[FRONT COVER]
[Community Financial Corporation Logo]
Community Financial Corporation
Our name really does say it all!
2000
ANNUAL
REPORT
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[Community Financial Corporation Logo] Contents
1 Selected Consolidated Financial Data
Community Financial Corporation 2 Letter to Stockholders
4 Board of Directors
NASDAQ Symbol - CFFC 9 Management's Discussion
17 Report of Independent Certified Public Accountants
EXECUTIVE AND ADMINISTRATIVE OFFICES: 18 Consolidated Financial Statements
38 North Central Avenue 39 Stockholder Information
Staunton, Virginia 24401
(540) 886-0796 COMMUNITY BANK EMPLOYEES
Fax: (540) 885-0643
E-Mail: [email protected] Kim Aldhizer Robert Hoffman Janet Redifer
Web Address: www.cbnk.com Judy Botkin Shirley Holbrook Doug Richard
Jennifer Boxler Lisa Hovland Pamela Ritchie
RETAIL BANKING OFFICES: Ellen Boyd Carolyn Howell Kim Roberson
Downtown Office Janet Braithwaite Kristie Johnson Dana Rogers
38 North Central Avenue Deborah Burnett Teresa Knapton Connie Savage
Staunton, Virginia 24401 Patti Butler Ellen Kutchak Ramona Savidge
(540) 886-0796 Dianne Campbell Chris Kyriakides Karen Sheehan
Martha Chandler Lisa LaMay Lynn Sisson
Richmond Road Branch Amanda Clark Patricia Lane Butch Smiley
101 Community Way Patsy Clem Teresa Layne Hope Smith
Staunton, Virginia 24401 Stacy Clemmer Tonna Lotts Lona Smith
(540) 213-3888 Michelle Coffey Marcie Mader Kimberly St. Clair
Neva Collins Virginia McCormack Susan Swisher
Waynesboro Branch Gary Davenport Pam McGovern Carey Taylor
2934 West Main Street Charlott Dean Hugh McMenamin Linda Turner
Waynesboro, Virginia 22980 Kay Dean Emilie Mehrtens Sarah Tyree
(540) 943-5000 Diana Decker Peggy Miller Glenn VanLear
Grace Dick Lyle Moffett Jeff Wagner
Stuarts Draft Branch Maria Dimapelis Lovetta Moore Tom Wagner
2658 Stuarts Draft Highway Renee Fangman Rosalie Moster Benny Werner
Stuarts Draft, Virginia 24477 Danny Fields Angel Negron, Jr. Ann Wescott
(540) 337-1514 Ariel Fix Heather Nelson Connie West-Williams
Jim Fordham Niki Orebaugh Courtney Williams
HAMPTON ROADS REGION: Kristie Frieberg Jane Orem Kathy Willis
Regional Headquarters Wanda Garrison Janice Pappas Dee Wimer
621 Nevan Road Jerry Giles Catherine Pauly Stephanie Wimer
Virginia Beach, Virginia 23451 Jacelyn Hailstalk Wendi Pell Barbara Wood
(757) 491-8810 Alisha Hammer Kristie Powell John Woods
Janalin Hill Lee Ralston-Shaner
Kemps River Branch
5300 Kemps River Drive, Suite 100
Virginia Beach, Virginia 23464
(757) 424-5600 [PICTURE]
COMMUNITY FIRST MORTGAGE CORPORATION:
Main Office
9201 Arboretum Parkway, Suite 210
Richmond, Virginia 23236
(804) 330-9800
Staunton Office
101 Community Way
Staunton, Virginia 24401
(540) 213-3770
Virginia Beach Office
621 Nevan Road, Suite 201
Virginia Beach, Virginia 23451
(757) 491-0743
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Selected Consolidated Financial Data
At March 31,
------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $243,077 $200,810 $183,894 $167,707 $159,793
Loans receivable, net 189,701 171,414 162,471 148,905 141,739
Investment securities & other earning assets(1) 38,074 17,020 8,976 9,865 10,319
Real estate owned, net 823 352 303 173 123
Deposits 158,568 153,015 138,164 116,595 109,501
Advances and other borrowed money 57,000 19,000 18,000 26,000 27,000
Stockholders' equity 25,394 26,384 25,515 23,337 21,900
Year Ended March 31,
--------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Selected Operations Data:
Total interest income $ 16,154 $ 14,258 $ 13,949 $ 12,778 $ 12,388
Total interest expense 8,715 7,332 7,316 6,536 6,516
Net interest income 7,439 6,926 6,633 6,242 5,872
Provision for loan losses 283 360 498 180 307
Net interest income after provision
for loan losses 7,156 6,566 6,135 6,062 5,565
Service charges and fees on loans 2,410 1,328 757 510 431
Gain on sale of securities 601 1,225 -- -- --
Other noninterest income(2) 185 85 9 9 25
Noninterest expenses 8,258 6,028 4,017 3,806 2,809
Income before income taxes 2,094 3,176 2,884 2,775 3,212
Income taxes 770 1,328 1,079 1,040 1,200
Net income $ 1,324 $ 1,848 $ 1,805 $ 1,735 $ 2,012
At or for the Year Ended March 31,
----------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Other Data:
Interest-earning assets to
interest-bearing liabilities 107.30% 111.43% 111.47% 112.70% 111.40%
Average interest rate spread during year 3.30 3.45 3.42 3.49 3.42
Non-performing assets to total assets .52 .76 .51 .40 .50
Return on assets (ratio of net
income to average total assets) .60 .96 1.03 1.06 1.28
Return on equity (ratio of net
income to average equity) 5.11 7.12 7.39 7.67 9.71
Equity-to-assets ratio (ratio of
average equity to average assets) 11.66 13.52 13.89 13.81 13.23
Per Share Data:
Net income - diluted $ .52 $ .71 $ 0.70 $ .68 $ .80
Book value 10.11 10.26 9.97 9.15 8.63
Dividends .32 .31 .28 .27 .21
Dividend payout ratio 61.90% 43.11% 39.60% 38.69% 26.30%
Number of full-service offices 6 5 4 4 3
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(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.
(3) Includes a special one-time assessment of approximately $671,000 to
capitalize the SAIF insurance fund.
1
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[THREE PICTURES]
Dear Stockholder:
The past year was both a challenging and exciting time for your Bank. Assets
increased by $42.3 million or 21.0%, while loans increased by $18.3 million or
10.6%, and securities purchased increased $25.5 million. Despite the growth in
interest earning assets, earnings for the year were $1.32 million or $.52 per
share down from $1.85 million or $.71 per share the previous year. However, when
nonrecurring expense and income items are deleted from both years, the result
was substantially flat earnings for this past year. The decrease in earnings was
attributed to the costs associated with the Bank's expansion efforts which began
as early as three years ago.
The Bank expanded into the Hampton Roads market in April 1997, with the
organization of a Regional Bank and branch office. In December 1998, a second
branch was opened in Virginia Beach. We are pleased to report that the Region
became profitable in April 1998, and as of this date the Region's earnings have
exceeded the Bank's investment. The Region currently has loans outstanding
exceeding $37 million with $21 million in deposits and is expected to continue
to grow and contribute to the Bank's profitability.
In November 1997, the Bank formed a mortgage banking subsidiary, Community First
Mortgage. The principal business of the Mortgage Corporation is to originate
residential fixed rate mortgages and sell them on the secondary market. Its
purpose is to increase the Bank's fee income capabilities and expand the
products and services that we can offer. Due to the highly competitive economic
environment at the time, Community First found it very difficult to attract high
volume originators and as a result, production and profitability have suffered.
It has therefore taken longer than expected for Community First to contribute to
the Bank's profitability; however, we are optimistic that Community First will
begin to contribute to the Company's earnings during the coming year. We base
our assumptions on several things. Despite rising interest rates, we have
experienced a marked improvement in loan originations during the past six months
and our current production is at its highest level. The recent accelerated
consolidation in the mortgage banking business has allowed our management to
attract a talented pool of loan originators. The unprofitable wholesale division
has been eliminated and a construction loan program has been instituted which
has proven to be profitable. Community First has a talented and dedicated staff
who are committed to the success of the operation and have taken every step
possible to insure that Community First contributes to the Bank's earnings
during the coming year.
This past year our newest Staunton office, on Richmond Road, was opened in
September. We are pleased with its performance thus far, which has produced
deposits in excess of $5 million. This location gives the Bank a much-needed
expanded presence in our market from which to better serve the Staunton
community. Please take time to visit this office if you have not already, and
allow our knowledgeable staff to show you the facility and provide you
information on our products and services.
In the midst of this expansion, the Bank also installed a new data processing
system to insure our compliance with the Y2K requirements. We're pleased to
report that the turn of the century was a "nonevent" and did not impact any of
the Bank's systems. This computer conversion was a major undertaking for your
2
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[BAR GRAPHS: EARNINGS PER SHARE -- NET INCOME -- STOCKHOLDERS' EQUITY TO AVERAGE
ASSETS -- TOTAL ASSETS]
Bank. It required many hours of preparation in 1998, with 1999 as a year of
further training and familiarization with the system.
You may have experienced some inconvenience over the past year, as a result of
this conversion; if so, we apologize. It has been said that progress does not
come without a price and this conversion was no exception.
As you can see, the past several years have been very active for your Bank. Many
times expansion impacts short-term profitability and we have experienced this
phenomenon this past year. Your Board and Management feel that it is time to
pause and refocus our energies on improving profitability. We have built an
infrastructure during the past three years that has given the Bank future growth
capacity and we now intend to take full advantage of it.
Community Bank has been built on the premise of friendly attitudes, superior
service and competitive products. We have every reason to face the future with
optimism and confidence that we will continue to emphasize these qualities in
conjunction with controlled, profitable growth.
We would like to thank the Staff, our leaders on the Board, our Customers and
Stockholders for their enthusiasm and commitment to the success of Community
Bank. We look forward to serving our communities for many years to come.
/s/ James R. Cooke, Jr. /s/ P. Douglas Richard
James R. Cooke, Jr. P. Douglas Richard
Chairman of the Board President & CEO
3
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HAMPTON ROADS BOARD OF DIRECTORS
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[PICTURE] [PICTURE]
BOARD OF DIRECTORS Pictured, left to right: Chris P. Kyriakides,
Pictured left to right: Kenneth L. Elmore, robert M. Thornton, William R. Waddell,
James R. Cooke, Jr., D.D.S., P. Douglas Richard, James R. Cooke, Jr., Cerard Harrison,
Jane C. Hickok, Charles F. Andersen, M.D., P. Douglas Richard, Leslie Watson.
Dale C. Smith, Charles W. Fairchilds Not pictured: Morgan N. Trimyer, Jr.
Charles F. Anderson, M.D. Dr. Anderson is an OFFICERS
orthopedic surgeon in private practice in
Waynesboro, Virginia. P. Douglas Richard..................President & CEO
R. Jerry Giles..............Chief Financial Officer
Kenneth L. Elmore. Mr. Elmore is a partner of Benny N. Werner...............Senior Vice President
Elmore, Hupp & Company, a certified public Angel Negron, Jr.....................Vice President
accounting firm located in Staunton, Virginia. Norman C. (Butch) Smiley, III........Vice President
Mr. Elmore has been a certified public Lynn P. Sisson.......................Vice President
accountant for over 30 years. Mr. Elmore's term Patsy D. Clem.............Controller/Vice President
will expire at the July, 2000 stockholders' Chris P. Kyriakides..............Regional President
meeting and he has expressed his intention to Robert M. (Bobby) Hoffman...Regional Vice President
retire from the Board of Directors. Jane P. Orem................Regional Vice President
Kathy H. Willis.............Regional Vice President
Jane C. Hickok. Mrs. Hickok was elected as Vice Ellen H. Boyd..............Assistant Vice President
Chairman of the Board in October 1994. She had Dianne F. Campbell.........Assistant Vice President
previously retired as President and Chief Kay T. Dean................Assistant Vice President
Executive Officer of Community Bank in 1994 Danny R. Fields Assistant............Vice President
after serving since 1984. She retired as Virginia M. McCormack......Assistant Vice President
President and Chief Executive Officer of Ramona W. Savidge..........Assistant Vice President
Community Financial Corporation in January 1995. Thomas R. Wagner...........Assistant Vice President
Mrs. Hickok continues to serve as a director of Gary L. Davenport..........Assistant Vice President
Community Financial and Community Bank. Mrs. Martha B. Chandler..............Assistant Secretary
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 in Staunton, Virginia.
James R. Cooke, Jr., D.D.S. Dr. Cooke has been,
for the past 30 years, a practicing dentist in
Staunton, Virginia.
P. Douglas Richard. Mr. Richard was appointed as
Regional President of the Bank's Hampton Roads
region in 1997. Mr. Richard was elected as
President and Chief Executive Officer of
Community Financial and Community Bank in April,
2000. Prior to joining Community Financial, Mr.
Richard was President and Chief Executive
Officer of Seaboard Bancorp in Hampton Roads.
Charles W. Fairchilds. Mr. Fairchilds has been
the President of Allied Ready Mix in Waynesboro,
Virginia since 1987.
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4
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[THREE PICTURES]
IN 1929 - ONLY ONE YEAR AFTER COMMUNITY BANK opened its doors in the
Staunton-Augusta County area - the Great Depression descended on the nation and
robbed it of its economic vitality. Jobless lines stretched for blocks; family
homesteads were lost; soup kitchens abounded; and banks, once a bulwark of the
American economy, went out of business by the hundreds.
But not Community Bank. Situated in one of the most fiscally conservative
sections of Virginia, our robust local bank combined its philosophy of being a
good neighbor with sound financial stewardship to weather the worst economic
crisis the nation had ever seen. And not only did Community Bank withstand the
storm, it thrived - and made sure the people it served thrived, as well.
Today, many things have changed. The economy skyrockets to new heights every
day. Prosperity is available for all who work to achieve it. Financial
institutions are once again a mainstay of the American economy. But one
overriding element has conspicuously remained the same:
COMMUNITY BANK'S UNWAVERING LOYALTY TO THE PEOPLE IT SERVES.
For Community Bank, "Our Name Really Does Say it All" is more than just a slogan
or marketing tool. It's the crux of who we are and what we're all about. Behind
those words stand 72 years of constant and consistent service, of making sure we
know and respond to the needs of the customer, of building trust and following
through on our commitment to serve.
5
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[PICTURE - OUR EMPLOYEES GAVE OF THEIR PERSONAL TIME TO RAISE MONEY FOR THE
MARCH OF DIMES]
[PICTURE - COMMUNITY BANK HELPS SPONSOR STAUNTON'S LOCAL FARMER'S MARKET.]
THE COMMUNITY BANK DIFFERENCE
MARK TWAIN ONCE SAID, "The difference between the right word and almost the
right word is the difference between lightning and a lightning bug." The same
holds true for the right bank and the almost right bank - and the difference
between them is what has given Community Bank the resounding success it enjoys
today.
For Community Bank, the current trend to merge into an impersonal financial
giant holds no attraction. For us, it's the personal touch that matters. A face
with a name. A neighbor helping a neighbor. A bank with old-fashioned strength
and trust and an up-to-date knowledge of the community it serves.
Our customers tell us they like walking into Community Bank and being recognized
by the people they consider their friends and neighbors. They like the fact that
they can apply for a loan face-to-face with the people making the decisions.
They like the feeling of loyalty and trust the Community Bank difference
inspires.
But quality, hometown banking and individualized service isn't all there is to
Community Bank's personal touch. It extends, even, beyond the construction of a
new, convenient location on Richmond Road and the recent election of a
community-oriented president and CEO. No, Community Bank takes its role as a
member of the community very seriously and assumes an active, high-profile
responsibility in making sure it remains a place we all want to live.
Since the essence of any community flows from the commitment of its people,
Community Bank involves itself in many local projects designed to enhance
quality of life and engender a spirit of cooperation. Whether it's working with
children to build solid citizens for the future, increasing cultural
opportunities, supporting historic preservation or serving on public service
boards and committees, the people of Community Bank give unselfishly of their
time and talents toward the common good.
They are our greatest resource and our greatest source of pride. Through them,
we are inextricably woven with the community we seek to serve.
Real community involvement. It's the Community Bank difference - a difference we
enjoy and one we are proud to continue.
6
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[PICTURE - OUR OWN LYNN SISSON DRESSED TO CELEBRATE COMMUNITY BANK'S
PARTICIPATION IN STAUNTON'S ANNUAL VICTORIAN FESTIVAL.]
LOOKING AHEAD WITH NEW RESOURCES
IN MAY 2000, Community Financial Corporation announced the election of P.
Douglas Richard as President, Chief Executive Officer and member of the Board of
Community Financial Corporation and its subsidiary, Community Bank.
Richard, 56, is a native of Hampton Roads, Virginia, and has been employed in
the financial services industry since 1970. He was President and Chief Executive
Officer of Seaboard Savings Bank in Virginia Beach prior to joining Community
Bank as President of its Hampton Roads region, which he helped organize in 1997.
Richard is no stranger to the Shenandoah Valley, as he is a 1966 graduate of
Virginia Military Institute. "I am excited to return to the Shenandoah Valley
and to be associated with an organization which has such a rich tradition of
serving this community since 1928," Richard said. "Community Bank has an
extraordinary staff of professionals with many years of experience who are
focused on providing the best service and most competitive products in the
market. I am pleased to be part of this team and I look forward to becoming a
member of the Staunton-Augusta County community."
Chris P. Kyriakides succeeded Richard as President of Community Bank's Hampton
Roads Region. Kyriakides has been the Executive Vice President of the region
since its organization.
Kyriakides is a native of Cyprus and a 1984 graduate of the University of
Virginia with a degree in economics. He was Executive Vice-President of Seaboard
Savings Bank prior to joining Community Bank in 1997.
These two professionals bring to their respective roles deep commitments to the
betterment of their communities and to the strengthening of the ties that have
made Community Bank a trusted financial leader.
VITALITY THROUGH VARIETY
IN ADDITION TO INDIVIDUALIZED ATTENTION and a genuine concern for the people it
serves, Community Bank continues to grow, change, improve and succeed by
offering the best financial services in the area. Through a range of personal
and business checking options - from Totally Free to Ultimate - Community Bank
customers can attain the financial flexibility they need. Overdraft Protection,
Check Safekeeping, Small Business Checking, Non-Profit Checking and much more -
we pride ourselves on the diversity of our offerings.
Checking account diversity is only part of the Community Bank picture. Community
Bank's traditional real estate lending has been an important part of our
expertise in our communities. Qualified borrowers can tailor mortgages to meet
their specific needs - not get lumped together in a pre-packaged set of
financial boundaries. Home Equity Installment Loans and Lines of Credit,
Automobile and Personal Loans, Savings/CD Loans - these options and more make it
possible for you to attain the varied financial goals that are important to you.
While variety is, indeed, the spice of life, it is also the vitality of a
community-based and service-oriented bank. And no one does it better, or with
greater vitality, than Community Bank.
7
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[THREE PICTURES -- RICHMOND ROAD BRANCH CELEBRATES GRAND OPENING.]
THE COMMUNITY BANK CARE PACKAGE
In the year to come, Community Bank will build on the foundation of trust it has
established since 1928 and promote its role as both a financial partner and
adviser. By doing what it does best - serving as a reliable resource for
financial and business needs - Community Bank will continue to instill long-term
loyalty among its customers and bolster an already superior bank/client working
relationship.
That relationship can grow through the enduring person-to-person, individualized
services we've become known for; through in-school educational programs and
tours of our facilities; and through our willingness to always listen to what
our customers have to say.
Those elements, combined with the use of cutting-edge technology and the hiring
and training of the very best employees, serve to position us as a local market
leader in community banking.
Community. Advice. Relationships. Exceptional service. CARE. It's a package for
success, for the future and - most importantly - for the community that means so
much to us.
8
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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 and to Community First Mortgage Corporation, a
wholly-owned subsidiary of Community Bank. 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.
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.
Presented in the following table, as of March 31, 2000 and 1999, 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 global 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,
Community Bank's 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 interest 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.
9
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COMMUNITY FINANCIAL CORPORATION
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<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
Change in
Interest Rate Board Limit $ Change % Change $ Change % Change
(Basis Points) % Change in NPV in NPV in NPV in Npv
-----------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+300 -40% $-10,701 -36% $-2,488 -8%
+200 -30 -6,883 -23 -1,150 -4
+100 -20 -3,261 -11 -324 -1
-0- -- -- -- -- --
-100 -20 2,345 8 220 1
-200 -30 3,832 13 636 2
-300 -40 5,588 19 1,466 5
</TABLE>
Management generally 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, 2000, approximately 72% of our gross loan
portfolio consisted of loans which reprice during the life of the loan. We
emphasize adjustable rate mortgage loans 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 are currently 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.
In managing our asset/liability mix, we, at times, depending on the
relationship between long- and short-term interest rates, market conditions, and
consumer preference, may place somewhat greater emphasis on maximizing our net
interest income than on strictly matching the interest rate sensitivity of our
assets and liabilities. We believe the increased net income that may result from
an acceptable mismatch in the actual maturity or repricing of our asset and
liability portfolio can provide sufficient returns to justify the increased
exposure to sudden and unexpected increases in interest rates which may result
from such a mismatch. We have established limits, which may change from time to
time, on the level of acceptable interest rate risk. There can be no assurance,
however, that in the event of an adverse change in interest rates, our efforts
to limit interest rate risk will be successful.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as 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
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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,
--------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- -------------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Interest-Earning Assets
-----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $178,801 $ 14,566 8.15% $162,861 $ 13,666 8.40% $158,057 $ 13,344 8.44%
Investment securities
and other investments 27,254 1,588 5.83 13,459 592 4.40 11,665 605 5.18
------- ------ ------- ------ ------- ------
Total interest-earning
assets 206,055 16,154 7.84 176,320 14,258 8.09 169,722 13,949 8.22
------- ------ ------- ------ ------- ------
Interest-Bearing Liabilities
----------------------------
Deposits 151,057 6,380 4.22 141,789 6,387 4.50 126,689 5,845 4.61
FHLB advances and
other borrowings 40,985 2,336 5.70 16,445 945 5.75 25,572 1,471 5.75
------- ----- ------- ----- ------- -----
Total interest-
bearing liabilities 192,042 8,716 4.54 158,234 7,332 4.64 152,261 7,316 4.80
------- ----- ------- ----- ------- -----
Net interest income/
interest rate spread $7,438 3.30 $6,926 3.45 $6,633 3.42
====== ====== ======
Net interest-earning
assets/net yield on
interest-earning assets $14,013 3.61 $18,086 3.93 $17,461 3.91
======= ======= =======
Percentage of interest-earning
assets to interest-
bearing liabilities 107.30% 111.43% 111.47%
</TABLE>
11
<PAGE>
The following table sets forth our interest rate spread at the dates indicated.
March 31,
-------------------------
2000 1999 1998
---- ---- ----
Yield on
--------
Loans 8.36% 8.02% 8.29%
Investment securities and other investments 6.36% 4.50% 4.49%
Total interest-earning assets 8.03% 7.74% 8.04%
Cost of
-------
Deposits 4.27% 4.32% 4.60%
FHLB advances and other borrowings 6.49% 5.60% 5.77%
Total interest-bearing liabilities 4.86% 4.46% 4.74%
INTEREST RATE SPREAD 3.17% 3.28% 3.30%
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,
2000 v. 1999 1999 v. 1998
---------------------------------- ------------------------------------
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 $ 1,299 $ (399) $ 900 $ 385 $ (63) $ 322
Investments securities and other
investments 804 192 996 78 (91) (13)
------- ------- ------- ------- ------- -------
Total interest-earnings assets $ 2,103 $ (207) $ 1,896 $ 463 $ (154) $ 309
======= ======= ------- ======= ======= -------
INTEREST-BEARING LIABILITIES
Deposits $ 391 $ (398) $ (7) $ 681 $ (139) $ 542
FHLB advances and other borrowings 1,398 (7) 1,391 (526) -- (526)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 1,789 $ (405) $ 1,384 $ 155 $ (139) $ 16
======= ======= ------- ======= ======= -------
NET INTEREST INCOME $ 512 $ 293
======= =======
</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.
At March 31, 2000, total non-performing assets, consisting of
non-performing loans and real estate owned, were $1,217,000 or .52% of total
assets compared to $1,518,000 or .76% at March 31, 1999. Non-performing assets
at March 31, 2000 were comprised primarily of single family and multi-unit
residential properties acquired through foreclosure. At March 31, 2000, the
largest property in non-performing assets was a multi-family unit with an
approximate value of $457,000. 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. We determine the level of reserves based on loan
performance, the value of the collateral, economic and market conditions, and
previous experience. We review the adequacy of the allowance at least quarterly,
utilizing its internal loan classifications system. During fiscal 2000, we
decreased our allowance for loan losses $98,000 to $1,218,000 due primarily to
the charge-off of specific allowances. Management believes that the loan loss
reserve is adequate. We have had net charge-offs to our allowance for loan
losses of $381,000, $161,000, and $421,000, for the years ended March 31, 2000,
1999 and 1998, respectively. The increase in net charge-offs from 1999 to 2000
is related primarily to increased foreclosures in fiscal 2000. Although
management believes it uses the best information available, future adjustments
to reserves may be necessary.
FINANCIAL CONDITION
--------------------------------------------------------------------------------
Total assets increased by $42.3 million to $243.1 million at March 31, 2000
as a result of increases in both investment securities of $21.1 million and
loans of $18.3 million. The increase in both loans and investment securities was
funded by increases in both borrowings of $38.0 million and deposits of $5.6
million. The increase in deposits can be attributed primarily to an increase in
time deposits of $4.9 million. Management believes the increase in time deposits
is primarily attributable to maintaining competitive rates. The increase in
loans receivable was due primarily to more competitive pricing on consumer
loans.
Stockholders' equity decreased $990,000 to $25.4 million at March 31, 2000
compared to March 31, 1999. The decrease was the result of a decline in net
unrealized gains of $879,000 on available for sale securities, dividends paid to
stockholders of $819,000 and common stock repurchased of $615,000, offset by
$1.3 million of net income in fiscal 2000.
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, 2000 AND 1999
GENERAL. Net income for the year ended March 31, 2000 was $1,324,000 or
$.52 diluted earnings per share compared to $1,848,000 or $.71 diluted earnings
per share for the year ended March 31, 1999. Net income decreased due primarily
to a decrease in the gain on the sale of available for sale securities of
$624,000 and an increase in noninterest expenses during the year ended March 31,
2000.
Our return on average assets was .60% for the fiscal year ended 2000
compared to .96% for the fiscal year ended 1999. Return on average equity was
5.11% for fiscal year ended 2000 compared to 7.12% for the fiscal year ended
1999. Average equity to average assets was 11.66% for the fiscal year ended 2000
compared to 13.52% for the fiscal year ended 1999. We paid dividends to
13
<PAGE>
COMMUNITY FINANCIAL CORPORATION
stockholders of $819,000 during 2000 and $796,000 during fiscal 1999
representing a dividend payout ratio of 61.90% and 43.11%, respectively.
INTEREST INCOME. Total interest income increased to $16,154,000 for the
year ended March 31, 2000 as compared to $14,258,000 for the year ended March
31, 1999. The increase in total interest income can be attributed to an increase
in the average dollar volume of interest-earning assets, primarily $13.8 million
in investment securities and $15.9 million in loans receivable, which was offset
by a decrease in the average yield on interest earning assets. Average yields on
total interest-earning assets decreased from 8.09% in fiscal 1999 to 7.84% for
the current fiscal year due primarily to a more competitive and lower rate
environment.
INTEREST EXPENSE. Total interest expense increased to $8,716,000 for the
year ended March 31, 2000 from $7,332,000 for the year ended March 31, 1999.
While the cost of funds decreased from 4.64% for the year ended March 31, 1999
to 4.54% for the current year, the increase in interest expense is attributable
to increases in both the average balance of borrowings and deposits during the
fiscal year. The increase in deposit balances was due primarily to an increase
in certificates of deposit for the current fiscal year.
PROVISION FOR LOAN LOSSES. The provision decreased to $283,000 for the
fiscal ended March 31, 2000 from $360,000 for the fiscal year ended March 31,
1999 due primarily to a decrease in non-performing assets for fiscal 2000. 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, 2000, the total allowance for loan losses amounted to
$1,218,000. At March 31, 2000, out total allowance as a percentage of total
loans receivable was .64% and as a percentage of total non-performing loans was
96%.
NONINTEREST INCOME. Noninterest income increased to $3,196,000 in fiscal
2000 as compared to $2,638,000 for the year ended March 31, 1999, primarily due
to increased fees and gains on sale of secondary mortgage loans in the Bank's
mortgage subsidiary, offset by a decrease in gain on sale of securities.
NONINTEREST EXPENSE. Total noninterest expense increased to $8,258,000 for
the year ended March 31, 2000 from $6,028,000 for the year March 31, 1999 due
primarily to compensation and other overhead related to the mortgage banking
subsidiary's first full year of operation, a contract settlement with a former
Bank president and the opening of an additional branch in Staunton, Virginia in
October 1999.
TAXES. Total taxes decreased to $770,000 during the year ended March 31,
2000 from $1,328,000 during fiscal 1999. The effective tax rate for the year
ended March 31, 2000 was 36.8% as compared to 41.8% for the year ended March 31,
1999. The decrease in taxes is attributable primarily to a decrease in income
before income taxes, a decrease in the effective state income tax rate and
purchases of investments with reduced effective income tax rates.
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
mortgage and consumer loans which was offset by a decrease in the yield on
14
<PAGE>
COMMUNITY FINANCIAL CORPORATION
interest earning assets. Average yields on total interest-earning assets
decreased from 8.22% in fiscal 1998 to 8.09% for fiscal 1999 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 fiscal 1999, the increase in interest expense is attributable to an
increase in the average balance of deposits during fiscal 1999. The increase in
deposit balances was due to increases in both certificates of deposit and
checking accounts for fiscal 1999. The increase in interest expense related to
deposits was partially offset by the lower average balance of Federal Home Loan
Bank advances during fiscal 1999.
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.
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 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 Community Bank's average daily balance
of net withdrawable deposit accounts and borrowings payable in one year or less.
At March 31, 2000, our liquid asset ratio was 6.8%.
Our dominant source of funds during the year ended March 31, 2000 was from
borrowings which increased by $38.0 million
Our cash decreased $2.7 million from $10.1 million at March 31, 1999 to
$7.4 million at March 31, 2000. The decrease in cash was related to the increase
in securities and loans receivable.
At March 31, 2000, we had commitments to purchase or originate $12.8
million of loans. Certificates of deposit scheduled to mature in one year or
less at March 31, 2000, totaled $63.0 million. Based on our historical
experience, management believes that a significant portion of such deposits will
remain with us. Management further believes that loan repayments and other
15
<PAGE>
COMMUNITY FINANCIAL CORPORATION
sources of funds will be adequate to meet our foreseeable short- and long-term
liquidity needs.
At March 31, 2000, we had tangible and core capital of 9.75% 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 15.9% 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 2000 and new pronouncements which will be implemented in the
future, see Summary of Accounting Policies to Consolidated Financial Statements.
16
<PAGE>
COMMUNITY FINANCIAL CORPORATION
BDO 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, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 2000. 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, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2000 in conformity with generally accepted accounting
procedures.
Richmond, Virginia
April 28, 2000
/s/ BDO Seidman, LLP
17
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31, 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash (including interest bearing deposits of
approximately $1,908,000 and $6,407,000) $ 7,424,577 $ 10,131,157
Securities (Note 1)
Held to maturity 27,312,943 5,561,314
Available for sale 6,863,674 3,543,092
Investment in Federal Home Loan Bank stock,
at cost (Note 6) 1,950,000 1,508,200
Loans receivable, net (Notes 2 and 6) 189,700,859 171,413,721
Real estate owned, net 823,002 351,733
Property and equipment, net (Note 3) 6,627,869 6,050,785
Accrued interest receivable 1,288,112 1,164,745
Prepaid expenses and other assets 1,086,330 1,085,272
----------------------------------------------------------------------------------------
$243,077,366 $200,810,019
----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 4) $158,568,275 $153,015,076
Advances from Federal Home Loan Bank (Note 6) 37,000,000 19,000,000
Securities sold under agreement to repurchase (Note 7) 20,000,000 --
Advance payments by borrowers
for taxes and insurance 226,195 190,421
Other liabilities (Notes 8 and 12) 1,888,821 2,220,794
----------------------------------------------------------------------------------------
Total liabilities 217,683,291 174,426,291
----------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 12, 13, and 14)
----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Notes 10 and 13)
Preferred stock, $.01 par value, authorized
3,000,000 shares, none outstanding -- --
Common stock, $.01 par value, 10,000,000 authorized
shares, 2,511,526 and 2,572,146 shares outstanding 25,115 25,721
Additional paid-in capital 4,782,029 4,897,207
Retained earnings 19,401,019 19,395,509
Accumulated other comprehensive income (Note 9) 1,185,912 2,065,291
----------------------------------------------------------------------------------------
Total stockholders' equity 25,394,075 26,383,728
----------------------------------------------------------------------------------------
$243,077,366 $200,810,019
----------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31, 2000 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 14,565,894 $ 13,665,754 $ 13,344,490
Investment securities 1,448,006 348,965 410,909
Other investments 140,048 243,468 193,908
-------------------------------------------------------------------------------------------
Total interest income 16,153,948 14,258,187 13,949,307
-------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits (Note 4) 6,380,089 6,387,333 5,844,535
Borrowed money 2,335,487 945,198 1,471,490
-------------------------------------------------------------------------------------------
Total interest expense 8,715,576 7,332,531 7,316,025
-------------------------------------------------------------------------------------------
NET INTEREST INCOME 7,438,372 6,925,656 6,633,282
PROVISION FOR LOAN LOSSES (NOTE 2) 282,854 360,000 498,764
-------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,155,518 6,565,656 6,134,518
-------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges, fees and commissions 1,366,212 1,327,680 757,462
Gain on sale of securities 601,412 1,224,721 --
Gain (loss) on sale of loans 1,015,447 81,730 (4,335)
Other 213,400 3,449 13,463
-------------------------------------------------------------------------------------------
Total noninterest income 3,196,471 2,637,580 766,590
-------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Compensation and employee benefits
(Note 12) 4,844,745 3,306,117 1,956,187
Occupancy 1,241,315 826,089 481,063
Data processing 132,051 486,775 407,925
Insurance 72,530 82,317 74,222
Other 1,967,601 1,326,435 1,097,558
-------------------------------------------------------------------------------------------
Total noninterest expense 8,258,242 6,027,733 4,016,955
-------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,093,747 3,175,503 2,884,153
-------------------------------------------------------------------------------------------
Income taxes (Note 8)
Current 920,799 1,175,168 1,013,576
Deferred (150,932) 152,789 65,094
-------------------------------------------------------------------------------------------
Total income taxes 769,867 1,327,957 1,078,670
-------------------------------------------------------------------------------------------
NET INCOME $ 1,323,880 $ 1,847,546 $ 1,805,483
-------------------------------------------------------------------------------------------
EARNINGS PER SHARE (NOTES 11 AND 13)
Basic $ .52 $ .72 $ .71
Diluted $ .52 $ .71 $ .70
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders'
Stock Capital Earnings Income Equity
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 (Note 9) -- -- -- 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 13) 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
(Note 9) -- -- -- (305,868) (305,868)
------------
Total comprehensive income -- -- -- -- 1,541,678
------------
Cash dividends, $.31 per share -- -- (796,410) -- (796,410)
Exercise of stock options (Note 13) 127 123,573 -- -- 123,700
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 25,721 4,897,207 19,395,509 2,065,291 26,383,728
Comprehensive income
Net income -- -- 1,323,880 -- 1,323,880
Change in unrealized gain on
available for sale securities
(Note 9) -- -- -- (879,379) (879,379)
------------
Total comprehensive income -- -- -- -- 444,501
------------
Cash dividends, $.32 per share -- -- (819,493) -- (819,493)
Repurchase of stock
(60,620 shares) (Note 11) (606) (115,178) (498,877) -- (614,661)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2000 $ 25,115 $ 4,782,029 $ 19,401,019 $ 1,185,912 $ 25,394,075
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 1,323,880 $ 1,847,546 $ 1,805,483
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 282,854 360,000 498,764
Depreciation 715,219 394,438 234,007
Amortization of premium and accretion
of discount on securities, net 3,662 5,238 (586)
Increase (decrease) in net deferred loan
origination fees (81,228) 21,510 (115,671)
Loans originated for resale (59,081,330) (19,528,255) (4,805,000)
Proceeds from loan sales 59,083,634 19,130,400 3,816,000
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
20
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<S> <C> <C> <C>
Increase in deferred income taxes $ (401,119) $ (46,012) $ (24,394)
Loss (gain) on sale of real estate -- -- (9,755)
Gain on sale of securities (601,412) (1,224,721) --
(Increase) decrease in other assets (124,425) (720,091) (206,452)
Increase (decrease) in other liabilities 104,920 241,986 464,334
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,224,655 482,039 1,656,730
----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of held to maturity
securities 6,237,420 1,829,429 3,742,267
Purchase of held to maturity securities (27,260,915) (4,175,685) (2,359,982)
Proceeds from sale of securities 612,189 1,244,761 --
Purchase of available for sale securities (4,942,534) -- --
Net increase in loans (19,522,241) (9,282,876) (13,232,234)
Purchases of property and equipment (1,292,303) (2,811,000) (326,123)
Proceeds from sale of real estate owned 559,904 308,351 152,043
Redemption of FHLB stock 1,350,000 91,800 --
Purchase of FHLB stock (1,791,800) -- (200,000)
----------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (46,050,280) (12,795,220) (12,224,029)
----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in certificates of
deposit 4,793,639 4,887,457 17,787,000
Net increase in savings and
checking deposits 759,560 9,963,446 3,782,288
Proceeds from issuance of common stock -- 123,700 57,001
Repurchase of stock (614,661) -- --
Increase in securities sold under agreements
to repurchase 20,000,000 -- --
Dividends paid (819,493) (796,410) (715,058)
Proceeds from advances 85,000,000 8,000,000 76,000,000
Repayments of advances (67,000,000) (7,000,000) (84,000,000)
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 42,119,045 15,178,193 12,911,231
----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,706,580) 2,865,012 2,343,932
CASH AND CASH EQUIVALENTS - beginning of year 10,131,157 7,266,145 4,922,213
----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - end of year $ 7,424,577 $ 10,131,157 $ 7,266,145
==========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments of interest expense $ 8,722,056 $ 7,363,055 $ 7,340,052
----------------------------------------------------------------------------------------------------------
Cash payments of income taxes $ 967,226 $ 1,413,415 $ 1,207,076
==========================================================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
----------------------------------------------------------------------------------------------------------
Transfers from loans to real estate
acquired through foreclosure $ 1,031,173 $ 412,862 $ 331,237
----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
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 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. Manage-ment 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
22
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
payments of principal or interest will not be made in full. Whenever the accrual
of interest is stopped, previously accrued but uncollected interest income is
reversed. Thereafter, interest is recognized only as cash is received until the
loan is reinstated to accrual status.
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 the Federal Home Loan Mortgage Corporation and other
investors. Under participation service agreements, the Corporation continues to
service the loans and the participant is paid its share of principal and
interest collections.
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 was
deferred if the Corporation met 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 Statement 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, 2000 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 11.
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, 2000 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:
<TABLE>
<CAPTION>
March 31, 2000
------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
United States government
and agency obligations $23,064,860 $ -- $ 454,881 $22,609,979
Corporate securities 249,607 -- 8,669 240,938
Other 3,998,476 50 45,873 3,952,653
------------------------------------------------------------------------------------------
27,312,943 50 509,423 26,803,570
Available for Sale
Federal Home Loan Mortgage
Corporation securities 4,950,913 2,195,846 283,085 6,863,674
------------------------------------------------------------------------------------------
$32,263,856 $2,195,896 $ 792,508 $33,667,244
------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market value of securities at March 31, 2000,
by contractual maturity, are shown below:
<TABLE>
<CAPTION>
March 31, 2000
------------------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
------------------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity
Due in one year or less $ 1,194,740 $1,193,029
Due in one through five years 26,118,203 25,610,541
------------------------------------------------------------------------------------------
27,312,943 26,803,570
------------------------------------------------------------------------------------------
Available for Sale
Federal Home Loan Mortgage
Corporation securities 4,950,913 6,863,674
------------------------------------------------------------------------------------------
$32,263,856 $33,667,244
------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
2. LOANS RECEIVABLE
Loans receivable are summarized as follows:
MARCH 31, 2000 1999
--------------------------------------------------------------------------------
Residential real estate $117,600,980 $102,567,603
Commercial real estate 22,126,570 26,934,359
Construction and land 20,686,821 14,244,817
Commercial business 9,391,517 7,635,017
Consumer 30,752,825 25,865,898
--------------------------------------------------------------------------------
200,558,713 177,247,694
Less
Loans in process 9,542,080 4,249,251
Deferred loan fees, net 187,606 268,834
Allowance for loan losses 1,218,168 1,315,888
--------------------------------------------------------------------------------
$ 10,857,854 $ 5,833,973
--------------------------------------------------------------------------------
$189,700,859 $171,413,721
================================================================================
Loans serviced for others amounted to approximately $5,584,000 and $6,919,000 at
March 31, 2000 and 1999, respectively. The loans were not included in the
accompanying consolidated balance sheets.
The weighted average interest rate on loans receivable was approximately 8.36%
and 8.02% at March 31, 2000 and 1999, respectively.
A summary of the allowance for loan losses is as follows:
Year Ended March 31, 2000 1999 1998
--------------------------------------------------------------------------------
Balance at beginning of year $ 1,315,888 $ 1,117,131 $ 1,039,013
Provision charged to expense 282,854 360,000 498,764
Losses charged to the allowance,
net of recoveries (380,574) (161,243) (420,646)
--------------------------------------------------------------------------------
Balance at end of year $ 1,218,168 $ 1,315,888 $ 1,117,131
--------------------------------------------------------------------------------
Of the total allowance for loan losses at March 31, 2000 and 1999, approximately
$1,195,000 is not specifically allocated to identified problem loans.
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
MARCH 31, 2000 1999
--------------------------------------------------------------------------------
Buildings $4,149,949 $3,379,926
Land and improvements 2,158,849 2,138,883
Furniture and equipment 2,672,606 2,218,362
Construction in progress 6,956 185,050
--------------------------------------------------------------------------------
8,988,360 7,922,221
Less accumulated depreciation and amortization 2,360,491 1,871,436
--------------------------------------------------------------------------------
Net office properties and equipment $6,627,869 $6,050,785
--------------------------------------------------------------------------------
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEPOSITS
MARCH 31, 2000 1999
--------------------------------------------------------------------------------
DEMAND DEPOSITS
Savings accounts $ 14,574,084 $ 14,306,876
NOW accounts 26,762,722 25,914,356
Money market deposit accounts 11,257,373 11,613,387
--------------------------------------------------------------------------------
Total demand deposits 52,594,179 51,834,619
TIME DEPOSITS 105,974,096 101,180,457
--------------------------------------------------------------------------------
$158,568,275 $153,015,076
--------------------------------------------------------------------------------
The aggregate amount of time deposit accounts with a minimum denomination of
$100,000 was approximately $15,301,000 and $19,478,000 at March 31, 2000 and
1999, respectively.
Time deposits mature as follows:
MARCH 31, 2000 1999
--------------------------------------------------------------------------------
Within one year $ 63,034,279 $ 78,346,261
One to two years 34,437,972 10,164,229
More than two years 8,501,845 12,669,967
--------------------------------------------------------------------------------
$105,974,096 $101,180,457
--------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
YEAR ENDED MARCH 31, 2000 1999 1998
--------------------------------------------------------------------------------
Time deposits $5,143,629 $5,202,693 $4,773,241
Money market deposit and NOW accounts 795,965 782,097 701,547
Savings 440,495 402,543 369,747
--------------------------------------------------------------------------------
$6,380,089 $6,387,333 $5,844,535
--------------------------------------------------------------------------------
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 1999
--------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments $ 7,424,577 $ 7,425,000 $ 10,131,157 $ 10,131,000
Securities 34,176,617 33,667,000 9,104,406 9,121,000
Loans, net of allowance for
loan losses 189,700,859 188,677,000 171,413,721 173,844,000
FINANCIAL LIABILITIES
Deposits 158,568,275 159,181,000 153,015,076 153,402,000
Advances from Federal Home
Loan Bank 37,000,000 37,000,000 19,000,000 19,000,000
Securities sold under agreements
to repurchase 20,000,000 20,000,000 -- --
</TABLE>
27
<PAGE>
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 $16,197,000 $16,197,000 $32,807,000 $32,807,000
</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.
Securities sold under agreements to repurchase
----------------------------------------------
Securities sold under agreements to repurchase are treated as short-term
borrowings and the carrying value approximates fair value.
Commitments to extend credit
----------------------------
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace, loan fees vary greatly with no fees charged in many
cases.
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,
----------------------------
2001 $37,000,000
----------------------------
$37,000,000
============================
The weighted average interest rate on advances was 6.59% and 5.60% at March 31,
2000 and 1999, 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, 2000 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding during the year $42,000,000 $20,000,000 $32,000,000
---------------------------------------------------------------------------------------
Average amount outstanding during the year $32,583,333 $14,166,667 $25,916,667
---------------------------------------------------------------------------------------
Average interest rate during the year 5.68% 5.72% 5.68%
---------------------------------------------------------------------------------------
</TABLE>
7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The following is a summary of certain information regarding the Bank's
repurchase agreements:
Year Ended March 31, 2000 1999
--------------------------------------------------------------------------------
Balance at end of year $20,000,000 $ --
--------------------------------------------------------------------------------
Weighted average interest rate during the year 5.74% --
--------------------------------------------------------------------------------
Average amount outstanding during the year $10,000,000 $ --
--------------------------------------------------------------------------------
Maximum amount outstanding at any month end
during the year $20,000,000 $ --
--------------------------------------------------------------------------------
8. INCOME TAXES
Deferred tax assets (liabilities), included in "Other liabilities" in the
consolidated balance sheets are as follows:
March 31, 2000 1999
--------------------------------------------------------------------------------
Deferred tax assets
Allowance for losses $141,951 $ 98,855
Other 4,954 11,684
--------------------------------------------------------------------------------
$146,905 $110,539
--------------------------------------------------------------------------------
29
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
8. INCOME TAXES (CONTINUED)
DEFERRED TAX LIABILITIES
Depreciable assets $ (139,142) $ (204,388)
FHLMC stock (726,849) (1,417,236)
FHLB stock (36,320) (85,640)
--------------------------------------------------------------------------------
(902,311) (1,707,264)
--------------------------------------------------------------------------------
Net deferred tax liability $ (755,406) $(1,596,725)
--------------------------------------------------------------------------------
9. COMPREHENSIVE INCOME
The components of the other comprehensive income (loss) are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended March 31, 2000 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gain arising during
the period $ (889,052) $ 706,301 $ 1,661,835
Less: reclassification adjustments for gains
included in net income 601,421 1,224,721 --
-------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax (1,490,473) (518,420) 1,661,835
Income tax (expense) benefit related to
items of other comprehensive income 611,094 212,552 (631,497)
-------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax $ (879,379) $ (305,868) $ 1,030,338
-------------------------------------------------------------------------------------------
</TABLE>
10. 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, relative to
the OTS requirements applicable at that date:
Amount Percent Actual Actual Excess
MARCH 31, 2000 Required Required Amount Percent Amount
--------------------------------------------------------------------------------
Tangible Capital $ 3,672,000 1.50% $23,867,000 9.75% $20,195,000
Core Capital 9,793,000 4.00 23,867,000 9.75 14,074,000
Risk-based Capital 13,406,000 8.00 25,923,000 15.85 12,517,000
Amount Percent Actual Actual Excess
March 31, 1999 Required Required Amount Percent Amount
--------------------------------------------------------------------------------
Tangible Capital $ 3,014,000 1.50% $23,572,000 11.70% $20,558,000
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
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Bank may not declare or pay a cash dividend, or repurchase any of its
capital stock if the effect thereof would cause the net worth of the Bank to be
reduced below certain requirements imposed by federal regulations.
Capital distributions by OTS-regulated savings 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 equal to net income for the current year
plus the previous two years net income, less capital distributions paid over
that same period. 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 banks 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.
11. 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.
During the year ended March 31, 2000, the Board of Directors authorized a stock
repurchase program under which up to 5%, or 128,607 shares, of the then
outstanding share of the Corporation's stock may be repurchased. During the year
ended March 31, 2000, 60,620 shares were repurchased for an aggregate amount of
approximately $615,000.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 2000 1999 1998
-----------------------------------------------------------------------------------------
BASIC EARNINGS
<S> <C> <C> <C>
Income available to common shareholders $1,323,880 $1,847,546 $1,805,483
-----------------------------------------------------------------------------------------
Weighted average shares outstanding 2,561,343 2,569,543 2,553,216
-----------------------------------------------------------------------------------------
Basic earnings per share $ .52 $ .72 $ .71
-----------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income available to common shareholders $1,323,880 $1,847,546 $1,805,483
-----------------------------------------------------------------------------------------
Weighted average shares outstanding 2,561,343 2,569,543 2,553,216
Diluted effect of stock options -- 19,960 30,415
-----------------------------------------------------------------------------------------
Total weighted average shares outstanding 2,561,343 2,589,503 2,583,631
-----------------------------------------------------------------------------------------
Diluted earnings per share $ .52 $ .71 $ .70
-----------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
12. 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, 2000 1999 1998
---------------------------------------------------------------------------------------
NET PERIODIC PENSION COST
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 74,653 $ 75,192 $ 46,902
Interest cost on projected benefit obligations 48,874 42,780 39,573
Actual return on plan assets (39,563) (38,281) (38,146)
Net amortization and deferral (10,954) (11,604) (7,275)
---------------------------------------------------------------------------------------
$ 73,010 $ 68,087 $ 41,054
---------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION
Vested benefits $511,450 $511,450 $ 471,078 $ 520,012
Non-vested benefits 23,503 13,755 9,945
---------------------------------------------------------------------------------------
$ 534,953 $ 484,833 $ 529,957
---------------------------------------------------------------------------------------
</TABLE>
YEAR ENDED MARCH 31, 2000 1999
--------------------------------------------------------------------------------
ACCRUED PENSION COST
Projected benefit obligation $ 700,531 $ 694,077
Fair value of plan assets, primarily
IPG insurance contracts 719,060 616,206
--------------------------------------------------------------------------------
Assets in excess (deficit) of projected
benefit obligation 18,529 (77,871)
Unrecognized prior service cost 9,304 12,404
Unrecognized net (gain) loss (27,740) 62,256
Unrecognized net asset (33,063) (41,330)
--------------------------------------------------------------------------------
$ (32,970) $ (44,541)
--------------------------------------------------------------------------------
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following assumed rates were used in determining the projected benefit
obligations:
YEAR ENDED MARCH 31, 2000 1999
--------------------------------------------------------------------------------
Weighted average discount rate 8.0% 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, 1999, and
1998.
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 $154,400, $92,000,
and $50,000 for the years ended March 31, 2000, 1999, and 1998, respectively.
33
<PAGE>
13. 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, 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 228,300 $11.87 165,450 $10.80 127,300 $ 9.57
Granted 27,500 9.90 79,450 12.48 47,000 13.58
Forfeited (12,850) 11.88 (11,600) 9.66 (8,750) 6.52
Exercised -- -- (5,000) 12.19 (100) 10.00
----------------------------------------------------------------------------------------------------------------------
Options outstanding at
end of year 242,950 $11.65 228,300 $11.87 165,450 $10.80
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted during the year ended March
31, 2000 was $2.38.
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 and 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: 2000 1999 1998
--------------------------------------------------------------------------------
As reported $1,323,880 $1,847,546 $1,805,483
Pro forma 1,283,921 1,661,854 1,696,279
NET INCOME PER SHARE: Basic Diluted Basic Diluted Basic Diluted
--------------------------------------------------------------------------------
As reported $0.52 $0.52 $0.72 $0.71 $0.71 $0.70
Pro forma 0.50 0.50 0.68 0.64 0.66 0.65
34
<PAGE>
13. STOCK OPTION PLAN (CONTINUED)
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, 2000: 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%.
The following table summarizes information about stock options outstanding and
exercisable at March 31, 2000.
Options Outstanding
--------------------------------------------------------------------------------
Weighted Weighted
Average Average
Remaining Exercise
Number of Contractual Price
Shares Life (Years) Per Share
--------------------------------------------------------------------------------
$ 6.50 - 9.50 53,500 7.83 $ 8.71
$10.00 - 15.00 189,450 7.49 12.29
--------------------------------------------------------------------------------
242,950 7.57 $11.65
--------------------------------------------------------------------------------
14. 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, 2000, the Corporation had outstanding
commitments to originate loans with variable interest rates of approximately
$7,151,000 and loans with fixed rates of approximately $5,694,000. In addition,
unused lines of credit amounted to approximately $3,352,000 at March 31, 2000.
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
--------------------------------------------------------------------------------
2001 $ 224,000
2002 231,000
2003 198,000
2004 and thereafter 808,000
--------------------------------------------------------------------------------
$1,461,000
--------------------------------------------------------------------------------
Total lease expense was $219,000, $157,000, and $31,200 for the years ended
March 31, 2000, 1999, and 1998, respectively.
In the normal course of business, the Corporation has entered into employment
agreements with certain officers of the Bank.
35
<PAGE>
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data is shown as follows: (Dollars in thousands
except per share data)
YEAR ENDED MARCH 31, 2000
--------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
Total interest income $ 3,631 $ 3,857 $ 4,433 $ 4,219
Total interest expense 1,860 1,979 2,411 2,466
--------------------------------------------------------------------------------
Net interest income 1,771 1,878 2,022 1,753
Provision for loan losses 69 110 122 (18)
--------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,702 1,768 1,900 1,771
Other income 1,089 867 935 606
Other expenses 1,924 1,953 2,219 2,449
--------------------------------------------------------------------------------
Income before income (loss) taxes 867 682 616 (72)
Income tax expense (benefit) 356 312 185 (83)
--------------------------------------------------------------------------------
Net income $ 511 $ 370 $ 431 $ 11
--------------------------------------------------------------------------------
Earnings per share
Basic $ .20 $ .14 $ .17 $ .01
Diluted $ .20 $ .14 $ .17 $ .01
--------------------------------------------------------------------------------
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 tax expense 376 291 420 241
--------------------------------------------------------------------------------
Net income $ 507 $ 373 $ 613 $ 354
--------------------------------------------------------------------------------
Earnings per share
Basic $ .20 $ .14 $ .24 $ .14
Diluted $ .19 $ .13 $ .24 $ .15
--------------------------------------------------------------------------------
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. CONDENSED FINANCIAL INFORMATION OF THE CORPORATION (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2000 1999
--------------------------------------------------------------------------------
ASSETS
Investment in the Bank, at equity $23,957,601 $23,613,677
Cash 161,712 651,510
Prepaid expenses and other assets 88,850 53,250
--------------------------------------------------------------------------------
$24,208,163 $24,318,437
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ -- $ --
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 25,115 25,721
Additional paid-in capital 4,782,029 4,897,207
Retained earnings 19,401,019 19,395,509
--------------------------------------------------------------------------------
Total stockholders' equity 24,208,163 24,318,437
--------------------------------------------------------------------------------
$24,208,163 $24,318,437
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED MARCH 31, 2000 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividend from Bank $ 1,000,000 $ -- $ --
Interest income 14,089 9,333 --
-------------------------------------------------------------------------------------------
Total income 1,014,089 9,333 --
-------------------------------------------------------------------------------------------
NONINTEREST EXPENSES (46,399) (42,535) (55,652)
-------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
NET INCOME OF THE BANK 967,690 (33,202) (55,652)
Equity in undistributed net income of the Bank 343,924 1,868,145 1,840,010
-------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,311,614 1,834,943 1,784,358
Income expense (benefit) (12,266) (12,603) (21,125)
-------------------------------------------------------------------------------------------
NET INCOME $ 1,323,880 $ 1,847,546 $ 1,805,483
-------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
16. CONDENSED FINANCIAL INFORMATION OF THE CORPORATION (PARENT COMPANY ONLY)
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 2000 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,323,880 $ 1,847,546 $ 1,805,483
Adjustments
Equity in undistributed income of the Bank (343,924) (1,868,145) (1,840,010)
(Increase) decrease in prepaid and other assets (35,600) (12,603) (21,128)
-------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities 944,356 (33,202) (55,655)
-------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net cash provided by investing activities -- -- --
-------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends paid on common stock (819,493) (796,410) (715,058)
Repurchase common stock (614,661) -- --
Stock options exercised -- 123,700 57,001
-------------------------------------------------------------------------------------------------
Net cash absorbed by financing activities (1,434,154) (672,710) (658,057)
-------------------------------------------------------------------------------------------------
DECREASE IN CASH (489,798) (705,912) (713,712)
CASH, beginning of year 651,510 1,357,422 2,071,134
-------------------------------------------------------------------------------------------------
CASH, end of year $ 161,712 $ 651,510 $ 1,357,422
-------------------------------------------------------------------------------------------------
</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 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 Community 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 second
Staunton office at 101 Community Way, 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, 2000 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
Nelson, McPherson, Summers & Santos
BDO Seidman, LLP 12 North New Street
300 Arboretum Place Staunton, Virginia 24401
Suite 520
Richmond, Virginia 23236 Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
MARKET MAKERS 7th Floor-East
Washington, D.C. 20005
Scott & Stringfellow, Inc
Knight Securities L.P. Williams, Mullen, Christian & Dobbins
Anderson & Strudwick, Inc. Two James Center
Sandler O'Neill & Partners 1021 East Cary Street
Richmond, Virginia 23210
TRANSFER AGENT
Community Bank
acts as Transfer Agent for
Community Financial Corporation
39
<PAGE>
COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
COMMON STOCK
As of May 31, 2000, there were approximately 553 holders of record of
Community Financial common stock. Community Financial common stock is traded on
the Nasdaq Small Cap Market under the symbol "CFFC." The shareholders of record
number does not reflect persons or entities who hold their stock in nominee or
"street" name.
The following tables present the Corporation's high, low, and closing
prices as reported by the Nasdaq Small Cap Market during the last two fiscal
years and the dividends declared by us for the stated periods.
Fiscal 2000 High Low Close Dividend Declared
---- --- ----- -----------------
June 1999 $11.50 $10.75 $11.50 $ .08
September 1999 12.00 10.25 10.63 .08
December 1999 12.00 9.00 10.13 .08
March 2000 11.50 9.63 9.63 .08
Fiscal 1999 High Low Close Dividend Declared
---- --- ----- -----------------
June 1998 $16.38 $14.50 $15.00 $ .07
September 1998 15.00 10.75 12.50 .08
December 1998 12.50 11.00 11.88 .08
March 1999 11.88 10.75 10.75 .08
Dividend payment decisions are made by the Board of Directors of Community
Financial 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.
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 8 of the Notes to Consolidated Financial
Statements contained in this Annual Report.
40
<PAGE>
<PAGE>
[TWO PICTURES] [COMMUNITY FIRST MORTGAGE CORPORATION LOGO]
Community First Mortgage Corporation Employees
Tony Bottoms
President
Harril Whitehurst
Executive Vice-President
June Bethea
Kerri Bliss
Lorey Bowles
Karen Brown
Debbie Clendenin
Lisa Collins
Mary Jean Davis
Steve Davis
Tom Gill
Carol Harris
Bobbi Heath
Clayton Hicks
Lisa Kurtz
Jason Marrugi
Julie Miller
Susan Miller
Rick Perkins
Sandy Redd
Cheryl Simpson
Molly Stout
Becky Tinsley
Chris Vick
DURING THE FISCAL YEAR ENDING MARCH 31, 2000 Community First Mortgage
Corporation closed over $78.3 million in permanent residential mortgage loans.
Approximately 53% of those new loans were originated by the Mortgage
Corporation's retail division, which has offices in Staunton/Waynesboro,
Richmond and Virginia Beach. The Company's wholesale division originated the
remaining loan volume. However, due to the sharp increase in interest rates that
occurred during the year, the determination was made in December to cease the
wholesale lending operations.
During the year, the Company hired two experienced loan officers in the Richmond
market, Christopher S. Vick and Thomas A. Gill. These two successful and highly
motivated individuals have already made significant contributions to the
Company's retail loan production during the year.
In May of 1999, Community First established a construction lending division to
serve the needs of the medium-sized builders in the Richmond market. In
cooperation with the Company's retail mortgage lending division, the
construction lending division attracted many excellent local builders and
developed and implemented a very attractive construction to permanent loan
product. At fiscal year end the construction lending division had originated
over $10.0 million in construction loans, with $7.7 million in outstanding
commitments and $2.8 million disbursed.
41
