 million for the
three months ended June 30, 1998, from $986,000 for the three months ended June
30, 1997. The increase in noninterest expense is primarily attributable to an
increase in compensation related to both the general growth of the Company and
the opening of First Mortgage in November, 1997 in Richmond, Virginia. Since
June 30, 1997, the Company has employed a total of an additional 25 full-time
employees, most of which were employed during the last quarter.
Taxes. Taxes increased to $376,000 for the three months ended June 30, 1998,
from $297,000 for the three months ended June 30, 1997, due to the increase in
income before taxes and an increase in the effective income tax rate.
Impact of the Year 2000
The Company has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Company's data
processing and other critical systems are supplied by outside vendors. The
Company is scheduled to convert to an in-house Year 2000 compliant system in
November 1998. The Company has already contacted each vendor to request time
tables for Year 2000 compliance and expected costs, if any, to be passed along
to the Company. To date, the Company has been informed that most of its primary
service providers anticipate that all reprogramming efforts will be completed in
enough time to allow for testing. The Company plans to test the mission critical
systems by December 1998 and all non-mission critical systems by June 1999.
Certain other vendors have not yet certified their system as Year 2000
compliant. The Company will pursue other options if it appears that these
vendors will be unable to comply. The Company has prepared contingency plans for
all mission critical systems. Management does not expect these costs to have a
significant impact on its financial position or results of operations, however,
there can be no assurance that the vendors' systems will be Year 2000 compliant,
consequently the Company could incur incremental costs to convert to another
vendor. The Company testing to date has not identified any of its hardware and
software that will not be Year 2000 compliant. Any capital expenditures
currently are not expected to exceed $50,000.
<PAGE>
Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
with respect to the financial condition, results of operations and business of
Community. These forward-looking statements involve certain risks and
uncertainties. When used in this Quarterly Report on Form 10-QSB or future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases or other public or shareholder communications, or in
oral statements made with the approval of an authorized executive officer, the
words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", "believe" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made, and to advise readers that various factors
including regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities, and competitive and
regulatory factors could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
See Exhibit Index.
b. Reports on Form 8k
None to be reported.
<PAGE>
SIGNATURES
Pursuant to the requirements 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: August 7, 1998
By: /s/ R. Jerry Giles
-------------------------------
R. Jerry Giles
Chief Financial Officer
(Duly Authorized Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Computation of Per Share Data
27 Financial Data Schedule.
EXHIBIT 11
COMMUNITY FINANCIAL CORPORATION
For the Three Months Ended
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------------------------ ------------------------------
Weighted Weighted
Average Per-Share Average Per Share
Income Shares Amount Income Shares Amount
-------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common stockholders $506,360 2,564,495 $0.20 $495,174 2,550,710 $0.20
Effect of Dilutive
Securities
Options -- 45,661 -- 22,080
Diluted EPS
Income available to
common stockholders $506,360 2,610,156 $0.19 $495,174 2,572,790 $0.20
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
REPORT ON FORM 10-QSB FOR THE QUARTER ENDED June 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 6,610,010
<INT-BEARING-DEPOSITS> 2,452,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,775,354
<INVESTMENTS-CARRYING> 2,970,484
<INVESTMENTS-MARKET> 0
<LOANS> 162,355,632
<ALLOWANCE> 0
<TOTAL-ASSETS> 183,229,864
<DEPOSITS> 137,158,660
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 2,159,625
<LONG-TERM> 15,000,000
0
0
<COMMON> 25,689
<OTHER-SE> 25,791,566
<TOTAL-LIABILITIES-AND-EQUITY> 183,229,864
<INTEREST-LOAN> 3,434,030
<INTEREST-INVEST> 66,967
<INTEREST-OTHER> 50,360
<INTEREST-TOTAL> 3,551,357
<INTEREST-DEPOSIT> 1,538,624
<INTEREST-EXPENSE> 1,815,029
<INTEREST-INCOME-NET> 1,736,328
<LOAN-LOSSES> 75,000
<SECURITIES-GAINS> 99,174
<EXPENSE-OTHER> 1,173,808
<INCOME-PRETAX> 882,768
<INCOME-PRE-EXTRAORDINARY> 882,768
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 506,360
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
<YIELD-ACTUAL> 0
<LOANS-NON> 1,955,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
