SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 and 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24316
Community Financial Holding Corporation
(Exact name of registrant as specified in its charter)
New Jersey 52-1712224
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Haddon Ave, Westmont, N.J. 08108
Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code (609) 869-7900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of issued and outstanding voting stock
held by non-affiliates of the Registrant based upon a price of
$25.56 per share, the average of the bid and asked prices of the
Registrant's common stock on March 27, 1998 is $23,345,720. For
purposes of this calculation, all directors and executive
officers of the Registrant, and their associates, have been
considered affiliates.
The Exhibit Index is located on Page 90
(Applicable Only to Corporate Registrants)
The number of shares of Common Stock outstanding on March 27,
1998 was 1,044,236.
________________________________________________________________
<PAGE>
PART I
ITEM 1. Business
General
Community Financial Holding Corporation (the "Corporation")
is a New Jersey business corporation, which is registered as a
bank holding company under the Bank Holding Company Act of 1956,
as amended. The Corporation was incorporated on April 23, 1991,
and became an active bank holding company in April 1991 through
the acquisition of 100% of the shares of Community National Bank
of New Jersey, a full service commercial national bank
established in 1987 (the "Bank"). The Bank accounts for
substantially all of the consolidated assets, revenues and
operating results of the Corporation. In March 1994, Community
Investment Corporation, Inc. was formed as a wholly-owned
subsidiary of the Bank, for the purpose of purchasing, holding
and selling investments of the Bank. The Corporation's principal
executive offices are located at 222 Haddon Avenue, Westmont,
New Jersey 08108, and its telephone number is (609) 869-7900.
On March 3, 1998, the Corporation and HUBCO, Inc. ("HUBCO")
entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which the Corporation will be merged
with and into HUBCO with HUBCO as the surviving corporation (the
"Merger"). In the Merger, each share of the common stock of the
Corporation will be exchanged for 0.695 shares of HUBCO common
stock. Outstanding options to purchase the common stock of the
Corporation issued under the Corporation's 1994 Employee and
Director Stock Option Plan (the "Option Plan") will be exchanged
in the Merger for HUBCO common stock in accordance with the terms
of the Option Plan. The Merger is expected to be consummated
during the third quarter of 1998, subject to the satisfaction of
certain conditions, including among others, approval of the
Merger by the Corporation's shareholders and receipt of required
regulatory approvals. The transaction will be accounted for as a
pooling of interests. The Merger Agreement also provides for the
merger of the Bank with and into Hudson United Bank, a wholly-
owned subsidiary of HUBCO, with Hudson United Bank surviving such
merger.
Concurrently with the execution of the Merger Agreement, the
Corporation entered into a Stock Option Agreement with HUBCO
pursuant to which the Corporation granted HUBCO an option to
purchase up to 252,790 shares of the common stock of the
Corporation at a price of $24.40 per share, exercisable upon the
occurrence of certain events.
The Bank
The Bank's head office is located in Westmont, New Jersey
and consists of a full service banking location and a nearby
operations' support and servicing facility (including an ATM).
The Bank's other full service banking offices are located in
Audubon, Cherry Hill, Collingswood, HiNella, Marlton, Runnemede
and Westville, New Jersey. The Bank's primary service area
consists of Audubon, Cherry Hill, HiNella, Marlton, Runnemede,
Westville, Westmont and contiguous communities in Camden,
Gloucester and Burlington counties.
The principal activity of the Bank is to provide its local
communities with general commercial and retail banking services.
The Bank offers commercial and consumer loans of all types,
including real estate loans, residential mortgage loans, home
equity loans and lines of credit, auto loans and other credit
products. The Bank is not authorized to offer trust services and
does not presently offer the sale of investment products such as
mutual funds to its customers. The Bank's deposit services
include business and individual demand and time deposit accounts,
NOW accounts, money market accounts, Individual Retirement
Accounts and holiday accounts.
The Bank seeks to differentiate itself from its competitors
by delivering superior service and offering longer service hours.
As part of its commitment to delivering superior service, the
Bank has been engaged in an expansion program directed at
additional southern New Jersey communities. The Bank has opened
two branches in 1994 and one branch in 1996. The Bank opened a
branch in February 1997, another in May 1997 and another in
September 1997, and intends to open another branch in 1998.
As of December 31, 1997, the Bank employed 109 persons on a
full time basis and 12 persons on a part time basis. The
Corporation has no paid employees.
The Bank has outsourced virtually all of its data processing
operations pursuant to a contract with Fiserv, Inc. ("Fiserv")
for the provision of data processing services with respect to
deposit accounts, checking accounts, loan accounts and other
matters. The current contract with Fiserv was entered into on
November 1, 1996 and has a term of five years. In the event of
early termination of the contract with the Bank, Fiserv may
charge the Bank a fee determined by multiplying 75% of the Bank's
average monthly invoice from Fiserv by the remaining months of
the term. HUBCO has advised the Corporation that if the Merger
is consummated, HUBCO intends to terminate the contract with
Fiserv on or about November 1, 1998. Management estimates that
the termination fee charged by Fiserv in such event would be
approximately $615,000. The Bank also has an agreement with
Mellon Network Services for ATM processing services and an
agreement with IBAA Bancard, Inc. for certain credit card
processing services.
As of December 31, 1997, the Bank had total assets of
$150.7 million, total deposits of $136.8 million, and total
stockholders equity of $11.6 million. The Bank's strategy for
deposit acquisition and development has been to attract and
retain core deposits, and the Bank traditionally has not priced
its deposits to attract short term relationships. The Bank does
not accept brokered deposits.
At December 31, 1997, the Bank had loans of approximately
$85.8 million (net of a $974,000 allowance for loan losses),
representing approximately 56.9% of total assets. Securities,
primarily U.S. treasury, U.S. government agency and local
municipal securities, totaled approximately $37.9 million or
approximately 25.2% of total assets. The Bank's lending activity
is concentrated primarily in commercial loans (59% of its
loan-portfolio) and consumer loans (26.9% of its loan portfolio).
The Bank's commercial loan portfolio is largely made up of loans
secured by owner occupied commercial real estate with an average
loan to value ratio under 75%. There is no material
concentration in the portfolio within any business or industry
segment. The Bank's consumer portfolio consists of home equity,
automobile, credit card and personal loans. Approximately 76% of
the consumer portfolio is home equity loans. The average loan to
value ratio of these loans is approximately 75%. The Bank's
strategy is to make commercial loans based on its analysis of a
borrower's ability to repay the loan out of its operating cash
flows. With few exceptions, the Bank also obtains real estate or
other collateral for a loan, and typically requires repayment
guarantees by principals of a borrower. Most of the Bank's
commercial loans are made to small and medium size diverse
businesses. The Bank has no land or residential development
loans.
Risk elements in the loan portfolio include loans past due,
non-accrual loans, other real estate owned and a concentration of
loans to one type of borrower. The Bank closely monitors the
loan portfolio to reduce the risk of delinquent and problem
credits. Strict underwriting criteria which include loan to
value and debt to income ratios are followed, which also helps
reduce credit risk in the loan portfolio. An internal loan
review function is responsible for evaluating loan quality
including adherence to underwriting criteria. This function
reports directly to the Audit Committee of the Board of
Directors. The Bank's loan portfolio is geographically
concentrated in the southern New Jersey counties that make up its
primary service area.
Service Area
The Bank's head office is in Westmont, Camden County, New
Jersey, and it has full service branch offices in Audubon,
Collingswood, Cherry Hill, HiNella and Runnemede, Camden County,
New Jersey; Marlton, Burlington County, New Jersey; and
Westville, Gloucester County, New Jersey. The Bank's primary
service area is Westmont, Audubon, Cherry Hill, HiNella, Marlton,
Runnemede and Westville and contiguous communities thereto. The
Bank's primary service area is a diverse economic and employment
market with no significant dependence on any one industry or
large employer. Research materials available from the Federal
Reserve Bank of Philadelphia report slight growth in the Bank's
regional economy of New Jersey, Pennsylvania and Delaware through
1995 and continuing in 1996 and 1997. However, the pace of
growth has eased. The manufacturing employment rate has
increased 0.3% in the first three quarters of 1997 which is
slightly below the 0.5% national rate of increase. However, most
current economic indicators suggest the regional economy should
continue to grow at a moderate pace in 1998. The profitability
of the Bank is affected by economic conditions in the Bank's
primary service area.
Competition
The banking business in the service area of the Bank, as
well as the balance of New Jersey and the Delaware Valley area,
is highly competitive with respect to both loans and deposits and
is dominated by a number of major regional and super-regional
banks and non-depository institutions which have many offices.
Many of these institutions, particularly the larger banking firms
that have enhanced their local presence through mergers in recent
years, have substantially greater resources and offer a wider
array of services, such as trust services, than the Bank. In
addition, many of these institutions are permitted to make larger
loans than the Bank. In addition, the Bank faces increasing
competition for loans and deposits from institutions such as
credit unions, mortgage brokers, mortgage banking companies,
mutual funds, insurance companies and others. The Bank competes
with these institutions primarily on the basis of service,
quality and hours of operation. The Corporation believes that
the Bank's local presence of senior management and its Board of
Directors, and their collective familiarity with its service
area, affords the Bank an advantage in service, quality and
understanding the needs of its customer base.
SUPERVISION AND REGULATION
General
Bank holding companies and national banks are extensively
regulated under Federal law. The following is a summary of
certain Federal laws and regulations that govern the Corporation
and the Bank. However, to the extent that the following
information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular
statutory or regulatory provisions. Any change in applicable law
or regulation could have a material effect on the business and
prospects of the Corporation and the Bank. The regulation and
inspection of the Corporation and the regulation and examination
of the Bank by the regulatory authorities are designed primarily
for the protection of depositors and not the Corporation or its
shareholders.
Bank Holding Companies
The Corporation is a registered bank holding corporation
under the Bank Holding Corporation Act of 1956, as amended (the
"BHCA"), and is subject to regulation and inspection by the
Federal Reserve Board. The BHCA restricts the activities of the
Corporation and among other things requires the prior approval of
the Federal Reserve Board in any case where a bank holding
corporation proposes to acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank or to
merge or consolidate with any other bank holding corporation.
The Corporation is a legal entity separate and distinct from
its subsidiary bank and its nonbank subsidiary. Accordingly, the
right of the Corporation, and consequently the right of creditors
and shareholders of the Corporation, to participate in any
distribution of the assets or earnings of any subsidiary is
necessarily subject to the prior claims of creditors of the
subsidiary, except to the extent that claims of the Corporation
in its capacity as creditor may be recognized. The principal
source of the Corporation's revenue and cash flow is dividends
from the Bank. There are legal limitations on the extent to
which the Bank can finance or otherwise supply funds to the
Corporation and its nonbank subsidiaries.
The BHCA currently permits bank holding companies from any
state to acquire banks and bank holding companies located in any
other state, subject to certain conditions, including certain
nationwide and state imposed concentration limits. Effective
June 1, 1997, banks have the ability, subject to certain
restrictions, including state opt-out provisions, to consolidate
with one another or to acquire by acquisition or merger branches
outside their home states. The establishment of new interstate
branches also is possible in those states with laws that
expressly permit it. New Jersey, however, does not permit
out-of-state banks to branch into New Jersey.
The BHCA also prohibits a bank holding corporation, with
certain exceptions, from acquiring more than 5% of the voting
shares of any corporation that is not a bank and from engaging in
any business other than banking or managing or controlling banks
and other subsidiaries authorized by the BHCA or providing
services to them without the prior approval of the Federal
Reserve Board. Under the BHCA, the Federal Reserve Board is
authorized to approve the ownership of shares by a bank holding
corporation of any corporation whose activities have been
determined by the Federal Reserve Board to be so closely related
to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal
Reserve Board is required to weigh the expected benefits to the
public, such as greater convenience, increased competition or
gains in efficiency, against such possible adverse effects as
undue concentration of resources, decreased or unfair
competition, conflicts of interest and unsound banking practices.
The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA"), in addition to expanding the enforcement
powers of bank regulators (and supervision and regulation),
created new opportunities for acquisitions by bank holding
companies. Under FIRREA, a bank holding corporation may acquire
savings associations, regardless of a savings association's
financial condition and without the imposition of "tandem"
restrictions on transactions between the savings association and
its holding corporation affiliates. Moreover, bank holding
companies that own savings associations are permitted to merge
such institutions into existing bank subsidiaries, subject to
certain requirements.
Source of Strength Policy
Under Federal Reserve Board's policy, a bank holding
corporation is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct
its operations in an unsafe or unsound manner. In addition, it
is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding corporation
should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility
and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding corporation's
failure to meet its obligations to serve as a source of strength
to its subsidiary banks will generally be considered by the
Federal Reserve Board to be an unsafe and unsound banking
practice or a violation of the Federal Reserve Board regulations
or both. Consistent with its "source of strength" policy for
subsidiary banks, the Federal Reserve Board has stated that, as a
matter of prudent banking, a bank holding company generally
should not maintain a rate of cash dividends unless its net
income available to common shareholders has been sufficient to
fund fully the dividends, and the prospective rate of earnings
retention appears to be consistent with the corporation's capital
needs, asset quality and overall financial condition.
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Banking Act") permits bank holding
companies to acquire banks in any state. Acquired banks in
different states may now be merged into a single bank, and the
merged banks may establish and acquire additional branches
anywhere the acquiree could have branched.
A bank may establish and operate a de novo branch in a state
in which the bank does not maintain a branch if that state
expressly permits de novo branching. States were permitted to
opt out of the Interstate Banking Act's interstate branching
provisions, so long as they did so prior to June 1, 1997.
Domestic institutions in the states which have opted out are also
prohibited from branching interstate.New Jersey has opted out of
interstate branching. Limited branch purchases are still subject
to state laws.
After a bank has established branches in a state through an
interested merger transaction, the bank may establish and acquire
additional branches at any location in the state where any bank
involved in the interstate merger transaction could have
established or acquired branches under applicable federal or
state law. A bank that has established a branch in a state
through de novo branching may establish and acquire additional
branches in such state in the same manner and to the same extent
as a bank having a branch in such state as a result of an
interstate merger. Bank management anticipates that the
Interstate Banking Act will increase competitive pressures in the
Bank's market by permitting entry of additional competitors, but
management is of the opinion that this will not have a material
impact upon the anticipated results of operations of the Bank.
The Bank
The Bank is a national bank chartered under the National
Bank Act of 1864, as amended. The Bank is subject to regulation,
supervision and examination by the Office of the Comptroller of
Currency ("OCC") and is also regulated in certain respects by the
Federal Reserve Board and the FDIC. The FDIC, through the Bank
Insurance Fund ("BIF"), insures all deposits held by the Bank up
to a maximum of $100,000 for any one customer.
The various laws and regulations administered by the OCC
affect corporate practices, such as payment of dividends,
incurring debt and acquisition of financial institutions and
other companies, and affect business practices, such as payment
of interest on deposits, the charging of interest on loans, types
of business conducted and location of offices.
Capital Requirements
Under Federal Reserve Board regulations, the Corporation
must maintain a minimum ratio of qualified total capital to
risk-weighted assets of 8.00%. Risk-weighted assets are
determined by multiplying the various categories of assets by the
appropriate risk weighing factor (ranging from 0% to 100%) under
applicable regulations. Certain off-balance sheet items, such as
standby letters of credit, are included in assets for these
purposes at a "credit equivalent" value, determined by
multiplying the off-balance sheet item by a credit conversion
factor established by applicable regulations. At least half of
the total capital must be comprised of common equity, retained
earnings and a limited amount of permanent preferred stock, less
goodwill ("Tier 1 capital"). The remainder ("Tier 2 capital")
may consist of a limited amount of subordinated debt, other
preferred stock, certain other instruments and a limited amount
of loan and lease losses reserves. The sum of Tier 1 capital and
Tier 2 capital is "total risk-based capital." Federal Reserve
Board regulations also require a minimum ratio of Tier 1 capital
to risk-weighted assets of 4.00%. The Corporation's total
risk-based capital and Tier 1 risk-based capital ratios as of
December 31, 1997 were 13.11% and 12.09%, respectively.
In addition, the Federal Reserve Board has established a
minimum leverage ratio (Tier 1 capital to quarterly average
assets less goodwill) of 3.00% for bank holding companies that
meet certain specified criteria, including that they have the
highest regulatory rating. All other bank holding companies will
be required to maintain a leverage ratio of 3.00% plus an
additional cushion of at least 100 to 200 basis points. The
Corporation's leverage ratio as of December 31, 1997 was 7.91%.
The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above
the minimum supervisory levels, without significant reliance on
intangible assets.
The Bank is subject to capital requirements adopted by the
OCC that are the same as those that apply to the Corporation.
At December 31, 1997, the Bank's total risk-based capital, Tier 1
capital and leverage ratios were 13.11%, 12.09% and 7.91%,
respectively.
Bank regulators continue to indicate their desire to raise
banking organization capital requirements beyond their current
levels. However, management is unable to predict whether higher
capital ratios will be imposed and, if so, at what levels and on
what schedule.
Any bank holding corporation or national bank not in
compliance with applicable capital requirements may be subject to
certain growth restrictions, issuance of a capital directive by
the appropriate federal regulator, and various other possible
enforcement actions by the appropriate federal regulators,
including a cease and desist order, civil money penalties, and
the establishment of restrictions on operations. In addition,
the institution could be subject to appointment of a receiver or
conservator or a forced merger into another institution.
Limits on Dividends
The amount of dividends that may be paid by the Bank to the
Corporation depends upon the Bank's earnings and capital
position, and is limited by federal law, regulations and
policies.
As a national bank subject to the regulations of the OCC,
the Bank must obtain approval for any dividend if the total of
all dividends declared in any calendar year would exceed the
total of its net profits, as defined by applicable regulations,
for that year, combined with its retained net profits for the
preceding two years. In addition, the Bank may not pay a
dividend in an amount greater than its undivided profits then on
hand after deducting its losses and bad debts. For this purpose,
bad debts are generally defined to include the principal amount
of loans which are in arrears with respect to interest by six
months or more unless such loans are fully secured and in the
process of collection. Moreover, for purposes of this
limitation, the Bank is not permitted to add the balance in its
allowance for loan losses account to its undivided profits then
on hand; however, it may net the sum of its bad debts as so
defined against the balance in its allowance for loan losses
account and deduct from undivided profits only bad debts as so
defined in excess of that account. At December 31, 1997, the
Bank had $2.4 million of retained earnings legally available for
the payment of dividends.
In addition, the OCC and the Federal Reserve Board are
authorized to determine under certain circumstances relating to
the financial condition of a national bank or a bank holding
corporation that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof. The payment of
dividends that deplete a bank's capital base could be deemed to
constitute such an unsafe or unsound practice. As noted above,
the Federal Reserve Board has indicated that banking
organizations should generally pay dividends only out of current
operating earnings.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), a bank has a
continuing and affirmative obligation consistent with its safe
and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs
for financial institutions nor does it limit an institution's
discretion to develop types of products and services that it
believes are best suited to its particular community, consistent
with the CRA. The CRA requires the OCC and Federal Reserve
Board, in connection with their examination of national banks and
bank holding companies, to assess the institution's record of
meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications by such
institution. The OCC is required to provide a written evaluation
of an institution's CRA performance utilizing a four tiered
descriptive rating system, which rating is disclosed to the
public. The Bank has been rated "satisfactory" under this
system, but no assurance can be given as to the Bank's ability to
maintain this rating.
There are numerous legislative and regulatory proposals that
are pending regarding CRA requirements and standards. The
Corporation cannot predict the effect of changes in the law, or
in the interpretation of existing law as applied to it, or the
Bank's ability to comply with any such laws or interpretations.
Borrowings by the Corporation
There are various legal restrictions on the extent to which
the Corporation can borrow or otherwise obtain credit from the
Bank. In general, these restrictions require that any such
extensions of credit be secured by designated amounts of
specified collateral and are limited, as to the Corporation, to
10% of the Bank's capital stock and surplus, and as to the
Corporation and any other affiliates in the aggregate, to 20% of
the Bank's capital stock and surplus. Federal law also requires
that transactions between the Bank and the Corporation or any
other affiliates, including extensions of credit, sales of
securities or assets and the provision of services, be conducted
on terms at least as favorable to the Bank as those that apply or
would apply to comparable transactions with unaffiliated parties.
Economic and Monetary Policies
The earnings and growth of the Corporation and the Bank are
affected by domestic and foreign economic conditions,
particularly by the monetary and fiscal policies of the United
States government and its agencies.
The monetary policies of the Federal Reserve Board have had,
and will continue to have, an important impact on the operating
results of commercial banks through its power to implement
national monetary policy in order, among other things, to
mitigate recessionary and inflationary pressures by regulating
the national money supply. In particular, the Federal Reserve
Board regulates money, credit and interest rates in order to
influence general economic conditions. These policies have a
significant influence on overall growth and distribution of
loans, investments and deposits and affect interest rates charged
on loans or paid for time and savings deposits. The techniques
used by the Federal Reserve Board include setting the reserve
requirements of member banks and establishing the discount rate
on member bank borrowings. The Federal Reserve Board also
conducts open market transactions in United States government
securities. It is impossible to predict the effects of such
policies upon future business, earnings and growth of the
Corporation or the Bank.
FDICIA
The prompt corrective action provisions of the Federal
Deposit Insurance Company Improvement Act of 1991 ( "FDICIA")
significantly expanded the regulatory and enforcement powers of
federal banking regulators, including FDIC. Among other things,
FDICIA establishes additional capital standards for insured
depository institutions and requires specific enforcement actions
by the appropriate federal regulatory agencies against
institutions that fail to meet these standards. The extent of
these powers depends upon whether the institutions in questions
are "well capitalized," "adequately capitalized"
"undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
Prompt Corrective Action. Among other things, FDICIA
requires the federal banking agencies to take "prompt corrective
action" in respect of banks that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well
capitalized," "adequately capitalized," "under capitalized,"
"significantly under capitalized" and "critically under
capitalized." At December 31, 1997, the Bank was "well
capitalized." The following table sets forth the minimum capital
ratios that a bank must satisfy in order to be considered well
capitalized or adequately capitalized under Federal Reserve Board
regulations:
Adequately Well
Capitalized Capitalized
Total Risk-Based Capital Ratio 8% 10%
Tier 1 Risk-Based Capital Ratio 4% 6%
Leverage Ratio 4% 5%
The FDIC's regulations establish specific actions that are
permitted or, in certain cases, required to be taken by
regulators with respect to institutions falling within one of the
three undercapitalized categories. Depending on the level of the
institution's capital, the agency' correction powers can include:
requiring a capital restoration plan; placing limits on asset
growth and restrictions on activities; requiring the institution
to issue additional stock (including voting stock) or to be
acquired; placing restrictions on transactions with affiliates;
restricting the interest rate the institution may pay on
deposits; ordering a new election for the institution's board of
directors; requiring that certain senior executive officers or
directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the
payment of principal or interest on subordinated debt;
prohibiting the holding company from making capital distributions
without prior regulatory approval; and, in the most severe cases,
appointing a receiver for the institution. A bank that is
undercapitalized is required to submit a capital restoration
plan, and such a plan will not be accepted unless, among other
things, the bank holding company guarantees the capital plan, up
to a certain specified amount. Under certain circumstances, a
"well capitalized" "adequately capitalized" or "undercapitalized"
institution may be required to comply with restrictions
applicable to the next lowest capital category.
Safety and Soundness Standards
In addition, FDICIA required regulators to promulgate a new
set of non-capital measures of bank safety, such as loan
underwriting standards and minimum earnings levels. The Federal
Banking Agencies have adopted "Interagency Guidelines
Establishing Standards for Safety and Soundness" ("Guidelines").
These operational and managerial standards address an
institution's general practices, and are designed to provide a
framework for the federal bank regulators to determine whether
those practices are sound in principle and whether procedures are
in place to ensure that they are applied in the normal course of
business. The guidelines cover such areas as internal controls,
loan documentation, credit underwriting, interest rate exposure,
asset growth and compensation. Banks failing to meet these
standards are required to submit compliance plans to their
appropriate federal regulators.
FDICIA also requires regulators to perform annual on-site
bank examinations, place limits on real estate lending by banks
and tighten auditing requirements.
Deposit Insurance Assessment
As a "well capitalized" financial institution, the Bank was
not assessed any material BIF deposit premiums in 1996 by the
FDIC. The Deposit Insurance Act of 1996 (the "Deposit Act") was
enacted on September 30, 1996 to recapitalize the Savings
Association Insurance Fund ("SAIF") and requires banks, such as
the Bank, which are well capitalized and insured by the BIF to
share the burden of repaying certain outstanding bonds issued by
SAIF in the late 1980's to address the savings and loan crisis.
The Deposit Act mandates the Bank, and the other BIF insured
financial institutions, starting in 1997 must pay as a special
deposit insurance assessment of 4.1 basis points of its deposits
until the year 2000 and then a special deposit insurance
assessment of 2.4 basis points of its deposits from 2000 until
2017. The Bank's BIF insurance premium for 1997 was $14,000, and
the Bank estimates that its BIF insurance premium for 1998 will
be approximately $16,000.
Depositor Preference
Section 3001(a) of the Omnibus Budget Reconciliation Act of
1993 provides depositors a preference over general and
subordinated creditors and shareholders where a receiver (the
FDIC or RTC) distributes assets from a failed bank or savings
association. Under prior law, depositors were paid on a pro rata
basis with general creditors when a receiver distributed the
assets of a failed institution, except if the institution was
located in a state having a depositor preference law. Under the
new law, claims against the failed institution are paid in the
following order: (i) the receiver's administrative expenses,
(ii) deposit liabilities of the institution, (iii) other general
or senior liabilities of the institution, (iv) obligations
subordinated to depositors or general creditors and
(v) obligations to shareholders. The new law applies to any case
in which a receiver is appointed after August 10, 1993.
Legislative Proposals and Reforms
Legislative and regulatory proposals regarding changes in
banking, and the regulation of banks, thrifts and other financial
institutions, are being considered by the executive branch of the
Federal government, Congress and various state governments,
including New Jersey. Certain of these proposals, if adopted,
could significantly change the regulation of banks and the
financial services industry. It cannot be predicted whether any
of these proposals will be adopted or, if adopted, how these
proposals will affect the Corporation.
ITEM 2. Properties
The headquarters of the Corporation is located at 222 Haddon
Avenue, Westmont, New Jersey. The property is leased by the
Bank, which maintains its administrative headquarters and a full
service banking office at that location. The Bank has an
operations support and servicing facility located directly
across Haddon Avenue from the main office, at 231 Haddon Avenue.
There is an ATM at this location. This property was leased by
the Bank during 1996, and was purchased by the Bank on January 7,
1997. The Bank also has full service branches located at
449 Nicholson Road, Audubon, New Jersey, which the Bank acquired
on May 17, 1994, and 135 Broadway, Westville, New Jersey. These
properties are owned by the Bank. There is an ATM at the Audubon
location. The Bank opened a branch at 600 N. Route 73, Marlton,
New Jersey, on September 6, 1994. This property is also leased
by the Bank. There is an ATM, owned by the Bank, at this
location. The Bank opened a branch at 2099 Route 70, Cherry
Hill, New Jersey on September 16, 1996. This property is leased
by the Bank and there is an ATM, owned by the Bank, at this
location.
On July 19, 1996, the Bank purchased the physical property
and equipment at three banking locations which had been recently
closed when other banks merged. These locations are 765 Haddon
Avenue, Collingswood, New Jersey; 705 Warwick Road, HiNella, New
Jersey; and 4 East Clements Bridge Road, Runnemede, New Jersey.
The Bank opened a branch at the Collingswood location on
February 28, 1997, at the Runnemede location on May 28, 1997, and
at the HiNella location on September 10, 1997. There is an ATM
owned by the Bank at each of these three locations.
In the opinion of management, all properties are well
maintained and suitable to their respective present needs and
operations.
On January 9, 1998, the Bank entered into a lease agreement
for a location in Medford, Burlington County, New Jersey. The
Bank plans to operate a full-service banking branch at this
location. The lease agreement is contingent upon the completed
construction of a retail shopping complex in which the branch is
to be located. Construction is scheduled to be completed by the
end of 1998.
ITEM 3. Legal Proceedings
Neither the Corporation or the Bank is a party to any
material pending legal proceedings, nor is any of their property
subject to any material legal proceedings, other than ordinary
routine litigation incidental to the business of the Corporation
and the Bank, and management is not aware of any such proceedings
contemplated by governmental authorities.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Corporation's Common Stock is quoted on the NASDAQ Small
Cap Market under the symbol CMFH. The following table sets forth
the high and low bid information, as reported by the NASDAQ Small
Cap Market, as of the most recent practicable date and for the
periods indicated below:
NASDAQ SMALL CAP MARKET*
HIGH LOW
March 27, 1998 $25.63 $25.00
1997
Quarter ended December 31, 1997 18.50 17.50
Quarter ended September 30, 1997 17.62 15.48
Quarter ended June 30, 1997 17.14 14.76
Quarter ended March 31, 1997 19.05 15.95
1996
Quarter ended December 31, 1996 18.57 12.62
Quarter ended September 30, 1996 13.15 10.66
Quarter ended June 30, 1996 12.02 10.66
Quarter ended March 31, 1996 12.70 11.34
*These quotations may reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions, and, therefore, may not
necessarily represent actual transactions. These quotations have
been adjusted to reflect the 5% common stock dividends
distributed by the Corporation in December 1997 and December
1996.
Dividends. The Corporation declared a 5% common stock
dividend in 1997 and 1996. The Corporation has never paid a cash
dividend. The Merger Agreement permits the Corporation to pay
quarterly cash dividends on its common stock in an amount equal
to $0.14 per share. The Board of Directors has not made any
determination as to whether the Corporation will declare any cash
dividends prior to the consummation of the Merger. The
Corporation's ability to pay cash dividends is primarily, if not
entirely, dependent upon cash dividends paid to the Corporation
by the Bank. The payment of dividends to the Corporation by the
Bank is restricted under federal banking law. The approval of
the OCC will be required if the total of all dividends declared
in any calendar year by the Bank exceed's the Bank's net profits
to date, as defined, for that year combined with its retained
profits for the preceding two years. In addition, the Bank may
not pay a dividend in an amount greater than its undivided
profits then on hand after deducting its losses and bad debts.
The Federal Reserve Board and the OCC also have the authority
under federal law to enjoin a national bank or bank holding
company from engaging in what, in its opinion, constitutes an
unsafe or unsound practice in conducting its business, including
the payment of a dividend under certain circumstances in which
the bank or bank holding company fails to meet minimum capital
requirements or in which its earnings are impaired. See Part I,
Item 1 "Supervision and Regulation--Limits on Dividends."
Holders. As of January 31, 1998, the Corporation had
approximately 490 holders of record of its Common Stock. Such
information does not include those persons holding securities in
brokerage accounts using street names, the addition of which
would increase the number of beneficial owners of the
Corporation's securities.
<PAGE>
ITEM 6. Selected Financial Data
Selected Historical Consolidated Financial Data
The following table sets forth certain historical financial
data with respect to the Corporation on a consolidated basis.
This table should be read in conjunction with the Corporation's
historical Consolidated Financial Statements and related notes
thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands, except ratios and per share data (Unaudited))
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income ......................... $ 9,312 $ 8,594 $ 7,455 $ 6,011 $ 5,346
Interest expense ........................ 2,996 2,831 2,549 1,911 1,787
Net interest income ..................... 6,316 5,763 4,906 4,100 3,559
Provision for loan losses ............... 590 340 210 105 270
Noninterest income ...................... 1,300 895 652 630 679
Noninterest expense ..................... 6,269 4,849 4,189 3,473 3,054
Income taxes ............................ 127 464 367 403 358
Income before accounting changes ........ 630 1,006 792 749 556
Net income (1) .......................... 630 1,006 792 749 577
Per Share Data (2):
Income before accounting changes ........ $ 0.57 $ 0.93 $ 0.76 $ 0.89 $ 1.17
Net income (1)(3) ....................... 0.57 0.93 0.76 0.89 1.21
Book value end of period ................ 11.27 10.65 9.73 8.70 9.06
Period End Balance Sheet:
Total assets ............................ $ 150,671 $ 126,527 $ 112,845 $ 95,625 $ 86,076
Loans Held For Sale ..................... 1,746 1,305 262 0 0
Loans (net) ............................. 85,800 71,649 62,542 52,839 43,548
Securities (4) .......................... 37,909 32,728 39,060 31,946 29,676
Federal funds sold ...................... 7,300 8,050 1,550 1,150 5,775
Deposits ................................ 136,757 111,448 99,504 83,947 78,358
Shares outstanding (2) .................. 1,027,713 1,027,713 1,024,078 1,024,078 477,006
Performance Ratios:
Return on average assets ................ 0.48% 0.85% 0.76% 0.83% 0.77%
Return on average equity ................ 5.64 9.72 8.50 11.20 14.56
Net interest margin ..................... 5.44 5.39 5.27 5.02 5.22
Asset Quality Ratio:
Allowance for loan losses to period
end loans ............................. 1.12% 1.02% 0.94% 1.13% 1.62%
Allowance for loan losses to nonaccrual
loans ................................. 148.18% 139.87 186.10 116.65 224.31
Nonperforming assets to period end loans
& foreclosed properties ............... 1.05 0.75 1.52 1.20 1.10
Net charge offs to average loans ........ 0.45 0.29 0.38 0.48 0.77
Liquidity and Capital Ratios (5):
Average loans to average deposits ....... 66.52% 64.73% 63.00% 57.01% 64.65%
Tier 1 Risk-Based Capital Ratio ......... 12.09 13.86 15.80 17.07 9.52
Total Risk-Based Capital Ratio .......... 13.11 14.80 16.75 18.20 10.77
Tier 1 Leverage Ratio ................... 7.91 8.70 8.74 10.11 5.17
</TABLE>
(1) During 1993 the Corporation adopted Statement of Financial
Accounting Standards No. 109 with a resultant benefit of
$20,851 which is included in Net Income.
(2) Adjusted to give retroactive effect to the 5% stock
dividends of 1997, 1996, 1995, 1994 and 1993 for all years
presented.
(3) Represents net income per share on an fully diluted basis.
Basic net income per share for 1997, 1996, 1995, and 1994
was $0.61, $0.98, $0.77 and $0.91, respectively. There was
no dilution for 1993.
(4) Total of securities available for sale and investment
securities.
(5) For definitions of certain terms relating to capital ratios,
see "Supervision and Regulation-Capital Requirements."
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide
information about the financial condition and results of
operations of the Corporation for the fiscal years ended
December 31, 1997, 1996 and 1995, and should be read in
conjunction with the Consolidated Financial Statements and
related notes.
Financial Highlights
The Corporation reported net income for the year ended
December 31, 1997 of $630,000, a decrease of 37% from net income
of $1.0 million for the year ended December 31, 1996. The
Corporation's net income for the year ended December 31, 1996
reflected an increase of 27% over net income of $792,000 for the
year ended December 31, 1995. The decrease in earnings from 1996
to 1997 resulted primarily from expenses associated with the
branch expansion and increases in the provision for loan losses.
The increase in earnings from 1995 to 1996 was due primarily to
higher net interest income which was partially offset by
increases in the provision for loan losses and operating expenses
resulting from expansion of the residential mortgage business
line, opening a bank branch in September and the purchase of
three additional bank branch locations.
Expressed on a diluted earnings per share basis (after
giving retroactive effect to the payment of a 5% stock dividend
for each year), net income for 1997 was $0.57 per diluted share
compared to $0.93 per diluted share for 1996 and $0.76 for 1995.
Book value per share at December 31, 1997 was $11.27, as compared
to $10.65 and $9.73 at December 31, 1996 and 1995, respectively.
The book value per share has been restated to give retroactive
effect to the 5% stock dividends issued in 1997, 1996, and 1995.
The Corporation's return on average assets was .48% for 1997
as compared to .85% for 1996 and .76% for 1995. The return on
average shareholders' equity was 5.64% for 1997 compared to 9.72%
for 1996 and 8.50% for 1995. The 1996 to 1997 decrease was due
primarily to increased expenses associated with the branch
expansion and increased provision for loan losses. The 1995 to
1996 increase was due primarily to an increase in net interest
income.
The Corporation's assets grew steadily over the period from
December 31, 1995 through December 31, 1997, driven primarily by
increased deposits resulting from continued growth in the number
of depositor accounts as a result of increasing market share in
its primary service area. Total assets at December 31, 1997 were
$150.7 million, an increase of $24.2 million or 19.1% over total
assets of $126.5 million at December 31, 1996. Net loans were
$85.8 million at December 31, 1997 compared to $71.7 million at
December 31, 1996. Total deposits increased $25.4 million or
22.8% from $111.4 million at December 31, 1996 to $136.8 million
at December 31, 1997. The investment securities portfolio,
including federal funds sold and securities available for sale,
increased 10.8% or $4.4 million to $45.2 million at December 31,
1997 from $40.8 million at December 31, 1996. Cash and due from
bank accounts increased $2.5 million or 30.1% to $10.8 million
from $8.3 million at December 31, 1996 primarily as a result of
increased deposits.
In 1997, the Corporation continued to expand its residential
mortgage business line resulting in an increase of loans held for
sale from $1.3 million at December 31, 1996 to $1.7 million at
December 31, 1997. In addition, residential mortgage loans held
in portfolio increased from $4.1 million at December 31, 1996 to
$11.4 million at December 31, 1997. This portfolio consists
primarily of adjustable rate mortgages. Bank premises and
equipment increased $1.8 million or 58.1% to $4.9 million at
December 31, 1997 from $3.1 million at December 31, 1996. This
increase resulted primarily from the purchase of the three
additional branches opened during 1997.
The Federal Deposit Insurance Corporation (FDIC) reduced the
Corporation's insurance premium in June 1995 and suspended the
premium for 1996. The premium decreased $92,000 or 98% to $2,000
for 1996 as compared to $94,000 for 1995. This expense was
$10,000 for 1997. The FDIC at its discretion will determine
future premiums effective beyond December 31, 1997. Management
is unaware of any reason that might cause the FDIC insurance
premium to increase substantially in 1998.
Except for the Merger, management is not aware of any
trends, events or uncertainties that will have or that are
reasonably likely to have a material effect on the Corporation's
liquidity, capital resources or results of operations.
This Annual Report on Form 10-K contains forward looking
statements with respect to, among other things, plans, future
events or performance of the Corporation, the occurrence of which
involve certain risks and uncertainties that could cause actual
results or future events to differ materially from those
expressed in any forward looking statement, including but not
limited to changes in economic conditions, the adequacy of loan
loss reserves, the effect of competition and changes in
regulatory requirements. Where any forward looking statement
includes a statement of the assumptions or bases underlying such
forward looking statement, the Corporation cautions that, while
such assumptions or bases are believed to be reasonable and are
made in good faith, assumed facts or bases almost always vary
from actual results, and the differences between assumed facts or
bases and actual results can be material, depending upon the
circumstances. Where, in any forward looking statement, the
Corporation expresses an expectation or belief as to plans or
future results or events, such expectation or belief is expressed
in good faith and believed to have reasonable basis, but there
can be no assurance that the statement of expectation or belief
will result or be achieved or accomplished. The words "believe",
"expect" and "anticipate" and similar expressions identify
forward looking statements.
Results of Operations
The principal source of revenue for the Corporation is net
interest income. Net interest income is the difference between
income earned on loans and securities and the interest paid on
deposits and borrowed funds. Interest-earning assets are
comprised primarily of loans and securities, while deposits
represent the major portion of interest bearing liabilities.
Changes in the volume and mix of interest-earning assets and
interest-bearing liabilities, as well as their respective yields
and rates, have a significant impact on the level of net interest
income. Net interest margin is calculated as the tax-equivalent
net interest income divided by the average earning assets and
represents the Corporation's net yield on its earning assets.
Net interest income was $6.3 million for the year ended
December 31, 1997, 8.6% greater than the $5.8 million reported
during fiscal 1996. The improvement in net interest income from
1996 to 1997 was due primarily to volume and rate increases in
the investment portfolio and volume increases in the loan
portfolio. Partially offsetting these improvements were
decreases in volume of federal funds sold, increases in volume of
interest bearing deposit balances and the negative impact of
rates on the loan portfolio. Net interest income was
$5.8 million for the year ended December 31, 1996, 18.4% greater
than the $4.9 million reported during fiscal 1995. The
improvement in net interest income from 1995 to 1996 was due
primarily to volume and rate increases in the investment
portfolio, volume increases in the loan portfolio and rate
decreases in interest paid on deposits. Partially offsetting
these improvements were increases in volume of interest bearing
deposit balances and the negative impact of rates on the loan
portfolio.
The average balance of the loan portfolio for 1997 was
$79.4 million, up $11.8 million or 17.5% from the average balance
for 1996. The average balance of the loan portfolio was
$67.6 million for 1996, up $10.1 million or 17.6% from the
average balance for 1995. The average balance of the securities
portfolio (including federal funds sold and securities available
for sale) was $40.5 million for 1997, down $1.0 million or 2.4%
from the average for 1996. The average balance of the securities
portfolio (including federal funds sold and securities available
for sale) was $41.5 million for 1996, up $4.0 million or 10.7%
over the average for 1995. The yield on average loans decreased
42 basis points from 9.14% in 1996 to 8.72% in 1997 and decreased
28 basis points from 9.42% in 1995 to 9.14% in 1996 generally
consistent with the trend in market interest rates during the
period. The average yield on the securities portfolio increased
25 basis points from 6.26% in 1996 to 6.51% in 1997 and increased
57 basis points from 5.69% in 1995 to 6.26% for 1996.
Interest expense for 1997 increased by 7.1% from
$2.8 million for 1996 to $3.0 million for 1997. Average interest
bearing liabilities increased 6.0% from $81.5 million for 1996 to
$86.4 million for 1997. The interest rate paid on average
interest bearing liabilities was 3.47% for 1997 and 1996. The
growth of interest earning assets offset the increased interest
expense associated with the growth of interest bearing deposits.
Interest expense for 1996 increased 12.0% from $2.5 million for
1995 to $2.8 million for 1996. Average interest bearing
liabilities increased 13.2% from $72.0 million for 1995 to
$81.5 million for 1996. A higher yield on the securities
portfolio and the growth of interest earning assets offset the
increase associated with the growth of interest bearing deposits
for 1996.
Net interest margin increased 5 basis points from 5.39% in
1996 to 5.44% in 1997 and increased 12 basis points from 5.27% in
1995 as compared to 1996. The primary reason for the improving
trend was improving and stable yields on the securities portfolio
from 1995 to 1997, as well as a reduction in the average interest
rate paid for deposits from 1995 to 1997. Specifically, the
average rate paid on deposits was stable, increasing one basis
point, from 1996 to 1997 but decreasing from 1995 levels.
Interest on loans is included in interest income on the
accrual method over the terms of the loans based upon the
principal balances outstanding. Income recognition of interest
is discontinued when, in the opinion of management, the
collectibility of such interest becomes doubtful. A loan is
generally classified as non-accrual when principal or interest
has been in default for a period of 90 days or more or because of
a deterioration in the financial condition of the borrower such
that payment in full of principal or interest is not expected.
Loans past due 90 days or more and still accruing interest are
loans that are generally well-secured and in process of
collection.
At December 31, 1997, 1996 and 1995, loans for which the
accrual of interest has been discontinued or reduced totalled
$657,317, $527,881 and $320,051, respectively. If interest on
such loans had been accrued, such income would have approximated
$39,271 in 1997, $38,747 in 1996 and $22,306 in 1995. Loans
which are contractually past due 90 days or more as to principal
or interest payments totaled $146,932, $14,047 and $9,654 at
December 31, 1997, 1996 and 1995, respectively. The amount of
interest income on those loans that was included in net income
was $14,646, $675 and $1,213 for 1997, 1996 and 1995,
respectively.
The following table illustrates the average balances of
total interest-earning assets and total interest-bearing
liabilities for the periods indicated, showing the average
distribution of assets, liabilities, stockholders equity, and the
related income, expense, and corresponding weighted average
yields and costs. The average balances used for the purposes of
these tables and other statistical disclosures were calculated by
using the daily average balances. Non-accruing loans are
included in these average balances.
Average Balances, Interest Income And Expense,
Average Yield And Rates
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ----------------------------- ----------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ------ ------- ------- ------ ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Federal funds sold ..................$ 4,415 $ 244 5.53% $ 6,999 $ 369 5.27% $ 6,151 $ 363 5.90%
Securities:(1)
U.S. treasury securities ............ 6,371 400 6.28% 9,936 601 6.05% 16,806 922 5.49%
Obligations of U.S. agencies ........ 20,517 1,337 6.52% 18,958 1,200 6.33% 9,190 516 5.61%
Tax exempt municipal obligations(2) . 8,999 601 6.68% 5,408 345 6.38% 5,190 337 6.49%
Other ............................... 242 15 6.20% 243 15 6.17% 240 14 5.83%
-------- ------ ------ -------- -------- ------ -------- ------ ------
Total securities .................... 36,129 2,353 6.51% 34,545 2,161 6.26% 31,426 1,789 5.69%
-------- ------ ------ -------- -------- ------ -------- ------ ------
Loans(3) ............................. 79,394 6,920 8.72% 67,628 6,181 9.14% 57,534 5,418 9.42%
-------- ------ ------ -------- -------- ------ -------- ------ ------
Total interest earning assets ........ 119,938 9,517 7.93% 109,172 8,711 7.98% 95,111 7,570 7.96%
-------- ------ ------ -------- -------- ------ -------- ------ ------
Non-interest earning assets:
Cash and due from banks ............ 7,364 6,183 5,699
Other assets ....................... 5,948 4,168 3,469
Less: allowance for loan losses ... (811) (725) (640)
-------- -------- --------
Total non-interest earning assets .. 12,501 9,626 8,528
-------- -------- --------
Total assets ......................... $132,439 $118,798 $103,639
======== ======== ========
Liabilities and stockholders' equity
Interest bearing liabilities:
Deposits:
Interest bearing demand .......... $ 43,293 1,270 2.93% $ 39,806 $ 1,134 2.85% $ 34,485 $1,038 3.01%
Savings .......................... 18,311 439 2.40% 16,459 405 2.46% 15,025 395 2.63%
Other time ....................... 23,660 1,227 5.19% 21,990 1,142 5.19% 20,049 1,001 4.99%
-------- ------ ------ -------- -------- ------ -------- ------ ------
Total interest bearing deposits ...... 85,264 2,936 3.44% 78,255 2,681 3.43% 69,559 2,434 3.50%
Short term borrowings .............. 1,168 60 5.14% 3,244 150 4.62% 2,436 115 4.72%
-------- ------ ------ -------- -------- ------ -------- ------ ------
Total interest bearing liabilities ... 86,432 2,996 3.47% 81,499 2,831 3.47% 71,995 2,549 3.54%
-------- ------ ------ -------- -------- ------ -------- ------ ------
Non-interest bearing liabilities:
Demand deposits .................... 34,084 26,221 21,850
Other liabilities .................. 743 729 466
-------- -------- --------
Total non-interest bearing
liabilities ........................ 34,827 26,950 22,316
-------- -------- --------
Total liabilities .................... 121,259 108,449 94,311
Stockholders' equity ................. 11,180 10,349 9,328
-------- -------- --------
Total liab. & stockholders' equity ... $132,439 $118,798 $103,639
======== ======== ========
Interest spread ...................... 4.46% 4.51% 4.42%
Net interest income/net interest
margin ............................. $ 6,521 5.44% $ 5,880 5.39% $ 5,021 5.27%
======== ======== ========
</TABLE>
(1) Yields are based on historical costs.
(2) Adjusted $204,000, $117,000 and $115,000 for 1997, 1996 and
1995, respectively, to tax-equivalent basis at a 34% tax
rate.
(3) Includes $1.3 million average balance and $63,000 interest
income for loans held for sale for 1997 and $591,000 average
balance and $18,000 interest income for loans held for sale
for 1996. Amounts for 1995 include $37,000 average balance
for loans held for sale and $7,000 of related interest
income.
<PAGE>
Net interest income is affected by changes in both average
interest rates and average volumes of interest-earning assets and
interest-bearing liabilities. The following table sets forth the
amounts of the total change in interest income that can be
attributed to changes in the volume of interest bearing assets
and liabilities, and the amount of change that can be attributed
to changes in interest rates. The balance of the change in
interest income or expense and net interest income has been
attributed to the change in average rate.
Volume And Rate Analysis
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Changes Due to: Changes Due to:
--------------- ---------------
Volume Rate Net Volume Rate Net
------ ---- ----- ------ ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold ........... $ (136) $ 11 $(125) $ 50 $(44) $ 6
Securities:
U.S. treasury securities ..... (216) 15 (201) (377) 56 (321)
Obligations of U.S. agencies . 99 38 137 548 136 684
Tax exempt municipal obliga-
tions (1) .................. 229 27 256 14 (6) 8
Other ...................... 0 0 0 0 1 1
------ ----- ----- ------ ---- ------
Total Securities ........... 112 80 192 185 187 372
------ ----- ----- ------ ---- ------
Loans .......................... 1,075 (336) 739 950 (187) 763
------ ----- ----- ------ ---- ------
Total interest income .......... $1,051 $(245) $ 806 $1,185 $(44) $1,141
------ ----- ----- ------ ---- ------
Interest expense:
Deposits:
Interest bearing demand .... $ 99 $ 37 $ 136 $ 160 $(64) $ 96
Savings .................... 46 (12) 34 38 (28) 10
Other time ..................... 87 (2) 85 97 44 141
------ ----- ----- ------ ---- ------
Total deposits ............. 232 23 255 295 (48) 247
Short term borrowings .......... (96) 6 (90) 38 (3) 35
------ ----- ----- ------ ---- ------
Total interest expense ..... $ 135 $ 29 $ 165 $ 333 $(51) $ 282
------ ----- ----- ------ ---- ------
Increase (decrease) in net
interest income ............ $ 915 $(274) $ 641 $ 852 $ 7 $ 859
====== ===== ===== ====== ==== ======
</TABLE>
_______________
(1) Adjusted to tax-equivalent basis at a 34% tax rate.
Non-Interest Income. Non-interest income was $1.3 million
for the year ended December 31, 1997, an increase of 45.3% from
1996. Non-interest income was $895,000 for the year ended
December 31, 1996, an increase of 37.3% from 1995. The primary
cause of these increases was gross revenues from the
Corporation's residential mortgage department achieved as a
result of the Corporation's commitment to expand this business
line. The Corporation began its residential mortgage origination
activity in 1991. The Corporation uses various third party
sources to fund its residential mortgage activities, and starting
in 1996, booked primarily adjustable rate residential mortgage
loans processed by the residential mortgage department into its
own portfolio.
The remainder of the change in non-interest income relates
primarily to service and activity fees associated with depositor
accounts. In February 1996, the Corporation announced that
monthly charges for demand deposit accounts would be
discontinued. The discontinuance of monthly charges was expected
to reduce non-interest income. However, the "free checking
accounts" enabled the Bank to have greater access to new and
existing customers. The average balance of non-interest bearing
deposits increased $7.9 million or 30% from $26.2 million for
1996 to $34.1 million for 1997. The average balance of non-
interest bearing deposits also increased $4.4 million or 20% from
$21.8 million for 1995 to $26.2 million for 1996. The increase
in non-interest bearing deposits helped lower the average costs
of funds 6 basis points from 2.57% in 1996 to 2.51% in 1997. The
average cost of funds was also lower by 9 basis points from 2.66%
in 1995 to 2.57% in 1996. Non-interest bearing deposits totalled
$45.7 million at December 31, 1997 as compared to $31.6 million
at December 31, 1996, an increase of $14.1 million or 44.6%.
Non-interest bearing deposits totalled $31.6 million at
December 31, 1996 as compared to $25.6 million at December 31,
1995, an increase of $6.0 million or 23.4%. These increases in
non-interest bearing deposits also improved opportunities for
deposit service charges, which have increased.
Non-Interest Expenses. For the year ended December 31,
1997, non-interest expense increased 31.3% to $6.3 million
compared to $4.8 million at December 31, 1996. For the year
ended December 31, 1996, non-interest expense increased 14.3% to
$4.8 million, compared to $4.2 million for 1995. Expense related
to salary and occupancy and other costs associated with
purchasing three branches in 1996, opening three new branches in
1997 and one new branch in 1996 and continued expansion of the
Residential Mortgage Department in 1997 and 1996 were the largest
portions of this increase. Salary and benefits expenses
increased 32.9%, 19.7% and 31.7% in 1997, 1996, and 1995,
respectively, over previous respective years due primarily to
added staff levels (which increased to 106 full time equivalent
employees at December 31, 1997 from 57 at January 1, 1995) as
well as to merit increases in salaries and increased health care
costs. The 1997 increase reflects the opening of three branches
in 1997. The 1996 increase includes the effect of opening a
branch in September 1996. The 1995 increase includes the effect
of the first full year of salary expense for two new branches and
expansion of the Residential Mortgage Department.
Occupancy and equipment costs increased 34.3%, 20.0% and
27.3% in 1997, 1996 and 1995, respectively, over previous
respective years. The remaining other operating expenses, which
increased 21.2%, 8.3% and 5.7% in 1997, 1996 and 1995,
respectively, over the respective previous years, included such
expenses as legal fees, postage, professional fees, advertising,
and other general operating expenses much of which is associated
with the new branches and residential mortgage department
expansion.
In 1996, the Bank purchased the physical property and
equipment at three banking locations which had been closed when
rival banks merged. The cost of acquiring these locations was
approximately $1.0 million, most of which will be depreciated
over the expected useful life of the assets acquired. The Bank
received regulatory approval for the establishment of a full
service branch office at each of the three locations and opened
them in 1997. In addition, the Bank entered into an agreement to
lease space in Cherry Hill that was also formerly a bank branch
recently closed as a result of other bank mergers. The Bank
received regulatory approval and opened a full service branch at
this location in September 1996. The cost of the lease averages
$66,000 annually over five years. Costs to improve and equip the
site were approximately $200,000, which will be expensed over the
lease period. The Bank has the option to extend the lease for
four additional five year periods. The lease amount at the
renewal date is 10% higher than the prior period lease amount.
Management does not expect the expense to acquire and equip each
new branch location to be fully offset by income from the branch
until after approximately eighteen to twenty-four months of
operations.
Income Taxes. The Corporation accounts for income taxes
under the asset and liability method. Deferred income taxes are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment
date.
For the year ended December 31, 1997, the Corporation's
provision for income taxes was $127,000, a decrease of 72.6% from
1996. For the year ended December 31, 1996, the Corporation's
provision for income taxes was $464,000, an increase of 26.3%
from the 1995. These fluctuations were caused by changes in the
level of pre-tax earnings and the increased proportional amount
of non-taxable income from local municipal bonds in 1997. The
effective tax rates for 1997, 1996 and 1995 were 17%, 32% and
32%, respectively.
Financial Condition
Loan Portfolio.
General. The Corporation is an active lender with a loan
portfolio that includes commercial and residential mortgages,
commercial loans, consumer installment loans, home equity loans,
and credit card loans. The Corporation's commercial loan
portfolio is largely made up of loans secured by owner occupied
commercial real estate with an average loan to value ratio under
75%. There is no significant concentration in the portfolio
within any business or industrial segment. The Corporation's
consumer portfolio consists of residential mortgage, home equity,
automobile, credit card and personal loans. Approximately 76% of
the consumer portfolio consists of home equity loans. The
average loan to value ratio of these loans is under 75%. The
Corporation's lending activity extends to individuals and small
and medium sized businesses within its primary service area,
which is predominantly Camden, Gloucester and Burlington
counties, New Jersey. Consistent with its focus on providing
community-based financial services, the Corporation does not
attempt to diversify its loan portfolio geographically by making
significant amounts of loans to borrowers outside its primary
service area. The Corporation's primary service area is a
diverse economic and employment market with no significant
dependence on any one industry or large employer.
Net loans consist of total loans minus the allowance for
loan losses. Loan origination fees are primarily offset by
certain direct origination costs. Net deferred loan fees, if
any, are amortized over the life of the related loans as an
adjustment of the yield on the loans. Net loans were $85.8
million at December 31, 1997, compared to net loans of $71.6
million at December 31, 1996.
The following table summarizes the Corporation's loan
portfolio for the dates indicated:
December 31,
(Dollars in Thousands)
1997 1996 1995
Commercial ....................... $51,221 $46,288 $44,719
Construction ..................... 869 1,204 457
Mortgage ......................... 11,353 4,071 98
Consumer ......................... 23,331 20,824 17,864
Total .......................... 86,774 72,387 63,138
Less: allowance for loan losses . (974) (738) (596)
Net loans ...................... $85,800 $71,649 $62,542
Net loans at December 31, 1997 of $85.8 million increased
19.8% or $14.2 million from $71.6 million on December 31, 1996.
Commercial loans at year end 1997 increased $4.9 million from
year end 1996, while consumer loans at year end 1997 increased
$2.5 million from 1996. Residential mortgages, consisting
primarily of adjustable rate mortgages, increased $7.3 million
from 1996. Commercial loans at year end 1996 increased $1.6
million from year end 1995, while consumer loans increased $3.0
million from 1995. At December 31, 1997, $27.1 million or
approximately 52.9% of the commercial loan portfolio was secured
by commercial real estate and $13.0 million or approximately
25.4% was secured by residential one- to four-family real estate.
Commencing in the fourth quarter of 1995 and continuing
through 1997, the Corporation experienced a significant increase
in loan demand. The Corporation's ratio of average loans
outstanding to average total deposits increased to 66.5% for 1997
from 64.7% for 1996 and from 63.0% for 1995. The increase in the
loan to deposit ratio, while affected by loan demand, is also
impacted by the continuing growth in deposit accounts (See
"Deposits"). The Corporation has not responded to the increased
loan demand by lowering credit standards.
A summary of selected loan maturities at December 31, 1997,
is as follows:
Maturity Distribution
Within One-Five After Five
One Year Years Years Total
________ ________ _______ _______
(Dollars in thousands)
Commercial........$17,638 $30,573 $ 3,010 $51,221
Construction..........869 0 0 869
Mortgage..............602 9,896 855 11,353
Consumer.......... 7,573 8,624 7,134 23,331
Total.............$26,682 $49,093 $10,999 $86,774
The $30.6 million in commercial loans maturing in one to
five years and the $7.1 million in consumer loans maturing in
more than five years, included $1.6 million and $5.7 million,
respectively, in loans with floating or adjustable rates.
Mortgage loans maturing in more than five years are adjustable
rate mortgages. The commercial loans maturing in more than five
years and the mortgage and consumer loans maturing in one to five
years are fixed rate loans.
Loans held for sale are residential mortgage loans which
have been committed for by various investors such as mortgage
companies. Funds for these sales have not yet been received from
the investors which have, in some cases, two weeks or more to
deliver. Funds are usually received by the Bank within one week
of the loan closing. The Bank began closing residential mortgage
loans with its own funds in October 1995. The Bank receives
interest income from the investor from the date the loan closes
to the date funds are received from the investor. At
December 31, 1997, loans held for sale were $1.7 million as
compared to $1.3 million at December 31, 1996 and $262,000 at
December 31, 1995. Interest earned from loans held for sale
totalled $63,000 for 1997, $18,000 for 1996 and $7,000 for 1995
and is included in interest and fees on loans.
Asset Quality. The Corporation manages asset quality and
controls credit risk through diversification of the loan
portfolio and the application of policies designed to foster
sound underwriting and loan monitoring practices. The
Corporation's senior officers are charged with monitoring asset
quality, establishing credit policies and procedures subject to
approval by the Board of Directors, seeking the consistent
application of these policies and procedures across the Bank and
adjusting policies as appropriate for changes in market
conditions.
Non-performing assets include non-performing loans and
foreclosed real estate held for sale. Non-performing loans
consist of loans where the principal, interest, or both, is 90 or
more days past due and loans that have been placed on
non-accrual. When loans are placed on non-accrual, accrued income
from the current period is reversed from current earnings.
Consumer loans are charged off when principal or interest is 120
or more days delinquent or are placed on non-accrual if the
collateral is insufficient to recover the principal. As of
December 31, 1997, the Corporation's troubled debt restructurings
were not material. As of December 31, 1996 and 1995, for
purposes of accounting and reporting in accordance with SFAS 15,
the Corporation had no troubled debt restructuring. As of
December 31, 1997 and 1996, for purposes of accounting and
reporting in accordance with SFAS 114, the Corporation's
"impaired" loans were not material.
The following is a summary of the Corporation's
non-performing assets as of the end of each period:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1996 1995
------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Past due 90 days or more and still accruing $147 $ 14 $ 10
Non-accrual loans 657 528 320
Total non-performing loans 804 542 330
Other real estate owned (OREO) 108 0 638
Total non-performing assets $912 $542 $968
Non-performing loans as a percent of loans 0.93% 0.75% 0.52%
Non-performing assets as a percent of loans and OREO 1.05% 0.75% 1.52%
Non-performing assets as a percent of assets 0.60% 0.43% 0.86%
Reserve for loan losses as a percent of non-performing loans 121.14% 136.25% 180.61%
</TABLE>
Total non-performing loans at December 31, 1997 were
$804,000 (0.93% of total loans), up $262,000 or 48.3% from year
end 1996. Total non-performing loans at December 31, 1996 were
$542,000 (or 0.75% of total loans), up $212,000 or 64.2% from
year end 1995. The increases in non-performing loans from 1996
to 1997 and from 1995 to 1996 are not due to any one loan but
several unrelated loans. All non-performing loans are, in the
opinion of management, either adequately collateralized and in
process of collection, or adequately reserved in the
Corporation's allowance for possible loan losses. The other real
estate owned at December 31, 1997 consists of two residential
properties taken in foreclosure. One property was sold in
January 1998 for which the Corporation recognized a net loss of
$14,000 from the sale. Management anticipates the remaining
property will be sold during 1998. The other real estate owned
at December 31, 1995 of $638,000 includes one commercial property
taken in foreclosure carried at $440,000 and two residential
properties taken in foreclosure. All OREO properties from 1995
were sold in 1996. The Corporation realized a net loss of $5,510
from the sale of OREO in 1996.
Allowance For Loan Losses. The Corporation determines the
provision for loan losses through a quarterly analysis of the
adequacy of the loan loss reserve. Factors such as economic
conditions and trends, the volume of non-performing loans,
concentrations of credit risk, adverse situations that may affect
the ability of borrowers to pay, and prior loss experience within
the various categories of the portfolio are considered when
reviewing the risks in the portfolio. Larger exposures are
analyzed individually. While management believes the allowance
for loan losses is currently adequate, future additions to the
allowance may be necessary based on changes in general economic
conditions and/or the condition of specific borrowers. The
adequacy of the allowance is reviewed quarterly by the audit
committee of the Board of Directors and senior management of the
Corporation. The full Board of Directors reviews quarterly the
relevant ratios with respect to the allowance after the audit
committee makes its recommendations. In addition, various
regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowance for loan
losses. Such agencies may require the Corporation to recognize
additions to the allowance based on their judgments about
information available to them at the time of their examination.
The Corporation has no credit exposure to foreign countries
or foreign borrowers or highly leveraged transactions.
The following table sets forth for each of the past three
years the period-end balances and changes in the allowance for
possible loan losses and certain ratios:
December 31,
----------------------------
1997 1996 1995
----- ----- -----
(Dollars in thousands)
Balance, beginning of year $ 738 $ 596 $ 604
Loans charged-off:
Commercial (303) (166) (134)
Construction (0) (0) (0)
Mortgage (0) (0) (0)
Consumer (97) (83) (113)
Total charge-offs (400) (249) (247)
Recoveries:
Commercial 37 8 5
Construction 0 0 0
Mortgage 0 0 0
Consumer 9 43 24
Total recoveries 46 51 29
Net charge-offs 354 198 218
Provision charged to operations 590 340 210
Balance, end of year $ 974 $ 738 $ 596
Average gross loans (for year) $79,394 $67,628 $57,534
Total gross loans at year end $86,774 $72,387 $63,138
Ratio of net charge offs
to average loans 0.45% 0.29% 0.38%
Allowance as a percentage
of total gross loans 1.12% 1.02% .94%
Loans charged off represents the Corporation's recognition
of losses previously provided for in the overall allowance for
loan losses through the provisions charged to operations in the
respective periods. The increase in the provision in 1997 and
1996 was primarily because of the increased loan portfolio and
the higher level of charge-offs experienced. Management has,
through its analysis of the adequacy of the allowance for loan
losses completed as of December 31, 1997, determined the
allowance to be adequate. Future additions to the allowance for
loan losses through provisions charged to operations will be
determined as a result of management's continuing analysis of the
adequacy of the allowance for loan losses.
The following schedule sets forth the allocation of the
allowance for possible loan losses among various categories. The
allocation is based upon historical experience and the
Corporation's review of the specific amount or specific loan
category in which future losses may ultimately occur. However,
the entire allowance for possible loan losses is available to
absorb future loan losses in any category. The Corporation is
unable to accurately predict in what category future charge offs
and recoveries may actually occur.
Allocation Of Allowance For Possible Loan Losses
December 31,
_________________________________________
1997 1996 1995
(Dollars in thousands)
Amount %* Amount %* Amount %*
Commercial $621 59% $440 64% $379 71%
Construction 9 1% 3 2% - 1%
Mortgage 46 13% 16 6% - 0%
Consumer 172 27% 185 28% 179 28%
Unallocated 126 N/A 94 N/A 38 N/A
____ ____ ____ ____ ____ ____
Total $974 100% $738 100% $596 100%
* Percentages indicate percent of loans in each category to total
loans.
Securities.
The Corporation's securities portfolio serves several
purposes. Portions are held as investments. The remaining
portions are used to assist the Corporation in liquidity and
asset/liability management. Total securities at December 31,
1997 were $37.9 million, an increase of $5.2 million from year
end 1996. The increase was primarily in bonds issued by local
municipalities. Total securities at December 31, 1996 were
$32.7 million, down $6.3 million from year end 1995. The
decrease was primarily in U.S. Treasury securities. Total
securities are 25.2% of total assets at December 31, 1997 and
were 25.9% of total assets at December 31, 1996.
Securities are classified as investment securities when
management has the intent and the Corporation has the ability at
the time of purchase to hold the securities to maturity.
Investment securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. Securities
to be held for indefinite periods of time are classified as
securities available for sale. Securities available for sale
include securities that may be sold in response to changes in
market interest rates, changes in the security's prepayment risk,
increases in loan demand, general liquidity needs and other
similar factors. The Corporation's recent purchases of
investment securities have been limited primarily to U.S.
government and agency securities with short- to medium-term
maturities.
Securities available for sale are reflected at fair value
with unrealized gains and losses, net of tax, being included in
the Corporation's equity account. The fair value of the
securities available for sale, as of December 31, 1997 was
$15.9 million, which resulted in an unrealized loss on such
securities and a corresponding decrease in stockholders' equity
of $78 as of December 31, 1997. The unrealized loss on
securities available for sale for the year ended December 31,
1996 resulted in a decrease in stockholders' equity of $8,601.
The change in the unrealized loss during 1997 was primarily a
result of changes in market interest rates and certain maturities
and additions of securities in the available for sale portfolio.
The following tables summarize the carrying amount of the
Corporation's Investment Securities and of Securities Available
for Sale at the dates indicated.
Securities Portfolio
December 31,
(Dollars in Thousands)
Securities Available for Sale 1997 1996 1995
U.S. Treasury $ 2,009 $ 1,505 $ 7,532
U.S. Government agencies & corp 13,941 13,086 15,843
Total securities available for sale $15,950 $14,591 $23,375
Investment Securities
U.S. Treasury $4,981 $ 6,476 $7,444
U.S. Government agencies & corp 5,997 6,008 2,989
Other securities 10,981 5,653 5,252
Total investment securities $21,959 $18,137 $15,685
The carrying amount and weighted average yield of the
Corporation's Investment Securities and Securities Available for
Sale at December 31, 1997, by contractual maturity, are reflected
in the following tables. Actual maturities will differ from
contractual maturities because certain borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
Fair Value and Average Yield of Securities Available for Sale(1)
Amount Average Yield
(Dollars in thousands)
Due in one year or less $268 5.40%
Due after one year up to five years 14,681 6.35%
Due after five years up to 10 years 1,001 7.00%
Due after 10 years 0 N/A
Total securities $15,950 5.99%
Carrying Amount and Average Yield of Investment Securities(1)
Average
Amount Yield
(Dollars in thousands)
Due in one year or less $9,212 5.97%
Due after one year up to five years 10,912 6.57%
Due after five years up to 10 years 1,550 7.54%
Due after 10 years 285 8.32%
Total securities $21,959 6.38%
(1) Yields are based on historical costs.
Deposits.
The Corporation's predominate source of funds is depository
accounts. The Corporation's deposit base is comprised of demand
deposits, savings and money market accounts and other time
deposits.
The following table sets forth the distribution of average
deposits by major category and the average rate paid in each year
as applicable.
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in Thousands)
--------------------------------------------------------
1997 1996
------------------------- --------------------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- -------- -------
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 34,084 0.00% $ 26,221 0.00%
Interest bearing demand deposits 43,293 2.93% 39,806 2.85%
Savings deposits 18,311 2.40% 16,459 2.46%
Time deposits 23,660 5.19% 21,990 5.19%
Total/Weighted Average Rate $119,348 2.51% $104,476 2.57%
</TABLE>
The following table is a summary of time deposits of
$100,000 or more (all of which are certificates of deposit) by
remaining maturities as of December 31, 1997:
Maturities of Time Deposits of $100,000 and Over
Amount Percent
(Dollars in thousands)
Three months or less $3,068 38%
Three to six months 1,165 14%
Six to twelve months 3,087 38%
Over twelve months 858 10%
Total $8,178 100%
Total deposits at December 31, 1997 were $136.8 million,
compared to $111.4 million at December 31, 1996, an increase of
approximately $25.4 million or 22.8%. Total deposits averaged
$119.3 million for 1997, compared to the average total deposits
for the year ended December 31, 1996 of $104.5 million, an
increase of $14.8 million or 14.2%. Interest bearing demand,
non-interest demand and savings balances have increased 26.7%
from $88.2 million at December 31, 1996 to $111.8 million on
December 31, 1997. Certificates of deposit totaled $25.0 million
at December 31, 1997, an increase of $1.7 million or 7.3% from
$23.3 million at December 31, 1996. The 16.0% growth in average
core deposits from $82.5 million for 1996 to $95.7 million for
1997 enabled the Corporation to maintain a low average cost of
funds and helped maintain the Corporation's interest margin.
As new deposits are generated from the existing branches as
well as any future branches, to the extent that these deposits
grow faster than loan growth, the Corporation expects to use
these funds for investment securities and other earning assets.
Management expects to manage the growth of deposits in any new
branches as it does in its current operations, by interest rate
management and marketing. The Corporation's strategy for deposit
acquisition and development has been to attract and retain core
deposits, and the Corporation traditionally has not priced its
deposits to attract short term relationships.
Short-Term Borrowings.
The Corporation has no funding dependence on short term
borrowings. Typically the short term borrowings are in the form
of securities sold under repurchase agreements ("Repurchase
Agreements") and are an accommodation for significant depositor
relationships that have excess large investable balances for
short periods. The majority of the repurchase agreements mature
within 45 days. The following table summarizes short term
borrowing and weighted average interest rates paid:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996 1995
------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Average daily amount of short term borrowings
outstanding during the period $1,168 $3,244 $2,436
Weighted average interest rate on average
daily short-term borrowings 5.14% 4.62% 4.72%
Maximum outstanding short-term borrowings
outstanding at any month-end $2,827 $5,357 $2,778
Short-term borrowings outstanding at period end 1,596 $3,281 $2,778
Weighted average interest rate on short-term
borrowings at period end 5.27% 4.25% 4.56%
</TABLE>
Interest Sensitivity.
An important element of both earnings performance and the
maintenance of sufficient liquidity is management of the interest
sensitivity gap. The interest sensitivity gap is the difference
between interest sensitive assets and interest sensitive
liabilities in a specific time interval. The gap can be managed
by repricing assets or liabilities, by selling securities or
loans held for sale, by replacing an asset or liability at
maturity or by adjusting the interest rate during the life of an
asset or liability. Matching the amounts of assets and
liabilities repricing in the same time interval contributes to
preserving net interest margins and minimizing the impact on net
interest income in periods of rising or falling interest rates.
The Corporation evaluates interest sensitivity risk and then
formulates guidelines regarding asset generation and pricing,
funding sources and pricing, and off-balance sheet commitments
(such as letters of credit, lines of credit and credit card
lines) in order to manage sensitivity risk. These guidelines are
based on management's outlook regarding future interest rate
movements, the state of the regional and national economy, and
other financial and business risk factors.
The following table illustrates the interest sensitivity gap
position of the Corporation at December 31, 1997. It summarizes
the contractual repayment terms or nearest repricing dates of the
Corporation's interest earning assets and interest-bearing
liabilities. This table presents a position that existed at one
particular day (December 31, 1997) and therefore is not
necessarily indicative of the Corporation's position at any other
time.
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
Maturing Or Repricing In:
------------------------------------------------
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
-------- -------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets
Federal funds sold $ 7,300 $ 0 $ 0 $ 0 $ 7,300
Securities available for sale 269 0 14,680 1,001 15,950
Investment securities 2,612 6,600 10,912 1,835 21,959
Loans 23,912 7,974 47,573 9,096 88,519
Total interest earning assets $ 34,093 $ 14,574 $73,129 $11,932 $133,728
Interest bearing liabilities
Deposits:
Interest bearing demand $ 46,458 $ 0 $ 0 $ 0 $ 46,458
Savings 19,568 0 0 0 19,568
Time deposits $100,000 & over 3,068 4,252 858 0 8,178
Other time deposits 3,531 7,071 6,224 0 16,826
Other borrowed money 1,141 355 100 0 1,596
Total interest bearing liabilities $ 73,766 $ 11,678 $ 7,182 $ 0 $ 92,626
Period gap $(39,673) $ (2,896) $65,947 $11,932 $ 41,102
Cumulative gap $(39,673) $(36,777) $29,170 $41,102
Ratio of cumulative gap to total
earning assets (29.67)% (27.50)% 21.81% 30.74%
</TABLE>
While securities available for sale are presented in the
foregoing table according to their stated maturities, such
investments can, if necessary, be sold at any time in reaction to
interest rate changes or funding demands.
The Corporation had $39.7 million more in liabilities than
assets that reprice in 90 days and was, therefore, in a
liability-sensitive (negative gap) position for this interval at
December 31, 1997. Generally, a negative gap position with
respect to a given time period indicates that more liabilities
may reprice within that time period than assets, with the result
that rising rates may have a negative impact on interest rate
spread and therefore on earnings. Conversely, a positive gap
position indicates that more assets may reprice in that time
period than liabilities, so that declining rates may have a
negative impact on interest rate spreads and earnings. The
Corporation manages its interest rate sensitivity gap to control
the exposure of its net interest margin such that a 200 basis
point increase or decrease in market rates will impact net
interest income by no more than approximately 10% in any one year
period. At December 31, 1997, the Corporation estimates that if
interest rates rose by 200 basis points, net interest income for
1998 would decrease by $736,000 or 11.7%.
As noted previously, securities available for sale, while
presented in the table at their stated maturities, can be sold
any time and are an active interest sensitivity gap management
tool. For example, if the securities available for sale were
accelerated into the 4-12 months maturity/repricing column in the
above chart, the cumulative negative gap position would decrease
from (27.50%) to (15.78%). Further, the magnitude and timing of
changes to deposit rate changes can be managed to further
minimize the exposure of net interest margin. For example,
savings deposits and certain interest bearing demand deposits,
while recorded at their first possible repricing opportunity,
would not likely react as quickly to a market rate change as
their first recorded repricing opportunity would indicate.
Impact of Year 2000.
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Corporation's computer programs that
have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.
Based on a continuing assessment, the Corporation has
preliminarily determined that it, or third party vendors with
which the Corporation contracts, will be required to modify or
replace portions of software and hardware so that computer
systems will function properly with respect to dates in the year
2000 and thereafter. The Corporation presently believes that
with modifications or replacements to existing software and
hardware and conversions to new software and hardware, the Year
2000 Issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions
are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the
Corporation.
The Corporation is initiating an ongoing program of formal
communications with all of its significant suppliers and large
customers to determine the extent to which the Corporation's
interface systems and its outstanding loans to such customers are
vulnerable to those third parties' failure to remediate their own
Year 2000 Issues. However, there can be no guarantee that the
systems of other companies on which the Corporation's systems
rely or to which the Bank has extended credit will be timely
converted and would not have an adverse effect on the
Corporation's systems or operations.
The Corporation will utilize both internal and external
resources to reprogram, or replace, and test the software and
hardware for Year 2000 modifications. The Corporation
anticipates completing the Year 2000 project prior to any
anticipated impact on its operating systems. Although the
Corporation's assessment is not yet complete, the Corporation
believes that the expenses associated with the Year 2000 project
for 1998 may be material.
The timetable in which the Corporation believes it will
complete the Year 2000 modifications is based on management's
best estimate, which was derived utilizing numerous assumptions
of future events, including the continued availability of certain
resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
Although the Corporation believes that the program outlined
above should be adequate to address the Year 2000 Issue, there
can be no assurance to that effect.
Liquidity.
Liquidity represents an institution's ability to meet
present and future financial obligations through either the sale
or maturity of existing assets or the acquisition of additional
funding through liability management. Liquid assets include
cash, interest-bearing deposits with banks, federal funds sold,
securities classified as available for sale, and loans maturing
within one year. As a result of the Corporation's management of
liquid assets and the ability to generate liquidity through
liability funds, management believes that the Corporation
maintains overall liquidity sufficient to satisfy its deposit
requirements and meet its customers' credit needs.
At December 31, 1997 cash, securities classified as
securities available for sale, and federal funds sold were 22.6%
of total assets, compared to 24.4% of total assets at
December 31, 1996. Asset liquidity is also provided by managing
loan maturities. At December 31, 1997, approximately
$31.9 million or 36.0% of loans would mature or reprice within a
one year period. To the extent possible, loans are funded with
deposits or other funding with coinciding maturity or repricing
dates.
Capital Resources.
The assessment of capital adequacy depends on a number of
factors such as asset quality, liquidity, earnings performance,
changing competitive conditions, economic forces and growth and
expansion activities. The Corporation seeks to maintain a
capital base to support its growth and expansion activities, to
provide stability to current operations and to promote public
confidence.
The Corporation's capital position continues to exceed
regulatory minimums. The primary indicators relied on by the
Federal Reserve Board and other bank regulators in measuring
strength of capital position are the Tier 1 Risk-Based Capital
Ratio, Total Risk-Based Capital Ratio and Leverage Ratios.
Tier 1 Capital consists of common and qualifying preferred
stockholders equity less goodwill. Total Capital consists of
Tier 1 Capital, qualifying subordinated debt and a portion of the
allowance for loan losses. Risk-based capital ratios are
calculated with reference to risk weighted assets which consist
of both on and off balance sheet risks (such as letters of
credit, lines of credit and credit card lines). The
Corporation's Tier 1 Risk-Based Capital Ratio was 12.09% at
December 31, 1997 compared to 13.86% at December 31, 1996 and
15.80% at December 31, 1995. The Corporation's Total Risk-Based
Capital Ratio was 13.11% at December 31, 1997 compared to 14.80%
at December 31, 1996 and to 16.75% at December 31, 1995. These
ratios are in excess of the mandated minimum requirements of
4.00% and 8.00% respectively. The Leverage Ratio consists of
Tier 1 capital divided by quarterly average assets. At
December 31, 1997, the Corporation's Leverage Ratio was 7.91%
which exceeded the required minimum leverage ratio of 4.00%.
Management anticipates these ratios to decline as capital is
leveraged in support of deposit and asset growth. The
Corporation manages capital ratios to exceed regulatory minimums.
The following table shows the Corporation's regulatory
capital ratios and shareholders equity to total assets as of the
periods ended:
December 31,
Regulatory --------------
Minimum 1997 1996 1995
Capital Ratios:
Tier 1 Risk-Based Capital Ratio 4.00% 12.09% 13.86% 15.80%
Total Risk-Based Capital Ratio 8.00% 13.11% 14.80% 16.75%
Tier 1 Leverage Ratio 4.00% 7.91% 8.70% 8.74%
Shareholders Equity
to Total Assets None 7.69% 8.65% 8.83%
ITEM 7A. MANAGEMENT'S DISCUSSION OF MARKET RISK.
Incorporated herein by reference to Part II, Item 7
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Interest Rate
Sensitivity."
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED INCOME STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
<PAGE>
KPMG Peat Marwick LLP
1600 Market Street
Philadelphia PA 19103-7212
Independent Auditors' Report
The Board of Directors
Community Financial Holding Corporation
We have audited the accompanying consolidated balance sheets of
Community Financial Holding Corporation and subsidiary (the
Company) as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Community Financial Holding Corporation and
subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick, LLP
February 12, 1998
<PAGE>
COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS December 31 December 31
1997 1996
Cash and Due from Banks $ 10,852,186 $ 8,282,683
Federal Funds Sold 7,300,000 8,050,000
Securities Available for Sale
(Amortized cost of $15,950,353 at
December 31, 1997 and $14,603,603
at December 31, 1996) 15,950,261 14,590,571
Investment Securities (Market Value of
$22,120,512 at December 31, 1997 and
$18,213,864 at December 31, 1996) 21,959,122 18,137,427
Loans Held For Sale 1,745,821 1,304,840
Loans 86,773,603 72,387,490
Less: Allowance for Loan Losses (973,991) (738,353)
Net Loans 85,799,612 71,649,137
Bank Premises and Equipment, Net 4,885,853 3,120,643
Accrued Interest Receivable 1,172,092 902,084
Deferred Tax Assets 118,524 88,320
Other Assets 887,944 401,614
Total Assets $150,671,415 $126,527,319
LIABILITIES
Demand Deposits $ 92,184,858 $ 70,910,844
Savings Deposits 19,567,902 17,266,946
Time Deposits 25,004,042 23,270,538
Total Deposits 136,756,802 111,448,328
Accrued Interest Payable 583,858 584,769
Short-Term Borrowings 1,596,498 3,280,586
Other Liabilities 149,645 267,881
Total Liabilities 139,086,803 115,581,564
SHAREHOLDERS' EQUITY
Common Stock $5 Par Value
Authorized 1,600,000 Shares
Issued and Outstanding
1,027,713 Shares 1997
and 978,774 Shares 1996 5,189,565 4,944,870
Additional Paid In Capital 5,514,547 4,899,873
Retained Earnings 999,422 1,228,457
Less Treasury Stock, at Cost,
10,200 Shares (118,844) (118,844)
Unrealized Loss on Securities
Available for Sale (78) (8,601)
Total Shareholders' Equity 11,584,612 10,945,755
Total Liabilities &
Shareholders' Equity $150,671,415 $126,527,319
The accompanying notes are an integral part of these statements.
<PAGE>
COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $6,919,669 $6,181,220 $5,417,724
Interest on Federal Funds Sold 243,748 369,308 362,436
Interest and Dividends on Investments:
Taxable 1,751,667 1,815,912 1,452,719
Non-Taxable 396,947 227,578 222,342
Total Interest Income 9,312,031 8,594,018 7,455,221
Interest Expense:
Interest on Demand Deposits 1,270,021 1,133,942 1,037,969
Interest on Savings Deposits 439,018 405,210 394,692
Interest on Time Deposits 1,227,503 1,141,914 1,001,434
Interest on Short Term Borrowings 59,770 149,647 114,793
Total Interest Expense 2,996,312 2,830,713 2,548,888
Net Interest Income 6,315,719 5,763,305 4,906,333
Provision for Loan Losses 590,000 340,000 210,000
Net Interest Income After Provision
for Loan Losses 5,725,719 5,423,305 4,696,333
Other Income:
Service Charges on Deposit Accounts 620,613 514,715 486,616
Net Gain on Sale of Securities 0 11,269 0
Mortgage Banking Activities 570,044 275,873 94,249
Other Income, Service Charges and Fees 109,509 93,483 71,192
Total Other Income 1,300,166 895,340 652,057
Other Expenses:
Salaries, Wages and Employee Benefits 3,231,676 2,431,794 2,030,767
Occupancy and Equipment Expenses 1,100,216 819,426 683,075
Data Processing Expense 439,137 362,826 325,184
Advertising Expense 168,457 195,003 173,024
Stationary and Supplies 169,787 130,877 111,055
Other Operating Expenses 1,159,515 909,242 865,727
Total Other Expenses 6,268,788 4,849,168 4,188,832
Income Before Income Taxes 757,097 1,469,477 1,159,558
Income Tax Expense 126,763 463,764 367,100
Net Income $ 630,334 $1,005,713 $ 792,458
Net income per share information:
Basic Earnings Per Share $0.61 $0.98 $0.77
Fully Diluted Earnings Per Share 0.57 0.93 0.76
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For The Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
SECURITIES TOTAL
ADDITIONAL AVAILABLE FOR SHARE
COMMON PAID IN RETAINED TREASURY SALE, NET HOLDERS'
STOCK CAPITAL EARNINGS STOCK OF TAX EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $4,474,185 $3,962,248 $ 808,696 $ (118,844) $ (219,131) $ 8,907,154
Net Income for 1995 792,458 792,458
5% Stock Dividend 221,160 364,914 (586,074) 0
Change in Unrealized Gain (Loss)
Available for Sale, Net of Tax 261,664 261,664
Balance at December 31, 1995 4,695,345 4,327,162 1,015,080 (118,844) 42,533 9,961,276
Issuance of Common Stock Under
Director & Officer Stock Option Plan 16,485 13,415 29,900
Net Income for 1996 1,005,713 1,005,713
5% Stock Dividend 233,040 559,296 (792,336) 0
Change In Unrealized Gain (Loss)
on Securities Available
For Sale, Net of Tax (51,134) (51,134)
Balance at December 31, 1996 $4,944,870 $4,899,873 $1,228,457 $(118,844) $ (8,601) $10,945,755
Net Income for 1997 630,334 630,334
5% Stock Dividend 244,695 614,674 (859,369) 0
Change In Unrealized Loss
Securities Available For Sale, Net
of Tax 8,523 8,523
Balance at December 31, 1997 $5,189,565 $5,514,547 $ 999,422 $(118,844) $ (78) $11,584,612
========== ========== ========== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COMMUNITY FINANCIAL HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Income $ 630,334 $1,005,713 $792,458
Adjustments To Reconcile Net Income to Net Cash Provided
By Operating Activities:
Depreciation and Amortization 375,822 248,324 222,237
Provision For Loan Losses 590,000 340,000 210,000
Accretion (Amortization) of Discount
(Premium) on Securities, Net (9,412) (36,822) 9,677
Gain on Sale of Securities Available For Sale 0 (11,269) 0
Loss On Sale of Other Real Estate 0 5,510 26,871
Deferred Tax Assets (34,621) (43,235) 118,642
Cash Disbursed for Mortgage Banking Activities (21,387,856) (10,038,056) (776,218)
Cash Received from Mortgage Banking Activities 20,946,874 8,995,034 514,400
Decrease (Increase) In Accrued Interest Receivable (270,008) 76,371 (218,527)
Decrease (Increase) In Other Assets (486,330) 591,523 (785,177)
Increase (Decrease) In Accrued Interest Payable (911) 112,964 242,585
Increase (Decrease) In Other Liabilities (118,236) 138,015 102,280
Total Adjustments (394,678) 378,359 (333,230)
Net Cash Provided By Operating Activities 235,656 1,384,072 459,228
Cash Flow From Investing Activities:
Proceeds From Maturity and Sale Of Securities
Available For Sale 6,535,000 17,520,594 11,500,000
Proceeds From Maturities and Prepayments
Of Investment Securities 4,663,908 8,369,473 5,609,166
Purchases Of Securities Available For Sale (7,882,817) (8,748,668) (16,926,273)
Purchases Of Investment Securities (8,475,124) (10,811,979) (7,045,255)
Loans Made To Customers, Net (14,740,474) ( 9,446,845) (9,651,661)
Premises And Equipment Expenditures (2,141,032) (1,434,365) (270,058)
Net Cash Used By Investing Activities (22,040,539) (4,551,790) (16,784,081)
Cash Flows From Financing Activities:
Net Increase in Deposits 25,308,474 11,943,839 15,557,974
Net Increase (Decrease) In Short
Term Borrowings (1,684,088) 502,909 263,006
Proceeds from Issuance of Common Stock Under
Director and Officer Stock Option Plan 0 29,900 0
Net Cash Provided By Financing Activities 23,624,386 12,476,648 15,820,980
Net Increase (Decrease) In Cash
And Cash Equivalents 1,819,503 9,308,930 (503,873)
Cash And Cash Equivalents As of Beginning Of Year 16,332,683 7,023,753 7,527,626
Cash And Cash Equivalents As of End Of Year $18,152,186 $16,332,683 $ 7,023,753
Supplemental Disclosure: =========== =========== ===========
Cash Paid During The Year:
Interest $ 2,997,223 $ 2,717,749 $ 2,224,584
Income Taxes 370,866 352,137 331,600
Non-Cash Items:
Net Unrealized Gain/(Loss) From
Securities Available For Sale 12,940 (77,475) 396,460
Tax Effect Of Unrealized Gain/(Loss)
From Securities Available For Sale 4,417 (26,341) 134,796
Acquisition of Real Estate in Settlement of Loans 108,100 0 637,643
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COMMUNITY FINANCIAL HOLDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Community Financial Holding Corporation (the Holding
Company) is the parent of Community National Bank of New Jersey
(the Bank) which is the sole wholly owned subsidiary of the
Holding Company. The Holding Company conducts no business
separate from that of the Bank.
The Bank is a national banking corporation organized under
the laws of the United States in 1987. It provides commercial
banking services at its main facility in Haddon Township, New
Jersey and at branch offices in Westville, Audubon, Cherry Hill,
Collingswood, Runnemede, HiNella and Marlton, New Jersey. The
principal activity of the Bank is to provide its local
communities with general commercial and retail banking services.
The Bank offers commercial and consumer loans, including real
estate loans, residential mortgage loans, home equity loans and
lines of credit, auto loans and other credit products. The bank
is not authorized to offer trust services and does not presently
offer the sale of investment products such as mutual funds to its
customers. The Bank's deposit services include business and
individual demand and time deposit accounts, NOW accounts, money
market accounts, Individual Retirement Accounts and holiday
accounts.
The accounting and reporting policies reflected in the
consolidated financial statements conform to generally accepted
accounting principles and to general practice within the banking
industry. The following is a description of the more significant
of these policies.
Principals of Consolidation
The financial statements consolidate the Holding Company and
its subsidiary, the Bank collectively referred to as the
"Corporation". All significant intercompany balances have been
eliminated.
Use of Estimates
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination
of the allowance for possible loan losses and the valuation of
real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of
the allowances for possible loan losses and real estate owned,
management obtains independent appraisals for significant
properties to the extent considered practical.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows,
cash and cash equivalents include cash on hand, amounts due from
banks and federal funds sold. Federal funds generally are
purchased and sold for a one-day period.
Securities
Applicable securities are classified in three categories
consisting of held-to-maturity, trading and available for sale.
Trading securities are those which are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities for which the
Corporation has the ability and intent to hold the security until
maturity. All other securities not included in trading or held
to maturity are classified as available for sale. Held-to-
maturity securities are reported at amortized cost, while trading
securities and available-for-sale securities are reported at fair
value. For trading securities the unrealized gains and losses
are included in current earnings. Available-for-sale securities
are accounted for by reporting unrealized gains and losses as a
separate component of shareholders equity, net of tax.
Loans Held For Sale
The Bank originates residential real estate loans and sells
primarily fixed rate loans to various investors such as mortgage
companies and agencies. The Bank has purchase commitments at par
value for all loans held for sale. The interest income earned
from the loan closing date to the date of sale is recorded in
Interest and Fees on Loans.
Loans
Interest on loans is included in interest income on the
accrual method over the terms of the loans based upon the
principal balances outstanding.
Income recognition of interest is discontinued when, in the
opinion of management, the collectibility of such interest
becomes doubtful. A loan is generally classified as non-accrual
when principal or interest has consistently been in default for a
period of 90 days or more or because of a deterioration in the
financial condition of the borrower such that payment in full of
principal and interest is not expected. Loans past due 90 days
or more and still accruing interest are loans that are generally
well-secured and in the process of collection.
Loan origination fees are offset by certain direct
origination costs. Net deferred loan fees are amortized over the
life of the related loans as an adjustment of the yield on the
loans.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans' effective
interest rate or, as a practical expedient, at the loans
observable market price or the fair value of the collateral if
the loan is collateral dependent. For purposes of applying the
measurement criteria for impaired loans the Bank excludes large
groups of smaller-balance homogeneous loans, primarily consisting
of residential real estate loans and consumer loans, as well as
commercial, financial and agriculture loans with balance less
than $100,000. For applicable loans, the Bank evaluates the need
for impairment recognition when a loan becomes non-accrual, or
earlier if based on management's assessment of the relevant facts
and circumstances, it is probable that the Bank will be unable to
collect all proceeds due according to the contractual terms of
the loan agreement. The Bank's policy for the recognition of
interest income on impaired loans is the same as for non-accrual
loans discussed previously. Impaired loans are charged off when
the Bank determines that foreclosure is probable and the fair
value of the collateral is less than the recorded investment of
the impaired loan. At December 31, 1997, the amount of impaired
loans was not material.
Allowance for Loan Losses
The allowance for loan losses represents the amount which,
in management's judgment, is necessary to cover estimated loan
losses. Management performs a quarterly assessment of the credit
portfolio in order to determine the appropriate level of the
allowance. The factors considered in this evaluation include,
but are not necessarily limited to, estimated losses from loan
and off-balance sheet arrangements; general economic conditions;
deterioration in credit concentration or pledged collateral;
historical loss experience; and trends in portfolio volume,
maturity, composition, delinquencies, and non-accruals. While
management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based
on changes in economic conditions or any other factors used in
management's determination. In addition, various regulatory
agencies, as an integral part of their examination process
periodically review the Corporations' allowance for losses on
loans. Such agencies may require the Corporation to recognize
additions to the allowance based on their judgements about
information available to them at the time of their examination.
Accounts are charged directly against the allowance as soon as
probability of loss is established, taking into consideration
such factors as the customer's financial condition, underlying
collateral and guarantees. Recoveries on previously charged off
loans are added to the allowance.
Bank Premises and Equipment
Land, buildings and equipment owned by the Corporation are
carried at amortized cost. The Corporation leases certain
facilities under long-term agreements as described in Note 10.
Leasehold improvements are capitalized and amortized over the
lease term, including extension options or the estimated useful
lives of the improvements, whichever is shorter. Depreciation of
buildings and equipment is based on the economic useful lives of
the assets, ranging from five to forty years, using the straight
line method. Maintenance and repairs which do not extend the
useful life of the assets are charged to current operating
expenses.
Other Assets
Other assets include other real estate owned, consisting of
foreclosed real estate which is carried at the lower of cost or
estimated fair value less selling costs. Any write-down, at or
prior to the dates the real estate is considered foreclosed, is
charged to the allowance for loan losses. Subsequent write-downs
and expenses incurred in connection with holding such assets are
recorded in non-interest expense and any gains or losses upon
their sale are included in other income or expense.
Stock Option Plan
The Corporation accounts for its stock option plan in
accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued To Employees,
and related interpretations. As such, compensation expense would
be reported on the date of grant only if the current market price
of the underlying stock exceeds the exercise price. On
January 1, 1996, the Corporation adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Corporation has
elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
Income Taxes
The Corporation accounts for income taxes under the asset
and liability method. Deferred income taxes are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be resolved or settled. The effect
on deferred taxes of a change in tax rates is recognizable in
income in the period that includes the enactment date.
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In June 1996, the Financial Accounting Standards Board
("FASB") issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of Liabilities occurring
after December 31, 1996 and is to be applied prospectively. In
December 1996, FASB issued SFAS No. 127 which defers the
effective date of certain provisions of SFAS No. 125. This
Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments
of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that
are secured borrowings. The adoption of the effective portions
of SFAS No. 125 did not have a material impact on the
Corporation's financial position, results of operations or
liquidity.
Accounting for Mortgage Servicing Rights
The Bank, which services mortgage loans for others in return
for a fee, recognizes as an asset the right to service mortgage
loans, regardless of how they were acquired. Additionally, the
Bank assesses the fair value of these assets at each reporting
date to determine impairment. Impairment, if any, is recognized
in the statement of income through a valuation reserve. The
underlying servicing rights are amortized over the estimated
useful life of the underlying servicing using the interest rate
method.
At December 31,
1997 1996
Mortgage Servicing Rights $ 298,340 $ 61,100
Amortized Amounts 29,454 3,141
Mortgages Serviced 19,465,000 5,030,000
Earnings Per Share
In February 1997 the FASB issued SFAS No. 128, "Earnings Per
Share". This statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities
with publicly-held common stock or potential common stock. This
statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings per
Share," and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement of all entities
with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. This
statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim
periods; earlier application is not permitted.
The following table sets forth the computation of basic and
diluted earnings per share.
1997 1996 1995
Numerator:
Net income: $ 630,334 $1,005,713 $ 792,458
Denominator:
Denominator for basic
earnings per share -
weighted average shares 1,027,713 1,025,522 1,024,078
Effect of dilutive
securities:
Employee Stock Options 74,166 49,310 21,089
Warrants 12,528 8,398 1,726
Denominator for diluted
earnings per share -
adjusted weighted average shares
and assumed exercised 1,114,408 1,083,231 1,046,893
Basic earnings per share 0.61 0.98 0.77
Diluted earnings per share 0.57 0.93 0.76
The computation of the 1997, 1996 and 1995 average number of
common shares and all per share data gives retroactive
recognition to a 5% stock dividend declared in each of those
years.
Comprehensive Income
In September 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income ("SFAS No. 130") SFAS No. 130 establishes
standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial
statements. SFAS No. 130 requires that all items that are
required to be recognized as components of comprehensive income
be reported in a financial statement that is displayed with the
same prominence as other financial statements. SFAS No. 130 does
not require a specific format for the financial statement but
requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Bank will make the appropriate disclosures
in the applicable consolidated financial statements, as required.
Segment Reporting
In September 1997, the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 established standards for the way
that public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprise report selected information about operating
segments in interim financial reports issued to shareholders in
the second year of its application. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for periods beginning after December 15,
1997. Management has not yet determined the impact, if any, of
this statement on the Bank.
Employers' Disclosures about Pension and Other
Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
("Statement No. 132") which amends the disclosure requirements of
Statements Nos. 87, "Employers' Accounting for Pensions"
("Statement No. 87"), 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pensions Plans and for
Termination Benefits" ("Statement No. 88"), and 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions"
("Statement No. 106"). Statement No. 132 is applicable to all
entities. This statement standardizes the disclosure
requirements of Statements Nos. 87 and 106 to the extent
practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits.
Statement No. 132 only addresses disclosure and does not change
any of the measurement or recognition provisions provided for in
Statements Nos. 87, 88 or 106. The Statement is effective for
fiscal years beginning after December 15, 1997. Restatement of
comparative period disclosures is required unless the information
is not readily available, in which case the notes to the
financial statements shall include all available information and
a description of the information that is not available. The
impact, if any, of this Statement on the Corporation would be to
require additional disclosures in the Corporation's financial
statements.
NOTE 2. CASH AND DUE FROM BANKS
Average reserves with the Federal Reserve Bank of $554,000
and $300,000 were maintained to satisfy minimum Federal
regulatory reserve requirements during 1997 and 1996,
respectively.
<PAGE>
NOTE 3. SECURITIES
The amortized cost and estimated fair value of debt and
equity securities at December 31, 1997 and December 31, 1996 are
as follows.
<TABLE>
<CAPTION>
1997
Securities Available for Sale
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury
and Agency Securities $15,693,238 $ 19,482 $(31,188) $15,681,532
Other 16,765 11,614 0 28,379
Federal Reserve Stock 240,350 0 0 240,350
Total $15,950,353 $ 31,096 $(31,188) $15,950,261
<CAPTION>
1997
Investment Securities
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury
and Agency Securities $ 8,985,018 $ 58,567 $ (1,136) $ 9,042,449
Obligations of State and
political subdivisions 10,981,260 89,403 0 11,070,663
Mortgage backed securities 1,992,844 14,556 0 2,007,400
Total $21,959,122 $162,526 $ (1,136) $22,120,512
<CAPTION>
1996
Securities Available for Sale
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury
and Agency Securities $14,348,582 $27,160 $(40,192) $14,335,550
Other 14,671 0 0 14,671
Federal Reserve Stock 240,350 0 0 240,350
Total $14,603,603 $27,160 $(40,192) $14,590,571
<CAPTION>
1996
Investment Securities
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury
and Agency Securities $10,493,612 $43,407 $(18,036) $10,518,983
Obligations of State and
political subdivisions 5,652,976 38,962 (658) 5,691,280
Mortgage backed securities 1,990,839 12,762 0 2,003,601
Total $18,137,427 $95,131 $(18,694) $18,213,864
</TABLE>
There were no sales of securities available for sale or
investment securities during 1997. During 1996, the Bank
received proceeds of $11,520,594 from the sale of securities
available for sale. Gross gains of $17,621 and gross losses of
$6,352 were realized on those sales. There were no sales of
investment securities during 1996. There were no sales of
securities available for sale or investment securities during
1995.
The amortized cost and estimated fair value of investment
securities as of December 31, 1997, by contractual maturity, are
shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available for Sale
-----------------------------
1997
----
Amortized Fair
Cost Value
--------- -----
<S> <C> <C>
Due in one year or less $ 242,444 $ 242,352
Due after one year through five years 14,693,238 14,680,907
Due after five years through ten years 1,000,000 1,000,625
Due after ten years 0 0
Total Debt Securities 15,935,682 15,923,884
Total Equity Securities 14,671 26,377
----------- -----------
Total $15,950,353 $15,950,261
=========== ===========
<CAPTION>
Investment Securities
---------------------
1997
----
Amortized Fair
Cost Value
--------- -----
<S> <C> <C>
Due in one year or less $ 9,211,899 $ 9,220,298
Due after one year through five years 10,911,840 11,011,167
Due after five years through ten years 1,550,383 1,604,047
Due after ten years 285,000 285,000
----------- -----------
Total $21,959,122 $22,120,512
=========== ===========
</TABLE>
Investment securities and securities available for sale with a
carrying value of approximately $14,471,790 and $7,987,456 at
December 31, 1997 and 1996, respectively, were pledged as
collateral for demand and time deposits of governmental agencies
as required by law.
NOTE 4. LOANS
Major classifications of loans at year end are as follows
(net deferred loan fees are netted against individual loan
types):
1997 1996
Commercial ......................... $51,220,557 $46,287,940
Construction ....................... 868,831 1,204,000
Residential Mortgages .............. 11,352,987 4,070,846
Consumer ........................... 23,331,228 20,824,704
Total loans ................... $86,773,603 $72,387,490
Allowance for loan losses ..... (973,991) (738,353)
Net Loans...................... $85,799,612 $71,649,137
At December 31, 1997, 1996 and 1995, loans for which the
accrual of interest has been discontinued totalled $657,317,
$527,881 and $320,051 respectively. If interest on these loans
had been accrued, such income would have approximated $39,271 in
1997, $38,747 in 1996 and $22,306 in 1995. In the opinion of
management, sufficient collateral exists to recover the amounts
owed.
Accruing loans which are contractually past due 90 days or
more as to principal or interest payments totalled $146,932 and
$14,047 and $9,654 at December 31, 1997, 1996 and 1995,
respectively. The amount of interest income on those loans that
was included in net income was $14,646, $675 and $1,213 for 1997,
1996 and 1995, respectively.
Loans to directors and their associates and principal
officers and shareholders which are made in the ordinary course
of business and on substantially the same terms and rates as to
other borrowers aggregated approximately $910,022 and $780,701 as
of December 31, 1997 and 1996, respectively. During 1997,
approximately $323,214 of new loans were made, repayments totaled
$206,896 and advances on existing loans were $13,003.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year ........ $738,353 $595,593 $604,054
Provision charged to operations . 590,000 340,000 210,000
Loans charged off ............... (400,308) (248,855) (247,045)
Recoveries ...................... 45,946 51,615 28,584
Balance, end of year .............. $973,991 $738,353 $595,593
</TABLE>
NOTE 5. BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment as of
December 31, 1997 and 1996 are summarized as follows:
1997 1996
Land and buildings .................. $3,110,531 $1,924,795
Equipment ........................... 3,127,947 1,975,538
Leasehold and other improvements .... 420,260 617,373
Total ............................. 6,658,738 4,517,706
Accumulated depreciation and amor-
tization .......................... (1,772,885) (1,397,063)
Premises and equipment, net ......... $4,885,853 $3,120,643
NOTE 6. DEPOSITS
A summary of deposits as of December 31, 1997 and 1996 is as
follows:
1997 1996
Non-Interest Bearing ................ $ 45,726,452 $ 31,581,773
Interest Bearing:
NOW checking accounts ............. 33,798,289 27,534,055
Money market deposit accounts ..... 12,660,117 11,795,016
Savings accounts .................. 19,567,902 17,266,946
Certificates of deposit less than
$100,000 ........................ 16,826,010 14,872,644
Certificates of deposit $100,000
and greater ..................... 8,178,032 8,397,894
Total interest bearing deposits . 91,030,350 79,866,555
Total deposits .................. $136,756,802 $111,448,328
The weighted average interest rate paid on interest bearing
deposits was 3.44% and 3.43% at December 31, 1997 and 1996,
respectively.
While the certificates frequently are renewed at maturity
rather than paid out, they are scheduled to mature contractually
as follows:
1997 1996
Within one year ..................... $17,921,524 $18,724,472
Beyond one year but within three
years ............................. 3,705,820 2,300,148
Over three years .................... 3,376,698 2,245,918
Total ............................. $25,004,042 $23,270,538
A summary of interest expense during 1997, 1996 and 1995, is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NOW checking accounts ............... $ 996,022 $ 855,188 $ 747,460
Money market deposit accounts ....... 273,999 278,754 290,509
Savings accounts .................... 439,018 405,210 394,692
Certificates of deposit less than
$100,000 .......................... 745,140 778,710 558,140
Certificates of deposit $100,000
and greater ....................... 482,363 363,204 443,294
Short term borrowings ............... 59,770 149,647 114,793
Total ........................... $2,996,312 $2,830,713 $2,548,888
</TABLE>
NOTE 7. SHORT TERM BORROWINGS
At December 31, 1997, 1996 and 1995, short term borrowings
under agreements to repurchase securities sold are summarized as
follows:
<TABLE>
<CAPTION>
Collateral
U.S. Government
Weighted Obligations
Repurchase Average Book Market
Liability Interest Rate Value Value
--------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1997, Within 30 Days $1,141 4.98% $2,000 $2,010
1997, Within One Year 355 5.80% 1,000 1,004
1997, Over One Year 100 6.50% 1,000 1,004
1996, Within 30 Days 2,943 4.13% 3,005 3,005
1996, Within One Year 338 5.25% 1,000 1,004
1995, Within 30 Days 2,272 4.56% 3,134 3,132
1995, Within 30 to 120 Days 506 4.57% 892 888
</TABLE>
These agreements to repurchase securities require that the
Corporation repurchase the identical securities as those that
were sold. The short-term borrowings under these agreements
averaged $1,054,233, $3,185,610 and $2,339,764 during 1997, 1996
and 1995, respectively, and the maximum amount of short-term
borrowings outstanding at any month-end during 1997, 1996 and
1995 were $2,826,739, $5,356,816 and $2,777,677, respectively.
NOTE 8. INCOME TAXES
The following is a summary of the provision for income tax
expense:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal .............................. $135,319 $398,490 $341,347
State ................................ 26,065 82,168 41,908
Total .............................. 161,384 480,658 383,255
Deferred:
Federal .............................. (34,621) (16,894) (16,155)
State ................................ 0 0 0
Total .............................. (34,621) (16,894) (16,155)
Total .............................. $126,763 $463,764 $367,100
</TABLE>
A reconciliation of federal income taxes at the statutory
rate of 34% to the consolidated effective income tax is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Tax at statutory rate .................. $257,413 $499,622 $394,250
Tax exempt income net of interest
scale back ........................... (124,549) (68,574) (67,056)
State income taxes net of federal
benefit .............................. 17,202 54,231 27,660
Other .................................. (23,303) (21,515) 12,246
Total ................................ $126,763 $463,764 $367,100
</TABLE>
Significant deferred tax assets and liabilities of the
corporation are as follows:
1997 1996
Loan loss reserve book vs. tax ............ $193,830 $135,487
Unrealized loss available for sale
securities .............................. 14 4,431
Total deferred assets ................. $193,844 $139,918
Depreciation, amortization and deferrals .. 75,320 51,598
Total deferred credits ................ 75,320 51,598
Net deferred tax asset .................... $118,524 $ 88,320
Management has determined that it is more likely than not
that deferred tax assets will be realized. There can be no
assurance, however, that the Corporation will generate any
taxable income, or any specific level of continuing earnings.
NOTE 9. SHAREHOLDERS' EQUITY
The Board of Directors of the Corporation declared 5% common
stock dividends on October 21, 1997, November 7, 1996 and
November 13, 1995 to shareholders of record on December 1, 1997,
December 1, 1996 and December 1, 1995, respectively.
In connection with the Corporation's public offering of
450,000 shares of common stock in 1994, warrants to purchase
27,349 shares of common stock were issued to the underwriter for
such offering. Such warrants are exercisable at a price of $9.50
per share and expire as of June 16, 1999. The number of shares
issuable under such warrant and the exercise price thereof have
been adjusted to reflect the Corporation's 5% stock dividends
distributed in 1997, 1996, 1995 and 1994.
NOTE 10. LEASES
The Corporation leases operating facilities under operating
lease agreements. Generally, the Corporation is required to pay
executory costs such as property taxes, maintenance, and
insurance.
The total minimum rental commitment at December 31, 1997
under leases is $2,525,615 which is due as follows:
In the year ending December 31:
1998 .................... $390,557
1999 .................... 375,595
2000 .................... 338,197
2001 .................... 315,697
2002 .................... 202,189
2003 to 2007 ............ 903,380
The total rental expense was $285,034, $269,770 and $232,077 in
1997, 1996 and 1995, respectively.
On January 9, 1998 the Corporation entered a lease agreement
for a location in Medford, New Jersey to operate a full service
banking branch. The lease agreement is for twenty-five years and
requires annual lease payments starting at $103,000 for each of
the first five years and increasing approximately 12% for each of
the following four five year periods. The lease agreement is
contingent upon the construction of a retail shopping complex of
which the bank branch is to be included. Construction is
scheduled to be completed by the end of 1998.
NOTE 11. DIVIDENDS
The ability of the Corporation to pay dividends is limited
by the Bank's ability to pay dividends to the Holding Company.
Dividends payable to the Corporation by the Bank are subject to
certain regulatory limitations. The payment of dividends in any
year without regulatory permission is limited to the net profits
(as defined for regulatory purposes) for that year plus the
retained net profits for the preceding two calendar years.
Accordingly, as of December 31, 1997, dividends in excess of
those already declared from the Bank to the Corporation are
limited to approximately $2,437,000.
NOTE 12. EMPLOYEE BENEFIT PLAN
The Corporation maintains a defined contribution profit
sharing and savings plan covering substantially all employees.
The plan allows eligible employees to make contributions by
salary reduction pursuant to Section 401(K) of the Internal
Revenue Code. Required matching contributions by the Corporation
expensed in the consolidated financial statements were $32,547,
$26,432 and $17,455 in 1997, 1996 and 1995, respectively.
NOTE 13. EMPLOYEE AND DIRECTOR STOCK OPTION PLAN
In 1994, the Corporation adopted a stock option plan (the
Plan) pursuant to which the Corporation's Board of Directors may
grant stock options to Directors and Officers. The plan
authorizes grants of options to purchase up to 364,652 shares
(adjusted for stock dividends) of authorized but unissued common
stock. Stock options are granted with an exercise price equal to
the stock's fair market value at the date of grant. All stock
options have ten year terms and vest and become fully exercisable
after two years from the date of grant.
At December 31, 1997, there were 88,575 additional shares
available for grant under the plan. The per share weighted-
average fair value of the stock options granted during 1997 and
1995 was $11.68 and $6.81, respectively, on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions for 1997 and 1995, respectively:
expected dividend yield of 0.0% and 0.0%, risk-free interest rate
of 5.6% and 6.5%, and an expected life of 8.4 and 10 years.
There were no stock options granted in 1996. The stock price
volatility for 1997 and 1995 was 0.183 and 0.326, respectively.
The Corporation applies APB Opinion No. 25 in accounting for
its Plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements.
Had the Corporation determined compensation cost based on the
fair value at the grant date for its stock options under SFAS
No. 123, the Corporation's net income would have been reduced to
the pro forma amounts indicated below:
1997 1996 1995
Net Income As Reported $630,334 $1,005,713 $792,458
Net Income Pro Forma 491,124 815,117 643,921
Basic Earnings as Reported 0.61 0.98 0.77
Basic Earnings, Pro Forma 0.48 0.79 0.63
Diluted Earnings As Reported 0.57 0.93 0.76
Diluted Earnings, Pro Forma 0.44 0.75 0.62
Pro forma net income reflects only options granted in 1995
and 1997 as there were no options granted in 1996. Therefore,
the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is
reflected over the option's vesting period of two years and
compensation cost for options granted prior to January 1, 1995 is
not considered.
Stock option activity during the periods indicated is as
follows:
Weighted-
Average
Number of Exercise
Shares(1) Price
Balance at December 31, 1995 .......... 154,956 $ 8.97
Forfeited ............................. (9,144) 9.95
Exercised ............................. (3,635) 8.21
Balance at December 31, 1996 .......... 142,177 8.93
Forfeited ............................. (1,050) 15.95
Granted ............................... 134,950 18.50
Balance at December 31, 1997 .......... 276,077 12.92
(1) The figures are adjusted to reflect the Corporation's stock
dividends in 1997, 1996 and 1995.
At December 31, 1997, there were 142,177 outstanding options
with a range of exercise prices from $8.21 to $11.10 and a
weighted-average remaining contractual life of 7.2 years. In
addition, there were 133,900 outstanding options with a range of
exercise prices from $15.95 to $17.72 and a weighted-average
remaining contractual life of 9.7 years.
At December 31, 1997, the number of options exercisable was
142,177 and the weighted-average exercise price of those options
was $8.97.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, to meet the financial and
servicing needs of its customers, the Corporation enters into
transactions that involve instruments with off-balance sheet
risk. These instruments include loan commitments, letters of
credit and credit card lines. These instruments involve, to
varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance
sheet.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
loan commitments, letters of credit and credit card lines is
represented by the dollar amount of those instruments. The
Corporation uses the same credit policies and collateral
requirements in making commitments and conditional obligations as
it does for on-balance sheet financial instruments.
The aggregate dollar amount of financial instruments with
off-balance sheet risk are as follows at December 31, 1997 and
1996, respectively:
1997 1996
Loan commitments .................... $12,135,290 $12,977,028
Commercial and standby letters of
credit ............................ 838,825 819,280
Credit cards ........................ 1,143,663 1,056,488
Total ............................. $14,117,778 $14,852,796
Loan commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates
each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained is based on management's credit
evaluation of the customer. Collateral may include accounts
receivable, investments, inventory, property, plant and
equipment, and commercial income producing and residential real
property.
Letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. The credit risk involved and collateral obtained in
issuing letters of credit is essentially the same as that
involved in extending loan commitments to customers.
The Corporation does not anticipate any material losses as a
result of these commitments.
Concentrations of Credit Risk
Most of the Corporation's commercial, real estate, and
installment loan activity is with customers located in the
southern counties of New Jersey. The concentrations of credit by
type of loan are set forth in Note 4. Generally these loans are
collateralized by assets of the borrower. The loans are expected
to be repaid from cash flow or proceeds from the sale of selected
assets of the borrower. Performance by the Corporation's loan
customers is expected to be substantially influenced by economic
conditions in the Southern New Jersey market area.
Legal and Regulatory Proceedings
The Corporation is a party to certain claims and litigation
that arise primarily in the ordinary course of business. Based
on information presently available and advice received from legal
counsel representing the Corporation in connection with such
claims and litigation, it is the opinion of management that the
disposition or ultimate determination of such claims and
litigation will not have a material adverse effect on the
consolidated financial position or the results of operations of
the Corporation.
NOTE 15. RELATED PARTIES
The Corporation leased its operations center at 231 Haddon
Avenue from a partnership, the partners of which are also members
of the Corporation's board of directors. The lease required
annual rental payments of $55,000 through December 31, 1996.
This property was purchased by the Corporation at its fair value
of $325,000 on January 7, 1997.
Several of the Corporation's directors, including the
Corporation's legal counsel or organizations controlled by them,
have been paid $62,560 and $64,389 by the Corporation, for
services rendered in connection with loans or loan applications
during 1997 and 1996, respectively.
In the opinion of management, all transactions with related
parties are conducted on similar terms and bases as those
utilized in the normal course of business.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation is required to disclose the fair value of
its financial instruments, whether or not recognized in the
balance sheet, where it is practical to estimate that value.
Fair value estimates made as of December 31, 1997 and 1996
are based on relevant market information about the financial
instruments. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
corporation's entire holding of a particular financial
instrument. In cases where quoted market prices are not
available, fair value estimates are based on judgements regarding
future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement and,
therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
The following methods and assumptions were used in
estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts of cash and
short-term instruments approximate those assets' fair values.
Securities Available for Sale and Investment Securities -
Fair values were based on quoted market prices, where available,
except for Federal Reserve Bank stock, which is stated at
carrying value.
Loans Held For Sale - The carrying amounts for loans held
for sale approximate their fair values since commitments for sale
at par are obtained prior to the loan close date.
Loans - The carrying values, reduced by estimated inherent
credit losses, of variable-rate loans and other loans with short-
term characteristics were considered fair value. For other
loans, the fair market values were calculated by discounting
scheduled future cash flows using current interest rates offered
on loans with similar terms adjusted to reflect the estimated
credit losses inherent in those loans.
Accrued Interest Receivable and Accrued Interest Payable -
The carrying amounts of accrued interest receivable and accrued
interest payable approximate their fair values.
Deposit Liabilities - The fair value of deposits with no
stated maturity, such as non-interest-bearing demand deposits,
NOW, savings, and money market deposits, was, by definition,
equal to the amount payable on demand as of December 31, 1997.
The fair value of certificates of deposit was based on the
discounted value of contractual cash flows, calculated using the
discount rates that equaled the interest rates offered at the
valuation date for deposits of similar remaining maturities.
Short-Term Borrowings - The carrying amounts of federal
funds purchased, borrowings under repurchase agreements, and
other short-term borrowings approximate their fair values.
Off-Balance Sheet Financial Instruments - These instruments
include loan commitments, letters of credit and unused credit
card lines. It is impractical to assign these instruments a fair
value.
The following is a summary of the carrying amounts and
estimated fair values of financial assets and liabilities at
December 31, 1997 and 1996. (Dollars in thousands)
<TABLE>
<CAPTION>
1996
1997 1997 1996 EST
CARRYING ESTIMATED CARRYING FAIR
AMOUNT FAIR VALUE AMOUNT VALUE
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks - non-interest bearing .......... $ 10,852 $ 10,852 $ 8,283 $ 8,283
Federal funds sold .................................... 7,300 7,300 8,050 8,050
Securities available for sale ......................... 15,950 15,950 14,591 14,591
Investment securities ................................. 21,959 22,121 18,137 18,214
Loans Held For Sale ................................... 85,800 87,900 71,649 71,546
Accrued interest receivable ............................. 1,172 1,172 902 902
Financial liabilities:
Deposits .............................................. 136,757 136,657 111,448 111,422
Short-term borrowings ................................. 1,596 1,596 3,281 3,281
Accrued interest payable .............................. 584 584 585 585
</TABLE>
NOTE 17. REGULATORY CAPITAL
The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative
judgements about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and
ratios set forth in the following table. Management believes, as
of December 31, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997 the most recent notification from
the FDIC categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum
ratios as set forth in the following table. There are no
conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented
in the table. ($ in thousands)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) $12,545 13.11% $7,656 8.00% $9,569 10.00%
Tier 1 Capital (to Risk Weighted Assets) 11,571 12.09% 3,828 4.00% 6,742 6.00%
Tier 1 Capital (to Average Assets) 11,571 7.91% 5,849 4.00% 7,312 5.00%
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) $11,676 14.80% $6,313 8.00% $7,891 10.00%
Tier 1 Capital (to Risk Weighted Assets) 10,938 13.86% 3,157 4.00% 4,735 6.00%
Tier 1 Capital (to Average Assets) 10,938 8.70% 5,027 4.00% 6,284 5.00%
</TABLE>
<PAGE>
NOTE 18. PARENT COMPANY ONLY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Balance Sheets for the Parent Company
($ in thousands)
(Dec. 31) (Dec. 31)
1997 1996
<S> <C> <C>
Assets
Investment in Community National Bank .......... $11,563 $10,931
Other assets ................................... 22 15
Total Assets ................................. $11,585 $10,946
Liabilities and Shareholders' Equity
Common stock ................................... $ 5,190 $ 4,945
Additional paid in capital ..................... 5,515 4,900
Retained earnings .............................. 999 1,229
Treasury stock ................................. (119) (119)
Unrealized gain (loss) on securities available
for sale ..................................... 0 (9)
Total Liabilities and Shareholders' Equity ... $11,585 $10,946
<CAPTION>
Condensed Income Statements for the Parent Company
($ in thousands)
1997 1996 1995
<S> <C> <C> <C>
Non-interest income:
Dividend received from Community .......... $ 0 $ 0 $ 0
Other income .............................. 0 2 0
Non-interest expense:
Amortization of organization costs ........ 0 0 (9)
Net income/(loss) before equity in undis-
tributed net income of subsidiary ....... 0 2 (9)
Equity in undistributed net income of
subsidiary .............................. 630 1,004 801
Net income .............................. $630 $1,006 $792
<CAPTION>
Condensed Statements of Cash Flows for the Parent Company
($ In Thousands)
1997 1996 1995
<S> <C> <C> <C>
Operating activities:
Net income ................................ $630 $1,006 $792
Amortization of organization costs ........ 0 (2) 9
Equity in undistributed net income of
subsidiary ................................ (630) (1,004) (801)
Cash provided by operations ................. 0 0 0
Investing activities:
Investment in subsidiary .................. 0 (30) 0
Purchase of securities available for sale . 0 (0) 0
Total ................................... 0 (30) 0
Financing activities:
Proceeds from sale of stock ............... 0 30 0
Total ................................... 0 30 0
Increase in cash and cash equivalents ....... 0 0 0
Cash and cash equivalents, beginning
of year ................................. 0 0 0
Cash and cash equivalents, end of year .... $ 0 $ 0 $ 0
</TABLE>
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers.
Board of Directors
Set forth below is certain information concerning each
member of the Corporation's Board of Directors.
TERM
DIRECTOR EXPIRES
NAME AGE SINCE IN
Robert T. Pluese 58 1987 2000
Gerard M. Banmiller 50 1987 2000
Frank B. Smith (1) 61 1987 2000
Michael G. Brennan (2) 52 1987 1999
Joseph A. Riggs 64 1987 1999
Doris M. Damm (2) 63 1996 1999
Elizabeth H. Burns (1) (2) 58 1995 1998
Letitia Colombi (1) 53 1988 1998
Gerald DeFelicis 71 1987 1998
Marvin Samson 56 1994 1998
________________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
ROBERT T. PLUESE has been Chairman of the Board of the
Corporation since its formation in 1991 and of the Bank since its
organization in 1987. He is an attorney-at-law admitted to
practice in Pennsylvania and New Jersey, and is a shareholder in
the law firm of Pluese, Leone, Incollingo & Matez, P.C.
GERARD M. BANMILLER has been a director and the President of
the Corporation since its formation in 1991 and a director and
the President and Chief Executive Officer of the Bank since its
organization in 1987.
MICHAEL G. BRENNAN has been a director of the Corporation
since its formation in 1991 and of the Bank since its
organization in 1987. He is an attorney-in-law admitted to
practice in New Jersey and is a shareholder and President of the
law firm of Brennan & Bernardin P.C. Mr. Brennan served as the
Mayor of the Borough of Collingswood, New Jersey, from 1971 to
1993.
ELIZABETH H. BURNS has been a director of the Corporation
and of the Bank since 1995 and is a member and the President of
Burns Egan Byrne, A Professional Association, Certified Public
Accountants of Haddonfield, New Jersey. Ms. Burns is a Certified
Public Accountant.
LETITIA G. COLOMBI has been a director of the Corporation
since its formation in 1991 and of the Bank since October 1988.
Since 1985, she has been a Borough Commissioner and the Director
of Public Works for the Borough of Haddonfield, New Jersey.
DORIS M. DAMM has been a director of the Corporation and of
the Bank since 1996. Since 1990, she has been the President and
a director of ACCU Personnel, Inc., a temporary employment
service company.
GERALD J. DEFELICIS has been a director of the Corporation
since its formation in 1991 and of the Bank since its
organization in 1987. Mr. DeFelicis is retired after 40 years of
service with Sun Company, Inc., where he held the position of
Manager of Systems Policy and Strategic Facilities.
JOSEPH A. RIGGS, SR., M.D. has been a director of the
Corporation since its formation in 1991 and of the Bank since its
organization in 1987. Dr. Riggs is a physician licensed to
practice in New Jersey and is a member and the President of Riggs
Gynecology Associates.
MARVIN SAMSON has been a director of the Corporation and of
the Bank since January 1994. From 1985 to September 1996,
Mr. Samson was President and Chief Executive Officer and a
director of Marsam Pharmaceuticals, Inc., a manufacturer and
marketer of pharmaceutical products and a publicly-held
corporation. In September 1995, Marsam Pharmaceuticals was
acquired by Schein Pharmaceutical, Inc., a privately-held
corporation. Mr. Samson serves as a director of Schein
Pharmaceutical, Inc.
FRANK B. SMITH has been a director of the Corporation since
its formation in 1991 and of the Bank since its organization in
1987. From 1986 to 1995, Mr. Smith was Chairman of the Board,
President and Chief Executive Officer of Smith, Breslin,
Enright & Assoc., Inc., a mortgage banking consulting firm.
Since 1995, Mr. Smith has been Chairman of the Board of Smith,
Breslin, Enright & Assoc., Inc., and since 1996, he has been the
President of Green Shield Ltd., which provides warehouse lines of
credit to mortgage originators. In addition, from 1993 to 1996,
Mr. Smith was President and Chief Executive Officer of Princap
Mortgage Warehouse, Inc.
Executive Officers
Set forth below is certain information concerning the
Corporation's Executive Officers.
Name Age Position(s)
Gerard M. Banmiller 50 President of the Corporation since
formation in 1991; Chief Executive
Officer and President of the Bank
since organization in 1987.
Kevin L. Kutcher 42 Executive Vice President, Treasurer
and Secretary of the Corporation
since formation in 1991; Executive
Vice President and Chief Operating
Officer of the Bank since 1988.
The Corporation's officers are elected annually by, and
serve at the discretion of, the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires the Corporation's
directors and officers, and any persons owning ten percent or
more of the common stock of the Corporation, to file in their
personal capacities initial statements of beneficial ownership,
statements of changes in beneficial ownership and annual
statements of beneficial ownership with the Securities and
Exchange Commission (the "SEC"). Persons filing such beneficial
ownership statements are required by SEC regulations to furnish
the Corporation with copies of all such statements filed with the
SEC. The rules of the SEC regarding the filing of such
statements require that "late filings" of such statements be
disclosed in the Corporation's Annual Report on Form 10-K. Based
solely on the Corporation's review of any copies of such
statements it received and on written representations from
directors and officers, the Corporation believes that, except as
described below, such statements were timely filed in 1997.
One Form 4 for Director Joseph Riggs, Sr., M.D. filed in May
1997 should have been filed in March 1997. The transaction
reported was the acquisition of 1,500 shares of the common stock
of the Corporation.
A Form 5 was filed in March 1998 for Robert T. Pluese,
Chairman of the Board of the Corporation, reporting two
transactions which occurred in October 1997 and August 1997. A
Form 4 should have been filed at the time of each transaction,
and the Form 5 should have been filed by February 15, 1998. The
transactions reported were decreases in the number of shares
beneficially owned by Mr. Pluese caused by the change in
residence of two children of Mr. Pluese, who are holders of
record of a total of 460 shares of common stock. Because such
children no longer share the same household as Mr. Pluese,
Mr. Pluese no longer reports their shares as being beneficially
owned by him.
ITEM 11. Executive Compensation.
The following table sets forth certain information relating
to the compensation awarded to, earned by or paid to the Chief
Executive Officer and the Corporation's other executive officers
whose total annual salary and bonus exceeded $100,000 during 1997
(the "Named Executive Officers") for services in all capacities
during 1997, 1996, and 1995.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
Securities All Other
Name and Underlying Compensation
Principal Position Year Salary ($) Bonus ($) Options (#)(1) ($)
<S> <C> <C> <C> <C> <C>
Gerard M. Banmiller, 1997 143,090 0 30,450 4,012(2)
President of the Corporation; 1996 137,345 22,500 0 3,652(3)
Chief Executive Officer and 1995 134,871 3,175 4,000 1,802
President of the Bank
Kevin L. Kutcher, 1997 110,102 0 16,275 3,102(4)
Executive Vice President & 1996 103,258 18,500 0 2,220(5)
Treasurer & Secretary of the 1995 100,092 2,480 2,500 1,021
Corporation EVP/Chief Operating
Officer of the Bank
________________________________
</TABLE>
(1) Represents options granted under the Option Plan.
(2) Consists of $3,764 of matching 401(k) contributions made by
the Corporation and $248 of premiums paid by the Corporation
with respect to group term life insurance premiums.
(3) Consists of $3,382 of matching 401(k) contributions made by
the Corporation and $270 of premiums paid by the Corporation
with respect to group term life insurance premiums.
(4) Consists of $2,896 of matching 401(k) contributions made by
the Corporation, and $206 of premiums paid by the
Corporation with respect to group term life insurance
premiums.
(5) Consists of $2,002 of matching 401(k) contributions made by
the Corporation and $218 of premiums paid by the Corporation
with respect to group term life insurance premiums.
Employment and Severance Agreements
Gerard M. Banmiller, President of the Corporation and
President and Chief Executive Officer of the Bank, has an
employment agreement with the Corporation. The agreement may be
terminated by the Corporation for cause and terminates on the
last day of the calendar month in which Mr. Banmiller dies or
becomes totally disabled. The agreement provides for an annual
base salary, to be determined each January for that calendar
year, participation in annual incentive or long range incentive
plans, health insurance, other fringe benefits available to
employees generally, and the use of an automobile. In the event
that Mr. Banmiller's employment is terminated (other than for
cause) following a sale of (i) all or substantially all of the
assets of the Corporation or the Bank or (ii) shares of stock of
the Corporation or the Bank so as to effect a change of ownership
or control of the Corporation or the Bank, whether by merger,
consolidation or otherwise, Mr. Banmiller is entitled to receive
a lump sum payment within thirty (30) days following termination
of employment in an amount equal to the sum of his base salary
which would otherwise have been payable for the remainder of that
calendar year plus his base salary for the following calendar
year. Under the terms of the agreement, Mr. Banmiller has agreed
not to compete with or maintain any significant investment or
participation in, any business similar to the Corporation or any
of its subsidiaries, during the term of his employment.
Kevin L. Kutcher, Executive Vice President, Treasurer and
Secretary of the Corporation and Executive Vice President and
Chief Operating Officer of the Bank, has a Severance Compensation
Agreement with the Corporation. Under the Severance Compensation
Agreement, in the event of a change in control of the Corporation
or the Bank, Mr. Kutcher is entitled to receive monthly
one-twelfth of this annual base salary on the effective date of
the change in control for up to twenty-four months; provided,
however, that Mr. Kutcher's right to such payments terminates
upon the termination of his employment for cause or voluntarily
or the acceptance of employment by Mr. Kutcher with a bank or
other financial institution in a capacity and with compensation
commensurate with his position and base salary at the time of a
change in control. The agreement also contains certain
confidentiality agreements and restrictive covenants against
employee piracy or soliciting customers or former customers of
the Bank during and following termination of employment.
Option Grants in Last Fiscal Year
The following table sets forth information concerning grants
of stock options for the fiscal year ended December 31, 1997 to
the named executive officers.
<TABLE>
<CAPTION>
Individual Grants
Number of % of
Securities Total Option
Underlying Granted Potential Realizable Value at
Options to Employees Exercise or Assumed Annual Rates of Price
Granted (1) in Fiscal Base Price (3) Expiration Appreciation for Option Term
(#) Year (2) ($/Sh) Date 5% ($)(4) 10% ($)(4)
<S> <C> <C> <C> <C> <C> <C>
Gerard M. Banmiller 26,250(5) 38.8% $ 17.61 12/01/2007 $328,650 $797,213
4,200(6) 6.2% 15.95 03/19/2007 47,586 115,500
Kevin L. Kutcher 13,125(5) 19.4% 17.61 12/01/2007 164,325 398,606
3,150(6) 4.7% 15.95 03/19/2007 35,690 86,625
</TABLE>
________________
(1) Amounts represent securities underlying nonqualified stock
options granted under the Option Plan and have been adjusted
to reflect the Corporation's 5% stock dividend distributed
in December 1997. Options terminate and are not exercisable
as of the date 12 months following the death or disability
of the optionholder and 90 days from the date of any other
termination of employment, except that the Corporation may
terminate the option earlier upon the occurrence of certain
events, including the commencement by the optionholder of
employment with a competitor of the Corporation.
(2) Does not include options to purchase 66,150 shares issued in
1997 to directors of the Corporation who are not employees.
(3) In the case of each option grant, the exercise price per
share is equal to the fair market value on the date the
option was granted. The exercise price may be paid in cash,
in shares of the common stock of the Corporation valued at
their fair market value on the date of exercise, or in a
combination thereof.
(4) The dollar amounts set forth under these columns are the
result of calculations made at the 5% and 10% appreciation
rates set forth in the SEC's regulations and are not
intended to indicate future price appreciation, if any, of
the common stock of the Corporation.
(5) Options have a term of ten years from the date of grant.
Options vest at the rate of 20% per year for five
consecutive years beginning one year from the date of grant.
(6) Options have a term of ten years from the date of grant.
Options vest at the rate of 50% per year for two consecutive
years beginning one year from the date of grant.
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
No options were exercised during the year ended December 31,
1997 by any Named Executive Officer. The following table sets
forth the aggregate options to purchase shares of the common
stock of the Corporation held by the Named Executive Officers at
December 31, 1997, separately identifying exercisable and
unexercisable options, and the aggregate dollar value of
in-the-money unexercised options, separately identifying
exercisable and unexercisable options.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised in-the-money
Unexercised Options Held at 12/31/97 (#) Options at 12/31/96 ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Gerard M. Banmiller 14,493 30,450 $128,924 $18,600
Kevin L. Kutcher 8,834 16,275 $ 78,387 $11,450
</TABLE>
________________
(1) Based upon the December 31, 1997, NASDAQ closing price of
the Corporation's common stock of $18.00 per share, less the
respective exercise prices.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee members are Michael Brennan,
Doris M. Damm and Elizabeth Burns.
Mr. Brennan, a director of the Corporation, is a shareholder
of the law firm of Brennan and Bernardin, P.C., which provides
legal services to the Bank from time to time. Mr. Brennan is a
partner in the partnership from which the Bank leased certain
facilities during 1996. In January 1997, the Bank purchased the
facilities from such partnership. See "Certain Relationships and
Related Transactions" below.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of the
Corporation (the "Committee") is comprised of non-employee
directors. The Committee is responsible for setting and
administering policies governing compensation of executive
officers of the Bank. (The Corporation has no salaried executive
officers.) The Committee reviews the performance and
compensation levels for executive officers, sets salary and bonus
levels and makes option grants under the Option Plan.
Compensation Policies
The goals of the Corporation's executive officer
compensation policies are to attract, retain and reward executive
officers who contribute to the Corporation's success, to align
executive officer compensation with the Corporation's performance
and to motivate executive officers to achieve the Corporation's
business objectives. The Corporation uses salary, bonuses and
stock options to achieve these goals. The Committee reviews
various available data, including compensation surveys, to enable
the Committee to compare the Bank's compensation package with
that of other banks of similar size and market in the
Corporation's geographic area. The Committee also considers the
Corporation's annual net income and earnings per share.
Base Salary
Base Salary is minimum compensation for the particular
office and is not tied to any performance formula or standard.
Position description, direct responsibility assumed, comparatives
to salaries of peers in the region, and the performance of the
Bank are among the criteria used to establish base salary.
Annual Bonuses
Cash incentive compensation is provided through bonus
awards. Individual awards to executive officers are determined
by multiplying the executive officer's base salary by a formula
based upon the average of the increase in the return on average
assets and the growth in average assets in excess of a
pre-determined minimum over the prior year. The resulting bonus
amount may be increased or decreased in the subjective
determination of the Committee based upon a review by the
Committee or overall individual performance. Because the
Corporation's return on average assets for 1997 decreased as
compared to 1996, the executive officers were not entitled to
bonus awards during 1997 under the formula described above.
Stock Options
Stock option awards are determined by the Committee. The
Committee believes that equity ownership by executive officers
provides incentives to build shareholder value and aligns the
interests of executive officers with the shareholders. The
Committee meets to evaluate meritorious performance of all
officers for consideration to receive stock options. Depending
on circumstances, the Committee makes awards based upon the
position of the officer in the Bank, its determination of the
benefit which the Corporation has derived as a result of the
performance of the executive officer, and the Corporation's
desire to encourage long-term employment of the executive
officer. Options were granted in March 1997 based, in part, on
performance for 1996. These options grants to executive officers
ranged from 3,000 to 4,000 shares. Options were also granted in
November 1997 based on the Committee's determination that (i) the
Bank's failure to meet the performance goals necessary for cash
bonuses to be awarded under the bonus plan was due to the
increased expenses incurred in connection with the opening of
four new branch offices during the 1996 and 1997 fiscal years,
(ii) the quality of the performance of the executive officers
was comparable to prior years when bonuses were awarded, and
(iii) such grants were necessary to retain such officers in light
of the competitive job market. These option grants to executive
officers, ranged from 12,500 to 25,000 shares.
CHIEF EXECUTIVE OFFICER COMPENSATION
The compensation of the Chief Executive Officer is based
upon the same criteria outlined above for the other executive
officers of the Bank. While the Chief Executive Officer makes
recommendations about the compensation levels, goals and
performance of the other executive officers, he does not
participate in discussions regarding his compensation or
performance. In 1997, the Committee increased the Chief
Executive Officer's base salary from $137,345 to $143,090, did
not award him a cash bonus and granted him options to purchase
29,000 shares of the common stock of the Corporation. The
Committee has not taken action with respect to the Chief
Executive Officer's compensation for 1998 performance.
By the Compensation Committee:
Michael G. Brennan
Elizabeth Burns
Doris M. Damm
PERFORMANCE GRAPH
The following graph summarizes the cumulative return on an
investment of $100 on June 17, 1994, in the Common Stock of the
Corporation, as compared to similar investment of $100 on that
date in stocks comprising the broad market index of NASDAQ US
Stocks and stocks comprising two peer groups defined as (i) SNL
listed banks under $500 million in assets and (ii) SNL listed
banks located in the Mid-Atlantic region of the United States.
The graph assumes the reinvestment of all dividends. SNL
Securities is a research and publishing firm specializing in the
collection and dissemination of data on banking, thrift, and
financial services industries. SNL maintains databases with
stock price, dividend, market, financial, and equity information
regarding every domestic publicly traded bank and thrift and a
wide range of financial services companies.
COMMUNITY FINANCIAL HOLDING CORPORATION
[LINE GRAPH]
<TABLE>
<CAPTION>
PERIOD ENDING
6/17/94 12/31/94 12/31/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C>
Community Financial Holding Corp. 100.00 89.12 143.58 199.22 203.53
NASDAQ-Total US 100.00 103.71 146.68 180.41 221.38
SNL Banks (under $500M) Index 100.00 99.74 136.45 175.63 299.39
SNL Mid-Atlantic Index 100.00 91.75 146.84 210.71 299.47
</TABLE>
Compensation of Directors
During 1997, each non-employee director received a quarterly
retainer of $1,000 for service as a director except for
Mr. Pluese, who received a quarterly retainer of $8,750 as
Chairman of the Board. In addition, Bank committee chairpersons
receive a $500 annual retainer for their service as a committee
chairperson. Committee members receive $50 for each Bank
committee meeting attended. The committee chairpersons are not
paid a per-meeting fee unless the committee which they chair
meets in excess of four times within the year. In addition, each
non-employee director receives $100 for each meeting of the
Bank's Board of Directors attended. The Board of Directors
compensation is paid by the Bank.
On April 4, 1994, the Board of Directors adopted the Option
Plan pursuant to which directors and officers of the Corporation
and Bank may be granted options to purchase shares of the
Corporation's stock. During March 1997, options to acquire
28,350 shares of common stock at an exercise price of $15.95 per
share were granted under the Option Plan to each director, and in
December 1997, options to acquire 37,800 shares of common stock
at an exercise price of $17.62 per share were granted under the
Option Plan to each director. Such amounts and exercise prices
have been adjusted to reflect the Corporation's 5% stock dividend
described in December 1997.
ITEM 12. Securities Ownership of Principal Shareholders and
Management
The following table sets forth certain information regarding
ownership of the Corporation's common stock, as of March 27,
1998, by: (i) each person or entity (including such person's or
entity's address) who is known by the Corporation to own
beneficially more than five percent of the Corporation's common
stock, (ii) each of the Corporation's directors who beneficially
owns shares, (iii) each Named Executive Officer (as defined under
Executive Compensation) who beneficially owns shares, and
(iv) all executive officers and directors as a group. The
information presented in the table is based upon the most recent
filings with the Securities and Exchange Commission by such
persons or upon information otherwise provided by such persons to
the Corporation.
<TABLE>
<CAPTION>
Number of Shares
Beneficially Percentage
Name of Beneficial Owner Owned (1) Owned
<S> <C> <C>
Buschman's Inc. 401(k) Savings Plan 102,206 9.79%
and certain individuals (2)
P.O. Box 11
Galloway, WI 54432
Robert T. Pluese (3) 90,705 8.40%
21 Euclid Avenue
Haddonfield, NJ 08033
Rae Pluese (4) 90,705 8.40%
21 Euclid Avenue
Haddonfield, NJ 08033
Gerard M. Banmiller (5) 32,516 3.07%
Michael G. Brennan (6) 36,614 3.45%
Letitia G. Colombi (7) 10,569 1.01%
Gerard J. DeFelicis (8) 27,896 2.64%
Joseph A. Riggs, Sr., M.D. (9) 33,477 3.17%
Marvin Samson (10) 22,876 2.17%
Frank B. Smith (11) 17,174 1.63%
Elizabeth Burns (12) 10,868 1.04%
Doris M. Damm (13) 2,391 *
Kevin L. Kutcher (14) 18,281 1.73%
All Directors and Executive Officers
as a Group (11 persons) (15) 303,367 25.64%
</TABLE>
*Less than 1% of the shares of the Corporation's common stock
outstanding.
____________________
(1) Beneficial ownership is determined in accordance with the
rules of the SEC. Under such rules, shares are deemed to be
beneficially owned by a person or entity if such person or
entity has or shares the power to vote or dispose of the
shares, whether or not such person or entity has any
economic interest in such shares. Except as otherwise
indicated, and subject to community property laws where
applicable, the persons and entities named in the table
above have sole voting and investment power with respect to
all shares of the Corporation's common stock shown as
beneficially owned by them. Shares of the Corporation's
common stock subject to options or warrants currently
exercisable within 60 days are deemed outstanding for
purposes of computing the percentage ownership of the person
or entity holding such option or warrant but are not deemed
outstanding for purposes of computing the percentage
ownership of any other person or entity.
(2) On August 21, 1995, the following entity and individuals
filed as a group a Schedule 13D with the SEC, which, as
amended on September 1, 1995 and adjusted for stock
dividends and information on recent transactions provided to
the Corporation by a representative of such entity and
individuals, indicates the following beneficial ownership:
<TABLE>
<CAPTION>
Shares
Beneficially Percentage
Name Owned Owned
<S> <C> <C>
Bushman's Inc. 401(k) Savings Plan 76,788 7.35%
Jerome Bushman 1,737 .17%
Barbara Bushman 528 .05%
Tia Bushman 12,155 1.16%
Mitchell Bushman 4,052 .39%
Derrick Bushman 6,946 .67%
</TABLE>
With the exception of the Bushman's Inc. 401(k) Savings
Plan, which indicated shared voting and dispositive power as
to all shares held beneficially by it, each individual named
above indicated sole voting and dispositive power as to all
shares held beneficially by such person.
(3) Includes 36,011 shares held by Rae Pluese who has sole
voting and dispositive power with respect thereto, and as to
which Mr. Pluese disclaims beneficial ownership. Also
includes 35,016 shares issuable upon the exercise of fully
vested options. Mr. Pluese is married to Rae Pluese.
(4) Includes 54,695 shares held or issuable upon exercise of
fully vested options by Robert Pluese who has sole voting
and dispositive power with respect thereto, as to which
Mrs. Pluese disclaims beneficial ownership. Mrs. Pluese is
married to Robert T. Pluese.
(5) Includes 16,593 shares issuable upon exercise of fully
vested options.
(6) Includes 1,596 shares held by family members who have sole
voting and dispositive power with respect thereto, as to
which Mr. Brennan disclaims beneficial ownership. Also
includes 15,600 shares issuable upon exercise of fully
vested options; 4,705 shares held in certain employee
retirement plans, as to which, as sole trustee under such
plans, Mr. Brennan has sole voting and dispositive power;
and 11,694 shares held jointly by Mr. Brennan and his wife,
Jeanne M. Brennan, as to which he shares voting and
dispositive power.
(7) Includes 3,838 shares held by family members who have sole
voting and dispositive power with respect thereto, as to
which Ms. Colombi disclaims beneficial ownership. Also
includes 6,589 shares issuable upon exercise of fully vested
options.
(8) Includes 1,828 shares held by family members who have sole
voting and dispositive power with respect thereto, as to
which Mr. DeFelicis disclaims beneficial ownership. Also
includes 14,336 shares issuable upon exercise of fully
vested options.
(9) Includes 608 shares held by family members who have sole
voting and dispositive power with respect thereto, as to
which Dr. Riggs, Sr. disclaims beneficial ownership. Also
includes 13,470 shares issuable upon exercise of fully
vested options; and 9,126 shares held by Riggs Gynecology
Associates 401(k) Profit Sharing Plan and Trust and Defined
Benefit Rollover Plan (the "Riggs Plan") in a defined
benefit segregated rollover account held for the benefit of
Dr. Riggs, Sr. and John C. Riggs, M.D., Dr. Riggs' son, in
the following percentages: 94.61% and 5.39%, respectively.
Each participant in the account has sole dispositive power
with respect to that number of shares represented by his
percentage interest in the account. Dr. Riggs, Sr. and
John C. Riggs, M.D., as sole trustees of the Riggs Plan,
share voting power over all shares held in the defined
benefit segregated rollover account.
(10) Includes 10,721 shares issuable upon exercise of fully
vested options. Also includes 12,155 shares held jointly by
Mr. Samson and his wife, Elaine Samson, as to which he
shares voting and dispositive power.
(11) Includes 6,598 shares held jointly by Mr. Smith and his
wife, Mary Jane Smith, as to which he shares voting and
dispositive power. Also includes 10,294 shares issuable
upon the exercise of fully vested options.
(12) Includes 4,331 shares issuable upon the exercise of fully
vested options.
(13) Includes 1,575 shares issuable upon the exercise of fully
vested options.
(14) Includes 10,409 shares issuable upon the exercise of fully
vested options.
(15) Includes 138,934 shares issuable upon the exercise of fully
vested options. Also includes 60,474 shares as to which the
above-named directors and officers have disclaimed
beneficial ownership, as described in notes (3) and (6)-(9),
above.
Changes in Control. The Corporation has entered into the
Merger Agreement and a related Stock Option Agreement with HUBCO.
The description of the Merger Agreement and its terms and the
related Stock Option Agreement with HUBCO are incorporated herein
by reference to "Item 1. Business -- General" herein.
Item 13. Certain Relationships and Related Transactions
Robert T. Pluese, Chairman of the Board of the Corporation,
is a shareholder of the law firm of Pluese, Leone, Incollingo &
Matez, P.C., which provides legal services to the Bank on certain
limited matters. Michael G. Brennan, a director of the
Corporation, is a shareholder of the law firm of Brennan &
Bernardin, P.C., which provides legal services to the Bank from
time to time.
The Bank's operations and support facility, located at
231 Haddon Avenue, Westmont, New Jersey (the "Property"), was
leased until January 7, 1997 from a partnership (the
"Partnership") in which Directors Pluese, Riggs, DeFelicis,
Brennan and Smith, and a trust for the benefit of children of
Joseph Riggs, Jr. (the son of a director of the Corporation),
among others, are partners. The aggregate rent payments with
respect to the lease in 1996 were approximately $57,600. The
Corporation believes that the terms of this lease were no less
beneficial to the Corporation than those that could be obtained
in an arms-length transaction with an unrelated third party. On
January 7, 1997, the Bank purchased the Property from the
Partnership for $325,000. The purchase price was based upon an
independent third party appraisal of the fair market value of the
Property and was determined by negotiations between the
Partnership and a committee, appointed by the Board of Directors
of the Corporation, comprised of Mr. Samson, Mrs. Damm, and
Mrs. Burns, none of whom are (or were) partners of the
Partnership. The respective interests of the partners in the
Partnership who are directors of the Corporation or and the Bank
are Mr. Pluese - 11.11%, Dr. Riggs - 11.11%, Mr. DeFelicis -
11.11%, Mr. Brennan - 11.11%, Mr. Smith - 11.11%, and the trust -
11.11%.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Documents filed as part hereof.
1. Financial Statements: The financial statements
listed in the Index to the Financial Statements
appearing at the beginning of Item 8.
2. Financial Statement Schedules: The supplementary
information and financial statement schedules are
hereby omitted because they are either
inapplicable, not required, or the required
information is included in the consolidated
financial statements or notes thereto, which are
included elsewhere in this report.
3. Exhibits: The exhibits listed in the Index to
Exhibits immediately following the signature pages
to this Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Corporation
during the quarter ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant had duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
COMMUNITY FINANCIAL HOLDING
CORPORATION
Dated: March 31, 1998 By:/s/ Gerard M. Banmiller
Gerard M. Banmiller,
President
(Signatures continued on next page)
<PAGE>
SIGNATURES
(Continued)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dated indicated.
________________________________ Dated: March 31, 1998
Robert T. Pluese, Director and
Chairman of the Board
/s/ Gerard M. Banmiller Dated: March 31, 1998
Gerard M. Banmiller, Director
and President
/s/ Michael Brennan Dated: March 31, 1998
Michael Brennan, Director
/s/ Elizabeth Burns Dated: March 31, 1998
Elizabeth Burns, Director
/s/ Gerald DeFelicis Dated: March 31, 1998
Gerald DeFelicis, Director
/s/ Marvin S. Samson Dated: March 31, 1998
Marvin S. Samson, Director
________________________________ Dated: March 31, 1998
Joseph Riggs, Sr., M.D.,
Director
________________________________ Dated: March 31, 1998
Frank Smith, Director
/s/ Letitia Colombi Dated: March 31, 1998
Letitia Colombi, Director
/s/ Doris Damm Dated: March 31, 1998
Doris Damm, Director
/s/ Kevin Kutcher Dated: March 31, 1998
Kevin Kutcher, Chief Financial
Officer and Chief Accounting
Officer
<PAGE>
EXHIBIT INDEX
2.1* Agreement and Plan of Merger, dated as of March 2, 1998,
by and between Community Financial Holding Corporation,
Community National Bank of New Jersey, HUBCO, Inc., and
Hudson United Bank, incorporated by reference to
Exhibit 99.2 to the Corporation's Current Report on
Form 8-K filed on March 13, 1998.
2.2* Stock Option Agreement, dated as of March 2, 1998, by and
between Community Financial Holding Corporation and HUBCO,
Inc., incorporated by reference to Exhibit 99.3 to the
Corporation's Current Report on Form 8-K filed on
March 13, 1998.
3.1.1* Certificate of Incorporation of the Registrant, as amended
through February 6, 1991, is incorporated herein by
reference to Exhibit 3.1.1 of the Registrant's
Registration Statement on Form S-1, No. 33-78696 filed
with the Security and Exchange Commission (the
"Registration Statement").
3.1.2* Certificate of Amendment, dated May 18, 1994, to the
Certificate of Incorporation of the Registrant is
incorporated herein by reference to Exhibit 3.1.2 of the
Registration Statement.
3.2* By-Laws of the Registrant are incorporated herein by
reference to Exhibit 3.2 of the Registration Statement.
10.1* Agreement of Sale dated March 18, 1994 with New Jersey
National Bank is incorporated herein by reference to
Exhibit 10.2 of the Registration Statement.
10.2* Software Order and License Agreement dated July 12, 1993
with Wausau Financial System, Inc. is incorporated herein
by reference to Exhibit 10.3 of the Registration
Statement.
10.3* Financial Services Agreement dated November 29, 1988 with
IBAA Bancard, Inc. is incorporated herein by reference to
Exhibit 10.4 of the Registration Statement.
10.4* Agreement of Lease between Community National Bank of New
Jersey, Tenant, and Wm. G. Rohrer, Inc., Landlord and
amendments thereto are incorporated herein by reference to
Exhibit 10.5 of the Registration Statement.
10.5* Lease dated January 1, 1991 between Community National
Bank of New Jersey, Tenant, and Community Annex
Associates, Landlord is incorporated herein by reference
to Exhibit 10.6 of the Registration Statement.
10.6* 1994 Employee and Director Stock Option Plan is
incorporated herein by reference to Exhibit 10.7 of the
Registration Statement.
10.7* Lease Agreement dated May 12, 1994, between the
Registrant, Tenant, and Greentree Mews Associates,
Landlord is incorporated by reference to Exhibit 10.8 of
the Form 10K for the fiscal year ended December 31, 1994.
10.8* Underwriting Agreement between the Registrant and
Pennsylvania Merchant Group dated June 16, 1994 is
incorporated herein by reference to Exhibit 1.1 of the
Registration Statement.
10.9* Employment agreement dated December 8, 1995 between the
Registrant and Gerard M. Banmiller is incorporated by
reference to Exhibit 10.34 to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1996
(the "1996 10-K").
10.10* Data processing contract dated November 1, 1996 between
Fiserv and Community National Bank of New Jersey is
incorporated herein by reference to Exhibit 10.35 to the
1996 10-K.
10.11* Severance compensation agreement made January 15, 1997
between the registrant and Kevin Kutcher is incorporated
herein by reference to Exhibit 10.36 to the 1996 10-K.
10.12* Severance compensation agreement made January 15, 1997
between the registrant and Benjamin Watts is incorporated
herein by reference to Exhibit 10.37 to the 1996 10-K.
21.1* Subsidiaries of the Registrant are incorporated herein by
reference to Exhibit 21.1 of the Registration Statement.
23 Consent of KPMG Peat Marwick, LLP.
27.1 Financial Data Schedule at and for the year ended
December 31, 1997.
27.2 Restated Financial Data Schedule at and for the year ended
December 31, 1996.
27.3 Restated Financial Data Schedule at and for the year ended
December 31, 1995.
99.1 Disclosure required in lieu of Annual Report on Form 11-K
for The Community National Bank 401(k) Plan.
* Previously Filed
EXHIBIT 23
Consent of Independent Auditors
The Board of Directors
Community Financial Holding Corporation:
We consent to incorporation by reference in the Form S-8
Registration Statements (No. 333-08643 and No. 333-11223) of
Community Financial Holding Corporation of our report dated
February 12, 1998, relating to the consolidated balance sheets of
Community Financial Holding Corporation and subsidiaries as of
December 31, 1997, and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997
annual report on Form 10-K of Community Financial Holding
Corporation.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,852,186
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,950,261
<INVESTMENTS-CARRYING> 21,959,122
<INVESTMENTS-MARKET> 22,120,512
<LOANS> 88,519,424
<ALLOWANCE> 973,991
<TOTAL-ASSETS> 150,671,415
<DEPOSITS> 136,756,802
<SHORT-TERM> 1,596,498
<LIABILITIES-OTHER> 733,503
<LONG-TERM> 0
0
0
<COMMON> 5,189,565
<OTHER-SE> 6,395,047
<TOTAL-LIABILITIES-AND-EQUITY> 11,584,612
<INTEREST-LOAN> 6,919,669
<INTEREST-INVEST> 2,392,362
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9,312,031
<INTEREST-DEPOSIT> 2,996,312
<INTEREST-EXPENSE> 2,996,312
<INTEREST-INCOME-NET> 6,315,719
<LOAN-LOSSES> 590,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,268,788
<INCOME-PRETAX> 757,097
<INCOME-PRE-EXTRAORDINARY> 757,097
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 630,334
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 5.44
<LOANS-NON> 657,000
<LOANS-PAST> 146,000
<LOANS-TROUBLED> 83,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 738,353
<CHARGE-OFFS> 400,308
<RECOVERIES> 45,946
<ALLOWANCE-CLOSE> 973,991
<ALLOWANCE-DOMESTIC> 973,991
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,282,683
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,050,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,590,571
<INVESTMENTS-CARRYING> 18,137,427
<INVESTMENTS-MARKET> 18,213,864
<LOANS> 73,692,330
<ALLOWANCE> 738,353
<TOTAL-ASSETS> 126,527,319
<DEPOSITS> 111,448,328
<SHORT-TERM> 3,280,586
<LIABILITIES-OTHER> 852,650
<LONG-TERM> 0
0
0
<COMMON> 4,944,870
<OTHER-SE> 6,000,985
<TOTAL-LIABILITIES-AND-EQUITY> 126,527,319
<INTEREST-LOAN> 6,181,220
<INTEREST-INVEST> 2,412,798
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,594,018
<INTEREST-DEPOSIT> 2,830,713
<INTEREST-EXPENSE> 2,830,713
<INTEREST-INCOME-NET> 5,763,305
<LOAN-LOSSES> 340,000
<SECURITIES-GAINS> 11,269
<EXPENSE-OTHER> 4,849,168
<INCOME-PRETAX> 1,005,713
<INCOME-PRE-EXTRAORDINARY> 1,005,713
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,005,713
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.93
<YIELD-ACTUAL> 5.39
<LOANS-NON> 528,000
<LOANS-PAST> 14,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 595,593
<CHARGE-OFFS> 248,855
<RECOVERIES> 51,615
<ALLOWANCE-CLOSE> 738,353
<ALLOWANCE-DOMESTIC> 738,353
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,473,753
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,550,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,375,476
<INVESTMENTS-CARRYING> 15,684,985
<INVESTMENTS-MARKET> 15,888,289
<LOANS> 63,399,703
<ALLOWANCE> 595,593
<TOTAL-ASSETS> 112,845,113
<DEPOSITS> 99,504,489
<SHORT-TERM> 2,777,677
<LIABILITIES-OTHER> 601,671
<LONG-TERM> 0
0
0
<COMMON> 4,695,345
<OTHER-SE> 5,265,931
<TOTAL-LIABILITIES-AND-EQUITY> 9,961,276
<INTEREST-LOAN> 5,417,724
<INTEREST-INVEST> 2,037,497
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,455,221
<INTEREST-DEPOSIT> 2,548,888
<INTEREST-EXPENSE> 2,548,888
<INTEREST-INCOME-NET> 4,906,333
<LOAN-LOSSES> 210,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,188,832
<INCOME-PRETAX> 1,159,558
<INCOME-PRE-EXTRAORDINARY> 1,159,558
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792,458
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 5.27
<LOANS-NON> 320,000
<LOANS-PAST> 10,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 604,054
<CHARGE-OFFS> 247,045
<RECOVERIES> 28,584
<ALLOWANCE-CLOSE> 595,593
<ALLOWANCE-DOMESTIC> 595,593
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 99.1
ANNUAL REPORT ON FORM 11-K FOR
THE COMMUNITY NATIONAL BANK 401(K) PLAN
This section is included in this Annual Report on Form 10-K
in lieu of filing a report on Form 11-K for The Community
National Bank 401(K) Plan. Under ERISA, no financial statements
are required to be prepared for The Community National Bank
401(K) Plan.
