SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
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 our 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-KSB or any
amendment to this Form 10-KSB. / /
The Issuer had $16,895,767 in gross income for the year ended March 31,
1999.
<PAGE>
As of May 28, 1999, there were issued and outstanding 2,572,146 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 28, 1999, was approximately
$23,900,000. (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 II of Form 10-KSB -- Portions of the Annual Report to Stockholders for the
fiscal year ended March 31, 1999.
PART III of Form 10-KSB--Proxy Statement for the 1999 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" or "Community 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, Community Bank
converted to the stock form of organization through the sale and issuance of
shares of our common stock. We effected a two-for-one stock split in the form of
a 100% stock dividend in November 1994 and March 1998.
Our principal asset is the outstanding stock of Community Bank, our wholly
owned subsidiary. Our common stock trades on The Nasdaq Stock Market under the
symbol "CFFC." In November, 1997 Community Bank established Community First
Mortgage Corporation ("Community First"), a wholly owned mortgage banking
subsidiary to originate and sell mortgage loans.
Community and Community 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 our
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, 1999, Community had $200.8 million in assets, deposits of
$153.0 million and stockholders' equity of $26.4 million. Community's primary
business consists of attracting deposits from the general public and originating
real estate loans and other types of investments through our offices located in
Staunton, Waynesboro, Stuart Drafts and Virginia Beach, Virginia.
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"). Our results of operations are largely dependent upon
our net interest income, which is the difference between the interest we receive
on our loan portfolio and our investment securities portfolio, and the interest
we pay on our deposit accounts and borrowings.
Community's main office is located at 38 North Central Avenue, Staunton,
Virginia 24401. Our telephone number is (540) 886-0796.
3
<PAGE>
Forward-Looking Statements
- --------------------------
This Annual Report on Form 10-KSB contains certain forward-looking statements
with respect to the financial condition and results of operations of our
business. These forward-looking statements involve certain risks and
uncertainties. When used in this Annual Report on Form 10-KSB or future filings
by us with the Securities and Exchange Commission,in our 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. We wish 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 our
financial performance and could cause our actual results for future periods to
differ materially from those anticipated or projected.
We do not undertake and specifically disclaim any obligation to publicly release
the results 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.
Lending Activities
- ------------------
General. We, like most other thrift institutions, concentrate our 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.
We make construction loans secured by commercial real estate and one-to
four-family residential properties. Additionally, we make consumer loans in
order to increase the diversification and decrease the interest rate sensitivity
of our loan portfolio and to increase interest income. Substantially all of our
loans are originated within our market area which includes Shenandoah,
Rockingham, Page, Highland, Augusta, Albemarle, Bath, Rockbridge and Nelson
counties and the Hampton Roads area in Virginia.
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 our 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 our experience and on 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 us, however, are not
readily saleable in the secondary market due to the fact that we do 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.
4
<PAGE>
Our 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 $175,000 or less may be approved by the Senior
Vice-President/Director of Lending or the President of the Company. Loans in
excess of $175,000 but less than $250,000 must be approved by a majority of our
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 and/or the Senior Vice-President of Lending 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,
1999, 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 $3.7 million. At March 31, 1999, the Bank had no borrower, or
groups of borrowers, with loans outstanding in excess of $2.5 million.
5
<PAGE>
Loan Portfolio Composition. The following table sets forth the composition
of our total loan portfolio in dollars and percentages as of the dates
indicated.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- -----------------
Residential $ 91,396 51.56% $ 94,962 56.92% $ 96,968 63.83% $ 91,212 62.92% $ 86,331 62.90%
Commercial 38,545 21.75 40,115 24.04 37,508 24.69 38,433 26.51 39,667 28.90
Construction 13,712 7.74 10,071 6.04 5,204 3.42 6,415 4.43 4,336 3.15
-------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Total real estate 143,653 81.05 145,148 87.00 139,680 91.94 136,060 93.86 130,334 94.95
-------- ------ ------- ------ -------- ----- ------- ----- ------- -----
Consumer Loans:
- --------------
Unsecured personal 2,710 1.53 1,935 1.16 4,418 2.91 3,616 2.50 3,600 2.62
Secured personal 4,200 2.37 3,066 1.84 546 .36 --- --- --- ---
Automobile 6,430 3.63 3,970 2.38 1,646 1.08 1,470 1.01 1,072 .78
Home equity 12,234 6.90 7,086 4.25 1,630 1.07 380 .26 412 .30
Deposit account 260 .15 277 .16 339 .22 234 .16 267 .20
Other 47 .02 35 .02 76 .05 496 .34 1,577 1.15
------ ----- ------ ---- ----- ---- ----- ---- ----- ----
Total consumer 25,881 14.60 16,369 9.81 8,655 5.69 6,196 4.27 6,928 5.05
Commercial business 7,713 4.35 5,321 3.19 3,588 2.37 2,709 1.87 --- ---
------ ----- ------ ---- ----- ---- ----- ---- ----- ----
Total loans
receivable $177,247 100.00% $166,838 100.00% $151,923 100.00% $144,965 100.00% $137,262 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Less:
Undisbursed loans in
process 4,249 3,003 1,619 1,830 1,477
Deferred fees and
unearned discounts 268 247 361 396 507
Allowance for losses 1,316 1,117 1,038 1,000 763
----- ----- ----- ----- -------
Total net items 5,833 4,367 3,018 3,226 2,747
----- ----- ----- ----- -------
Total loans
receivable, net $171,414 $162,471 $148,905 $141,739 $134,515
======= ======= ======= ======= =======
</TABLE>
6
<PAGE>
The following table shows the composition of our loan portfolio by fixed and
adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------
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 $ 16,587 9.36% $ 13,539 8.12% $ 11,161 7.34% $ 12,863 8.87% $ 12,896 9.40%
Commercial 11,294 6.37 6,442 3.86 6,223 4.10 5,548 3.83 2,765 2.01
------ ---- ------ ---- ------ ---- ------ ---- -------- ------
Total real
estate loans(1) 27,881 15.73 19,981 11.98 17,384 11.44 18,411 12.70 15,661 11.41
------ ----- ------ ----- ------ ----- ------ ----- -------- ------
Consumer 22,353 12.61 14,716 8.82 8,114 5.33 5,902 4.07 6,516 4.75
Commercial business 5,656 3.19 4,767 2.86 3,588 2.37 2,709 1.87 --- ---
------ ----- ------ ----- ------ ----- ------ ----- -------- ------
Total fixed-rate loans 55,890 31.53 39,464 23.66 29,086 19.14 27,022 18.64 22,177 16.16
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Adjustable-Rate Loans:
Real Estate:
Residential 84,877 47.89 86,074 51.59 87,336 57.49 80,773 55.72 75,023 54.66
Commercial 30,895 17.43 39,093 23.43 34,960 23.01 36,876 25.44 39,650 28.88
------- ----- -------- ----- ------- ----- ------- ----- -------- ------
Total real estate
loans(2) 115,772 65.32 125,167 75.02 122,296 80.50 117,649 81.16 114,673 83.54
------- ----- ------- ----- ------- ----- ------- ----- -------- ------
Consumer 3,528 1.99 1,653 .99 541 .36 294 .20 412 .30
Commercial Business 2,057 1.16 554 .33 --- --- --- --- --- ---
------- ----- ------- ----- ------- ----- ------- ----- -------- ------
Total adjustable-
rate loans 121,357 68.47 127,374 76.34 122,837 80.86 117,943 81.36 115,085 83.84
------- ----- ------- ----- ------- ----- ------- ----- -------- ------
Total loans
receivable $177,247 100.00% $166,838 100.00% $151,923 100.00% $144,965 100.00% $137,262 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- ======
</TABLE>
CONTINUED NEXT PAGE
7
<PAGE>
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------
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 4,249 3,003 1,619 1,830 1,477
Deferred fees and
unearned discounts 268 247 361 396 507
Allowance for losses 1,316 1,117 1,038 1,000 763
------- ------- ------- ------- ------
Total net items 5,823 4,366 3,018 3,226 2,747
------- ------- ------- ------- ------
Total loans
receivable, net $171,414 $162,471 $148,905 $141,739 $134,515
======= ======= ======= ======= =======
- ----------------
(1) Includes residential real estate construction loans of $2,679,000, $818,000,
$1,529,000, $2,424,000 and $1,588,000 and commercial real estate construction
loans of $2,636,000, $4,321,000, $3,675,000, $3,991,000 and $2,748,000 at March
31, 1999, 1998, 1997, 1996 and 1995, respectively.
(2) Includes residential real estate construction loans of $7,389,000 and
$3,833,000 and commercial real estate construction loans of $1,008,000 and
$1,099,000 at March 31,1999 and 1998, respectively.
</TABLE>
8
<PAGE>
Loan Maturity and Repricing
- ---------------------------
We originate fixed and adjustable rate construction loans both of which
generally mature in one year or less. At March 31, 1999, we had total
construction loans of $13.7 million, all of which mature in the fiscal year
ended March 31, 2000.
One-to Four-Family Residential Real Estate Lending
- ---------------------------------------------------
Our primary lending program is the origination of loans secured by one-to
four-family residences, substantially all of which are located in our market
area. We evaluate 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 us to make loans in amounts of up to 100% of the appraised
value of the underlying real estate, we generally make one-to four-family
residential real estate loans in amounts of 80% or less of the appraised value.
In certain instances, we will lend up to 90% of the appraised value of the
underlying real estate and require the borrower to purchase private mortgage
insurance in an amount to reduce our exposure to 80% or less.
Most savings institutions, including Community Bank, 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 our exposure to changes in interest rates, we have
de-emphasized the origination of 30-year fixed-rate one-to four-family
residential mortgage loans for retention in our own portfolio. For the year
ended March 31, 1999, 43.8% of all one-to four-family residential loans we
originated had adjustable interest rates. Although, due to competitive market
pressures, we do originate fixed-rate mortgage loans, we currently underwrite
and document 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, 1999, $13.9 million (excluding $2.7 million of
residential construction loans) or 15.2%, of our one-to four-family residential
mortgage loan portfolio consisted of fixed-rate mortgage loans.
Our 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 our primary
one-to four-family residential loan is the one year adjustable, we have begun to
offer a residential loan which adjusts every three years generally in accordance
with the rates on three year U.S. Treasury Bills. Our 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 our market area,
Community Bank 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, 1999, ARM loans totaled $84.9 million, or 47.9%, of our 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 us
contain a "due-on-sale" clause providing that we may declare the unpaid
principal balance due and payable upon the sale of the mortgaged property. It is
our policy to enforce these due-on-sale clauses concerning fixed-rated loans and
to permit assumptions of ARMs, for a fee, by qualified borrowers.
We require, 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 our interests. The cost of this
insurance coverage is paid by the borrower. We generally do not require escrows
for taxes and insurance.
Commercial Real Estate and Construction Lending
- -----------------------------------------------
We have originated and, in the past have purchased, commercial real estate
loans and loan participations. We also make commercial real estate construction
loans. Our 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. We have in recent years placed more emphasis on
multi-family housing loans for our commercial real estate loan portfolio. At
March 31, 1999, commercial real estate, land and construction loans aggregated
$52.3 million or 29.5% of our total loans receivable before net items. Our
commercial real estate and construction loans are secured primarily by
properties located in our market area.
Our 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, we charge fees ranging from 1% to 2% on these loans. At March
31, 1999, we had $11.2 million in fixed-rate commercial real estate and
construction loans. Commercial real estate loans made by us are fully amortizing
with maturities ranging from five to 30 years.
At March 31, 1999, we had $3.6 million or 2.1% of our total loans
receivable before net items invested in commercial construction loans compared
to $5.4 million or 3.2% at March 31, 1998. At March 31, 1999, we had four
commercial construction loans, the largest one having an outstanding balance of
$1.4 million. All of these loans are presently performing in accordance with
their terms. Our 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. Our 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 our underwriting of commercial real estate and construction loans, we
may lend, under federal regulations, up to 100% of the security property's
appraised value, although the loan to original appraised value ratio on such
properties is generally 80% or less. Our 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 we generally require personal guarantees or endorsements of borrowers. We
also carefully consider the location of the security property.
10
<PAGE>
At March 31, 1999, we had 19 commercial real estate loans (or multiple
loans to one borrower) in excess of $1.0 million with an aggregate balance of
$30.6 million. The largest was a loan to a single borrower for $2.5 million
secured by 168.5 acres of partially developed land with streets, curbing,
underground utilities and public water located near Johnson City, Tennessee.
The following table presents information as to Community's commercial real
estate and construction lending portfolio as of March 31, 1999 by type of
project.
Number
of Principal
Loans Balance
------ -----------
(Dollars in Thousands)
Permanent financing:
Multi-family residential
buildings 44 $15,667
Hotel and motel 1 215
Commercial and industrial buildings 83 18,278
Raw land 30 3,483
Church 1 902
--- ------
159 38,545
--- ------
Acquisition and construction
financing:
Commercial and industrial buildings 2 2,212
--- ------
Total 161 $40,757
=== ======
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. Our risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's sale 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, we may be
required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value proves to be inaccurate, we
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 we usually provide
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, we 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.
11
<PAGE>
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.
We offer 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, 1999, we
had $25.9 million or 14.6% of our total loans receivable before net items
invested in consumer loans. With the exception of $3.5 million of home equity
loans at March 31, 1999, our consumer loans have fixed interest rates and
generally have terms ranging from 90 days to five years. The largest component
of consumer loans are home equity loans. We originate all of our consumer loans
in our market area and intend to continue our consumer lending in this
geographic area.
We offer VISA credit card accounts. At March 31, 1999, 1,340 credit card
accounts had been issued, with an aggregate outstanding balance of $364,602 and
unused credit available of $3.1 million. We presently charge no annual
membership fee and an annual rate of interest of 15.98%.
The underwriting standards employed by us for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes a comparison
of the value of the security in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, such as credit
card receivables, or secured by rapidly depreciable assets such as automobiles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loan such as us, and a
borrower may be able to assert against such assignee claims and defenses which
it has against the seller of the underlying collateral. We add general
provisions to our 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 our consumer loan portfolio has generally
been low ($92,000 at March 31, 1999), there can be no assurance that
delinquencies will not increase in the future.
12
<PAGE>
Commercial Business Lending
- ---------------------------
We also orginiate commercial business loans. At March 31, 1999 we had $7.7
million in commercial business loans outstanding, representing 4.4% of our gross
loan portfolio. We offer commercial business loans to service existing
customers, to consolidate our banking relationships with these customers, and to
further our 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. Our 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, 1999, we had $6.5 million of secured commercial business loans and
$1.2 million of unsecured commercial business loans.
We recognize the generally increased credit risk associated with commercial
business lending. Our 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 our credit analysis.
Loan Originations, Purchases and Sales
- --------------------------------------
Federal regulations authorize us to make real estate loans anywhere in the
United States. However, at March 31, 1999, substantially all of our real estate
loans were secured by real estate located in our 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. We purchased one loan in the
amount of $2,500,000 in fiscal 1999, which is discussed further on page 12,
"Commercial Real Estate and Construction Lending".
Generally, we originate fixed-rate residential mortgage loans for sale in
the secondary market and retain adjustable-rate mortgage loans for our
portfolio. Prior to fiscal 1997 we retained the servicing for mortgage loans
sold. During fiscal 1997 we began to sell loans with servicing released to be
more competitive in that market.
13
<PAGE>
The following table shows our loan origination, purchase, sale and
repayment activities for the periods indicated.
Year Ended March 31,
----------------------------
1999 1998 1997
----------------------------
(In Thousands)
Origination by Type:
- -------------------
Adjustable Rate:
Real estate - one- to four-family
- residential $22,300 $20,724 $21,687
- commercial 13,916 9,693 5,974
- home equity 8,214 390 230
------- ------ ------
Total adjustable rate 44,430 30,807 27,891
------- ------ ------
Fixed Rate:
- ----------
Real estate - one- to four-family
residential 28,614 5,345 3,280
- commercial 4,514 --- 1,092
Non-real estate - consumer(1) 22,134 22,009 10,857
------- ------ ------
Total fixed rate 55,262 27,354 15,229
------- ------ ------
Sales and Repayments
- --------------------
Real estate loans 28,606 4,001 1,418
Principal repayments 41,034 23,552 23,836
------- ------ ------
Total reductions 69,640 27,553 25,254
------- ------ ------
Increase (decrease) in other
items, net (21,109) (17,041) (10,699)
------- ------ ------
Net increase (decrease) $ 8,943 $13,567 $ 7,167
======= ======= =======
- ---------------------
(1) Consumer loans include the amounts outstanding on credit card accounts
opened by us and outstanding lines of credit on home equity loans. The total
credit available was $5.9 million, $4.6 million and $4.1 million at March 31,
1999, 1998 and 1997, respectively, which would have increased fixed-rate
consumer loans to $28.0 million, $26.6 million and $14.9 million at such dates,
respectively.
14
<PAGE>
Delinquent and Problem Loans
- ----------------------------
When a borrower fails to make a required payment on a loan, we attempt 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
we issue a notice of intent to foreclose on the property and if the delinquency
is not cured within 60 days, we may institute foreclosure action. If foreclosed
on, real property is sold at a public sale and may be purchased by us.
Historically, deficiencies have been cured promptly.
The following table sets forth information concerning delinquent mortgage
and other loans at March 31, 1999. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
Residential Commercial
Real Estate Real Estate Consumer
------------------ ------------------ -----------------
Number Amount Number Amount Number Amount
--------------------------------------------------------
(Dollars in Thousands)
Loans Delinquent for:
- --------------------
30-59 days 16 $1,238 - $- 16 $185
60-89 days 3 196 - - 4 61
90 days and over 18 1,534 - - 9 73
-- ----- -- -- --- ----
Total delinquent loans 37 $2,968 - $- 29 $319
== ===== == == === ====
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 our periodic reports with the OTS and in
accordance with our classification of assets policy, we regularly review the
loans in our portfolio to determine whether any loans require classification in
accordance with applicable regulations.
15
<PAGE>
On the basis of management's review of our assets, at March 31, 1999, we had
classified $2,846,000 of our assets as substandard, none as doubtful and $893 as
loss. All assets that have been classified are included below in either the
table of non-performing assets or under "Other Loans of Concern."
Non-Performing Assets
- ---------------------
The table below sets forth the amounts and categories of non-performing
assets in our 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. All consumer loans more than 120 days delinquent are charged against
the consumer loan allowance for loan losses. Accruing mortgage loans delinquent
more than 90 days are loans that we consider to be well secured and in the
process of collection. For the years presented, we have 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).
March 31,
--------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------
(Dollars in Thousands)
Non-accruing loans:
Consumer $ 92 $ 590 $ 400 $ --- $ 3
Real Estate 1,074 45 103 --- ---
Accruing Loans Delinquent
More Than 90 Days:
Residential --- --- --- 52 ---
Commercial --- --- --- --- ---
Consumer --- --- --- 541 ---
Real estate acquired
through foreclosure 352 303 173 148 350
----- ----- ------ ----- ------
Total $1,518 $ 938 $ 676 $ 741 $ 353
===== ===== ====== ===== ======
Total as a percentage
of total assets .76% .51% .40% .46% .23%
===== ===== ====== ====== ======
Unallocated allowance for
loan losses $1,195 $1,080 $ 783 $ 791 $ 728
===== ===== ====== ====== ======
Non-performing assets at March 31, 1999 were comprised of six single family
residential properties, a commercial property, one multi-unit apartment
16
<PAGE>
building, one unsecured consumer loan and various smaller auto loans, which were
more than ninety-days past due, real estate acquired through foreclosure of two
single family dwellings, four rental properties of two units each and a five
acre lot. 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, 1999, there were $2,780,000 in loans with respect to which
known information about the possible credit problems of the borrowers or the
cash flows of the security properties have caused management to have doubts as
to the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the non-performing
asset categories.
The $2,780,000 in other loans of concern is comprised primarily of 14
residential real estate loans and one commercial real estate loan. Seven of the
loans are secured by one-to -four family rental properties with four borrowers
and with an aggregate loan balance of $500,000. Seven loans are secured by
multi-family properties with two borrowers and a total loan balance of
$2,084,000. The remaining real estate loan is secured by a commercial building
loan with one borrower and a total balance of $193,000. The balance of the
$2,780,000 in other loans of concern is one consumer loan. We are 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
- ---------------------------------------------
We provide valuation reserves for anticipated losses on loans and real
estate when 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, we also provide reserves based on
the dollar amount and type of collateral securing our 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 1999, we increased our allowance for losses on
loans by $199,000 due primarily to the increased loan volume, especially in
commercial real estate, construction and consumer loans. At March 31, 1999, we
had an allowance for loan losses of $1,316,000 which is predominantly a general
allowance of $1,195,000.
17
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses.
Year Ended March 31,
------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------
(Dollars in Thousands)
Balance at beginning
of period $ 1,117 $1,039 $ 1,000 $ 763 $ 661
------ ----- ----- ------ ------
Provision charged to
operations 360 499 181 307 109
------ ----- ----- ------ ------
Charge-offs:
- -----------
Residential real
estate 100 116 59 --- ---
Consumer 74 376 110 71 7
Recoveries:
Real Estate 6 --- --- --- ---
Consumer 7 73 27 1 ---
------ ----- ----- ------ ------
Net charge-offs 161 420 142 70 7
------ ----- ----- ------ ------
Balance at end
of period $ 1,316 $1,117 $1,039 $ 1,000 $ 763
====== ===== ===== ====== ======
Ratio of net charge-
offs during the
period to average
loans outstanding
during the period .10% .27% .01% .01% .01%
18
<PAGE>
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
Commercial Consumer and
Real Commercial
Residential Estate Construction Business Total
----------------------------------------------------------
(Dollars in Thousands)
March 31, 1999
- --------------
Amount of loan loss
allowance $ 375 $ 306 $ 123 $ 512 $ 1,316
Loan amounts by
category 91,396 38,545 13,712 33,594 177,247
Percent of loans in
each category to
total loans 51.56% 21.75% 7.74% 18.95% 100.0%
March 31, 1998
- --------------
Amount of loan loss
allowance $ 376 $ 161 $ 116 $ 464 $ 1,117
Loan amounts by
category 94,962 40,115 10,071 21,690 166,838
Percent of loans in
each category to
total loans 56.92% 24.04% 6.04% 13.00% 100.0%
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 62.92% 26.51% 4.43% 6.14% 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 62.90% 28.90% 3.15% 5.05% 100.0%
19
<PAGE>
Subsidiary Activities
- ---------------------
We established Community First Mortgage Corporation, a mortgage banking
subsidiary, in November 1997 and began operations in June 1998. The primary
business of Community First is to originate fixed rate mortgage loans to sell to
third party investors to generate fee income and gains on the sale of mortgage
loans. The success of a mortgage banking operation such as Community First is
generally dependent on increasing the volume of mortgage loans originated and
sold to investors. Community First, in its first ten months of operation during
the year ended March 31, 1999 experienced a loss before income taxes of
approximately $425,000.
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
- -Liquidity." 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, we have maintained our 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, 1999, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings and current borrowings) was 9.9%. See "Regulation Federal Home Loan Bank
System."
20
<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.
March 31, 1999
--------------------------------------------------
Within 1 to 5 Total Investment
1 Year Years Securities
---------- ---------- -------------------------
Book Value Book Value Book Value Market Value
---------- ---------- ---------- ------------
(Dollars in Thousands)
Federal agency
obligations $ --- $ 2,315 $ 2,315 $ 2,301
State agency
obligations and
commercial paper --- 3,246 3,246 3,277
----- ----- ----- -----
Total investment
securities $ --- $ 5,561 $ 5,561 $ 5,578
====== ===== ===== =====
Weighted average
yield ---% 5.00% 5.00% 4.98%
=== ==== ==== ====
21
<PAGE>
The following table sets forth the composition of our investment portfolio at
the dates indicated.
March 31,
----------------------------------------------
1999 1998 1997
----------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Interest-bearing
deposits with
banks $6,407 100.0% $2,866 100.0% $1,015 100.0%
Federal funds sold --- --- --- --- --- ---
------ ----- ------ ----- ----- -----
Total $6,407 100.0% $2,866 100.0% $1,015 100.0%
===== ===== ===== ===== ===== =====
Investment securities:
U.S. government
securities $ --- --- % $ --- --- % $ --- --- %
Federal agency
obligations 2,315 21.8 1,861 55.2 4,876 55.2
State agencies and
commercial paper 3,246 30.6 1,323 3.6 321 3.6
FHLMC common stock 3,543 33.4 3,905 25.4 2,243 25.4
----- ----- ----- ----- --- ---
Subtotal 9,104 85.8 7,089 84.2 7,440 84.2
FHLB stock 1,508 14.2 1,600 15.8 1,400 15.8
----- ----- ----- ----- ----- ----
Total investment
securities and
FHLB stock $10,612 100.0% $8,689 100.0% $8,840 100.0%
====== ===== ===== ===== ===== =====
Average remaining life
or term to repricing,
excluding FHLMC common
stock, FHLB stock and
other marketable equity
securities 3 years 3 years 2 years
During fiscal 1999 the market rates paid on investment securities declined.
During fiscal 1999 we invested primarily in federal and state agency securities
with maturities of one to five years, some of which are callable within three
months to two years from date of purchase.
22
<PAGE>
Sources of Funds
- ----------------
General. Deposits have traditionally been the principal source of our funds
for use in lending and for other general business purposes. In addition to
deposits, we derive 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. We attract both short-term and long-term deposits from the
general public by offering a wide assortment of accounts and rates. We have 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 our primary
source of deposits in the past. We offer 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 our jumbo certificates which have matured revert
to a passbook rate and are reflected in the tables as passbook accounts. We do
not solicit brokered deposits due to our ability historically to attract funds
from our local markets or borrow from the FHLB at lower rates.
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by us at the periods indicated.
At March 31,
----------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
Passbook and statement accounts $14,307 $ 12,443 $ 12,578
NOW and Super NOW accounts 25,914 21,080 15,576
Money market accounts 11,613 8,349 9,935
One- to five-year fixed-rate
certificates 97,508 91,996 73,817
Six-month and 91 day certificates 3,373 3,246 4,075
Jumbo certificates 300 1,050 614
-------- -------- --------
Total $153,015 $138,164 $116,595
======= ======= =======
23
<PAGE>
The following table sets forth the change in the dollar amount of savings
deposits in the various types of deposit programs offered by us for the periods
indicated.
Year Ended March 31,
----------------------------
1999 1998 1997
--------- --------- --------
(In Thousands)
Passbook and statement accounts $ 1,864 $ (135) $ 399
NOW and Super NOW accounts 4,834 5,504 1,993
Money market accounts 3,264 (1,586) (297)
One-to five-year fixed-rate
certificates 5,512 18,179 7,168
Six-month and 91 day certificates 127 (829) (2,349)
Jumbo certificates (750) 436 179
------- ------- -------
Total increase $14,851 $ 21,569 $ 7,093
======= ======= =======
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.
Year Ended March 31,
-------------------------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Deposit Category
- ----------------
Noninterest bearing
demand deposits $ 4,909 ---% $ 2,944 ---% $ 2,145 ---%
Interest bearing
demand deposits 26,027 2.96 23,715 2.96 21,412 3.03
Savings deposits 13,378 3.00 12,358 2.99 12,063 2.98
Time deposits 97,475 5.35 87,672 5.45 75,687 5.34
------- ---- ------- ----- ------- ----
Total deposits $141,789 4.50% $126,689 4.61% $111,307 4.54%
======= ==== ======= ==== ======= ====
24
<PAGE>
The variety of deposit accounts we offer has allowed us to be competitive
in obtaining funds and has allowed us 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, we have
become much more subject to short-term fluctuations in deposit flows, as
customers have become more interest rate conscious. Our ability to attract and
maintain deposits, and our cost of funds, has been, and will continue to be,
significantly affected by money market conditions.
The following table sets forth our deposit flows during the periods
indicated.
Year Ended March 31,
---------------------------------
1999 1998 1997
--------- -------- --------
(Dollars in Thousands)
Opening balance $138,164 $116,595 $109,502
Net deposits (withdrawals) 8,464 16,718 2,983
Interest credited 6,387 4,851 4,110
--------- -------- --------
Ending balance $153,015 $138,164 $116,595
--------- -------- --------
Net increase $ 14,851 $ 21,569 $ 7,093
--------- -------- --------
Percent increase 10.75% 18.50% 6.47%
===== ===== ====
During the fiscal years ended March 31, 1999, 1998 and 1997 we emphasized
free checking accounts, increased our marketing efforts and remained competitive
in regard to the rates offered by competitors. Due to these efforts and the
opening of an additional branch location in the Hampton Roads area in November
of 1998, we experienced an increase in both demand and time deposits during
fiscal 1999. To the extent that we may rely on sources of funds other than
deposits, our earnings may be adversely affected. We may use borrowings as an
alternative source of funds. See "- Borrowings."
25
<PAGE>
The following table shows rate information for our certificates of deposit
as indicated.
2.00- 3.01- 5.01- 6.01-
3.00% 5.00% 6.00% 7.00% Total
- --------------------------------------------------------------------------------
(Dollars in Thousands)
March 31, 1999 $ -- $29,790 $67,199 $ 4,192 $101,181
March 31, 1998 49 5,729 74,112 16,402 96,292
March 31, 1997 68 17,980 52,466 7,992 78,506
The following table indicates the amount of the certificates of deposit by
time remaining until maturity as of March 31, 1999.
Maturity
3 Months Over Over
or 3 to 12 12
less Months Months Total
-------- -------- --------- ------
(Dollars in Thousands)
Certificates of deposit
less than $100,000 $21,627 $48,559 $18,109 $ 88,295
Certificates of deposit
of $100,000 or more. 3,775 6,053 3,058 12,886
------ ----- ------ -------
Total certificates
of deposit $25,402 $54,612 $21,167 $101,181
====== ====== ======= =======
Borrowings
- ----------
As a member of the FHLB of Atlanta, we are required to own capital stock in
the FHLB of Atlanta and are 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. Our 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 us for general corporate purposes. At March 31, 1999,
we had no securities sold under agreements to repurchase.
26
<PAGE>
We generally utilize borrowings to supplement deposits when they are
available at a lower overall cost to us 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.
Year Ended March 31,
---------------------------------------------
1999 1998 1997
-------------- ------------- --------------
(In Thousands)
Maximum Balance:
FHLB advances $20,000 $32,000 $28,000
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Average Balance:
FHLB advances $14,167 5.7% $25,917 5.7% $26,542 5.6%
The following table sets forth information as to the our borrowings and the
weighted average interest rate paid on such borrowings at the dates indicated.
At March 31,
-------------------------
1999 1998 1997
------ ------ ------
(Dollars in Thousands)
FHLB advances $19,000 $18,000 $26,000
------- ------- -------
Total borrowings $19,000 $18,000 $26,000
======= ======= =======
Weighted average interest
rate of FHLB advances 5.60% 5.77% 6.85%
27
<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 our market area. We
compete for real estate loans principally on the basis of our interest rates and
loan fees, the types of loans and the quality of services provided to borrowers.
We face substantial competition in attracting deposits from other thrift
institutions, commercial banks, money market and mutual funds, credit unions and
other investment vehicles. Our ability to attract and retain deposits depends on
our ability to provide an investment opportunity that satisfies the requirements
of investors as to rate of return, liquidity, risk and other factors. We compete
for these deposits by offering a variety of deposit accounts at competitive
rates and convenient business hours.
We consider our primary market for deposits to be Augusta County and for
mortgage loans to be Augusta and Rockingham Counties and the Hampton Roads area.
At March 31, 1999, there were twelve commercial banks with offices in our
primary market areas. We estimate that our market share of savings deposits in
Augusta County is approximately 10% and our 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 expanded the Bank's market area to
the Hampton Roads area of Virginia.
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, Community Financial
also is subject to federal regulation and oversight. The purpose of the
regulation of Community Financial 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 Community Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive authority
over the operations of savings associations. As part of this authority, we are
required to file periodic reports with the OTS and we are subject to periodic
examinations by the OTS. When an examinations is conducted by the OTS, the
examiners may require us to provide for higher general or specific loan loss
reserves. Our last regular OTS examination was in January, 1998 and the
examiners did not require us to provide for higher general or specific loan loss
reserves.
28
<PAGE>
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.
Our OTS assessment for the fiscal year ended March 31, 1999, was $51,505.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Community Bank and Community
Financial. 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 Community
Bank is prescribed by federal laws, and we are 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 Bank is in compliance with these restrictions.
Our 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, 1999, our lending limit under this restriction was $3.7 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 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. 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
29
<PAGE>
capital and supervisory evaluation. Under this 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.
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.
This legislation provided 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 provided 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 Community Bank
in November 1996. This special assessment significantly increased noninterest
expense and adversely affected our results of operations for the year ended
March 31, 1997. As a result of the special assessment, our deposit insurance
premiums were reduced to zero based upon our 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 was limited to 20% of the rate
30
<PAGE>
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 Community 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 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 Community 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 9 of the Notes to Consolidated Financial Statements
contained in Part II, Item 7 of this report for information on our 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
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.
31
<PAGE>
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 us may
have a substantial adverse effect on our operations and profitability and the
value of our Common Stock. Our shareholders do not have preemptive rights, and
therefore, if we are 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 Community Financial 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 Bank that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of 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 Bank may pay dividends in accordance with this general authority.
Liquidity. All savings associations, including Community Bank, 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 we
include 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, 1999,
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
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
32
<PAGE>
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, 1999, 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 Community 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 Community 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, Community Bank may be required to devote additional funds for
investment and lending in our local community. We were 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 Community Financial and any company which is under common control
with Community 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. Community Bank's subsidiaries are not
deemed affiliates, however; the OTS has the discretion to treat subsidiaries of
savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
33
<PAGE>
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. Community Financial is a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such, we are
required to register and file reports with the OTS and are subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
us and our 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, we generally are not subject
to activity restrictions. If we acquire control of another savings association
as a separate subsidiary, we or the Company would become a multiple savings and
loan holding company, and our activities and any of our subsidiaries (other than
Community 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.
We 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. Our stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We are subject
to the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Community stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of Community may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
we meet specified current public information requirements, each affiliate of
ours is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Federal and State Taxation
- --------------------------
Federal Taxation. Savings associations such as Community 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.
34
<PAGE>
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 repealed 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,
1999, Community Bank's post-1987 excess reserves amounted to approximately
$1,056,000. The recapture will occur over a six-year period, the commencement of
which was delayed until the first taxable year beginning after December 31,
1997. 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.
In addition to the regular income tax, corporations, including savings
associations such as Community 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.
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, 1999, Community Bank's Excess for tax purposes
totaled approximately $2.7 million.
35
<PAGE>
Community Financial and Community Bank file consolidated federal income tax
returns on a fiscal year basis. Savings associations, such as the Community
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.
Our federal income tax returns and our 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 Financial and our consolidated
subsidiaries.
Virginia Taxation. We conduct our business in Virginia and consequently are
subject to the Virginia corporate income tax. The Commonwealth of Virginia
imposes a corporate income tax on a basis similar to federal income tax at a
rate of 6% on Virginia taxable income.
Executive Officers
- ------------------
The following information as to the business experience during the past
five years is supplied with respect to executive officers of Community
Financial. Except as otherwise indicated, the persons named have served as
officers of Community Financial since it became the holding company of Community
Bank, and all offices and positions described below are also with Community
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 54, is President and Chief Executive
Officer of the Company. 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 50, is our 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.
Patsy Clem. Ms. Clem, age 59, is our Controller, a position she has held
since July, 1986. Ms. Clem has been employed by us since 1983 in the Accounting
Department.
P. Douglas Richard. Mr. Richard, age 54, is our Senior 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 36, is our Vice President and
Regional Executive Vice President, a position he has held since January, 1997.
36
<PAGE>
Prior to joining the Company Mr. Kyriakides was Chief Operations Officer of
Seaboard Savings Bank in Virginia Beach, Virginia.
John D. Meade III. Mr. Meade, age 46, is our Senior Vice President of
Lending, a position he has held since September 1998. Prior to joining the
Company Mr. Meade was President and CEO of Hanover Bank in Richmond, Virginia
beginning in August 1996. Mr. Meade was also President and CEO of First Bank and
Trust of Tennessee from March 1995 to July 1996 and was employed by Tidemark
Bank from July 1994 to March 1995.
Benny N. Werner. Mr. Werner, age 50, is our Senior Vice President of Retail
Banking, a position he has held since May 1998. Prior to joining the Company Mr.
Werner was employed by Crestar for three years as President-Warrenton area and
employed by Jefferson Savings and Loan, Warrenton, Virginia as Senior Vice
President of Retail Banking for seventeen years.
Employees
- ---------
At March 31, 1999, we had a total of 101 employees, including eleven hourly
employees. None of our employees are represented by any collective bargaining
group. Management considers our employee relations to be good.
Item 2. Description of Property
- ---------------------------------
The following table sets forth information at March 31, 1999, with respect
to our offices, furniture and equipment.
Owned
or Gross Net Book
Leased Square Value at
Location Opened Expiration Footage March 31, 1999
- ----------------------------------------------------------------------------
38 North Central Avenue 1956 Owned 17,000 $2,196,000
Staunton, Virginia
Rte. 250 West 1989 Owned 5,300 986,000
Waynesboro, Virginia
Routes 340 and 608 1993 Owned 2,074 372,000
Stuart's Draft, Virginia
5300 Kemps River Drive 1997 2002 2,400 88,000
Virginia Beach, Virginia
621 Nevan Road
Virginia Beach, Virginia 1998 2038 13,000 907,505
Community First Mortgage
9011 Arboretum Parkway
Richmond, Virginia 1997 2003 1,800 10,000
Our accounting and record-keeping activities are maintained on an in-house
computer system. The net book value of our computer equipment at March 31, 1999
was $954,619.
37
<PAGE>
Item 3. Legal Proceedings
- ---------------------------
There are no material pending legal proceedings to which we or our
subsidiary is a party or to which any of our 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, 1999.
PART II
Item 5. Market for Common Equity and Related Security
Holder Matters
- -------------------------------------------------------
The information contained under the caption "Common Stock" on page 40 of
the Registrant's Annual Report to Stockholders attached hereto as Exhibit 13 is
incorporated herein by reference.
38
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
- -----------------------------------------------------------------
The information under the caption "Management's Discussion and Analysis of
Operations" on pages 9 through 16 of the Registrant's Annual Report to
Stockholders attached hereto as Exhibit 13 is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Financial Statements on pages 17 through 38 in the Registrant's Annual
Report to Stockholders attached hereto as Exhibit 13 is incorporated herein by
reference.
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.
39
<PAGE>
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 our definitive Proxy Statement for the 1999 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 our equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the last fiscal year ended March 31, 1999, all Section 16(a) filing
requirements applicable to our officers, directors and greater than 10 percent
beneficial owners were complied with, except for John D.Meade, III, an officer
of Community, who inadvertently failed to file a Form 4 to report the purchase
of 500 shares and 1,000 shares of common stock on October 8, 1998 and November
7, 1998, respectively. On May 13, 1999, Mr. Meade filed a Form 5 disclosing the
transactions.
Item 10. Executive Compensation
- --------------------------------
Information concerning executive compensation is incorporated herein by
reference from our definitive Proxy Statement for the 1999 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 our definitive Proxy
Statement for the 1999 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 our definitive Proxy Statement for the
1999 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
40
<PAGE>
PART IV
Item 13. Exhibits and Reports on 8-K
- -------------------------------------
(a) Exhibits:
Reference to
Prior Filing
or Exhibit
Regulation Number
S-K Exhibit Attached
Number Document Hereto
- ---------------------------------------------------------------------
2 Plan of acquisition, reorganization,
arrangement, liquid, or succession None
3 Amended and Restated Articles of
Incorporation and Bylaws ***
4 Instruments defining the rights of
security holders, including indentures:
Common Stock Certificate 4
9 Voting trust agreement None
10 Material contracts:
Stock Option and Incentive Plan *
Employment Agreement *
Employee Stock Ownership Plan **
1996 Incentive Plan ***
Supplemental Executive Retirement Plan 10
11 Statement re computation of per
share earnings None
13 Annual Report to Security Holders 13
16 Letter on change in certifying
accountant None
18 Letter on change in accounting
principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters
submitted to vote of security
holders None
23 Consent of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
- --------------------
*Filed on May 19, 1989 as exhibits to the Registrant's Registration
Statement No. 33-28817 on Form S-4. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
**Filed on June 28, 1993, as Exhibit 10 to the Annual Report on Form
10-KSB for the fiscal year ended March 31, 1993. Such previously filed document
is hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
***Filed on July 5, 1996 as exhibits to the Registrant's Definitive Proxy
Statement, File Number 000-18265 on Schedule 14A. Such previously filed document
is hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
41
<PAGE>
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period ended
March 31, 1998.
42
<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 29, 1999 By: /s/ Thomas W. Winfree
------------------------------
Thomas W. Winfree
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Thomas W. Winfree By: /s/ 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 29, 1999 Date: June 29, 1999
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 29, 1999 Date: June 29, 1999
By: /s/ Dale C. Smith By: /s/ Kenneth L. Elmore
----------------------------- ------------------------------
Dale C. Smith Kenneth L. Elmore
Director Director
Date: June 29, 1999 Date: June 29, 1999
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 29, 1999 Date: June 29, 1999
<PAGE>
EXHIBIT INDEX
Reference to
Prior Filing
or Exhibit
Regulation Number
S-K Exhibit Attached
Number Document Hereto
- ---------------------------------------------------------------------
2 Plan of acquisition, reorganization,
arrangement, liquid, or succession None
3 Amended and Restated Articles of
Incorporation and Bylaws ***
4 Instruments defining the rights of
security holders, including indentures:
Common Stock Certificate 4
9 Voting trust agreement None
10 Material contracts:
Stock Option and Incentive Plan *
Employment Agreement *
Employee Stock Ownership Plan **
1996 Incentive Plan ***
Supplemental Executive Retirement Plan 10
11 Statement re computation of per
share earnings None
13 Annual Report to Security Holders 13
16 Letter on change in certifying
accountant None
18 Letter on change in accounting
principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters
submitted to vote of security
holders None
23 Consent of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
- --------------------
*Filed on May 19, 1989 as exhibits to the Registrant's Registration
Statement No. 33-28817 on Form S-4. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
**Filed on June 28, 1993, as Exhibit 10 to the Annual Report on Form
10-KSB for the fiscal year ended March 31, 1993. Such previously filed document
is hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
***Filed on July 5, 1996 as exhibits to the Registrant's Definitive Proxy
Statement, File Number 000-18265 on Schedule 14A. Such previously filed document
is hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
Exhibit 4
COMMUNITY FINANCIAL CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF VIRGINIA
NUMBER SHARES
CUSIP 20365L 10 0 SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF
COMMUNITY FINANCIAL CORPORATION
(the "Corporation"), a Virginia corporation. The shares represented by this
certificate are transferable only on the stock transfer books of the Corporation
by the holder of record hereof, or by his duly authorized attorney or legal
representative, upon the surrender of this certificate properly endorsed.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the signatures of its duly authorized officers and has caused its
seal to be hereunto affixed.
DATED: COMMUNITY FINANCIAL CORPORATION
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
[reverse side]
The following abbreviations, when used in the inscription on the face of
this certificate, shall be constured as through they were written out in full
according to applicable laws or regulations:
TEN COM --as tenants in common UNIF GIFT MIN ACT --....Custodian.......
TEN ENT --as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act..........................
in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ______ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------Attorney
to transfer the said stock on the Books of the within named Corporation with
full power of substitution in the premises.
Dated________________________
____________________________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NOTICE: NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
COMMUNITY FINANCIAL CORPORATION
The shares represented by this certificate are issued subject to all
provisions of the articles of incorporation and bylaws of Community Financial
Corporation (the "Corporation") as from time to time amended (copies of which
are on file at the principal executive offices of the Corporation).
The Corporation will furnish to any stockholder upon request and without
charge a full statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights, to the extent that the same have been fixed, and
of the authority of the board of directors to designate the same with respect to
other series. Such request may be made to the Corporation.
COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE I
DEFINITIONS AND USAGE
1.1 Definitions. Wherever used in the Plan, the following words and phrases
shall have the meanings set forth below unless the context plainly requires a
different meaning:
o "Administrator" means the person or persons described in Section 6.1
hereof.
o "Beneficiary" means the person or persons designated in writing by the
Participant and of record with the Administrator. In the absence of a
valid Beneficiary designation of record or if the designated
Beneficiary predeceases the Participant, the Participant's estate
shall be deemed to be the Participant's Beneficiary.
o "Board" means the Board of Directors of the Company.
o "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
o "Committee" means the Compensation Committee of the Board, if any, and
otherwise, the Board.
o "Company" means, Community Financial Corporation, with primary offices
located in Staunton, Virginia, and any successor thereto.
o "Compensation" means annual salary, excluding bonuses, paid to a
Participant for personal services rendered to the Company for the last
calendar year prior to the year in which a Participant reaches Normal
Retirement Age.
o "Eligible Employee" means an officer of the Company having the rank of
Vice-President or above.
o "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
o "Normal Retirement Age" means for each Participant age 65.
o "Participant" means an Eligible Employee who is participating in the
Plan in accordance with Section 3.1 hereof, as shown on Schedule A.
o "Plan" means the Community Financial Corporation Supplemental
Executive Retirement Plan.
o "Plan Year" means the calendar year.
o "Supplemental Benefit" means the benefit provided in accordance with
Section 4.2 of the Plan.
o "Vesting Percentage" means for each Participant the non-forfeitable
percentage of benefit accrued from time to time, which shall be 100%.
o "Years of Service", for purposes of benefit accrual and vesting, means
a Participant's years of employment with the Company while serving at
the officer rank of Vice President or higher.
1.2 Usage. Except where otherwise indicated by the context, any masculine
terminology used herein shall also include the feminine and vice versa, and the
definition of any term herein in the singular shall also include the plural and
vice versa.
<PAGE>
ARTICLE II
GENERAL
2.1 Effective Date. The provisions of the Plan shall be effective as of
January 1, 1998. The rights, if any, of any person whose status as an employee
of the Company has terminated shall be determined pursuant to the Plan as in
effect on the date such employee terminated, unless subsequently adopted
provisions of the Plan are made specifically applicable to such person.
2.2 Purpose. The purpose of the Plan is to provide supplemental retirement
income to a Participant. The Plan is intended to be (and shall be construed and
administered as) an "employee pension benefit plan" under the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA") which is unfunded and
is maintained by the Company solely to provide retirement income to a select
group of management or highly compensated employees as such group is described
under sections 201(2), 301(a)(3), and 401(a)(1) of ERISA as interpreted by the
U.S. Department of Labor. The Plan is not intended to be a plan described in
section 401(a) of the Code or section 3(2)(A) of ERISA.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 Eligibility. The Committee shall select from time to time Eligible
Employees of the Company who shall participate in the Plan; provided, however,
that such Eligible Employees shall be members of a select group of management or
highly compensated employees.
3.2 Participation. An Eligible Employee so designated by the Committee
shall become a Participant at such time as the Committee shall specify in
writing as set forth on Schedule A, attached hereto.
ARTICLE IV
SUPPLEMENTAL BENEFIT
4.1 Entitlement to Benefits. Each Participant shall be entitled to the
Supplemental Benefit provided in Section 4.2 of the Plan upon terminating
employment following the attainment of his Normal Retirement Age. A Participant
who terminates employment (for any reason other than disability or death) before
his Normal Retirement Age shall be entitled to receive his vested accrued
Supplemental Benefit.
4.2 Supplemental Benefit. Each Participant who satisfies the entitlement
requirements provided in Section 4.1 of the Plan shall be entitled to an annual
Supplemental Benefit at Normal Retirement Age which is determined in accordance
with the amount or formula as shown on Schedule A.
4.3 Normal Form of Payment. The normal form of payment of the Participant's
Supplemental Benefit shall be a series of monthly payments (or such other
periodic payments as the Administrator and the Participant may agree) for a
period of twenty (20) years.
4.4 Time of Payment. The payment of the Supplemental Benefit shall commence
on the Participant's termination of employment at or after attaining Normal
Retirement Age or as soon thereafter as is reasonably practicable.
ARTICLE V
BENEFITS UPON DEATH OR TERMINATION OF EMPLOYMENT
5.1 Pre-Retirement Survivor Benefit. If a Participant dies before his
Benefit Commencement Date, then his Beneficiary shall be entitled to receive the
annual Supplemental Benefit to which the Participant would have been entitled
upon reaching his Normal Retirement Age, payable as provided in Section 4.3.
5.2 Post-Retirement Survivor Benefit. If a Participant dies after his
Benefit Commencement Date, then the balance of any installments of his
Supplemental Benefit shall be paid to his Beneficiary over the remaining period.
5.3 Termination of Employment Prior to Normal Retirement Age. If a
Participant terminates employment prior to Normal Retirement Age for any reason
other than death, he shall be entitled to receive a Supplemental Benefit equal
to the vested portion of the benefit accrued to the date of such termination, in
accordance with the accrual method shown on Schedule A.
ARTICLE VI
ADMINISTRATION
6.1 General. The Committee shall be the Administrator. Except as otherwise
specifically provided in the Plan, the Committee shall be responsible for
administration of the Plan.
6.2 Administrative Rules. The Committee may adopt such rules of procedure
as it deems desirable for the conduct of its affairs, except to the extent that
such rules conflict with the provisions of the Plan.
<PAGE>
6.3 Duties. The Committee shall have the following rights, powers and
duties:
(a) The decision of the Committee in matters within its jurisdiction shall
be final, binding and conclusive upon the Company and upon any other person
affected by such decision, subject to the claims procedure hereinafter set
forth.
(b) The Committee shall have the duty and authority to interpret and
construe the provisions of the Plan, to decide any question that may arise
regarding the rights of employees, Participants and beneficiaries, and the
amounts of their respective interests, to adopt such rules and to exercise
such powers as the Committee may deem necessary for the administration of
the Plan, and to exercise any other rights, powers or privileges granted to
the Committee by the terms of the Plan.
(c) The Committee shall maintain full and complete records of its
decisions. Its records shall contain all relevant data pertaining to the
Participant and his rights and duties under the Plan. The Committee shall
have the duty to maintain account records of all Participants.
(d) The Committee shall cause the principal provisions of the Plan to be
communicated to the Participants, and a copy of the Plan and other
documents to be available at the principal office of the Company for
inspection by the Participants at reasonable times determined by the
Committee.
(e) The Committee shall periodically report to the Board with respect to
the status of the Plan.
6.4 Fees. No fee or compensation shall be paid to any person for services
as the Committee.
ARTICLE VII
CLAIMS PROCEDURE
7.1 General. Any claim for benefits under the Plan shall be filed by the
Participant or Beneficiary ("claimant") on the form prescribed for such purpose
with the Committee.
7.2 Denials. If a claim for benefits under the Plan is wholly or partially
denied, notice of the decision shall be furnished to the claimant by the
Committee within a reasonable period of time after receipt of the claim by the
Committee.
<PAGE>
7.3 Notice. Any claimant who is denied a claim for benefits shall be
furnished written notice setting forth: (a) the specific reason or reasons for
the denial; (b) specific reference to the pertinent provision of the Plan upon
which the denial is based; (c) a description of any additional material or
information necessary for the claimant to perfect the claim; and (d) an
explanation of the claim review procedure under the Plan.
7.4 Appeals Procedure. In order that a claimant may appeal a denial of a
claim, the claimant or the claimant's duly authorized representative may:
(a) request a review by written application to the Committee, or its
designate, no later than sixty (60) days after receipt by the claimant of
written notification of denial of a claim;
(b) review pertinent documents; and
(c) submit issues and comments in writing.
7.5 Review. A decision on review of a denied claim shall be made not later
than sixty (60) days after receipt of a request for review, unless special
circumstances require an extension of time for processing, in which case a
decision shall be rendered within a reasonable period of time, but not later
than one hundred and twenty (120) days after receipt of a request for review.
The decision on review shall be in writing and shall include the specific
reason(s) for the decision and the specific reference(s) to the pertinent
provisions of the Plan on which the decision is based.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Amendment. The Company reserves the right to amend the Plan in any
manner that it deems advisable by a resolution of the Board, which shall be
communicated to Participants not later than sixty (60) days following the
effective date of such amendment. No amendment shall, without the Participant's
consent, reduce the amount of the Participant's Supplemental Benefit accrued and
vested at the time the amendment becomes effective or the right of the
Participant to receive a Supplemental Benefit after the Participant has met the
entitlement requirements provided in Section 4.1 of the Plan.
8.2 Termination. The Company reserves the right to terminate the Plan at
any time by resolution of the Board, which shall be communicated to Participant
not later than sixty (60) days following the effective date of such amendment.
No termination shall, without the consent of the Participant, affect the amount
of the Participant's Supplemental Benefit prior to the termination of the right
of the Participant to receive a Supplemental Benefit after the Participant has
met the entitlement requirements provided in Section 4.1 of the Plan.
<PAGE>
8.3 No Assignment. The Participant shall not have the power to pledge,
transfer, assign, anticipate, mortgage or otherwise encumber or dispose of in
advance any interest in amounts payable hereunder or any of the payments
provided for herein, nor shall any interest in amounts payable hereunder or in
any payments be subject to seizure for payment of any debts or judgments, or be
reached or transferred by operation of law in the event of bankruptcy,
insolvency or otherwise.
8.4 Incapacity. If the Committee determines that any person to whom such
benefit is payable is incompetent by reason of physical or mental disability,
the Committee may cause the payments becoming due to such person to be made to
another for his benefit. Payments made pursuant to this Section shall, as to
such payment, operate as a complete discharge of the Plan, the Company and the
Committee.
8.5 Successors and Assigns. The provisions of the Plan are binding upon and
inure to the benefit of the Company, its respective successors and assigns, and
the Participant and his beneficiaries, heirs, legal representatives, and
assigns.
8.6 No Guarantee of Employment. Nothing contained in the Plan shall be
construed as a contract of employment or deemed to give any Participant the
right to be retained in the employ of the Company or to give any Participant any
equity or other interest in the assets, business, or affairs of the Company.
8.7 Unfunded Plan. This Plan is intended to be "unfunded" for purposes of
both the Internal Revenue Code and ERISA. The obligation of the Company to make
payments under this Plan constitutes nothing more than an unsecured promise of
the Company to make such payments, and any property of the Company that may be
set aside for the payment of benefits under this Plan shall, in the event of the
Company's bankruptcy or insolvency, remain subject to the claims of the
Company's general creditors until such benefits are distributed in accordance
with Article IV hereof. No Participant hereunder shall have any interest or
right to assets the Company may set aside to be used to pay benefits under the
Plan. The rights of a Participant shall be no greater than those of an unsecured
general creditor with respect to the assets of the Company.
<PAGE>
8.8 Severability. If any provision of the Plan shall be held illegal or
invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of the Plan, but the Plan shall be construed and enforced
as if such illegal or invalid provision had never been included herein.
8.9 Notification of Addresses. Each Participant shall file with the
Committee, from time to time, in writing, the post office address of the
Participant, the post office address of each Beneficiary, and each change of
post office address. Any communication, statement or notice addressed to the
last post office address filed with the Committee (or if no such address was
filed with the Committee, then to the last post office address of the
Participant or beneficiary as shown on the Company's records) shall be binding
on the Participant and each beneficiary for all purposes of the Plan and neither
the Committee nor any Company shall be obliged to search for or ascertain the
whereabouts of any Participant or beneficiary.
8.10 Governing Law. The Plan shall be subject to and construed in
accordance with the laws of Virginia to the extent not preempted by the
provisions of ERISA.
COMMUNITY FINANCIAL CORPORATION
By____________________________
1999 Annual Report
Community Financial Corporation [LOGO]
<PAGE>
Community Financial Corporation [LOGO]
NASDAQ Symbol - CFFC
MAIN OFFICE:
38 North Central Avenue
Staunton, Virginia 24401540-886-0796
Fax: 540-885-0643
E-mail: [email protected]
Web address: cbnk.com
EXECUTIVE AND ADMINISTRATIVE OFFICES:
38 North Central Avenue
Staunton, VA 24401
RETAIL BANKING OFFICES:
STAUNTON, VA
Main Office
38 N. Central Avenue
540-886-0796
RICHMOND ROAD BRANCH
101 Community Way
540-886-5816
WAYNESBORO, VA
2934 West Main Street
540-943-5000
STUARTS DRAFT, VA
Rt. 340 & 608
540-337-1514
HAMPTON ROADS REGION:
Virginia Beach, VA
Regional Main Office
621 Nevan Road
757-491-8810
KEMPS RIVER BRANCH
5300 Kemps River Dr.
Suite 100
757-424-5600
COMMUNITY FIRST MORTGAGE CORPORATION:
Main Office
9201 Arboretum Pkwy, Suite 210
Richmond, VA 23236
804-330-9800
WAYNESBORO
2934 West Main Street
540-942-6223
VIRGINIA BEACH
621 Nevan Road, 2nd Floor
757-491-0743
<PAGE>
1 Selected Consolidated Financial Data
2 Letter to Stockholders
3 Board of Directors
9 Management's Discussion
17 Report of Independent Certified
Public Accountants
18 Consolidated Financial Statements
39 Stockholder Information
<PAGE>
COMMUNITY Patricia J. Lane Stephanie D. Wimer
BANK EMPLOYEES Teresa M. Layne Thomas W. Winfree
Robin C. Lindsay Barbara M. Wood
Dorothy A. Bain Debra C. Lynch John L. Woods
Kimberly A. Baker Marcie L. Mader Paula F. Wymer
Kristie J. Berry Virginia M. McCormack
Diana D. Bosley Hugh J. McMenamin COMMUNITY
Judy B. Botkin John D. Meade, III FIRST MORTGAGE
Ellen H. Boyd Emilie J. Mehrtens EMPLOYEES
Judith A. Brown Peggy R. Miller
Deborah M. Burnett Lyle A. Moffett June H. Bethea
Patricia A. Butler Lovetta L. Moore Gayle E. Blachura
Dianne F. Campbell Rosalie J. Moster Kerri L. Bliss
Martha B. Chandler Judy M. Moyer L. Anthony Bottoms, III
Patsy D. Clem Angel Negron, Jr. Lorey E. Bowles
Michelle R. Coffey Jane P. Orem Debra D. Clendenin
Neva F. Collins Catherine S. Pauly Lisa S. Collins
B. Clyde Dalton Janet R. Redifer Mary R. Davis
Charlott C. Dean P. Douglas Richard Steven E. Davis
Kay T. Dean Pamela A. Ritchie Michael G. Dolliver
Grace S. Dick Kimberly R. Roberson Karina P. Green
Maria E. Dimapelis Ramona W. Savidge W. Carol Harris
Renee A. Fangman Amelia D. Shull Bobbie J. Heath
Danny R. Fields Lynn P. Sisson Clayton J. Hicks
Ariel H. Fix Norman C. Smiley, III Mary Huneycutt
James N. Fordham Hope A. Smith Lisa A. Kurtz
Candace N. Gay Regina E. Smith Julie A. Miller
R. Jerry Giles Kimberly M. St. Clair Lisa C. Owen
Jacelyn P. Hailstalk Susan F. Swisher Sandra W. Redd
Robert M. Hoffman Linda H. Turner Kimberly L. Schubmehl
Heather A. Hobden Glenn A. Vanlear Carol J. Seay
Shirley J. Holbrook Jeffrey S. Wagner Marianne B. Stout
Lisa M. Hovland Thomas R. Wagner Kristen C. Talley
Carolyn H. Howell Benny N. Werner Becky H. Tinsley
Martha M. Kelley Connie West-Williams Kaylyn D. Vaccari
Chris P. Kyriakides Kathy H. Willis Ronald M. Voll
Lisa A. LaMay Edith F. Wimer C. Harril Whitehurst, Jr.
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
At March 31
-----------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $200,810 $183,894 $167,707 $159,793 $150,433
Loans receivable, net 171,414 162,471 148,905 141,739 134,516
Investment securities & other earning assets(1) 17,020 8,976 9,865 10,319 8,210
Real estate owned, net 352 303 173 123 350
Deposits 153,015 138,164 116,595 109,501 105,014
Advances and other borrowed money 19,000 18,000 26,000 27,000 25,000
Stockholders' equity 26,384 25,515 23,337 21,900 19,552
Year Ended March 31
-------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
SELECTED OPERATIONS DATA:
Total interest income $ 14,258 $ 13,949 $ 12,778 $ 12,388 $ 10,168
Total interest expense 7,332 7,316 6,536 6,516 4,963
-------- -------- -------- -------- --------
Net interest income 6,926 6,633 6,242 5,872 5,205
Provision for loan losses 360 498 180 307 109
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 6,566 6,135 6,062 5,565 5,096
Service charges and fees on loans 1,328 757 510 431 365
Other noninterest income(2) 1,310 9 9 25 34
Noninterest expenses 6,028 4,017 3,806 2,809 2,640
Income before income taxes 3,176 2,884 2,775 3,212 2,855
Income taxes 1,328 1,079 1,040 1,200 1,084
Net income $ 1,848 $ 1,805 $ 1,735 $ 2,012 $ 1,771
At or for the Year Ended March 31
---------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
OTHER DATA:
Interest-earning assets to
interest-bearing liabilities 111.43% 111.47% 112.70% 111.40% 112.02%
Average interest rate spread during year 3.45 3.42 3.49 3.42 3.38
Non-performing assets to total assets .76 .51 .40 .50 .23
Return on assets (ratio of net
income to average total assets) .96 1.03 1.06 1.28 1.22
Return on equity (ratio of net
income to average equity) 7.12 7.39 7.67 9.71 9.49
Equity-to-assets ratio (ratio of
average equity to average assets) 13.52 13.89 13.81 13.23 12.77
PER SHARE DATA:
Net income - diluted $ .71 $ 0.70 $ .68 $ .80 $ 0.72
Book value 10.26 9.97 9.15 8.63 7.87
Dividend .31 .28 .27 .21 .18
Dividend payout ratio 43.11% 39.60% 38.69% 26.30% 24.65%
Number of full-service offices 5 4 4 3 3
</TABLE>
(1) Includes federal funds sold, securities purchased under resale agreements
and overnight deposits.
(2) Other income includes customer service fees and commissions, gain or loss
on disposal of property and other items. Other income for fiscal 1999
includes gain on sale of available for sale securities of $1,225,000.
(3) Includes a special one-time assessment of approximately $671,000 to
capitalize the SAIF insurance fund. Letter to Stockholders Dear Fellow
Stockholders,
1
<PAGE>
LETTER TO STOCKHOLDERS
Dear Fellow Stockholders,
From modest beginnings over 70 years ago, Community Bank has grown into
one of the premier financial institutions in Virginia. During fiscal 1999,
Community Financial experienced significant growth and change. Last year, we
told you of the start-up of our mortgage banking subsidiary and the newly formed
regional presence in the Hampton Roads area of Virginia. We continue to be
optimistic regarding the success of these two major additions. In late 1998,
Management and the Board of Directors decided to further expand the mortgage
company. The decision to incorporate within Community First Mortgage Corporation
a multi-faceted wholesale operation has already begun to prove to be a wise
decision as its success is beginning to reap rewards.
In fiscal 1999, total assets of the corporation increased to $200.8
million, representing a 9% growth; total deposits increased to $153.0 million,
representing an 11% growth; and total loans increased by 6% to $171.4 million.
Net income for the fiscal year was $1,848,000, a 2% increase over the prior
period.
Despite record volume of $63.0 million in new originations of portfolio
loans, a net increase of only $8.9 million in our loan portfolio occurred. This
reflected a record year in payoffs of adjustable rate loans. Many of our
borrowers chose to refinance their loans from adjustable rate to fixed rate
loans taking advantage of the low fixed rate environment our economy has been
experiencing for many months. In addition to the above volume of loan
originations, our loan department at the bank originated $24.0 million in fixed
rate loans over and above those originated by our mortgage company. These loans
were sold directly into the secondary mortgage market.
The fiscal year ended March 31, 1999 resulted in a slight increase in
earnings over the last year, but there were many factors that affected the
corporation's profitability. During the year, the corporation utilized the sale
of securities to offset a substantial increase in operating expenses, which
increased by approximately $2 million from the fiscal year ended March 31, 1998.
The primary factors contributing to the increased levels of expenses were:
increased cost associated with the start-up expenses of the mortgage company,
conversion to a new Year 2000 compliant computer system, the opening of a second
branch office in Virginia Beach, and an additional location on Richmond Road in
Staunton, which is scheduled to open in July of this year, as well as additional
personnel costs. The Board of Directors and Management made the conscious
decision over a year ago to expand and transition Community's products and
services to that of a community commercial bank. When this strategy was
formulated, it was also decided to finance the expansion through the sale of
securities in order to avoid sacrificing short-term earnings.
While the above significant investments have impacted earnings, our
strategic plan for the future shows that we will begin to improve and realize
our goal of leveraging our relatively high capital position. Our employees
continue to be excited and dedicated toward ensuring that our strategy is
successfully carried out.
We believe that we have been successful in putting into place the
infrastructure and resources to enhance long term value for our shareholders.
With an expected slowdown in payoffs of loans, and increased profitability from
the HamptonRoads region, as well as expected profitability from the mortgage
banking subsidiary, we will begin to see the results of our long-term strategic
plan taking hold.
Another major accomplishment this year was the conversion of our computer
systems. This is indeed a major task for a financial institution that, by its
very nature, is very dependent on technology and its capabilities. As mentioned
above, our computer conversion required a significant investment. This
investment should begin to pay off soon by providing us with the capabilities to
compete more favorably in the ever-changing technologically advanced environment
in which we do business. We are greatly indebted to each and every employee of
the bank for his or her extreme extra effort put forth prior to, during, and
after the computer conversion.
In addition to increased efficiency, a major impetus for the computer
conversion was to make sure that a most important aspect of Year 2000 compliance
was dealt with with certainty. The Year 2000 issue is that of computer programs
and components using a two-digit format, as opposed to four digits, to indicate
the year. Unless fixed or changed, those computer systems may not be able to
[PICTURE OF JAMES R. COOKE, JR. AND THOMAS W. WINFREE]
2
<PAGE>
read dates beyond 1999. Our new Windows-based computer system was created
relatively recently (during the 1990s) and has always had four digits written
into its software programs.
The Year 2000 issue does not stop with just our in-house computer systems.
It spreads to almost every aspect of our business and is not limited to a
particular industry or field. Community's approach to the Year 2000 problem has
five phases: inventory of areas potentially affected, assessment to identify
problems, remediation to fix those problems identified, full testing of fixed
systems applications, and contingency planning in case something, over which we
have no control, was to fail. We feel that we have taken the reasonable and
necessary measures to reduce to a minimum the exposure to the Bank resulting
from potential problems in the Year 2000. While we do not anticipate problems,
there still could be an element of risk to our operations. We are in regular
contact with our regulators, who are acutely aware of our efforts, and those of
other financial institutions, to mitigate the potential for Year 2000 problems.
We have continually sought guidance from our regulators, as well as other
professionals associated with the Bank. We will continue to pay strict attention
to the Year 2000 issue until well after the change of the millennium.
When all is said and done, and after we reflect back and review our
accomplishments for the year, I would like to thank our people, our most
valuable asset. Our employees, proudly listed on the inside front cover of this
report, are part of our team of talented and dedicated people who possess the
highest degrees of integrity. These wonderful individuals are ready, willing,
and very much able to carry Community Financial and its subsidiaries through
whatever challenges lay ahead. They will do so with great skill and ability as
they ensure the continued success of your corporation.
During this past year, "The Community Family" said goodbye upon the
retirement of three of our most loved and respected long-time employees. On
November 20, 1998, Shirley Lovegrove, with 24 years of service, retired from the
position of Vice President of Operations. On the same date, our Corporate
Secretary, Sarah Ralston, and Accounting Clerk, Louise Pilson, retired. Sarah
had been with the Bank for 42 years and Louise had served for 28 years. These
three individuals will be remembered by all of us who continue in their
footsteps, having been inspired by their strong work ethic and dedication toward
the ideals of success and making our bank the best community bank it can be. It
is with great appreciation that we all wish these ladies the best the future can
possibly bring for them in their retirement.
As always, we invite each of our shareholders to continue to take
advantage of the wide array of financial products and services we offer by
bringing all of your business to us and by recommending us to your friends and
neighbors. We thank you for your continued support.
Sincerely,
/s/ James R. Cooke, Jr. /s/ Thomas W. Winfree
James R. Cooke, Jr. Thomas W. Winfree
Chairman of the Board President & CEO
3
<PAGE>
[BAR GRAPHS ON PAGE 3]:
[BAR GRAPH: NET INCOME (DOLLARS IN THOUSANDS) YEAR ENDED MARCH 31
1995 1,771
1996 2,012
1997 1,735
1997* 2,151
1998 1,805
1999 1,848
*NET INCOME BEFORE ONE TIME ASSESSMENT TO RECAPITALIZE SAIF]
[BAR GRAPH: STOCKHOLDERS' EQUITY TO AVERAGE ASSETS (IN PERCENTAGES) YEAR ENDED
MARCH 31
1995 12.77
1996 13.24
1997 13.81
1998 13.89
1999 13.52
1999* 10.63
*INDUSTRY AVERAGE AT 12/31/98]
[BAR GRAPH: EARNINGS PER SHARE (IN DOLLARS) YEAR ENDED MARCH 31
1995 0.72
1996 0.80
1997 0.68
1997* 0.85
1998 0.70
1999 0.71
*EPS BEFORE ONE-TIME ASSESSMENT TO RECAPITALIZE SAIF]
[BAR GRAPH: TOTAL ASSETS (DOLLARS IN THOUSANDS) YEAR ENDED MARCH 31
1995 150,433
1996 159,793
1997 167,707
1998 183,894
1999 200,810]
<PAGE>
[PICTURE OF THOMAS W. WINFREE, PRESIDENT AND CHIEF EXECUTIVE OFFICER]
BOARD OF DIRECTORS
CHARLES F. ANDERSEN, M.D.
Dr. Andersen is an orthopedic surgeon in private practice in Waynesboro,
Virginia.
JAMES R. COOKE, JR., D.D.S.
Dr. Cooke has been, for the past 30 years, a practicing dentist in Staunton,
Virginia.
KENNETH L. ELMORE
Mr. Elmore is a partner of Elmore, Hupp & Company, a certified public accounting
firm. Mr. Elmore has been a certified public accountant for over 30 years.
CHARLES W. FAIRCHILDS
Mr. Fairchilds has been the President of Allied Ready Mix in Waynesboro,
Virginia since 1987.
JANE C. HICKOK
Mrs. Hickok was elected as Vice Chairman of the Board in October 1994. She had
previously retired as President and Chief Executive Officer of Community Bank in
October 1994 after serving since 1984. She retired as President and Chief
Executive Officer of Community Financial Corporation in January 1995. Mrs.
Hickok continued to serve as a director of Community Financial Corporation and
Community Bank. Mrs. Hickok was elected as a director of Community Bank in 1983
and as a director of Community Financial in 1990 when it became the holding
company of Community Bank. Dale C. Smith Mr. Smith is the General Manager and
Chief Executive Officer of Augusta Cooperative-Farm Bureau, Inc., a farm supply
and retail store.
THOMAS W. WINFREE
Mr. Winfree was elected as President and Chief Executive Officer of Community
Financial and Community Bank in October 1995. Prior to joining Community
Financial, Mr. Winfree was President and Chief Executive Officer of Jefferson
Savings and Loan in Warrenton, Virginia.
[PICTURE: Pictured (left to right):
front row
. Thomas W. Winfree
. James R. Cooke, Jr., D.D.S.
. Jane C. Hickok
back row
. Dale C. Smith
. Charles W. Fairchilds
. Charles F. Anderrsen, M.D.
. Kenneth L. Elmore
4
<PAGE>
[PICTURES OF:
EXECUTIVE OFFICERS
Thomas W. Winfree
President and Chief Executive Officer
R. Jerry Giles
Chief Financial Officer, Vice President, Treasurer
Angel Negron, Jr.
Vice President - Business Banking
Lynn P. Sisson
Vice President - Branch Manager & Director of Consumer Services
Norman C. Smiley, III
Vice President - Lending
Patsy D. Clem
Controller
Benny N. Werner
Senior Vice President - Retail Banking
John D. Meade, III
Senior Vice President - Lending and Credit Administration
P. Douglas Richard
Senior Vice President/Regional President
Chris P. Kyriakides
Vice President/Regional Executive Vice President
HAMPTON ROADS BOARD OF DIRECTORS
[PICTURE:]
Pictured (left to right):
front row
. Thomas W. Winfree
. P. Douglas Richard
. James R. Cooke, Jr.
back row
. Morgan N. Trimyer, Jr.
. Robert M. Thornton
. Berard Harrison
. William R. Waddell
Not pictured: Chris P. Kyriakides
5
<PAGE>
WE'RE ONLY AS SUCCESSFUL AS OUR PEOPLE MAKE US
A bank is made up of people, trained to give its customers the products
and services they need. Providing that service requires special people, who are
dedicated to doing it the right way. Every one of our professional and dedicated
staff members places our customers and our community first.
Because all of our customers are so important to us, we bend over
backwards to see that they are given the best care. That means things like
instead of weeks later. It means cutting the red tape down to a minimum. It
means having the answers to our customers' questions, and solutions for their
financial needs.
But one person does not make a bank. In our case, it's a team of talented,
trained, and highly motivated individuals with the right attitude for prompt,
courteous service. Our people are committed to our customers for the long haul.
And these customers stay with us as a result. In 1998 we had three staff members
retire, with 94 years of combined service.
It all starts at the top. When you walk into one of our offices, you're
just as likely to bump into our President, Tom Winfree, as you are a Customer
Service Representative. Our Directors come and go from our offices daily. It
takes everyone pulling together to see that the Community Bank attitude comes
through in everything that we do.
WITH THE RIGHT ATTITUDE, YOU CAN REALLY GO PLACES
Community Bank is just what its name implies - a community bank. Which
means that we're here to meet the financial needs of our friends and neighbors.
We're not guided by out-of-state owners and managers. We're guided by our own
instincts and the needs of our community. And our goal is to meet those needs as
the best bank in town.
To accomplish this goal requires total commitment from every member of our
team, from the Chairman of the Board to the teller at your local branch. You'll
find us in leadership roles throughout the community, and as sponsors for an
endless array of our community's clubs, teams, programs, events and
organizations. We have a vested interest in our community and we're here every
day, showing that interest.
Community Bank is determined to be a bank that demands attention for all
the right reasons: the best attitude in town, and the service to match.
MISSION STATEMENT
Community Bank is committed to offering high quality, safe consumer and
business financial products to the communities we serve.
It is our desire to meet the financial needs of our customers with
integrity and pride to provide them with prompt, high quality service.
We recognize that our employees are the key to our success. We will
provide a stimulating and challenging work environment that encourages, develops
and rewards excellence for each employee's positive responses and efforts.
It shall be the purpose and mission of the bank to remain community-based,
so as to best serve our customers, depositors, and friends as personally and
efficiently as possible, consistent with the best interests of the shareholders.
This allows us to initiate innovative ideas and services, promptly respond to
customer needs, and maintain flexibility.
6
<PAGE>
TECHNOLOGY IS ATTITUDE DRIVEN
In 1998, we brought our complete computer operation in-house. We did this
for two reasons. First, it increases our capabilities so we can give our
customers the products and services they deserve. State-of-the-art technology
allows us to begin venturing into the exciting new world of internet and
electronic banking. Second, our new system ensures that the bank meets Y2K
requirements and has a seamless transition into the new millennium.
Special attention has been given to Year 2000 compliance and each new
piece of hardware and software was thoroughly evaluated with the help of
independent consultants with extensive banking and data processing experience.
It is very important to us that we continue to give uninterrupted service to our
customers, and we feel prepared to do so. Our new operating software system,
upgraded processing hardware, contracts with service providers, and continual
internal testing ensure that the Y2K rollover will be as smooth as possible. All
of our employees are taking the extra steps necessary to ensure the safety and
security of our customers assets.
Though changes in our technology can take some adjustment, it is all part
of becoming a first-rate bank of the twenty-first century. Providing new
technologies is part of our commitment to our customers and stockholders.
BANKING ONLINE
Technology continues to revolutionize our everyday lives and the banking
industry. We realize we must continue to utilize technology, but it will not
replace our culture of personal service. Community Bank debuted its web site on
the Internet in 1997. We are able to give our customers and prospective
customers the latest information about the products and services we offer from
the convenience of their computer. Please visit our web site at: www.cbnk.com.
For our customers' convenience, Community Bank offers applications for
mortgage and consumer loans online.
7
<PAGE>
TODAY'S ATTITUDE DETERMINES TOMORROW'S SUCCESS
Times change. We here at Community Bank know we have to keep up or be left
behind. Technological advancement moves at lightning speed. As our customers'
needs change, we will be there to respond to those changes with the best of
technology and the best of service.
Our customers are on the move and they need more convenience to meet their
needs. In 1998, we expanded our coverage in Virginia Beach with a second office
on Nevan Road. This larger coverage area enables us to become even more
convenient to our existing customers throughout the Tidewater area.
In Staunton, 1999 will bring a second office on Richmond Road. This is our
first office outside the downtown area. We're excited to be able to extend our
services to a much broader portion of the market.
To increase our mortgage capabilities and to reach more customers, we've
established a new mortgage corporation, headquartered in Richmond. In 1998, that
subsidiary opened new branch operations in Waynesboro and Virginia Beach, so
that now our customers everywhere can enjoy these expanded capabilities. As we
move into the new millennium, we will continue to broaden the coverage of this
operation to meet the mortgage needs of a rapidly growing and changing market.
In addition to our new mortgage capabilities, expect to see a much broader
range of products and services as we work hard to keep abreast of our customers'
changing needs. The bank continues to build its technology framework for many
future services. We will also be expanding the services available to our
business customers. And we continue to offer the proven products our customers
request. Services like totally free checking, Kids Club and great rates,
continue to be in high demand. We're refining our checking line-up with the
addition of the Ultimate, Ultimate 50, and Ultimate 50 Plus accounts.
Our attitude toward the future is definitely one of progress. But we
realize that our progress and our success is in direct proportion to the success
of our customers. That's why we are doing everything in our power to help make
our customers successful today, so that we will all be successful in the new
millennium.
KIDS' CLUB
When your child opens a new savings account at Community Bank, we make a
contribution to his/her future. Your child can choose a toy duck from our pond;
the amount on the bottom of the duck will be credited to his/her new account.
And your child keeps the duck and receives information about Community Bank,
along with stickers, a pen and a pencil. Open to children age 12 and under.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
INTRODUCTION
Community Financial Corporation is a Virginia corporation. Certain of the
information presented herein relates to Community Bank, a wholly owned
subsidiary of Community Financial. References in this report to "we", "us" and
"our" refer to Community Financial and/or Community Bank as the context
requires.
Community Financial and Community 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
and the Federal Deposit Insurance Corporation.
Our 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. Like other financial institutions, we are subject to interest rate risk
to the degree that our interest-bearing liabilities, primarily deposits and
borrowings with short- and medium-term maturities, mature or reprice more
rapidly, or on a different basis, than our interest-earning assets, primarily
loans with longer term maturities than deposits and borrowings. 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 non-interest income. Our 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.
DISCLOSURE REGARDING
FORWARD LOOKING
STATEMENTS
We may from time to time make written or oral forward-looking statements.
These forward-looking statements may be contained in this Annual Report to
Shareholders, in our filings with the Securities and Exchange Commission,
including our Annual Report on Form 10-KSB and its exhibits, and in other
communications by us, which are made in good faith pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to justify
forward-looking statements.
Forward-looking statements include statements with respect to our
beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions, that are subject to change based on various other factors beyond our
control, could cause our financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements:
. the strength of the United States economy in general and the
strength of the local economies in which we conduct our operations;
. the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
. inflation, interest rate, market and monetary fluctuations;
. the timely development of and acceptance of new products and
services of the bank and the perceived overall value of these
products and services by users, including the features, pricing and
quality compared to competitors' products and services;
. the willingness of users to substitute competitors' products and
services for our products and services;
. the impact of changes in the financial services' laws and
regulations (including laws concerning taxes, banking, securities
and insurance);
. the impact of technological changes including Year 2000 issues;
. acquisitions;
. changes in consumer spending and saving habits; and
. our success at managing the risks involved in the foregoing.
This list of important factors is not exclusive. Additional discussion
of factors affecting our business and prospectus is contained in our periodic
filings with the Securities and Exchange Commission. We do not undertake to
update any forward-looking statement, whether written or oral that may be made
from time to time by or on behalf of Community Financial or Community Bank.
ASSET/LIABILITY
MANAGEMENT
Management believes it is critical to manage the relationship between
interest rates and the effect on our net portfolio value. 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 our 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 net
portfolio value which is acceptable given certain interest rate changes.
9
<PAGE>
COMMUNITY FINANCIAL CORPORATION
Presented in the following table, as of March 31, 1999 and 1998, is an
analysis of Community Bank's interest rate risk as measured by changes in net
portfolio value 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 Office of Thrift Supervision
regulations, based on the assumptions described below. The Board limits have
been established with consideration of the dollar impact of various rate changes
and our strong capital position. As illustrated in the table, net portfolio
value is slightly 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, we do not experience a significant rise in market value for these loans
because borrowers prepay at relatively high rates. The value of our deposits and
borrowings change in approximately the same proportion in rising or falling rate
scenarios.
March 31, 1999 March 31, 1998
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% $-2,488 -8% $-1,296 -4%
+200 -15 -1,150 -4 -251 -1
+100 -10 -324 -1 217 1
-0- -- -- -- -- --
-100 -10 220 1 -506 -2
-200 -15 636 2 -825 -3
-300 -25 1,466 5 -773 -3
Management continually works to maintain a neutral position regarding
interest rate risk. In the current interest rate environment, our 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 our interest earning
assets. As of March 31, 1999, approximately 70% of our gross loan portfolio
consisted of loans which reprice during the life of the loan. We emphasize
adjustable rate mortgages and have increased our portfolio of short term
consumer loans. Longer term fixed-rate mortgage loans, 20 to 30 years, are
generally sold in the secondary market. We currently are originating fixed-rate
loans for immediate sale only through our subsidiary, Community First Mortgage.
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. We have also used Federal Home Loan Bank advances to provide funding
for loan originations and to provide liquidity as needed.
As with any method of measuring interest rate risk, certain shortcomings
are inherrent in the method of anlaysis 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 adjustable rate mortgage 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.
10
<PAGE>
COMMUNITY FINANCIAL CORPORATION
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table sets forth certain information relating to categories of our
interest-earning assets and interest-bearing liabilities for the periods
indicated. All average balances are computed on a monthly basis. Non-accruing
loans have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
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 $162,861 $ 13,666 8.40% $158,057 $ 13,344 8.44% $144,409 $ 12,189 8.44%
Investment securities
and other investments 13,459 592 4.40 11,665 605 5.18 10,700 589 5.51
-------- -------- -------- -------- -------- --------
Total interest-earning
assets 176,320 14,258 8.09 169,722 13,949 8.22 155,109 12,778 8.24
-------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES
Deposits 141,789 6,387 4.50 126,689 5,845 4.61 111,307 5,055 4.54
FHLB advances and
other borrowings 16,445 945 5.75 25,572 1,471 5.75 26,321 1,481 5.63
-------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities 158,234 7,332 4.64 152,261 7,316 4.80 137,628 6,536 4.75
-------- -------- -------- -------- -------- --------
Net interest income/
interest rate spread $ 6,926 3.45 $ 6,633 3.42 $ 6,242 3.49
======== ======== ========
Net interest-earning
assets/net yield on
interest-earning assets $ 18,086 3.83 $ 17,461 3.80 $ 17,481 3.57
======== ======== ========
Percentage of interest-earning
assets to interest-
bearing liabilities 111.43% 111.47% 112.70%
</TABLE>
11
<PAGE>
COMMUNITY FINANCIAL CORPORATION
The following table sets forth our interest rate spread at the dates indicated.
March 31,
----------------------------
1999 1998 1997
---- ---- ----
YIELD ON
Loans 8.02% 8.29% 8.15%
Investment securities and other investments 4.50% 4.49% 6.08%
Total interest-earning assets 7.74% 8.04% 8.03%
COST OF
Deposits 4.32% 4.60% 4.54%
Fhlb advances and other borrowings 5.60% 5.77% 6.85%
Total interest-bearing liabilities 4.46% 4.74% 4.96%
INTEREST RATE SPREAD 3.28% 3.30% 3.07%
---- ---- ----
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 our
interest income and expenses 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,
1999 v. 1998 1998 v. 1997
-------------------------------------- ----------------------------------
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 $ 385 $ (63) $ 322 $ 1,155 $ -- $ 1,155
Investments 78 (91) (13) 55 (39) 16
------- ------- ------- ------- ------- -------
Total interest-earnings assets $ 463 $ (154) $ 309 $ 1,210 $ (39) 1,171
======= ======= ------- ======= ======= -------
INTEREST-BEARING LIABILITIES
Deposits $ 681 (139) 542 $ 701 $ 89 790
FHLB advances and other borrowings (526) -- (526) (41) 31 (10)
------- ------- ------- ------- -------
Total interest-bearing liabilities $ 155 $ (139) 16 $ 660 $ 120 780
======= ======= ------- ======= ======= -------
NET INTEREST INCOME $ 293 $ 391
======= =======
</TABLE>
12
<PAGE>
COMMUNITY FINANCIAL CORPORATION
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.
We maintain 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, 1999, total non-performing assets were $1,518,000 or .76% of
total assets compared to $938,000 or .51% at March 31, 1998. Non-performing
assets at March 31, 1999 were comprised of six single family residential
properties, a commercial property, one multi-unit apartment building, one
unsecured consumer loan and various smaller auto loans, which were more than
ninety days past due, real estate acquired through foreclosure of two single
family dwellings, four rental properties of two units each and a five acre lot.
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 our level of non-performing
assets may not increase in the future.
We maintain an allowance for loan losses to provide for estimated
potential losses in our 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 1999, we
increased our allowance for loan losses $199,000 to $1,316,000 due to our
increased loan portfolio, especially in commercial real estate, construction and
consumer loans. Management believes that the loan loss reserve is adequate. We
have had net charge-offs to our allowance for loan losses of $161,000, $421,000,
and $142,000, for the years ended March 31, 1999, 1998 and 1997, respectively.
The decrease in net charge-offs from 1998 to 1999 is related primarily to losses
on two loan customers in fiscal 1998. 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.
FINANCIAL CONDITION
Total assets increased by $16.9 million to $200.8 million at March 31,
1999 primarily as a result of loans receivable which increased $8.9 million. The
increase in loans receivable was funded by an increase in deposits of $14.9
million. The increase in deposits can be attributed to increases in both time
deposits and checking accounts of $4.9 million. Management believes the increase
in time deposits is primarily attributable to maintaining competitive rates and
the increase in checking accounts is related to the continued offering of a free
checking account product. The increase in loans receivable was due to the
origination of commercial and construction real estate loans and more
competitive pricing on consumer loans.
Stockholders' equity increased $869,000 to $26.4 million at March 31, 1999
compared to March 31,1998. The increase was the result of $1.8 million of net
income in fiscal 1999, partially offset by a decline in net unrealized gains of
$306,000 on available for sale securities and dividends paid to stockholders of
$796,000.
RESULTS OF OPERATIONS
Our results of operations depend primarily on the level of our net
interest income and noninterest income and the level of our 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, 1999 AND 1998
GENERAL. Net income for the year ended March 31, 1999 was $1,848,000 or
$.71 diluted earnings per share compared to $1,805,000 or $.70 diluted earnings
per share for the year ended March 31, 1998. Net income increased due primarily
to an after tax gain on the sale of available for sale securities of $725,000
during the year ended March 31, 1999.
Our return on average assets was .96% for the fiscal year ended 1999
compared to 1.03% for the fiscal year ended 1998. Return on average equity was
7.12% for fiscal year ended 1999 compared to 7.39% for fiscal year 1998. Average
equity to average assets was 13.52% for the fiscal year ended 1999 compared to
13.89% for the fiscal year ended 1998. We paid dividends to stockholders of
$796,000 during 1999 and $715,000 during fiscal 1998 representing a dividend
payout ratio of 43.11% and 39.60% respectively.
INTEREST INCOME. Total interest income increased to $14,258,000 for the
year ended March 31, 1999 as compared to $13,949,000 for the year ended March
31, 1998. The increase in total interest income can be attributed to an increase
in the dollar volume of interest-earning assets, primarily $8.9 million in
13
<PAGE>
COMMUNITY FINANCIAL CORPORATION
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 8.22% in fiscal 1998 to 8.09% for the current fiscal year due
primarily to a more competitive and lower rate environment.
INTEREST EXPENSE. Total interest expense increased to $7,333,000 for the
year ended March 31, 1999 from $7,316,000 for the year ended March 31, 1998.
While the cost of funds decreased from 4.80% for the year ended March 31, 1998
to 4.64% for the current year, the increase in interest expense is attributable
to an increase in the average balance of deposits during the fiscal year. The
increase in deposit balances was due to increases in both certificates of
deposit and checking accounts for the current fiscal year. The increase in
interest expense related to deposits was partially offset by the lower average
balance of Federal Home Loan Bank advances during the year.
PROVISION FOR LOAN LOSSES. The provision decreased to $360,000 for the
fiscal year ended March 31, 1999 from $499,000 for the fiscal year ended March
31, 1998 due primarily to a decrease in charge-offs for fiscal 1999. We monitor
our loan loss reserve on a quarterly basis and make allocations as necessary.
Management believes that the level of our loan loss reserve is adequate. As of
March 31, 1999, the total allowance for loan losses amounted to $1,316,000. At
March 31, 1999, our total allowance as a percentage of total loans receivable
was .77% and as a percentage of total non-performing loans was 113%.
NONINTEREST INCOME. Noninterest income increased to $2,638,000 in fiscal
1999 as compared to $767,000 for the year ended March 31, 1998, primarily due to
the gain on the sale of securities of $1,225,000.
NONINTEREST EXPENSE. Total noninterest expense increased to $6,028,000 for
the year ended March 31, 1999 from $4,017,000 for the year ended March 31, 1998
due primarily to compensation and other overhead related to the mortgage banking
subsidiary, the conversion of our computer system and the opening of an
additional branch in the Hampton Roads region in November 1998.
TAXES. Total taxes increased to $1,328,000 during the year ended March 31,
1999 from $1,079,000 during fiscal 1998. The effective tax rate for the year
ended March 31, 1999 was 41.8% as compared to 37.4% for the year ended March 31,
1998. The increase in taxes is attributable in part to an increase in the
effective state income taxes.
COMPARISON OF YEARS ENDED MARCH 31, 1998 AND 1997
GENERAL. Net income for the year ended March 31, 1998 was $1,805,000 or
$.70 per share compared to $1,735,000 or $.68 per share for the year ended March
31, 1997. Net income increased due primarily to the increase in net interest
income of $391,000 during the year ended March 31, 1998.
Our return on average assets was 1.03% for the fiscal year ended 1998
compared to 1.06% for the fiscal year ended 1997. Return on average equity was
7.39% for the fiscal year ended 1998 compared to 7.67% for the fiscal year ended
1997. Average equity to average assets was 13.89% for the fiscal year ended 1998
compared to 13.81% for the fiscal year ended 1997. We paid dividends to
stockholders of $715,000 during 1998 and $674,000 during fiscal 1997
representing a dividend payout ratio of 39.60% and 38.69%, respectively.
INTEREST INCOME. Total interest income increased to $13,949,000 for the
year ended March 31, 1998 as compared to $12,778,000 for the year ended March
31, 1997. The increase in total interest income can be attributed to an increase
in the dollar volume of interest-earning assets, primarily $13.6 million in
mortgage and conumer loans which was offset by a decrease in the yield on
interest earning assets. Average yields on total interest-earning assets
remained relatively constant at 8.22% in fiscal 1998.
INTEREST EXPENSE. Total interest expense increased to $7,316,000 for the
year ended March 31, 1998, from $6,536,000 for the year ended March 31, 1997.
While the cost of funds increased from 4.75% for the year ended March 31, 1997
to 4.80% for the year ended March 31, 1999, the increase in interest expense is
attributable primarily to an increase in the average balance of deposits during
the fiscal year. The increase in deposit balances was due to increases in both
certificates of deposit and checking accounts for the current fiscal year.
PROVISION FOR LOAN LOSSES. The provision increased to $499,000 for the
fiscal year ended March 31, 1998 from $181,000 for the fiscal year ended March
31, 1997. We monitor our loan loss reserve on a quarterly basis and make
allocations as necessary. Management believes that the level of our loan loss
reserve is adequate. As of March 31, 1998, the total allowance for loan losses
amounted to $1,117,000. At March 31, 1998, our total allowance as a percentage
of total loans receivable was .68% and as a percentage of total non-performing
loans was 119%.
NONINTEREST INCOME. Noninterest income increased to $767,000 in fiscal
1998 as compared to $519,000 for the year ended March 31, 1997, primarily due to
an increase in the number of checking accounts and the related charges. We
14
<PAGE>
COMMUNITY FINANCIAL CORPORATION
increased marketing in regard to our checking account products and increased our
checking account base by approximately 1,400 accounts during the year ended
March 31, 1998.
NONINTEREST EXPENSE. Total noninterest expense increased to $4,017,000
during the year ended March 31, 1998 from $3,806,000 for the year March 31, 1997
due primarily to the opening of a branch in Virginia Beach, Virginia in April,
1997 and the organization of a mortgage banking subsidiary in November, 1997.
The increase in noninterest expense in the fiscal year 1998 was offset in part
by a special one-time assessment by the Federal Deposit Insurance Corporation of
$671,000 in fiscal 1997.
TAXES. Total taxes increased to $1,079,000 during the year ended March 31,
1998 from $1,040,000 during fiscal 1997. The effective tax rate for the year
ended March 31, 1998 was 37.4% as compared to 37.5% for the year ended March 31,
1997. The increase in taxes is attributable to an increase in income before
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds are customer deposits, advances from the
Federal Home Loan Bank of Atlanta, amortization and prepayment of loans,
proceeds from the sale of loans and funds provided from operations. Management
maintains investments in liquid assets based upon its assessment of (i) our need
for funds, (ii) expected deposit flows, (iii) the yields available on short-term
liquid assets, (iv) the liquidity of the our loan portfolio and (v) the
objectives of our asset/liability management program.
Liquidity represents our ability to meet our 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. Office of Thrift Supervision
regulations currently require us to maintain an average daily balance of liquid
assets equal to at least 4% of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. At
March 31, 1999, our liquid asset ratio was 9.9%.
Our dominant source of funds during the year ended March 31, 1999 was from
deposits which increased by $14.9 million due primarily to an increase in both
time deposits and demand deposits of $4.9 million and $10 million, respectively.
Federal Home Loan Bank advances increased for the year ended March 31, 1999 by
$1.0 million. Management believes the increase in time deposits is primarily
attributable to maintaining competitive rates and the increase in checking
accounts is related to the continued offering of a free checking account.
Our cash increased $2.9 million from $7.3 million at March 31, 1998 to
$10.1 million at March 31, 1999. The increase in cash was related to the
increase in deposits.
At March 31, 1999, we had commitments to purchase or originate $25.0
million of loans. Certificates of deposit scheduled to mature in one year or
less at March 31, 1999, totaled $78.4 million. Based on its historical
experience, management believes that a significant portion of such deposits will
remain with us. Management further believes that loan repayments and other
sources of funds will be adequate to meet our foreseeable short- and long-term
liquidity needs.
At March 31, 1999, we had tangible and core capital of 11.7% of adjusted
total assets, which was in excess of their respective requirements of 1.5% and
4.0%. We also had risk-based capital of 15.6% of risk weighted assets, which
also exceeded its requirement of 8.0%.
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 our
assets and liabilities are critical to the maintenance of acceptable performance
levels.
ACCOUNTING PRONOUNCEMENTS
For a discussion of certain accounting pronouncements implemented by us
during fiscal 1999 and new pronouncements which will be implemented in the
future, see Summary of Accounting Policies to Consolidated Financial Statements.
15
<PAGE>
COMMUNITY FINANCIAL CORPORATION
YEAR 2000 ISSUES
The approaching millenium is causing organizations of all types to review
their computer systems for the ability to properly accommodate the year 2000.
When computer systems were first developed, two digits wer used to designate the
year in date calculations and "19" was assumed for the century. As a result,
there is significant concern about the integrity of date sensitive calculations
when the calendar rolls over to January 1, 2000. An older system could interpret
01/01/00 as January 1, 1900 potentially causing major problems calculating
interest, payment, delinquency or maturity dates. An internal committee
comprised of senior officers and management has been formed to address the
potential risk that the year 2000 poses for Community Bank. This committee
reports to the full board of directors quarterly or more often as warranted.
Financial institution regulators recently have increased their focus upon
year 2000 compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council has issued several interagency statements on
Year 2000 Project Management Awareness. These statements require financial
institutions to, among other things, examine the year 2000 issue with respect to
their customers, suppliers and borrowers. These statements also require each
federally insured financial institution to survey its exposure, measure its risk
and prepare a plan to address the year 2000 issue. In addition, the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository institutions to assure resolution of any year 2000 problems.
Accurate data processing is essential to our operations and a lack of
accurate processing by our vendors or us could have a significant adverse impact
on our financial condition and results of operations. We believe that our
inhouse data processing operation will function properly on and after January 1,
2000. A contingency plan, however, has been developed by Community Bank in the
unlikely event that our data processing operation does not function properly on
or after January 1, 2000. This plan focuses on conducting operations in a manual
mode, including the recording of transactions on spreadsheets.
We have also received year 2000 updates from most of our material,
non-information system providers, including but not limited to security cameras,
credit card and ATM card processors, the vault alarm, check printers, telephone
systems, participation loan servicers, and institutions we invest through or
with. Based on these updates, we do not anticipate any significant year 2000
issues. Our future expense to be year 2000 compliant is immaterial.
In addition to expenses related to our own systems, we could incur losses
if loan payments are delayed due to year 2000 problems affecting any of our
significant borrowers or impairing the payroll systems of large employees in our
market area. We have been communicating with our vendors to assess their
progress in evaluating their systems and implementing any corrective measures
required by them to be prepared for the year 2000. We have been advised by such
parties that they have plans in place to address and correct the issues
associates with the year 2000 problem; however, no assurance can be given as to
the adequacy of these plans or to the timeliness of their implementation. We do
consider the year 2000 issue as part of our underwriting criteria.
16
<PAGE>
BDO [LOGO] BDO Seidman, LLP 300 Arboretum Place, Suite 520
Accountants and Consultants Richmond, Virginia 23236
Telephone: (804) 330-3092
Fax: (804) 330-7753
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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1999. 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
misstatements. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1999 in conformity with generally accepted accounting
procedures.
May 7, 1999
/s/ BDO Seidman, LLP
17
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash (including interest bearing deposits of
approximately ($6,407,000 and $2,866,000) $ 10,131,157 $ 7,266,145
Securities (Note 1)
Held to maturity 5,561,314 3,184,241
Available for sale 3,543,092 3,905,055
Investment in Federal Home Loan Bank stock,
at cost (Note 6) 1,508,200 1,600,000
Loans receivable, net (Notes 2 and 6) 171,413,721 162,471,219
Real estate owned, net 351,733 303,365
Property and equipment, net (Note 3) 6,050,785 3,634,223
Accrued interest receivable 1,164,745 1,031,789
Prepaid expenses and other assets 1,085,272 498,137
- -----------------------------------------------------------------------------------------
$200,810,019 $183,894,174
- -----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 4) $153,015,076 $138,164,173
Advances from Federal Home Loan Bank (Note 6) 19,000,000 18,000,000
Advance payments by borrowers
for taxes and insurance 190,421 175,053
Other liabilities (Notes 7 and 11) 2,220,794 2,040,188
- -----------------------------------------------------------------------------------------
Total liabilities 174,426,291 158,379,414
- -----------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11, 12, and 13)
- -----------------------------------------------------------------------------------------
Stockholders' Equity (Notes 9 and 12)
Preferred stock, $.01 par value, authorized
3,000,000 shares, none outstanding -- --
Common stock, $.01 par value, 10,000,000 authorized
shares, 2,572,146 and 2,559,446 shares outstanding 25,721 25,594
Additional paid-in capital 4,897,207 4,773,634
Retained earnings 19,395,509 18,344,373
Accumulated other comprehensive income (Note 8) 2,065,291 2,371,159
- -----------------------------------------------------------------------------------------
Total stockholders' equity 26,383,728 25,514,760
- -----------------------------------------------------------------------------------------
$200,810,019 $183,894,174
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
18
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 13,665,754 $ 13,344,490 $ 12,188,714
Investment securities 348,965 410,909 471,864
Other investments 243,468 193,908 117,409
- --------------------------------------------------------------------------------------------
Total interest income 14,258,187 13,949,307 12,777,987
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits (Note 4) 6,387,333 5,844,535 5,054,884
Borrowed money 945,198 1,471,490 1,480,747
- --------------------------------------------------------------------------------------------
Total interest expense 7,332,531 7,316,025 6,535,631
- --------------------------------------------------------------------------------------------
Net interest income 6,925,656 6,633,282 6,242,356
PROVISION FOR LOAN LOSSES (NOTE 2) 360,000 498,764 180,561
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 6,565,656 6,134,518 6,061,795
- --------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges, fees and commissions 1,327,680 757,462 509,748
Gain on sale of securities 1,224,721 -- --
Gain (loss) on sale of loans 81,730 (4,335) 6,915
Other 3,449 13,463 2,079
- --------------------------------------------------------------------------------------------
Total noninterest income 2,637,580 766,590 518,742
- --------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Compensation and employee benefits
(Notes 11 and 12) 3,306,117 1,956,187 1,333,550
Occupancy 826,089 481,063 399,290
Data processing 486,775 407,925 349,150
BIF/SAIF premium disparity
assessment (Note 9) -- -- 670,765
Insurance 82,317 74,222 189,143
Other 1,326,435 1,097,558 863,841
- --------------------------------------------------------------------------------------------
Total noninterest expense 6,027,733 4,016,955 3,805,739
- --------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,175,503 2,884,153 2,774,798
- --------------------------------------------------------------------------------------------
INCOME TAXES (NOTE 7)
Current 1,175,168 1,013,576 971,179
Deferred 152,789 65,094 68,885
- --------------------------------------------------------------------------------------------
Total income taxes 1,327,957 1,078,670 1,040,064
- --------------------------------------------------------------------------------------------
NET INCOME $ 1,847,546 $ 1,805,483 $ 1,734,734
- --------------------------------------------------------------------------------------------
EARNINGS PER SHARE (NOTES 10 AND 12)
Basic $ .72 $ .71 $ .68
Diluted $ .71 $ .70 $ .68
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
19
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders'
Stock Capital Earnings Income Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996 $ 12,697 $ 4,651,634 $ 16,206,237 $ 1,029,412 $ 21,899,980
Comprehensive income
Net income -- -- 1,734,734 -- 1,734,734
Unrealized gain on available
for sale securities (see Note 8) -- -- -- 311,409 311,409
Total comprehensive income -- -- -- -- 2,046,143
Cash dividends, $.26 per share -- -- (674,226) -- (674,226)
Exercise of stock options (Note 12) 56 65,043 -- -- 65,099
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 12,753 4,716,677 17,266,745 1,340,821 23,336,996
Comprehensive income
Net income -- -- 1,805,483 -- 1,805,483
Unrealized gain on available
for sale securities (see Note 8) -- -- -- 1,030,338 1,030,338
Total comprehensive income -- -- -- -- 2,835,821
Two-for-one stock split 12,797 -- (12,797) -- --
Cash dividends, $.28 per share -- -- (715,058) -- (715,058)
Exercise of stock options (Note 12) 44 56,957 -- -- 57,001
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 25,594 4,773,634 18,344,373 2,371,159 25,514,760
Comprehensive income
Net income -- -- 1,847,546 -- 1,847,546
Change in unrealized gain on
available for sale securities
(see Note 8) -- -- -- (305,868) (305,868)
Total comprehensive income -- -- -- -- 1,541,678
Cash dividends, $.31 per share -- -- (796,410) -- (796,410)
Exercise of stock options (Note 12) 127 123,573 -- -- 123,700
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 $ 25,721 $ 4,897,207 $ 19,395,509 $ 2,065,291 $ 26,383,728
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,847,546 $ 1,805,483 $ 1,734,734
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 360,000 498,764 180,561
Depreciation 394,438 234,007 216,462
Amortization of premium and accretion
of discount on securities, net 5,238 (586) (3,683)
Increase (decrease) in net deferred loan
origination fees 21,510 (115,671) (33,289)
(continued)
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
20
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans originated for resale $(19,528,255) $ (4,805,000) $ (1,587,470)
Proceeds from loan sales 19,130,400 3,816,000 1,568,470
Increase in deferred income taxes (46,012) (24,394) 66,316
Loss (gain) on sale of real estate -- (9,755) 4,274
Gain on sale of securities (1,224,721) -- --
Increase (decrease) in other assets (720,091) (206,452) 69,579
Increase (decrease) in other liabilities 241,986 464,334 317,805
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 482,039 1,656,730 2,533,759
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of held to maturity
securities 1,829,429 3,742,267 2,071,892
Purchase of held to maturity securities (4,175,685) (2,359,982) (1,375,234)
Proceeds of sale of securities 1,244,761 -- --
Net increase in loans (9,282,876) (13,232,234) (7,494,061)
Purchases of property and equipment (2,811,000) (326,123) (66,527)
Proceeds from sale of real estate owned 308,351 152,043 145,002
Redemption of FHLB stock 91,800 -- 150,000
Purchase of FHLB stock -- (200,000) (200,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (12,795,220) (12,224,029) (6,768,928)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in certificates of deposit 4,887,457 17,787,000 4,998,000
Net increase (decrease) in savings and
checking deposits 9,963,446 3,782,288 2,095,424
Proceeds from issuance of common stock 123,700 57,001 65,099
Dividends paid (796,410) (715,058) (674,226)
Proceeds from advances 8,000,000 76,000,000 33,000,000
Repayments of advances (7,000,000) (84,000,000) (34,000,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 15,178,193 12,911,231 5,484,297
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH
EQUIVALENTS 2,865,012 2,343,932 1,249,128
CASH AND CASH EQUIVALENTS - beginning of year 7,266,145 4,922,213 3,673,085
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - end of year $ 10,131,157 $ 7,266,145 $ 4,922,213
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
- -----------------------------------------------------------------------------------------------------------------------------
Cash payments of interest expense $ 7,363,055 $ 7,340,052 $ 6,553,835
- -----------------------------------------------------------------------------------------------------------------------------
Cash payments of income taxes $ 1,413,415 $ 1,207,076 $ 852,296
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------------
Transfers from loans to real estate
acquired through foreclosure $ 412,862 $ 331,237 $ 131,718
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
21
<PAGE>
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") and Community First Mortgage
Corporation, a wholly-owned subsidiary of 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.
Community First Mortgage Corporation originates mortgage loans to sell to
third-party investors.
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
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.
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
22
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
the accrual of interest is stopped, previously ac-crued but uncollected interest
income is reversed. Thereafter, interest is recognized only as cash is received
until the loan is reinstated to accrual status.
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.
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. 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. 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.
Sale of Loans and Participation in Loans
- --------------------------------------------------------------------------------
The Corporation is able to generate funds by selling loans and
participations in loans to Freddie Mac 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.
The Corporation allocates the cost of acquiring or originating morgage
loans between the morgage 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 three 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
23
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
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.
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 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 six years. The residential loan
requirement exception was met for the taxable years ended March 31, 1997 and
1998, therefore the income will be includable over the six-year period beginning
with the year ending March 31, 1999.
New Accounting Pronouncements
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
an entity recognized all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain requirements are met, a derivative may be specifically designated as a
hedge and an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999 and
requires application prospectively. Earnings Per Share Basic earnings per share
include 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 stock
options that could share in the earnings of the Corporation. The computation of
basic and diluted earnings per share is presented in Note 10.
Comprehensive Income
- --------------------------------------------------------------------------------
For the year ended March 31, 1999, the Corporation adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This statement establishes rules for the reporting of comprehensive income
and its components. Comprehensive income consists of net income and unrealized
gains on available for sale securities and is presented in the Consolidated
Statements of Stockholders' Equity. The adoption of SFAS 130 had no impact on
total shareholders' equity. Prior year financial statements have been
reclassified to conform to SFAS 130 requirements.
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, 1999 presentation.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SECURITIES
A summary of the amortized cost and estimated market values of securities is as
follows:
March 31, 1999
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------
Held to Maturity
United States government
and agency obligations $2,314,606 $ 1,952 $ 15,630 $2,300,928
Corporate obligations 250,000 -- 2,500 247,500
Other 2,996,708 34,893 2,183 3,029,418
- --------------------------------------------------------------------------------
5,561,314 36,845 20,313 5,577,846
Available for Sale
Federal Home Loan Mortgage
Corporation stock 60,565 3,482,527 -- 3,543,092
- --------------------------------------------------------------------------------
$5,621,879 $3,519,372 $ 20,313 $9,120,938
- --------------------------------------------------------------------------------
March 31, 1998
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------
Held to Maturity
United States government
and agency obligations $1,860,574 $ 6,069 $ 749 $1,865,894
Corporate obligations 1,298,644 30,471 -- 1,329,115
Other 25,023 736 -- 25,759
- --------------------------------------------------------------------------------
3,184,241 37,276 749 3,220,768
Available for Sale
Federal Home Loan Mortgage
Corporation stock 80,605 3,824,450 -- 3,905,055
- --------------------------------------------------------------------------------
$3,264,846 $3,861,726 $ 749 $7,125,823
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of securities at March 31, 1999,
by contractual maturity, are shown below:
March 31, 1999
- --------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
- --------------------------------------------------------------------------------
Held to Maturity
Due in one year or less $ -- $ --
Due in one through five years 5,561,314 5,577,846
Other -- --
- --------------------------------------------------------------------------------
5,561,314 5,577,846
- --------------------------------------------------------------------------------
Available for Sale
Federal Home Loan Mortgage
Corporation stock 60,565 3,543,092
- --------------------------------------------------------------------------------
$5,621,879 $9,120,938
- --------------------------------------------------------------------------------
25
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
2. LOANS RECEIVABLE
Loans receivable are summarized as follows:
March 31, 1999 1998
- --------------------------------------------------------------------------------
Residential real estate $118,216,118 $113,526,323
Commercial real estate 17,034,359 21,032,004
Construction and land 16,116,479 10,070,882
Consumer 25,880,738 22,209,117
- --------------------------------------------------------------------------------
177,247,694 166,838,326
Less
Loans in process 4,249,251 3,002,655
Deferred loan fees, net 268,834 247,321
Allowance for loan losses 1,315,888 1,117,131
- --------------------------------------------------------------------------------
Net real estate loans $171,413,721 $162,471,219
- --------------------------------------------------------------------------------
Loans serviced for others amounted to approximately $6,919,439 and $8,792,00 at
March 31, 1999 and 1998, respectively. The loans were not included in the
accompanying consolidated statements of financial condition.
The weighted average interest rate on loans receivable was approximately 8.02%
and 8.29% at March 31, 1999 and 1998, respectively.
A summary of the allowance for loan losses is as follows:
Year Ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $ 1,117,131 $ 1,039,013 $ 1,000,278
Provision charged to expense 360,000 498,764 180,561
Losses charged to the allowance,
net of recoveries (161,243) (420,646) (141,826)
- --------------------------------------------------------------------------------
Balance at end of year $ 1,315,888 $ 1,117,131 $ 1,039,013
- --------------------------------------------------------------------------------
Of the total allowance for loan losses at March 31, 1999 and 1998, approximately
$1,195,000 and $1,080,000, respectively, is not specifically allocated to
identified problem loans.
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
March 31, 1999 1998
- --------------------------------------------------------------------------------
Buildings $3,379,926 $3,275,898
Land and improvements 2,138,883 876,276
Furniture and equipment 2,218,362 977,220
Construction in progress 185,050 --
- --------------------------------------------------------------------------------
7,922,221 5,129,394
Less accumulated depreciation 1,871,436 1,495,171
- --------------------------------------------------------------------------------
$6,050,785 $3,634,223
- --------------------------------------------------------------------------------
Construction in progress represents construction costs for a new branch in
Staunton, Virginia. The cost to complete the branch is estimated at $514,000.
Construction is expected to be completed in 1999.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEPOSITS
March 31, 1999 1998
- --------------------------------------------------------------------------------
DEMAND DEPOSITS
Savings accounts $ 14,306,876 $ 12,442,584
NOW accounts 25,914,356 21,003,469
Money market deposit accounts 11,613,387 8,425,120
- --------------------------------------------------------------------------------
Total demand deposits 51,834,619 41,871,173
Time deposits 101,180,457 96,293,000
- --------------------------------------------------------------------------------
$153,015,076 $138,164,173
- --------------------------------------------------------------------------------
The aggregate amount of time deposit accounts with a minimum denomination of
$100,000 was approximately $19,478,225 and $10,255,517 at March 31, 1999 and
1998, respectively.
Time deposits mature as follows:
March 31, 1999 1998
- --------------------------------------------------------------------------------
Within one year $ 78,346,261 $ 70,867,000
One to two years 10,164,229 17,968,000
More than two years 12,669,967 7,458,000
- --------------------------------------------------------------------------------
$101,180,457 $ 96,293,000
- --------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
Year Ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Time deposits $5,202,693 $4,773,241 $4,045,717
Money market deposit and NOW accounts 782,097 701,547 649,194
Savings 402,543 369,747 359,973
- --------------------------------------------------------------------------------
$6,387,333 $5,844,535 $5,054,884
- --------------------------------------------------------------------------------
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
March 31, 1999 1998
- ---------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $ 10,131,157 $ 10,131,000 $ 7,266,145 $ 7,266,000
Securities 9,104,406 9,121,000 7,089,296 7,126,000
Loans, net of allowance for
loan losses 171,413,721 173,844,000 162,471,219 162,682,000
Financial liabilities
Deposits 153,015,076 153,402,000 138,164,173 138,369,000
Advances from Federal Home
Loan Bank 19,000,000 19,000,000 18,000,000 18,000,000
</TABLE>
27
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
Notional Fair Notional Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrecognized financial instruments
Commitments to extend credit $32,807,000 $32,807,000 $11,825,000 $11,825,000
</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.
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
For advances that mature within one year of the balance sheet date, carrying
value is considered a reasonable estimate of fair value. The fair values of all
other advances are estimated using discounted cash flow analysis based on the
Corporation's current incremental borrowing rate for similar types of advances.
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.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank are summarized as follows:
Due in year ending March 31,
2000 $4,000,000
2001 --
2002 --
2003 15,000,000
$19,000,000
The weighted average interest rate on advances was 5.60% and 5.77% at March 31,
1999 and 1998, respectively. These advances are collateralized by the investment
in FHLB stock and the Corporation's portfolio of first mortgage loans under a
Blanket Floating Lien Agreement.
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding during the year $20,000,000 $32,000,000 $28,000,000
- --------------------------------------------------------------------------------------------
Average amount outstanding during the year $14,166,667 $25,916,667 $26,541,667
- --------------------------------------------------------------------------------------------
Average interest rate during the year 5.72% 5.68% 5.58%
- --------------------------------------------------------------------------------------------
</TABLE>
7. INCOME TAXES
Deferred tax assets (liabilities), included in "Other liabilities" in the
consolidated balance sheets are as follows:
March 31, 1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets
Allowance for losses $ 98,855 $ --
Other 11,684 5,426
- --------------------------------------------------------------------------------
110,539 5,426
- --------------------------------------------------------------------------------
Deferred tax liabilities
Depreciable assets (204,388) (149,419)
FHLMC stock (1,417,236) (1,453,291)
FHLB stock (85,640) (90,852)
Allowance for losses -- (56,901)
Other -- (4,477)
- --------------------------------------------------------------------------------
(1,707,264) (1,754,940)
- --------------------------------------------------------------------------------
Net deferred tax liability $(1,596,725) $(1,749,514)
- --------------------------------------------------------------------------------
29
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
8. COMPREHENSIVE INCOME
The components of the other comprehensive income (loss) are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gain arising during
the period $ 706,301 $ 1,661,835 $ 502,273
Less: reclassification adjustments for gains
(losses) included in net income 1,224,721 -- --
- ------------------------------------------------------------------------------------------------
Other comprehensive income (loss) before tax (518,420) 1,661,835 502,273
Income tax (expense) benefit related to
items of other comprehensive income 212,552 (631,497) (190,864)
- ------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax $ (305,868) $ 1,030,338 $ 311,409
- ------------------------------------------------------------------------------------------------
</TABLE>
9. 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 4.0% 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,
1999 and 1998, relative to the OTS requirements applicable at that date:
<TABLE>
<CAPTION>
Amount Percent Actual Actual Excess
March 31, 1999 Required Required Amount Percent Amount
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tangible Capital $ 3,014,000 1.50% $23,572,000 11.70% $20,588,000
Core Capital 8,038,000 4.00 23,572,000 11.70 15,534,000
Risk-based Capital 12,011,000 8.00 24,707,000 15.66 12,696,000
Amount Percent Actual Actual Excess
March 31, 1998 Required Required Amount Percent Amount
- ---------------------------------------------------------------------------------------
Tangible Capital $ 2,742,000 1.50% $21,632,000 11.83% $18,890,000
Core Capital 7,313,000 4.00 21,632,000 11.83 14,319,000
Risk-based Capital 10,380,000 8.00 24,468,000 16.67 14,088,000
</TABLE>
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.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
Capital distributions by OTS-regulated savings banks 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" savings bank 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 savings bank is defined as a savings bank 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 savings bank 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, 1999.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act");
during the year ended March 31, 1997, 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 $.85,
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.
10. EARNINGS PER SHARE
On February 23, 1998, the Board of Directors declared a two-for-one stock split
in the form of a dividend, to be distributed March 25, 1998 to all shareholders
of record as of March 11, 1998. All applicable share and per share data have
been adjusted for the stock dividend.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS
Income available to common shareholders $1,847,546 $1,805,483 $1,734,734
- --------------------------------------------------------------------------------------
Weighted average shares outstanding 2,569,543 2,553,216 2,544,170
- --------------------------------------------------------------------------------------
Basic earnings per share $ .72 .71 .68
- --------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income available to common shareholders $1,847,546 $1,805,483 $1,734,734
- --------------------------------------------------------------------------------------
Weighted average shares outstanding 2,569,543 2,553,216 2,544,170
Diluted effect of stock options 19,960 30,415 13,379
- --------------------------------------------------------------------------------------
Total weighted average shares outstanding 2,589,503 2,583,631 2,557,549
- --------------------------------------------------------------------------------------
Diluted earnings per share $ .71 .70 .68
- --------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
11. 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:
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET PERIODIC PENSION COST
Service cost - benefits earned during the period $ 75,192 $ 46,902 $ 30,176
Interest cost on projected benefit obligations 42,780 39,573 34,077
Actual return on plan assets (38,281) (38,146) (37,684)
Net amortization and deferral (11,604) (7,275) (6,695)
- --------------------------------------------------------------------------------------------
$ 68,087 $ 41,054 $ 19,874
- --------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION
Vested benefits $ 471,078 $ 520,012 $ 441,077
Non-vested benefits 13,755 9,945 5,743
- --------------------------------------------------------------------------------------------
$ 484,833 $ 529,957 $ 446,820
- --------------------------------------------------------------------------------------------
</TABLE>
Year Ended March 31, 1999 1998
- --------------------------------------------------------------------------------
ACCRUED PENSION COST
Projected benefit obligation $ 694,077 $ 665,004
Fair value of plan assets, primarily
IPG insurance contracts 616,206 568,250
- --------------------------------------------------------------------------------
Assets in excess (deficit) of projected
benefit obligation (77,871) (96,754)
Unrecognized prior service cost 12,404 15,504
Unrecognized net (gain) loss 62,256 18,875
Unrecognized net asset (41,330) (49,597)
- --------------------------------------------------------------------------------
$ (44,451) $(111,972)
- --------------------------------------------------------------------------------
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following assumed rates were used in determining the projected benefit
obligations:
Year Ended March 31, 1999 1998
- --------------------------------------------------------------------------------
Weighted average discount rate 6.8% 6.8%
- --------------------------------------------------------------------------------
Expected long-term rate of return on
plan assets 7.5% 7.5%
- --------------------------------------------------------------------------------
Increase in future compensation levels 5.0% 5.0%
- --------------------------------------------------------------------------------
The measurement dates used to value the plan assets were December 31, 1998, and
1997.
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 October 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 $91,987, $49,967,
$43,513 for the years ended March 31, 1999, 1998, and 1997, respectively.
33
<PAGE>
12. STOCK OPTION PLAN
The Corporation has a noncompensatory stock option plan (the "Plan") designed to
provide long-term incentives to employees. All options are exercisable upon
grant date.
The following table summarizes options outstanding:
<TABLE>
<CAPTION>
Year Ending March 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
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 165,450 $10.80 127,300 $ 9.57 72,000 $ 8.02
Options granted 79,450 12.48 47,000 13.58 67,000 10.69
Options exercised (11,600) 9.66 (8,750) 6.52 (11,300) 10.00
Options forfeited (5,000) 12.19 (100) 10.00 (400) 5.76
- ---------------------------------------------------------------------------------------------------
Options outstanding at
end of year 228,300 $11.87 165,450 $10.80 127,300 $ 9.57
- ---------------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted during the year ended March
31, 1999 was $3.43.
The Corporation applies Accounting Principals Board Opinion 25 in accounting for
stock options granted to employees. Had compensation expense been determined
based upon the fair value of the awards at the grant date consistent with the
method under Statement of Financial Accounting Standards 123, the Corporation's
net earnings and net earnings per share would have been decreased to the pro
forma amounts as indicated in the following table:
Net income: 1999 1998 1997
- --------------------------------------------------------------------------------
As reported $1,847,546 $1,805,483 $1,734,734
Pro forma 1,661,854 1,696,279 1,611,900
Net income per share: Basic Diluted Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
As reported $0.72 $0.71 $0.71 $0.70 $0.68 $0.68
Pro forma 0.68 0.64 0.66 0.65 0.63 0.63
The fair value of each option granted is estimated on the date of grant using
the Black-Sholes option pricing model with the following assumptions used for
grants for the year ended March 31, 1999: a risk-free interest rate of 5.24%,
dividend yield of 2.00%, expected weighted average term of 10 years, and a
volatility of 20.00%.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1999.
Options Outstanding
- --------------------------------------------------------------------------------
Weighted Weighted
Average Average
Remaining Exercise
Number of Contractual Price
Shares Life (Years) Per Share
$ 6.50 - 9.50 30,000 7.13 $7.90
$10.00 - 15.00 198,300 8.49 12.47
228,300 8.31 $11.87
13. 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, 1999, the Corporation had outstanding
commitments to originate loans with variable interest rates of approximately
$16,969,000 and loans with fixed rates of approximately $8,485,000. In addition,
unused lines of credit amounted to approximately $15,838,000 at March 31, 1999.
LEASES
The Corporation is obligated under several noncancellable operating leases.
Future minimum annual rental commitments under the leases are as follows:
Year Ending
March 31 Amount
- --------------------------------------------------------------------------------
2000 $ 216,406
2001 223,658
2002 231,112
2003 and thereafter 869,455
- --------------------------------------------------------------------------------
$1,540,631
- --------------------------------------------------------------------------------
Total lease expense was $157,000, $31,200, and $0 for the years ended March 31,
1999, 1998, and 1997, respectively.
In the normal course of business, the Corporation has entered into employment
agreements with certain officers of the Bank.
35
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data is shown as follows: (Dollars in thousands
except per share data)
Year Ended March 31, 1999
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Total interest income $3,551 $3,557 $3,574 $3,567
Total interest expense 1,815 1,838 1,899 1,781
- --------------------------------------------------------------------------------
Net interest income 1,736 1,719 1,675 1,786
Provision for loan losses 75 25 36 224
- --------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,661 1,694 1,639 1,562
Other income 395 397 1,029 826
Other expenses 1,173 1,427 1,635 1,793
- --------------------------------------------------------------------------------
Income before income taxes 883 664 1,033 595
Income taxes 376 291 420 241
- --------------------------------------------------------------------------------
Net income $ 507 $ 373 $ 613 $ 354
- --------------------------------------------------------------------------------
Earnings per share
Basic $ .20 $ .14 $ .24 $ .14
Diluted $ .19 $ .13 $ .24 $ .15
- --------------------------------------------------------------------------------
Year Ended March 31, 1999
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Total interest income $3,363 $3,510 $3,538 $3,538
Total interest expense 1,729 1,874 1,884 1,829
- --------------------------------------------------------------------------------
Net interest income 1,634 1,636 1,654 1,709
Provision for loan losses 25 368 25 81
- --------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,609 1,268 1,629 1,628
Other income 169 174 207 217
Other expenses 986 919 984 1,128
- --------------------------------------------------------------------------------
Income before income taxes 792 523 852 717
Income taxes 297 195 313 274
- --------------------------------------------------------------------------------
Net income $ 495 $ 328 $ 539 $ 443
- --------------------------------------------------------------------------------
Earnings per share
Basic $ .20 $ .13 $ .21 $ .17
Diluted $ .20 $ .13 $ .21 $ .16
- --------------------------------------------------------------------------------
36
<PAGE>
15. 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
<TABLE>
<CAPTION>
March 31, 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment in the Bank, at equity $23,613,677 $21,745,532
Cash 651,510 1,357,422
Prepaid expenses and other assets 53,250 40,647
- ------------------------------------------------------------------------------------------
$24,318,437 $23,143,601
- ------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ -- $ --
- ------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 25,721 25,594
Additional paid-in capital 4,897,207 4,773,634
Retained earnings 19,395,509 18,344,373
- ------------------------------------------------------------------------------------------
Total stockholders' equity 24,318,437 23,143,601
- ------------------------------------------------------------------------------------------
$24,318,437 $23,143,601
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year Ended March 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Interest income $ 9,333 $ -- $ 4,900
- ------------------------------------------------------------------------------------------
Total income 9,333 -- 4,900
- ------------------------------------------------------------------------------------------
NONINTEREST EXPENSES (42,535) (55,652) (83,187)
- ------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
NET INCOME OF THE BANK (33,202) (55,652) (78,287)
Equity in undistributed net income of the Bank 1,868,145 1,840,010 1,783,140
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,834,943 1,784,358 1,704,853
Income taxes (12,603) (21,125) (29,881)
- ------------------------------------------------------------------------------------------
NET INCOME $ 1,847,546 $ 1,805,483 $ 1,734,734
- ------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
15. CONDENSED FINANCIAL INFORMATION OF THE CORPORATION (PARENT COMPANY ONLY)
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,847,546 $ 1,805,483 $ 1,734,734
Adjustments
Equity in income of the Bank (1,868,145) (1,840,010) (1,783,140)
(Increase) decrease in prepaid and other assets (12,603) (21,128) (10,224)
Increase (decrease) in other liabilities -- -- (16,823)
- ------------------------------------------------------------------------------------------------------
Net cash absorbed by operating activities (33,202) (55,655) (75,453)
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of investment securities -- -- 249,931
- ------------------------------------------------------------------------------------------------------
Net cash provided by investing activities -- -- 249,931
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends paid on common stock (796,410) (715,058) (674,226)
Stock options exercised 123,700 57,001 65,099
- ------------------------------------------------------------------------------------------------------
Net cash absorbed by financing activities (672,710) (658,057) (609,127)
- ------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (705,912) (713,712) (434,649)
Cash, beginning of year 1,357,422 2,071,134 2,505,783
- ------------------------------------------------------------------------------------------------------
Cash, end of year $ 651,510 $ 1,357,422 $ 2,071,134
- ------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
STOCKHOLDER INFORMATION
Corporate Profile
- --------------------------------------------------------------------------------
Community 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,
Community Bank converted to the stock form of organization through the sale and
issuance of 656,134 shares of its common stock. Community Financial was
organized in 1989 by us for the purpose of becoming a thrift institution holding
company. Effective January 31, 1990, Community Bank completed the holding
company reorganization of the bank and Community Financial acquired all of the
issued and outstanding shares of common stock of the bank. In 1996, the
Community Financial changed its place of incorporation to the Commonwealth of
Virginia from the State of Delaware.
The principal asset of Community Financial is the outstanding stock of
Community Bank, its wholly owned subsidiary. Community Financial presently has
no separate operations and its business consists only of the business of
Community Bank.
Community Bank's primary business is the promotion of savings through the
solicitation of savings accounts from the general public and the promotion of
home ownership through the granting of mortgage loans, primarily to finance the
purchase, construction and improvement of real estate.
Both Community Financial and Community Bank conduct business through a main
office located at 38 North Central Avenue, Staunton, Virginia 24401, a
Waynesboro office at 2934 West Main Street, Waynesboro, Virginia 22980, a
Stuarts Draft office at Routes 340 and 608, Stuarts Draft, Virginia 24477 and
two Virginia Beach offices at 5300 Kemps River Drive, Suite 100, Virginia Beach,
Virginia 23467 and 621 Nevan Road, Virginia Beach, Virginia. The Bank's
subsidiary, Community First Mortgage Corporation, conducts business at 9201
Arboretum Parkway, Suite 210, Richmond, Virginia 23236.
Form 10-KSB Report
- --------------------------------------------------------------------------------
A copy of our Annual Report on Form 10-KSB for the fiscal year ended March
31, 1999 including financial statements, as filed with the SEC will be furnished
without charge to our stockholders of record upon written request to the
Secretary, Community Financial Corporation, 38 North Central Avenue, Staunton,
Virginia 24401.
INDEPENDENT AUDITORS LEGAL COUNSEL
BDO Seidman, LLP Nelson, McPherson, Summers & Santos
300 Arboretum Place 12 North New Street
Suite 520 Staunton, Virginia 24401
Richmond, Virginia 23236
Silver, Freedman & Taff, L.L.P.
MARKET MAKERS 1100 New York Avenue, N.W.
7th Floor-East
Scott & Stringfellow, Inc. Washington, D.C. 20005
Knight Securities L.P.
Wheat First Securities, Inc. Williams, Mullen, Christian & Dobbins
Anderson & Strudwick, Inc. Two James Center
McKinnon & Company, Inc. 1021 East Cary Street
Sandler O'Neill & Partners Richmond, Virginia 23210
TRANSFER AGENt Mark A. Moorstein
Community Bank 10500 Battleview Parkway
acts as Transfer Agent for Manassas, Virginia 22110
Community Financial Corporation
39
<PAGE>
COMMON STOCK
As of May 29, 1999, there were approximately 585 holders of record of
Community Financial common stock. Community Financial common stock is traded on
the Nasdaq Stock Market under the symbol "CFFC." As of May 29, 1999, the bid and
asked prices for the common stock as reported on the Nasdaq Stock Market were
$11.13 and $11.25, 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 us for the stated periods. The information in the
table reflects inter dealer prices, without retail mark-up, mark-down or
commission and therefore may not represent actual transactions.
BID ASK
---------------- ----------------
Fiscal 1999 High Low High Low Dividend Declared
---- --- ---- --- -----------------
June 1998 $15.88 $14.25 $16.63 $14.88 $ .07
September 1998 14.50 10.75 15.25 12.00 .08
December 1998 12.25 10.75 13.00 11.00 .08
March 1999 11.50 10.63 12.13 10.88 .08
Fiscal 1998
June 1997 $10.75 $10.75 $11.75 $11.63 $ .07
September 1997 10.75 10.75 11.75 11.50 .07
December 1997 13.75 10.75 14.25 11.69 .07
March 1998 15.25 14.50 16.50 15.50 .07
Dividend payment decisions are made with consideration of a variety of
factors, including earnings, financial condition, market considerations and
regulatory restrictions. Our ability 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 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
Community Bank to Community Financial (Community Financial's primary source of
funds for the payment of dividends to its stockholders) are described in Note 9
of the Notes to Consolidated Financial Statements contained in this Annual
Report.
40
<PAGE>
Community First Mortgage Corporation
In November 1997, Community Bank established a wholly owned mortgage
banking subsidiary, Community First Mortgage Corporation, headquartered in
Richmond. Richmond was chosen because of the availability of skilled mortgage
professionals; its location is equally distant from the Bank's Shenandoah Valley
and Hampton Roads branches; and being in the center of the state, it is a
strategic location from which to expand to other areas of the state. Since its
establishment, the Mortgage Corporation has received approvals to do business
with HUD, VA, VHDA, FannieMae and numerous secondary market investors.
In December 1998, Community First opened a Staunton/Wayne-sboro loan
production office to serve the needs of those communities. In April 1999,
Community First opened a Virginia Beach loan production office. Both of these
offices are located within existing Community Bank branches and therefore can
allow the staff of the combined companies to better service our customers.
In March of 1999, the decision was made to open a wholesale mortgage
division within Community First. The wholesale division, utilizing much of the
existing staff and infrastructure, will be lending through a network of approved
mortgage correspondents in the midatlantic and southeastern states. Those loans
will be sold in the secondary market through the same means already developed by
Community First for the sale of retail mortgage loans.
In May of 1999, Community First established a construction lending division
to serve the needs of medium sized residential builders in the Richmond market.
In cooperation with the Company's permanent residential lending departments, it
is the objective of the construction lending division to develop and implement a
very attractive construction to permanent loan product.
With these accomplishments over the past year, the management of Community
First believes that the Company is now in a position to take advantage of the
excellent rate environment for residential mortgage lending and to successfully
compete with other mortgage companies in its market areas.
[PICTURE: TONY BOTTOMS, PRESIDENT (LEFT) AND HARRIL WHITEHURST,
EXECUTIVE VICE-PRESIDENT]
41
<PAGE>
[BACK COVER: PICTURES OF BRANCHES OF COMMUNITY BANK]
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Percent Jurisdiction of
of Incorporation
Parent Subsidiary Ownership or Organization
--------------------- ----------------- ----------- --------------------
Community Financial Community Bank 100% Federal
Corporation
Community Bank Community First 100% Virginia
Mortgage
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Community Financial Corporation
Staunton, VA
We hereby consent to the incorporation in the Registration Statement on Form S-8
of our report dated May 7, 1999, relating to the consolidated financial
statements of Community Financial Corporation and subsidiaries appearing in the
Corporation's Annual Report on Form 10-KSB for the year ended March 31, 1999.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Richmond, Virginia
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,131,157
<INT-BEARING-DEPOSITS> 6,407,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,543,092
<INVESTMENTS-CARRYING> 5,561,314
<INVESTMENTS-MARKET> 0
<LOANS> 171,413,721
<ALLOWANCE> 1,315,888
<TOTAL-ASSETS> 200,810,019
<DEPOSITS> 153,015,076
<SHORT-TERM> 4,000,000
<LIABILITIES-OTHER> 2,220,794
<LONG-TERM> 15,000,000
0
0
<COMMON> 25,721
<OTHER-SE> 26,358,007
<TOTAL-LIABILITIES-AND-EQUITY> 200,810,019
<INTEREST-LOAN> 13,665,754
<INTEREST-INVEST> 348,965
<INTEREST-OTHER> 243,468
<INTEREST-TOTAL> 14,258,187
<INTEREST-DEPOSIT> 6,387,333
<INTEREST-EXPENSE> 7,332,531
<INTEREST-INCOME-NET> 6,925,656
<LOAN-LOSSES> 360,000
<SECURITIES-GAINS> 1,224,721
<EXPENSE-OTHER> 6,027,733
<INCOME-PRETAX> 3,175,503
<INCOME-PRE-EXTRAORDINARY> 3,175,503
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,847,546
<EPS-BASIC> .72
<EPS-DILUTED> .71
<YIELD-ACTUAL> 0
<LOANS-NON> 1,518,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,380,000
<ALLOWANCE-OPEN> 1,195,000
<CHARGE-OFFS> 161,000
<RECOVERIES> 13,000
<ALLOWANCE-CLOSE> 1,316,000
<ALLOWANCE-DOMESTIC> 1,316,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
