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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission File No. 0-26292
COMMUNITY FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Illinois 37-1337630
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
240 E. Chestnut Street, Olney, Illinois 62450-2295
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 395-8676
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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
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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. [X]
As of March 24, 1997, the aggregate market value of the 1,802,772 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $27,942,966 based on the closing sale price of
$15.50 per share of the registrant's Common Stock on March 24, 1997 as listed on
the National Association of Securities Dealers Automated Quotation National
Market System. For purposes of this calculation, it is assumed that directors,
executive officers and beneficial owners of more than 5% of the registrant's
outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of March 24, 1997: 2,370,612.
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part
of the Form 10-K into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the fiscal year
ended December 31, 1996. (Parts I, II and IV)
2. Portions of Proxy Statement for 1997 Annual Meeting of Stockholders.
(Part III)
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PART I
Item 1. Business
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General
Community Financial Corp. Community Financial Corp. (the "Company") was
incorporated under the laws of the State of Illinois in December 1994 at the
direction of the Board of Directors of the Community Bank & Trust, sb (the
"Savings Bank") for the purpose of serving as the holding company of the Savings
Bank upon completion of its conversion from mutual to stock form (the "Stock
Conversion"), and then as a bank holding company of Community Bank & Trust, N.A.
(the "Bank") following the conversion of the Savings Bank from a federal savings
bank to a national bank (the "Bank Conversion"). The Stock Conversion and the
Bank Conversion were completed in June 1995 and the Company is now the holding
company for the Bank. The Company's principal business is overseeing the
business of the Bank and investing the portion of the net Stock Conversion
proceeds retained by it. The Company is also registered with the Federal
Reserve Board as a bank holding company under the Bank Company Holding Act
("BHCA").
The Company's executive offices are located at 240 E. Chestnut Street,
Olney, Illinois 62450-2295, and its main telephone number is (618) 395-8676.
Community Bank & Trust, N.A. The Bank is a national bank operating
through five offices serving Richland, Coles, Jasper, Lawrence and Wayne
Counties and contiguous counties in southeastern Illinois. The Bank was
chartered in 1883 as Olney Building and Loan Association. In 1961, the Bank
changed its name to Olney Savings and Loan Association. The Bank expanded its
branch office network through a series of acquisitions of other financial
institutions, acquiring its Lawrenceville and Fairfield offices in 1983, its
Charleston office in 1989 and its Newton office in 1990. The Bank became an
Illinois state savings bank in July 1992, at which time it adopted the title
Community Bank & Trust, sb, and converted to a federally chartered mutual
savings bank under the name Community Bank & Trust, fsb in February 1995. Upon
completion of the Bank Conversion in June 1995, the Bank became a national bank
and adopted its present name. At December 31, 1996, the Bank had total assets
of $176.1 million, total deposits of $139.1 million and stockholders' equity of
$25.0 million.
The principal business of the Bank historically has consisted of
attracting deposits from the general public and investing these deposits in
loans secured by first mortgages on single-family residences in the Bank's
market area. To an increasing extent, the Bank originates agricultural loans
because of the economic base of the surrounding communities and has recently
emphasized the origination of automobile and commercial business loans. The
Bank's origination of agricultural, automobile and commercial business loans
arises from management's perception of minimal anticipated growth in residential
loan demand within the Bank's market area and a local demand for nonresidential
loans.
At December 31, 1996, the Bank's single-family residential mortgage
loans, agricultural loans, automobile loans and commercial business loans
comprised 37.5%, 9.9%, 24.5% and 16.2%, respectively, of the Bank's total loan
portfolio. The Bank derives its income principally from interest earned on
loans and, to a lesser extent, interest earned on mortgage-backed and related
securities and investment securities and noninterest income. Funds for these
activities are provided through operating revenues, deposits and repayments of
outstanding loans and mortgage-backed and related securities.
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") up to the applicable limits for each depositor. The Bank is subject to
comprehensive examination, supervision, and regulation by the Office of the
Comptroller of the Currency ("OCC") and the Federal Deposit Insurance
Corporation ("FDIC"). This regulation is intended primarily for the protection
of depositors.
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The Bank's executive offices are located at 240 E. Chestnut Street,
Olney, Illinois 62450-2295, and its main telephone number is (618) 395-8676.
Growth Strategy. The Company is actively pursuing opportunities to grow
through selective acquisitions of other financial institutions. Acquisitions
will be selected based on the extent to which the candidates can enhance the
Company's retail presence in new or existing markets and complement the
Company's present retail network. In December 1996, the Company signed an
agreement for the purchase of all the outstanding stock of American Bancshares,
Inc., the holding company for American Bank of Illinois in Highland, an $18
million asset commercial bank with branches in Highland and Pocohontas,
Illinois. The acquisition is expected to be completed in the second quarter of
1997.
Market Area
The Bank conducts its business through its main office in Olney, Illinois
and its four branch offices in Lawrenceville, Fairfield, Newton and Charleston,
Illinois. The Bank's primary market area consists of Richland, Jasper, Lawrence
and Wayne Counties and the eastern two-thirds of Coles County, in Illinois, and
each of the Bank's offices is located in the county seat of one of those
Counties. The Bank also has loan and deposit customers in Clay, Crawford,
Cumberland, Edwards, Effingham, White and Wabash Counties, Illinois, which are
contiguous to its primary market area. A significant percentage of the Bank's
lending activities are conducted in its primary market area.
The Bank's market area is largely rural, with the exception of Charleston
which is home to a university. The main industry in the Bank's market area is
agriculture, with most of the farms being relatively small and family owned.
The local economy also is dependent on light industry. Major employers in the
area include Roadmaster, Prairie Farms, Golden Rule Insurance, Airtex,
Trailmobile, Wal-Mart and Eastern Illinois University. Oil production has been
present in the Bank's market area since the 1920s, but with the decline in oil
prices in recent years, production has been significantly reduced. However,
related businesses still exist in the area.
Lending Activities
General. The total loan portfolio totaled $123.8 million at December 31,
1996, representing 66.6% of total assets at that date. It is the Bank's policy
to concentrate its lending within its market area. At December 31, 1996, $46.5
million, or 37.5%, of the total loan portfolio, consisted of single-family,
residential mortgage loans. Other loans secured by real estate include multi-
family residential and real estate loans, which amounted to $2.5 million, or
2.0%, of the total loan portfolio at December 31, 1996. To a lesser extent and
as an accommodation to its existing customers, the Bank makes mortgage loans for
the purpose of constructing primarily single-family residences. At December 31,
1996, construction loans totaled $770,000, or .6% of the total loan portfolio.
In addition, the Bank originates commercial business loans and
agricultural loans, which include agricultural loans secured by real estate and
agricultural operating loans and equipment loans. At December 31, 1996,
commercial business loans amounted to $20.1 million, or 16.3%, of the Company's
total loan portfolio, and agricultural loans amounted to $12.2 million, or 9.9%,
of the total loan portfolio, which included $5.6 million of agricultural loans
secured by real estate.
The Bank also is active in the origination of consumer loans, which
primarily consist of automobile loans, credit card loans and, to a lesser
extent, home improvement loans, mobile home loans and loans secured by savings
deposits. Consumer loans amounted to $41.8 million, or 33.7%, of the total loan
portfolio at December 31, 1996.
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Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of the Company's loan portfolio by type of loan at
the dates indicated. At December 31, 1996, the Company had no concentrations of
loans exceeding 10% of total loans other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
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1996 1995
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Amount % Amount %
--------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
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Real estate loans:
Single-family residential................ $ 46,501 37.52% $ 46,959 40.40%
Construction............................. 770 .62 576 .50
Multi-family residential and commercial.. 2,494 2.01 2,994 2.57
Agricultural (1).......................... 12,226 9.87 8,763 7.54
Commercial business....................... 20,129 16.24 12,316 10.60
Consumer loans:
Automobile............................... 30,360 24.50 33,506 28.83
Credit card.............................. 1,879 1.52 1,743 1.50
Mobile home.............................. 850 .69 978 .84
Educational.............................. 29 .02 40 .03
Deposit account.......................... 807 .65 705 .61
Home improvement......................... 694 .56 819 .70
Other.................................... 7,184 5.80 6,836 5.88
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123,923 100.00% 116,235 100.00%
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Less:
Loans in process......................... 96 227
Allowance for loan losses................ 1,520 1,514
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Total................................... $122,307 $114,494
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</TABLE>
________________
(1) Includes agricultural loans secured by real estate and agricultural loans
to finance operating expenses or purchase farm equipment.
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Loan Maturities. The following table sets forth certain information at
December 31, 1996 regarding the dollar amount of loans maturing in the portfolio
based on their contractual terms to maturity, including scheduled repayments of
principal. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less. The
table below does not include any estimate of prepayments which significantly
shorten the average life of all mortgage loans and may cause the repayment
experience to differ from that shown below.
<TABLE>
<CAPTION>
Due After Due After
Due During the 1 through 5 Years
Year Ending 5 Years After After
December 31, December 31, December 31,
1997 1996 1996 Total
-------------- ------------- ------------ --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage....... $10,805 $23,331 $14,859 $ 48,995
Real estate construction... 770 -- -- 770
Agricultural............... 3,128 3,558 5,540 12,226
Commercial business........ 4,937 7,007 8,185 20,129
Consumer................... 7,120 32,949 1,734 41,803
------- ------- ------- --------
Total..................... $26,760 $66,845 $30,318 $123,923
======= ======= ======= ========
</TABLE>
The following table sets forth at December 31, 1996 the dollar amount of all
loans due after December 31, 1997 which have predetermined interest rates and
have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates (1)
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<S> <C> <C>
Real estate mortgage............ $18,095 $20,095
Real estate construction........ -- --
Agricultural.................... 9,098 --
Commercial business............. 15,192 --
Consumer........................ 34,683 --
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Total......................... $77,068 $20,095
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</TABLE>
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(1) Includes fixed-rate loans that are callable at the election of the Company.
See " -- Single-Family Residential Real Estate Lending."
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare a loan immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, when current mortgage loan market
rates are substantially higher than rates on existing mortgage loans and,
conversely, decreases when current mortgage loan market rates are substantially
lower than rates on existing mortgage loans.
Originations, Purchases and Sales of Loans. The Bank generally has
authority to originate and purchase loans secured by real estate located
throughout the United States. Consistent with its emphasis on being a
community-oriented financial institution, the Bank concentrates its lending
activities in its market area.
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The Bank's loan originations are derived from a number of sources,
including referrals by realtors, depositors and borrowers, as well as walk-in
customers. In addition, the Bank originates a portion of its automobile loans
on an indirect basis through various automobile dealerships located in the
Bank's market area. The Bank also has two officers who are experienced in the
areas of agricultural and commercial business lending. One such officer devotes
all his time to originating and monitoring such loans and the other devotes a
significant portion of his time to such activities, while also serving as a
branch manager. The Bank's solicitation programs consist of advertisements in
local media, in addition to occasional participation in various community
organizations and events. Real estate loans are originated by the Bank's loan
officers. All of the Bank's loan officers are salaried, and the Bank does not
compensate loan officers on a commission basis for loans originated. With the
exception of applications which are originated on an indirect basis through
various approved automobile dealerships, loan applications are accepted at each
of the Bank's offices. In all cases, however, the Bank has final approval of
any loan application.
Except as described below, the Bank generally does not purchase loans.
However, during fiscal 1992, when interest rates were low in relation to
historical levels, the Bank repurchased $5.1 million of single-family
residential mortgage loans it had sold with recourse in the mid to late 1980's.
Such loans carried interest rates ranging from 8% to 10.5% and exceeded yields
available to the Bank on comparable loans at the time it repurchased the loans.
The Bank participates in an informal program with other local banks
pursuant to which such participating banks will make loans to assist in
community development or the expansion of local business. Under this program,
each bank alternates acting as lead lender, and the other banks purchase
participation interests, without recourse, in any loans originated. The Bank
will not originate a loan or purchase a participation interest in any loan
originated pursuant to this program unless the loan meets the Bank's standard
underwriting criteria. The Bank retains the servicing on loans where it sells
participation interests to other lenders. At December 31, 1996, the Bank had
$74,000 of participation loans originated or purchased pursuant to this program.
In 1989, the Bank acquired its Charleston branch facility, which, prior to
such acquisition, sold a 95% participation interest in certain single-family
residential mortgage loans to the FHLMC. The Bank continues to service such
loans, which had an aggregate principal balance of $257,000 at December 31,
1996.
Loan Underwriting Policies. The Bank's lending activities are subject to
the Bank's written, non-discriminatory underwriting standards and to loan
origination procedures prescribed by the Bank's Board of Directors and its
management. Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. Property valuations are performed by appraisers approved by the
Bank's Board of Directors. Real estate loans of up to $75,000 may be approved
by branch managers. Shirley B. Kessler, President of the Bank, and Wayne H.
Benson, Executive Vice President of the Bank, each have authority individually
to approve unsecured loans of up to $50,000 and secured loans of up to $100,000
and together have authority to approve loans of up to $200,000. All loans of
between $200,000 and $400,000 must be approved by the Bank's Loan Committee,
which consists of five Directors of the Bank, four of whom must be Directors who
are not employees of the Bank. All loans in excess of $400,000 must be approved
by the full Board of Directors. Individual officers of the Bank have been
granted authority by the Board of Directors to approve consumer, commercial
business and agricultural loans up to varying specified dollar amounts,
depending upon the type of loan.
When possible, applications for fixed-rate, single-family real estate loans
are underwritten and closed in accordance with the standards of FHLMC and FNMA.
Included in its portfolio are loans in amounts below minimum FHLMC or FNMA
requirements or secured by properties in rural areas that may not conform to
secondary market standards. Generally, the Bank compensates for the reduced
marketability of these loans through its pricing mechanism.
It is the Bank's policy to record a lien on the real estate securing the
loan and to obtain title insurance or a lawyer's opinion of title which insures
that the property is free of prior encumbrances. Borrowers must also obtain
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hazard insurance policies prior to closing and, when the property is in a flood
plain in a participating community, as designated by the Federal Emergency
Management Agency, paid flood insurance policies. Upon receipt of a loan
application from a prospective borrower, a credit report generally is ordered to
verify specific information relating to the loan applicant's employment, income
and credit standing. If a proposed loan is to be secured by a mortgage on real
estate, an appraisal of the real estate is undertaken by an appraiser approved
by the Bank.
Federal regulations require that all appraisals performed in connection
with federally related transactions must be performed by state-certified or
state-licensed appraisers. Federally related transactions are defined to
include real estate-related financial transactions which the OCC regulates, and
would include mortgages made by the Bank. Appraisals by state-certified
appraisers will be required for all such transactions having a value of $1.0
million or more. The OCC is authorized to determine other circumstances in
which appraisals must be performed by state-certified appraisers. The OCC has
adopted regulations requiring that all real estate-related financial
transactions engaged in by national banks having a transaction value of $250,000
or more, other than those involving appraisals of one- to four-family
residential properties, require an appraisal performed by a state-certified
appraiser. One- to four-family residential property financing may require an
appraisal by a state-certified appraiser if the amount involved exceeds $1.0
million or the financing involves a "complex" one- to four-family property
appraisal. Exceptions are made for financings in which the transaction value is
$250,000 or less or when the lien is not necessary security. Illinois currently
has a certification program in effect. Management of the Bank does not
anticipate that these regulations will have a material effect on its lending
activities. It is the policy of the Bank that appraisals be obtained in
connection with all loans for the purchase of real estate or to refinance real
estate loans where the existing mortgage is held by a party other than the Bank.
The Bank is permitted to lend up to 100% of the appraised value of the real
property securing a mortgage loan. The Bank is required by federal regulations
to obtain private mortgage insurance on that portion of the principal amount of
any loan that is 90% or greater of the appraised value of the property. The
Bank will make a single-family residential mortgage loan with a loan-to-value
ratio of up to 90%. The Bank generally limits the loan-to-value ratio on
commercial real estate mortgage loans to 75%.
Under applicable law, with certain limited exceptions, loans and extensions
of credit by a national bank to a person outstanding at one time shall not
exceed 15% of the institution's unimpaired capital and surplus. Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of unimpaired capital and surplus. The Bank's loans to one
borrower were limited to $4.0 million at December 31, 1996. At December 31,
1996, the Bank had no lending relationships in excess of the loans-to-one-
borrower limit. At December 31, 1996, the Bank's largest loan was a $2.1
million loan to a health care facility and the Bank's next five largest loans
ranged from $1.8 million to $749,000 and included commercial real estate and
agricultural loans. All six loans were current and continued to perform in
accordance with their terms at December 31, 1996.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
Single-Family Residential Real Estate Lending. The Bank historically has
been and continues to be an originator of single-family, residential real estate
loans in its market area. At December 31, 1996, single-family, residential
mortgage loans, including FHA/VA loans but excluding home improvement loans,
totaled $46.5 million, or 37.5% of the total loan portfolio.
The Bank generally ceased originating adjustable-rate, single-family
residential mortgage loans in the early 1980's, and adjustable-rate mortgage
loans remaining in the loan portfolio are either adjustable-rate loans
originated before then, adjustable-rate loans obtained in connection with the
acquisition of other financial institutions in 1989 and 1990 or fixed-rate
callable loans deemed to be adjustable-rate loans as described below.
Adjustable-rate loans in the loan portfolio adjust once every one, three or five
years, at rates indexed to either the Contract Interest Rate
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published by the Federal Housing Finance Board or an index based on the cost of
funds for thrift institutions in the FHLB Seventh District. The amount of any
increase or decrease in the interest rate generally is limited to two percentage
points per year, with a limit of five percentage points over the life of the
loan.
Between 1980 and 1990, the Bank originated long-term, residential mortgage
loans that are callable, at the option of the Bank, at any time after a one-,
three- or five-year period after origination. In the event the Bank calls the
loan, the borrowers may elect to renew the loan at the rate offered by the Bank
or repay the loan in full. Management estimates that approximately 21% of its
single-family mortgage loan portfolio consists of callable loans originated
prior to 1990. Though these loans have fixed rates, because they are callable,
the Bank considers these loans to be adjustable-rate loans.
Subsequent to 1990, the Bank generally ceased originating callable
residential mortgage loans with long terms and instead emphasized the
origination of fixed-rate residential mortgage loans with terms of between one
and five years, with payments calculated on the basis of a 15 or 20 year
amortization schedule. Upon expiration of the one to five year term, provided
the loan is performing, the Bank contacts the borrower and offers to extend the
loan for an additional one to five year term at the prevailing interest rate.
To a limited extent, the Bank continues to originate single-family, fixed-rate
mortgage terms with 15 year terms to maturity. However, the Bank prices such
loans at rates in excess of market rates and, consequently, the Bank originates
only a small amount of those loans. Of the $46.5 million of single-family
mortgage loans at December 31, 1996, $18.1 million, or 38.9%, were fixed-rate
loans, and $28.4 million, or 61.1%, were callable or adjustable-rate loans.
The retention of adjustable-rate and short-term or callable fixed-rate
mortgage loans in the loan portfolio helps reduce the exposure to changes in
interest rates. However, there are unquantifiable credit risks resulting from
potential increased costs to the borrower as a result of repricing of
adjustable-rate and short-term or callable fixed-rate mortgage loans. It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate and short-term or callable fixed-rate mortgage loans may
increase due to the upward adjustment of interest cost to the borrower.
Accordingly, there can be no assurance that yields on the adjustable-rate
mortgages will adjust sufficiently to compensate for increases in the cost of
funds.
Agricultural Related Lending. Agriculture is the main industry in the
Bank's market area, and the Bank originates a significant number of loans to
finance the purchase of farmland, livestock, farm machinery and equipment, seed,
fertilizer and other farm related products and to finance farm operating
expenses. Also included in agricultural loans are loans secured by livestock
and loans to finance turkey cultivation businesses. At December 31, 1996,
agricultural loans amounted to $12.2 million, or 9.9%, of the total loan
portfolio.
Agricultural real estate loans primarily are secured by first liens on
farmland or buildings thereon located in the Bank's market area. Such loans
typically do not exceed $300,000. Loans are generally written in amounts up to
80% of the appraised value of the property for terms of between 10 and 15 years.
Such loans have interest rates that adjust every one, three or five years at a
rate equal to the Bank's prime rate (equal to the prime rate published in The
Wall Street Journal) plus a negotiated margin of between 0.5% and 2%. In
originating an agricultural real estate loan, the Bank considers the debt
service coverage of the borrower's cash flow and the appraised value of the
underlying property, as well as the Bank's experience with and knowledge of the
borrower.
Agricultural operating loans are made to finance the acquisition of seed,
fertilizer, livestock, feed, and to cover operating expenses of a farm, together
with, in some cases, family living expenses, over the course of a year and
typically do not exceed $100,000. As with agricultural real estate loans, the
Bank has been making these types of loans to satisfy the demand of its market
area. The Bank has particularly emphasized agricultural operating loans over
the past three years and intends to continue such emphasis. Agricultural loans
to cover operating expenses generally are made in amounts of up to 90% of the
borrower's anticipated expense for the farm for the year based on the acreage of
the farm, the crop to be planted and the expected price to be received for
harvested crops. The interest rate is fixed for the year at the Bank's prime
rate plus a negotiated margin of between 0.5% and 2.5%.
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Because such loans are made to finance a farm's annual operations, they are
written on a one-year renewable basis, and renewal is dependent upon timely
repayment of then outstanding advances.
In 1991, the Bank began a program of originating loans to finance the
purchase of farm equipment and expects to pursue this type of lending in the
future. Loans to purchase farm equipment are made for terms of up to seven
years in the case of new equipment or up to five years in the case of used
equipment. Most such loans carry rates which are fixed for the first one to
three years and then adjust to a rate equal to the Bank's prime rate plus a
negotiated margin of between 1% and 2%, although the Bank occasionally makes
loans secured by farm equipment with rates fixed throughout the term of the
loan. Where possible, the Bank seeks to cross-collateralize farm equipment loans
with real estate mortgages.
In underwriting agricultural operating loans, the Bank considers the cash
flow of the borrower based upon the farm's expected income stream as well as the
value of collateral used to secure the loan. Collateral generally consists of
the cash crops produced by the farm, such as corn and soybeans (the most
prevalent crops in the Bank's market area), wheat and livestock production. In
addition to considering cash flow and obtaining a security interest in the
farm's cash crop, the Bank may also collateralize an operating loan with the
farm's operating equipment, breeding stock, real estate, and federal
agricultural program payments to the borrower.
Agricultural real estate loans are generally larger than and involve a
greater degree of risk than single family residential mortgage loans. Payments
on an agricultural real estate loan depend to a large degree on the results of
operations of the related farm, and repayment is also subject to adverse
economic or weather conditions as well as market prices for agricultural
products, which can be highly volatile. The success of the loan may also be
affected by many factors outside the control of the farm borrower.
Weather presents one of the greatest risks as hail, drought, floods, or
other conditions, can severely limit crop yields and thus impair loan repayments
and the value of the underlying collateral. This risk can be reduced
substantially by the farmer with multi-peril crop insurance which can guarantee
set yields to provide certainty of repayment. The Bank encourages but generally
does not require multi-peril crop insurance.
Grain and livestock prices also present a risk as prices may decline prior
to sale resulting in a failure to cover production costs. These risks may be
reduced by the farmer with the use of future set price contracts.
Another risk is the uncertainty of government support programs and other
regulations. Many farmers rely on the income, in part, from support programs to
make loan payments and may default on their loans if these programs are
discontinued or significantly changed. Support payments are made, however, with
the requirement that a farmer leave idle certain acres of farm land from
production. If the support programs were modified or discontinued, the farmer
could produce some income from crop growth on the idle acreage, albeit, at an
amount presumably lower than the support payments.
In addition, the value of collateral securing agricultural real estate
loans may be affected in the coming years by the gradual release of farmland
from the federal government's Conservation Reserve Program, which began in the
mid-1980s and pays farmers to keep their land out of farming production for a
ten-year period. Because such farmland is being released gradually over a ten
year period which began in 1995 and because of the anticipated high economic
costs associated with preparing such farmland for active cultivation that may
discourage renewed farming thereon, management does not anticipate that release
of this land will have any significant effect on the value of its current
collateral.
Finally, many farms are dependent on a limited number of key individuals
whose injury or death may result in an inability to successfully operate the
farm.
Multi-Family and Commercial Real Estate Lending. The multi-family
residential loan portfolio consists primarily of loans secured by small
apartment buildings with between five and 20 units, and the commercial real
9
<PAGE>
estate loan portfolio includes loans to finance the acquisition of small office
buildings and warehouse space. Such loans generally range in size from $50,000
to $500,000. At December 31, 1996, the Bank had $2.5 million of multi-family
residential and commercial real estate loans, which amounted to 2.0% of the
total loan portfolio at such date. Multi-family and commercial real estate
loans are generally underwritten with loan-to-value ratios of up to 80% of the
lesser of the appraised value or the purchase price of the property. Such loans
generally are made at the Bank's prime rate and are fixed for a period of
between one and three years, after which they adjust at a rate equal to the
Bank's prime rate plus a negotiated margin of 0.5% to 2.0%. On a limited basis,
such loans may be at a fixed rate for a term of five years. Because of the
inherently greater risk involved in this type of lending, the Bank generally
limits its multi-family and commercial real estate lending to borrowers within
its market area with which it has had prior experience.
Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential property
lending. Multi-family residential and commercial real estate loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans typically is dependent on the successful
operation of the real estate project. These risks can be significantly impacted
by supply and demand conditions in the market for office, retail and residential
space, and, as such, may be subject to a greater extent to adverse conditions in
the economy generally. To minimize these risks, the Bank generally limits
itself to its market area or to borrowers with which it has prior experience or
who are otherwise well known to the Bank. It has been the Bank's policy to
obtain annual financial statements of the project for which commercial and
multi-family residential real estate loans are made. In addition, in the case
of commercial mortgage loans made to a partnership or a corporation, the Bank
seeks, whenever possible, to obtain personal guarantees and annual financial
statements of the principals of the partnership or corporation. The Bank
inspects the properties securing commercial real estate loans at least annually
and also reviews all commercial real estate loans in excess of $200,000 on an
annual basis to ensure that the loan meets current underwriting standards. In
addition, the Bank underwrites commercial real estate loans at a rate of
interest significantly above that carried on the loan at the time of origination
to evaluate the borrower's ability to meet principal and interest payments on
the loan in the event of upward adjustments to the interest rate on the loan.
Commercial Business Lending. The Bank originates commercial business loans
to small and medium sized businesses in its market area. Commercial business
loans are generally made to finance the purchase of inventory, new or used
equipment, and for short-term working capital. Such loans are generally secured
by equipment and inventory, and if possible, cross-collateralized by a real
estate mortgage, although commercial business loans are sometimes granted on an
unsecured basis. Such loans are made for terms of five years or less, depending
on the purpose of the loan and the collateral, with loans to finance operating
expenses made for one year or less, with interest rates that adjust at least
annually at a rate equal to the Bank's prime rate plus a margin of between 1%
and 2%. At December 31, 1996, the commercial business loans amounted to $20.1
million, or 16.2%, of the total loan portfolio.
At December 31, 1996, the largest outstanding commercial business loan was
a $2.1 million loan for acquisition of a health care facility. Such loan was
performing according to its terms at December 31, 1996. Most of the commercial
business loans range in size from $50,000 to $200,000.
The Bank underwrites its commercial business loans on the basis of the
borrower's cash flow and ability to service the debt from earnings rather than
on the basis of underlying collateral value, and the Bank seeks to structure
such loans to have more than one source of repayment. The borrower is required
to provide the Bank with sufficient information to allow the Bank to make its
lending determination. In most instances, this information consists of at
least three years of financial statements, a statement of projected cash flows,
current financial information on any guarantor and any additional information on
the collateral. For loans with maturities exceeding one year, the Bank requires
that borrowers and guarantors provide updated financial information at least
annually throughout the term of the loan.
10
<PAGE>
The Bank's commercial business loans may be structured as term loans or as
lines of credit. Commercial business term loans are generally made to finance
the purchase of assets and have maturities of five years or less. Commercial
business lines of credit are typically made for the purpose of providing working
capital and are usually approved with a term of between six months and one year.
The Bank also offers both commercial and standby letters of credit for its
commercial borrowers. Commercial letters of credit are written for a maximum
term of one year. The terms of standby letters of credit generally do not
exceed one year.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often dependent
on successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. The Bank
seeks to minimize these risks through its underwriting guidelines, which require
that the loan be supported by adequate cash flow of the borrower, profitability
of the business, collateral and personal guarantees of the individuals in the
business. In addition, the Bank limits this type of lending to its market area
and to borrowers with which it has prior experience or who are otherwise well
known to the Bank.
Construction Lending. On a limited basis and generally as an accommodation
to existing customers, the Bank also offers construction loans to qualified
borrowers for construction of single-family residences in the Bank's market
area. Typically, the Bank limits its construction lending to a local builder
for the construction of a single-family dwelling where a permanent purchase
commitment has been obtained or individuals are building their primary or
secondary residences. Generally, the Bank does not lend to contractors for
housing construction where the house is not presold. These loans generally have
a six-month term with only interest being paid during the term of the loan, and
a balloon payment at the end of six months and are underwritten in accordance
with the same standards as the Bank's mortgages on existing properties.
Construction loans generally have a maximum loan-to-value ratio of 80%.
Borrowers must satisfy all credit requirements which would apply to the Bank's
permanent mortgage loan financing for the subject property. The Bank's
construction loans typically convert to permanent loans following construction.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
The ability of a developer to sell developed lots or completed dwelling units
will depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk
by limiting construction lending to qualified borrowers in the Bank's market
area and by limiting the aggregate amount of outstanding construction loans. At
December 31, 1996, construction loans amounted to $770,000, or .6%, of the loan
portfolio.
Consumer Lending. The consumer loans originated by the Bank include
automobile loans, credit card loans, mobile home loans, home improvement loans
and loans secured by savings deposits. At December 31, 1996, consumer loans
totaled $41.8 million, or 33.7%, of the total loan portfolio. In future years,
the Bank will seek to increase consumer lending through its credit card and
automobile loan operations.
Automobile loans are secured by both new and used cars and, depending on
the creditworthiness of the borrower, may be made for up to 90% of the "sticker
price" or purchase price, whichever is lower, or, with respect to used
automobiles, the loan value as published by the National Automobile Dealers
Association. Automobile loans are made directly to the borrower-owner or
indirectly, where the financing is arranged by the car dealer. New and
relatively new cars (less than two years old or 20,000 miles or less) are
financed for a period of up to five years, while used cars are financed for
up to four years. Collision insurance is required for all automobile loans.
The Bank
11
<PAGE>
also maintains a blanket collision insurance policy that provides insurance
for any borrower who allows his insurance to lapse. Any expense under the
blanket insurance policy of covering a borrower is billed to the borrower.
Home improvement loans generally are made on the security of residences,
normally do not exceed 90% of the appraised value of the residence, less the
outstanding principal of the first mortgage, and have terms of up to 15 years.
Home improvement loans generally are made on a fixed-rate basis, although some
adjustable-rate home improvement loans are made, at a rate which generally is
approximately 1% above the rate charged on first mortgage loans. At December
31, 1996, home improvement loans amounted to $694,000, or .6%, of the total loan
portfolio.
The Bank makes deposit account loans for up to 90% of the depositor's
deposit account balance. The interest rate is normally 2% above the rate paid
on the deposit account, and the account must be pledged as collateral to secure
the loan. Interest generally is billed on a quarterly basis. At December 31,
1996, loans on deposit accounts totaled $807,000, or .7%, of the total loan
portfolio.
The Bank also offers credit card loans through its participation as a
MasterCard issuer. The Bank began offering credit cards in the mid 1980s as an
agent for another financial institution. However, in July 1993, the Bank
terminated its agency relationship with the other financial institution and
began issuing MasterCard credit cards under which the Bank funded outstanding
balances. Management believes that providing credit card services to its
customers helps the Bank remain competitive by offering customers an additional
service, and the Bank does not actively solicit credit card business beyond its
customer base and market area. The rate currently charged by the Bank on its
credit card loans ranges from 11.9% to 13.9%, and the Bank is permitted to
change the interest rate on 30 days notice. Processing of bills and payments is
contracted to an outside servicer. At December 31, 1996, the Bank had a
commitment to fund an aggregate of $7.8 million of credit card loans, which
represented the aggregate credit limit on credit cards, and had $1.9 million of
credit card loans outstanding, representing 1.5% of its total loan portfolio.
The Bank intends to continue credit card lending and estimates that at current
levels of credit card loans, it makes a small monthly profit net of service
expenses and write-offs.
Consumer lending affords the Bank the opportunity to earn yields higher
than those obtainable on single-family residential lending or agricultural
lending. However, consumer loans entail greater risk than do residential
mortgage loans, particularly in the case of loans which are unsecured (as is the
case with credit card loans) or secured by rapidly depreciable assets such as
automobiles. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer and credit card loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by events such as job loss, divorce, illness or
personal bankruptcy.
Loan Fees and Servicing. In addition to interest earned on loans, the Bank
receives fees in connection with late payments and for miscellaneous services
related to its loans. Due to competition from other lenders in its market area,
the Bank does not charge fees in connection with loan originations,
modifications or extensions. The Bank generally does not service loans for
others and earns minimal income from this activity.
Nonperforming Loans and Other Problem Assets. It is management's policy to
continually monitor its loan portfolio to anticipate and address potential and
actual delinquencies. When a borrower fails to make a payment on a loan, the
Bank takes immediate steps to have the delinquency cured and the loan restored
to current status. Loans which are delinquent 10 days incur a late fee of 5% of
principal and interest due. As a matter of policy, the Bank will contact the
borrower after the loan has been delinquent 10 days. If payment is not promptly
received, the borrower is contacted again, and efforts are made to formulate an
affirmative plan to cure the delinquency. Generally, after any loan is
delinquent 90 days or more, formal legal proceedings are commenced to collect
amounts owed.
12
<PAGE>
Loans generally are placed on nonaccrual status if the loan becomes past
due more than 90 days, except in instances where in management's judgment there
is no doubt as to full collectibility of principal and interest, or management
concludes that payment in full is not likely. Consumer loans are generally
charged off, or any expected loss is reserved for, after they become more than
120 days past due. All other loans are charged off when management concludes
that they are uncollectible. See Note A of Notes to Consolidated Financial
Statements.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate acquired through foreclosure until such time as it is sold. When
such property is acquired, it is recorded at the lower of cost or its fair value
less estimated selling costs. Any required write-down of the loan to its fair
value less estimated selling costs upon foreclosure is charged against the
allowance for loan losses. See Note A of the Notes to Consolidated Financial
Statements.
The following table sets forth information with respect to the
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------
1996(1) 1995(1)
-------------- ------------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis: (2)
Real estate:
Residential.................................. $ 253 $ 195
Commercial................................... -- --
Agricultural................................... -- --
Commercial business............................ -- --
Consumer....................................... 65 103
----- -----
Total....................................... $ 318 $ 298
===== =====
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential................................. $ 130 $ 98
Commercial.................................. -- --
Agricultural................................... -- --
Commercial business............................ -- --
Consumer....................................... -- --
----- -----
Total....................................... 130 98
----- -----
Total nonperforming loans................... $ 448 $ 396
===== =====
Percentage of total loans........................ .36% .34%
===== =====
Other nonperforming assets (3)................... $ 53 $ 137
===== =====
Loans modified in troubled debt restructurings... $ -- $ --
===== =====
</TABLE>
- --------------------
(1) Net of specific reserves.
(2) Nonaccrual status denotes loans on which, in the opinion of management, the
collection of additional interest is unlikely. Payments received on a
nonaccrual loan are either applied to the outstanding principal balance or
recorded as interest income, depending on assessment of the collectibility
of the loan.
(3) "Other nonperforming assets" represents property acquired by the Bank
through foreclosure or repossession and real estate held for sale. This
property is carried at the lower of its fair value less estimated selling
costs or the principal balance of the related loan, whichever is lower.
13
<PAGE>
During the year ended December 31, 1996, gross interest income of $36,000,
would have been recorded on loans accounted for on a nonaccrual basis if the
loans had been current throughout the year. Interest on such loans included in
income during the year ended December 31, 1996 amounted to $15,000.
At December 31, 1996, nonaccrual loans consisted of 13 single-family
residential real estate loans aggregating $253,000, and 14 consumer loans
aggregating $65,000.
Real estate acquired through foreclosure is initially recorded at the lower
of cost (net loan receivable balance at date of foreclosure) or fair value less
estimated selling costs. Fair value is defined as the amount in cash or cash-
equivalent value of other consideration that a real estate parcel would yield in
a current sale between a willing buyer and a willing seller, as measured by
market transactions. If a market does not exist, fair value of the item is
estimated based on selling prices of similar items in active markets or, if
there are no active markets for similar items, by discounting a forecast of
expected cash flows at a rate commensurate with the risk involved. Fair value is
generally determined through an appraisal at the time of foreclosure. The Bank
records a valuation allowance for estimated selling costs of the property
immediately after foreclosure. Subsequent to foreclosure, real estate acquired
through foreclosure is periodically evaluated by management and an allowance for
loss is established if the estimated fair value of the property, less estimated
costs to sell, declines. At December 31, 1996, the Bank had $53,000 in real
estate owned, which consisted of two single-family residences.
Loans which are not currently classified as non-accrual, 90 days past due
or restructured but where known information about possible credit problems of
borrowers causes management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and may result in
disclosure as non-accrual, 90 days past due or restructured amounted to $778,000
at December 31, 1996. Such amount included 13 single-family residential
mortgage loans totalling $237,000, 6 commercial business loans totalling
$200,000, 4 agricultural loans totalling $91,000 and 27 consumer and other loans
totalling $250,000. The Bank takes such loans into consideration in
establishing the allowance for loan losses.
Federal regulations require national banks to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if
it is determined to be inadequately protected by the current retained earnings
and paying capacity of the obligor or of the collateral pledged, if any. An
asset is classified as doubtful if full collection is highly questionable or
improbable. An asset is classified as loss if it is considered uncollectible,
even if a partial recovery could be expected in the future. The regulations
also provide for a special mention designation, described as assets which do not
currently expose a national bank to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as substandard or
doubtful require a national bank to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a national bank must
either establish a specific allowance for loss in the amount of the portion of
the asset classified loss, or charge off such amount. Federal examiners may
disagree with a bank's classifications. If a bank does not agree with an
examiner's classification of an asset, it may appeal this determination to the
District Manager of the OCC. The Bank regularly reviews its assets to determine
whether any assets require classification or re-classification. At December 31,
1996, the Bank had $2.2 million in classified assets, which consisted of $2.1
million in assets classified as substandard, $8,800 in assets classified as
doubtful and $49,700 in assets classified as loss.
14
<PAGE>
Allowance for Loan Losses. In originating loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. It is management's
policy to maintain an adequate allowance for loan losses based on, among other
things, the Bank's and the industry's historical loan loss experience,
evaluation of economic conditions, regular reviews of delinquencies, loan
portfolio quality and evolving standards imposed by federal bank examiners. The
Bank increases its allowance for loan losses by charging provisions for possible
loan losses against the Bank's income.
Management will continue to actively monitor the Bank's asset quality and
allowance for loan losses. Management will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowances for losses and
believes such allowances are adequate, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The Bank's methodology for establishing the allowance for loan losses takes
into consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of the Bank's assets and
evaluates the need to establish allowances on the basis of this review. Assets
reviewed include nonaccrual loans, accruing loans 90 days or more delinquent,
loans modified in troubled debt restructurings and real estate owned, as well as
any additional classified loans or loans not falling within any of the above
categories but where known information about possible credit problems of
borrowers causes management to have serious concerns as to the ability of the
borrowers to comply with loan repayment terms and may result in disclosure of
the loans as nonaccrual, 90 days past due or restructured. Allowances are
established by the Board of Directors on a quarterly basis based on an
assessment of risk in the Bank's assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, loan concentrations, the state of the real estate market,
regulatory reviews conducted in the regulatory examination process and general
economic conditions. Additional provisions for losses on loans are made in
order to bring the allowance to a level deemed adequate. Specific reserves will
be provided for individual assets, or portions of assets, when ultimate
collection is considered improbable by management based on the current payment
status of the assets and the fair value of the security. At the date of
foreclosure or other repossession, the Bank would transfer the property to real
estate acquired in settlement of loans at the lower of cost or fair value less
estimated selling costs. Any portion of the outstanding loan balance in excess
of fair value less estimated selling costs would be charged off against the
allowance for loan losses. If, upon ultimate disposition of the property, net
sales proceeds exceed the net carrying value of the property, a gain on sale of
real estate would be recorded.
OCC policy requires maintenance of an adequate allowance for loan and lease
losses and an effective loan review system. This policy includes an arithmetic
formula for checking the reasonableness of an institution's allowance for loan
loss estimate compared to the average loss experience of the industry as a
whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of: (i) up to 60% of the portfolio that is classified
doubtful; (ii) up to 25% of the portfolio that is classified as substandard; and
(iii) for the portions of the portfolio that have not been classified (including
those loans designated as special mention), estimated credit losses over the
upcoming 12 months given the facts and circumstances as of the evaluation date.
This amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.
15
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
------------ -----------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period............... $1,514 $1,641
------ ------
Loans charged off:
Real estate mortgage:
Single-family residential................ 1 34
Multi-family residential and commercial.. -- --
Construction............................. -- --
Agricultural............................... -- --
Commercial business........................ -- 8
Consumer................................... 400 510
------ ------
Total charge-offs............................ 401 552
------ ------
Recoveries:
Real estate mortgage:
Single-family residential................ 39 1
Multi-family residential and commercial.. -- --
Construction............................. -- --
Agricultural............................... -- --
Commercial business........................ 3 36
Consumer................................... 355 275
------ ------
Total recoveries............................. 397 312
------ ------
Net loans charged-off........................ 4 240
------ ------
Provision for losses on loans................ 10 113
------ ------
Balance at end of period..................... $1,520 $1,514
====== ======
Ratio of net charge-offs to average
loans outstanding during the period........ 0% 0.21%
====== ======
</TABLE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1996 1995
-------------------- --------------------
Percent of Percent of
Loans in Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate - mortgage:
Single-family residential.......... $ 330 37.52% $ 340 40.40%
Multi-family residential and
commercial....................... 125 2.01 141 2.57
Construction....................... 5 .62 5 .50
Agricultural......................... 315 9.87 308 7.54
Commercial business.................. 345 16.24 308 10.60
Consumer............................. 400 33.74 412 38.39
------ ------ ------ ------
Total allowance for loan losses.. $1,520 100.00% $1,514 100.00%
====== ====== ====== ======
</TABLE>
16
<PAGE>
Mortgage-Backed and Related Securities
Mortgage-backed securities represent a participation interest in a
pool of single-family or multi-family mortgages, the principal and interest
payments on which are passed from the mortgage originators through
intermediaries that pool and repackage the participation interest in the form of
securities to investors such as the Company. Such intermediaries may include
quasi-governmental agencies such as FHLMC, FNMA and GNMA which guarantee the
payment of principal and interest to investors. Mortgage-backed securities
generally increase the quality of the Company's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate mortgage loans. Mortgage-backed securities generally are referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of
the underlying mortgages may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accredited over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the
coupon rate of the underlying mortgage significantly exceeds the prevailing
market interest rates offered for mortgage loans, refinancing generally
increases and accelerates the prepayment of the underlying mortgages.
Prepayment experience is more difficult to estimate for adjustable-rate
mortgage-backed securities.
Mortgage-related securities, which consist of collateralized mortgage
obligations ("CMOs"), are typically issued by a special purpose entity, which
may be organized in a variety of legal forms, such as a trust, a corporation or
a partnership. The entity aggregates pools of pass-through securities, which
are used to collateralize the mortgage-related securities. Once combined, the
cash flows can be divided into "tranches" or "classes" of individual securities,
thereby creating more predictable average lives for each security than the
underlying pass-through pools. Accordingly, under this security structure, all
principal paydowns from the various mortgage pools are allocated to a mortgage-
related securities' class or classes structured to have priority until it has
been paid off. These securities generally have fixed interest rates, and, as a
result, changes in interest rates generally would affect the market value and
possibly the prepayment rates of such securities. The Company's CMOs are not
considered to be derivative financial instruments for reporting purposes of SFAS
No. 119.
Some mortgage-related securities instruments are like traditional debt
instruments due to their stated principal amounts and traditionally defined
interest rate terms. Purchasers of certain other mortgage-related securities
instruments are entitled to the excess, if any, of the issuer's cash flows.
These mortgage-related securities instruments may include instruments designated
as residual interest and are riskier in that they could result in the
17
<PAGE>
loss of a portion of the original investment. Cash flows from residual interests
are very sensitive to prepayments and, thus, contain a high degree of interest
rate risk. The Company does not purchase residual interests in mortgage-related
securities.
At December 31, 1996, the Company had CMOs with an amortized cost of
$15.2 million, representing 8.2% of total assets. The Company's CMOs had a
weighted average yield of 5.8% at December 31, 1996. The Company's investment
policy permits investments in individual issues of CMOs or REMICs up to one
percent of the Company's assets so long as the issue is rated AA or better at
the time of purchase by nationally recognized rating services or issued by U.S.
government agencies.
At December 31, 1996, all of the Company's mortgage-backed and related
securities were held as available for sale. At December 31, 1996, the Company's
mortgage-backed and related securities had an amortized cost of $28.5 million,
an approximate market value of $28.3 million and a weighted average yield of
6.5%.
Investment Activities
The Bank is permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB of Chicago, certificates of
deposits in federally insured institutions, certain bankers' acceptances and
federal funds. It may also invest, subject to certain limitations, in
commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds. Federal regulations require the Bank to
maintain an investment in FHLB and FRB stock and a minimum amount of liquid
assets which may be invested in cash and specified securities.
The Bank's investment policy currently allows for investment in
various types of liquid assets, including United States Government and Agency
securities, time deposits at the FHLB of Chicago, certificates of deposit or
bankers' acceptances at other federally insured depository institutions and
obligations of states and political subdivisions. Generally, the objectives of
the Bank's investment policy are to: (i) maximize returns; (ii) provide and
maintain liquidity within the guidelines of OCC regulations; (iii) maintain a
balance of high-quality, diversified investments to minimize risk; (iv) provide
collateral for pledging requirements; (v) serve as a counter-cyclical balance to
the loan portfolio; (vi) manage interest rate risk; and (vii) to insure
compliance with all regulatory requirements. In accordance with the investment
policy, at December 31, 1996, the Company had investments in U.S. Government and
agency notes, obligations of state and political subdivisions, interest-earning
deposits and certificates of deposit, FHLB of Chicago stock and FRB stock.
At December 31, 1996, certain securities and all mortgage-backed and
related securities with a total amortized cost of $42.7 million and a market
value of $42.3 million were classified as available for sale. Investments
classified as available for sale are recorded in the consolidated financial
statements at market value with unrealized gains and losses, net of tax,
recognized in stockholders' equity. At December 31, 1996, the effect of the
investments available for sale was $263,000 on stockholders' equity. The
Company intends to hold these investments for an indefinite period of time, but
not necessarily to maturity. Any decision to sell an investment would be based
on various factors, including significant movements in interest rates, liquidity
needs, regulatory capital considerations, acquisitions, and other factors. The
Company had classified state and municipal obligations with an amortized cost of
$3.4 million and market value of $3.1 million as held to maturity. Investments
classified as held to maturity are recorded in the consolidated financial
statements at amortized cost. The Company has the intent and ability to hold
these investments to maturity. The Company currently has no investments
classified as trading securities.
18
<PAGE>
The following table sets forth the carrying value of the Company's
investments at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
(In thousands)
Securities available for sale (1)
U.S. government and agency securities... $11,886 $17,408
State and municipal obligations......... 828 912
Securities held to maturity:
U.S. government and agency securities.. -- --
State and municipal obligations........ 3,362 3,113
Equities and mutual funds.............. -- --
------- -------
Total investment securities........... 16,076 21,433
Interest-bearing deposits................ 11,333 8,622
FRB stock................................ 381 332
FHLB stock............................... 895 695
------- -------
Total investments..................... $28,685 $31,082
======= =======
</TABLE>
- --------------------
(1) The carrying value of securities available for sale is the market value.
19
<PAGE>
The following table sets forth information in the scheduled
maturities, amortized cost, market values and average yields for the Company's
investment portfolio at December 31, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
------------------ ----------------- ------------------ ------------------- ----------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
--------- ------- --------- ------- --------- ------- --------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Securities available
for sale:
U.S. government
and agency securities.. $ 2,602 5.05% $7,613 5.30% $1,886 5.75% $ -- --% $12,101 $11,886 5.32%
State and municipal
obligations.......... 85 6.00 404 4.59 347 4.00 -- -- 836 828 4.63
------- ------ ------ ------ ------- -------
Total.............. 2,687 8,017 2,233 -- 12,937 12,714
Securities held to
maturity:
State and municipal
obligations........... 330 4.00 1,636 4.02 1,396 5.11 -- 3,362 3,378 4.46
Interest-bearing deposits
and time deposits....... 11,333 5.42 -- -- -- 11,333 11,333 5.42
FRB stock................ -- -- -- 381 6.00 381 381 6.00
FHLB stock............... -- -- -- 895 6.75 895 895 6.75
------- ------ ------ ------ ------- -------
Total................ $14,350 5.32 $9,653 5.07 $3,629 5.34 $1,276 6.53 $28,908 $28,701 5.29
======= ====== ====== ====== ======= =======
</TABLE>
20
<PAGE>
The Bank is required to maintain average daily balances of liquid assets
(cash, deposits maintained pursuant to Federal Reserve Board requirements, time
and savings deposits in certain institutions, obligations of state and political
subdivisions thereof, shares in mutual funds with certain restricted investment
policies, highly rated corporate debt, and mortgage loans and mortgage-backed
securities with less than one year to maturity or subject to repurchase within
one year) equal to a monthly average of not less than a specified percentage
(currently 5%) of its net withdrawable savings deposits plus short-term
borrowings.
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending,
investment activities and general operational purposes. In addition to
deposits, the Bank derives funds from loan principal and interest repayments,
maturities of investment securities and mortgage-backed and related securities
and interest payments thereon. Although loan repayments are a relatively stable
source of funds, deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds, or
on a longer term basis for general operational purposes. The Bank has access to
borrow from the FHLB of Chicago.
Deposits. The Bank attracts deposits principally from within its market area
by offering a variety of deposit instruments, including checking accounts, money
market accounts, regular savings accounts, Individual Retirement Accounts, and
certificates of deposit which range in maturity from three months to five years.
Deposit terms vary according to the minimum balance required, the length of time
the funds must remain on deposit and the interest rate. Maturities, terms,
service fees and withdrawal penalties for its deposit accounts are established
by the Bank on a periodic basis. The Bank reviews its deposit mix and pricing
on a weekly basis. In determining the characteristics of its deposit accounts,
the Bank considers the rates offered by competing institutions, funds
acquisition and liquidity requirements, growth goals and federal regulations.
Management believes it prices its deposits comparably to rates offered by its
competitors. The Bank does not accept brokered deposits.
The Bank competes for deposits with other institutions in its market areas by
offering deposit instruments that are competitively priced and by providing
customer service through convenient and attractive offices, knowledgeable and
efficient staff and hours of service that meet customers' needs. Substantially
all of the Bank's depositors are Illinois residents. To provide additional
convenience, the Bank participates in the CIRRUS Automatic Teller Machine
network at locations throughout the United States and the SHAZAM Automatic
Teller Machine network at locations throughout the midwest, through which
customers can gain access to their accounts at any time.
The following table sets forth the average month-end balances and interest
rates for interest-bearing demand deposits and time deposits for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995
--------------------- ---------------------
Interest- Interest-
Bearing Bearing
Demand Time Demand Time
Deposits Deposits Deposits Deposits
---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balance... $49,512 $87,252 $53,942 $93,534
Average rate...... 2.88% 5.61% 2.85% 5.49%
</TABLE>
21
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1996 and at such date represented 11.7% of total deposits with a weighted
average rate of 5.8%. A significant portion of such deposits were
collateralized with mortgage-backed and related securities pledged by the Bank
with a carrying value of $24.6 million at December 31, 1996. The Bank's
certificates of deposit in excess of $100,000 primarily consist of deposits from
schools, municipalities and other local entities. As these deposits mature, the
Bank bids against other financial institutions to retain those deposits. As a
result, these funds are less likely to remain on deposit at the Bank upon
maturity than smaller certificates of deposit maintained by the Bank's retail
customers. Management believes that it will be able to retain a significant
amount of these deposits because many of the schools, municipalities and other
entities are longstanding customers of the Bank with numerous other deposit and
loan relationships with the Bank. To the extent the Bank is unable to replace
maturing deposits, it may sell investment securities classified as available for
sale.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- --------------
(In thousands)
<S> <C>
Three months or less............ $ 5,544
Over three through six months... 2,549
Over six through 12 months...... 1,708
Over 12 months.................. 6,450
-------
Total......................... $16,251
=======
</TABLE>
Borrowings. Savings deposits historically have been the primary
source of funds for the Bank's lending, investments and general operating
activities. The Bank is authorized, however, to use advances from the FHLB of
Chicago to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Chicago functions as a central reserve
bank providing credit for savings institutions and certain other member
financial institutions. As a member of the FHLB System, the Bank is required to
own stock in the FHLB of Chicago and is authorized to apply for advances.
Advances are pursuant to several different programs, each of which has its own
interest rate and range of maturities. The Bank has a Blanket Agreement for
advances with the FHLB under which the Bank may borrow up to 25% of assets
subject to normal collateral and underwriting requirements. Advances from the
FHLB of Chicago would be secured by the Bank's stock in the FHLB of Chicago and
other eligible assets. At December 31, 1996, the Bank had $7.5 million of FHLB
advances. The Bank also obtains short-term borrowings consisting of repurchase
agreements with deposit customers. At December 31, 1996, the Bank had $3.1
million of short-term borrowings, which consisted of repurchase agreements. The
Bank is authorized to borrow from the Federal Reserve Bank of St. Louis but has
not done so.
The following table sets forth certain information regarding short-
term borrowings by the Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------
1996 1995
-------- --------
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances........................ $7,500 $3,000
Other short-term borrowings.......... 3,121 --
Rate paid on:
FHLB advances........................ 5.41% 5.83%
Other short-term borrowings.......... 5.48 --
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
------------ -----------
(Dollars in thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
FHLB advances................................. $8,500 $3,000
Other short-term borrowings................... 3,213 --
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances................................. $6,000 $1,500
Other short-term borrowings................... 2,060 --
Approximate weighted average rate paid on: (1)
FHLB advances................................. 5.07% 4.80%
Other short-term borrowings................... 4.90 --
- ---------------------
</TABLE>
(1) Based on month-end balances.
Trust Department Activities
The Bank operates a Trust Department, with Trust Officer Linda Karcher
serving as Manager. The activities of the Trust Department are supervised by
the Trust Committee of the Board of Directors consisting of Directors Clyde R.
King (Chairman), Allen D. Welker, Roger A. Charleston and William Cantwell.
Activities engaged in by the Trust Department include acting as: (i) executor
or administrator of estates; (ii) guardian of estates of disabled adults or
minors; (iii) trustee or co-trustee of living trusts or testamentary trusts;
(iv) trustee of life insurance trusts; (v) trustee of pension or profit-sharing
trusts; and (vi) trustee of Illinois land trusts. Trust activities presently
constitute a small portion of the Bank's operations. However, the Bank intends
to expand its activities in this area in the future.
Subsidiary Activities
The Bank had one subsidiary service corporation, Olney Savings Service
Corp. ("Service Corp."), through which it engaged in three businesses. Since
1985, the Bank also had offered its customers annuity products through Service
Corp. pursuant to an agreement with One Systems, Inc. Service Corp. had one
full-time employee engaged in the sale of annuities. In December 1993, Service
Corp. commenced securities brokerage activities pursuant to an agreement with
Robert Thomas Securities, Inc., a subsidiary of Raymond James Financial, Inc.
Service Corp. employed one licensed broker for this purpose. Service Corp. also
operated an appraisal service known as Olney Savings Service Corp. Appraisal
Services, which employed a licensed real estate appraiser. Prior to the Bank
Conversion, the Savings Bank operated Community Insurance Services, a full
service insurance agency, through Service Corp. Community Insurance was sold for
$200,000 in May 1995, as OCC regulations do not permit subsidiaries of national
banks to conduct such activities. Service Corp. was dissolved as of December
31, 1996. The annuity products and brokerage activities mentioned above are now
conducted through a department of the Bank.
National banks must give the OCC prior notice before establishing or
acquiring a new subsidiary, or commencing any new activity through an existing
subsidiary. The OCC has authority to order termination of subsidiary activities
determined to pose a risk to the safety or soundness of the institution.
Competition
The Bank faces strong competition both in originating real estate,
agriculture, automobile, consumer and other loans and in attracting deposits.
The Bank competes for real estate and other loans principally on the basis of
interest rates, the types of loans it originates and the quality of services it
provides to borrowers. Its competition
23
<PAGE>
in originating real estate loans comes primarily from savings institutions,
commercial banks and mortgage bankers making loans secured by real estate
located in the Bank's market area. Commercial banks, credit unions and finance
companies provide vigorous competition in consumer lending. Competition may
increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
The Bank attracts all its deposits through its branch offices
primarily from the communities in which those branch offices are located.
Consequently, competition for deposits is principally from other savings
institutions, commercial banks, credit unions and brokers in these communities.
The Bank competes for deposits and loans by offering a variety of deposit
accounts at competitive rates, a wide array of loan products, convenient
business hours and branch locations, a commitment to outstanding customer
service and a well-trained staff. In addition, the Bank believes it has
developed strong relationships with local businesses, realtors and the public in
general.
Management has designated as its primary market area the communities
in Richland, Wayne, Jasper and Lawrence Counties, and the eastern two-thirds of
Coles County, in Illinois. The Bank also has loan and deposit customers in
Clay, Crawford, Cumberland, Edwards, Effingham, White and Wabash Counties,
Illinois, which are contiguous to its primary market area.
Employees
As of December 31, 1996, the Bank and its subsidiaries had 67 full-
time and 5 part-time employees, none of whom were represented by a collective
bargaining agreement, and management considers the Bank's relationships with its
employees to be good.
Regulation, Supervision and Governmental Policy
The following is a brief summary of certain statutes, rules and
regulations affecting the Company and the Bank. A number of other statutes and
regulations have an impact on their operations. The following summary of
applicable statutes and regulations does not purport to be complete and is
qualified in its entirety by reference to such statutes and regulations.
Bank Holding Company Regulation. The Company is registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended (the
"Holding Company Act") and, as such, is subject to supervision and regulation by
the Board of Governors of the Federal Reserve Board ("FRB"). As a bank holding
company, the Company is required to furnish to the FRB annual and quarterly
reports of its operations at the end of each period and to furnish such
additional information as the FRB may require pursuant to the Holding Company
Act. The Company is also subject to regular examination by the FRB.
Under the Holding Company Act, a bank holding company must obtain the
prior approval of the FRB before (i) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.
The Holding Company Act currently prohibits the FRB from approving an
application by a bank holding company to acquire voting shares of a bank located
outside the state in which the operations of the holding company's bank
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by state law. Illinois law provides, subject to certain
terms and conditions, that an out-of-state bank holding company may acquire a
bank located in Illinois provided that Illinois bank holding companies may
acquire banks located in that state. The Riegle-Neal Act, however, generally
permits the FRB to approve interstate bank acquisitions by bank holding
companies without regard to any prohibitions of state law.
24
<PAGE>
Under the Holding Company Act, any company must obtain approval of the
FRB prior to acquiring control of the Company or the Bank. For purposes of the
Holding Company Act, "control" is defined as ownership of more than 25% of any
class of voting securities of the Company or the Bank, the ability to control
the election of a majority of the directors, or the exercise of a controlling
influence over management or policies of the Company or the Bank.
The Change in Bank Control Act and the regulations of the FRB
thereunder require any person or persons acting in concert (except for companies
required to make application under the Holding Company Act), to file a written
notice with the FRB before such person or persons may acquire control of the
Company or the Bank. The Change in Bank Control Act defines "control" as the
power, directly or indirectly, to vote 25% or more of any voting securities or
to direct the management or policies of a bank holding company or an insured
bank.
The Holding Company Act also prohibits, with certain exceptions, a
bank holding company from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of a company that is not a bank or a bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for
its subsidiaries. The principal exceptions to these prohibitions involve
certain non-bank activities which, by statute or by FRB regulation or order,
have been identified as activities closely related to the business of banking or
managing or controlling banks. The activities of the Company are subject to
these legal and regulatory limitations under the Holding Company Act and the
FRB's regulations thereunder. Notwithstanding the FRB's prior approval of
specific nonbanking activities, the FRB has the power to order a holding company
or its subsidiaries to terminate any activity, or to terminate its ownership or
control of any subsidiary, when it has reasonable cause to believe that the
continuation of such activity or such ownership or control constitutes a serious
risk to the financial safety, soundness or stability of any bank subsidiary of
that holding company.
The FRB has adopted guidelines regarding the capital adequacy of bank
holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets.
See " -- Regulatory Capital Requirements."
The FRB has the power to prohibit dividends by bank holding companies
if their actions constitute unsafe or unsound practices. The FRB has issued a
policy statement on the payment of cash dividends by bank holding companies,
which expresses the FRB's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the company's capital needs, asset quality, and overall
financial condition.
As a bank holding company, the Company is required to give the FRB
notice of any purchase or redemption of its outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the Company's consolidated net
worth. The FRB may disapprove such a purchase or redemption if it determines
that the proposal would violate any law, regulation, FRB order, directive, or
any condition imposed by, or written agreement with, the FRB.
Bank Regulation. As a national bank, the Bank is subject to the
primary supervision of the OCC under the National Bank Act. The prior approval
of the OCC is required for a national bank to establish or relocate an
additional branch office or to engage in any merger, consolidation or
significant purchase or sale of assets.
The OCC regularly examines the operations of the Bank, including but
not limited to capital adequacy, reserves, loans, investments and management
practices. These examinations are for the protection of the Bank's depositors
and not its shareholders. In addition, the Bank is required to furnish
quarterly and annual reports to the OCC. The OCC's enforcement authority
includes the power to remove officers and directors and the authority to issue
cease-and-desist orders to prevent a bank from engaging in unsafe or unsound
practices or violating laws or regulations governing its business.
25
<PAGE>
The OCC has adopted regulations regarding the capital adequacy of
national banks, which require national banks to maintain specified minimum
ratios of capital to total assets and capital to risk-weighted assets. See " --
Regulatory Capital Requirements."
Pursuant to the National Bank Act, no national bank may pay dividends
from its paid-in capital. All dividends must be paid out of current or retained
net profits, after deducting reserves for losses and bad debts. The National
Bank Act further restricts the payment of dividends out of net profits by
prohibiting a national bank from declaring a dividend on its shares of common
stock until the surplus fund equals the amount of capital stock or, if the
surplus fund does not equal the amount of capital stock, until one-tenth of a
bank's net profits for the preceding half year in the case of quarterly or semi-
annual dividends, or the preceding two half-year periods in the case of annual
dividends, are transferred to the surplus fund.
The approval of the OCC is required prior to the payment of a dividend
if the total of all dividends declared by a national bank in any calendar year
would exceed the total of its net profits for that year combined with its net
profits for the two preceding years, less any required transfers to surplus or a
fund for the retirement of any preferred stock. In addition, the Bank is
prohibited by federal statute from paying dividends or making any other capital
distribution that would cause the Bank to fail to meet its regulatory capital
requirements. Further, the OCC also has authority to prohibit the payment of
dividends by a national bank when it determines such payment to be an unsafe and
unsound banking practice.
The Bank is a member of the Federal Reserve System and its deposits
are insured by the SAIF administered by the FDIC to the legal maximum of
$100,000 for each insured depositor. Some of the aspects of the lending and
deposit business of the Bank that are subject to regulation by the FRB and the
FDIC include reserve requirements and disclosure requirements in connection with
personal and mortgage loans and savings deposit accounts. In addition, the Bank
is subject to numerous federal and state laws and regulations which set forth
specific restrictions and procedural requirements with respect to the
establishment of branches, investments, interest rates on loans, credit
practices, the disclosure of credit terms and discrimination in credit
transactions.
The Bank is subject to restrictions imposed by federal law on
extensions of credit to, and certain other transactions with, the Company and
other affiliates, and on investments in the stock or other securities thereof.
Such restrictions prevent the Company and such other affiliates from borrowing
from the Bank unless the loans are secured by specified collateral, and require
such transactions to have terms comparable to terms of arms-length transactions
with third persons. Further, such secured loans and other transactions and
investments by the Bank are generally limited in amount as to the Company and as
to any other affiliate to 10% of the Bank's capital and surplus and as to the
Company and all other affiliates to an aggregate of 20% of the Bank's capital
and surplus. These regulations and restrictions may limit the Company's ability
to obtain funds from the Bank for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses.
Under OCC regulations, national banks must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit that are secured by liens or interests in real estate or are made for the
purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards, including loan-to-value limits, that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. A bank's real estate lending policy must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal bank regulators. The
Interagency Guidelines, among other things, call upon depository institutions to
establish internal loan-to-value limits for real estate loans that are not in
excess of the loan-to-value limits specified in the Guidelines for the various
types of real estate loans. The Interagency Guidelines state, however, that it
may be appropriate in individual cases to originate or purchase loans with loan-
to-value ratios in excess of the supervisory loan-to-value limits.
The Bank is required to pay assessments based on a percent of its
insured deposits to the FDIC for insurance of its deposits by the SAIF. Under
the Federal Deposit Insurance Act, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions to maintain the designated reserve
ratio of the SAIF at 1.25% of estimated
26
<PAGE>
insured deposits or at a higher percentage of estimated insured deposits that
the FDIC determines to be justified for that year by circumstances raising a
significant risk of substantial future losses to the SAIF.
The assessment rate for an insured depository institution is
determined by the assessment risk classification assigned to the institution by
the FDIC based on the institution's capital level and supervisory evaluations.
Based on the data reported to regulators for date closest to the last day of the
seventh month preceding the semi-annual assessment period, institutions are
assigned to one of three capital groups -- well capitalized, adequately
capitalized or undercapitalized -- using the same percentage criteria as in the
prompt corrective action regulations. See "-- Prompt Corrective Regulatory
Action." Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund.
For the past several semi-annual periods, institutions with SAIF-
assessable deposits, like the Bank, have been required to pay higher deposit
insurance premiums than institutions with deposits insured by the BIF. In order
to recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on institutions with SAIF-assessable deposits based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Company incurred an after-tax expense of $714,000 during
the quarter ended September 30, 1996.
The FDIC has adopted a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings would be reduced to zero and
institutions in the lowest risk assessment classification will be assessed at
the rate of 0.27% of insured deposits. Until December 31, 1999, however, all
SAIF-insured institutions, will be required to pay assessments to the FDIC at
the rate of 6.5 basis points to help fund interest payments on certain bonds
issued by the Financing Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments.
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the
27
<PAGE>
foregoing sanctions on an undercapitalized institution if the regulators
determine that such actions are necessary to carry out the purposes of the
prompt corrective action provisions. If an institution's ratio of tangible
capital to total assets falls below a "critical capital level," the institution
will be subject to conservatorship or receivership within 90 days unless
periodic determinations are made that forbearance from such action would better
protect the deposit insurance fund. Unless appropriate findings and
certifications are made by the appropriate federal bank regulatory agencies, a
critically undercapitalized institution must be placed in receivership if it
remains critically undercapitalized on average during the calendar quarter
beginning 270 days after the date it became critically undercapitalized. If an
institution is in compliance with an approved capital plan on the date of
enactment of FDICIA, however, it will not be required to submit a capital
restoration plan if it is undercapitalized or become subject to the statutory
prompt corrective action provisions applicable to significantly and critically
undercapitalized institutions prior to July 1, 1994.
Under regulations jointly adopted by the federal banking regulators, a
depository institution's capital adequacy for purposes of the FDICIA prompt
corrective action rules is determined on the basis of the institution's total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-
weighted assets) and leverage ratio (the ratio of its core capital to adjusted
total assets). Under the regulations, an institution that is not subject to an
order or written directive to meet or maintain a specific capital level will be
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized"
institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the institution has a composite
1 CAMEL rating). An "undercapitalized institution" is an institution that has
(i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or
3.0% if the association has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as an institution that has: (i) a total
risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" institution is defined as an institution that has
a ratio of "tangible equity" to total assets of less than 2.0%. Tangible equity
is defined as core capital plus cumulative perpetual preferred stock (and
related surplus) less all intangibles other than qualifying supervisory goodwill
and certain purchased mortgage servicing rights. The OTS may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized or undercapitalized association to comply with the supervisory
actions applicable to associations in the next lower capital category if the OTS
determines, after notice and an opportunity for a hearing, that the institution
is in an unsafe or unsound condition or that the association has received and
not corrected a less-than-satisfactory rating for any CAMEL rating category.
The Bank is classified as "well-capitalized" under the regulations.
Regulatory Capital Requirements. The FRB and the OCC have established
guidelines with respect to the maintenance of appropriate levels of capital by
bank holding companies and national banks, respectively. The regulations impose
two sets of capital adequacy requirements: minimum leverage rules, which require
bank holding companies and banks to maintain a specified minimum ratio of
capital to total assets, and risk-based capital rules, which require the
maintenance of specified minimum ratios of capital to "risk-weighted" assets.
The regulations of the FRB and the OCC require bank holding companies
and national banks, respectively, to maintain a minimum leverage ratio of "Tier
1 capital" (as defined in the risk-based capital guidelines discussed in the
following paragraphs) to total assets of 3.0%. Although setting a minimum 3.0%
leverage ratio, the capital regulations state that only the strongest bank
holding companies and banks, with composite examination ratings of 1 under the
rating system used by the federal bank regulators, would be permitted to operate
at or near such minimum level of capital. All other bank holding companies and
banks are expected to maintain a leverage ratio of at least 1% to 2% above the
minimum ratio, depending on the assessment of an individual organization's
capital adequacy by its primary regulator. Any bank or bank holding company
experiencing or anticipating significant growth would be expected to maintain
capital well above the minimum levels. In addition, the FRB has indicated that
whenever appropriate, and in particular when a bank holding company is
undertaking expansion, seeking to
28
<PAGE>
engage in new activities or otherwise facing unusual or abnormal risks, it will
consider, on a case-by-case basis, the level of an organization's ratio of
tangible Tier 1 capital (after deducting all intangibles) to total assets in
making an overall assessment of capital.
The risk-based capital rules of the FRB and the OCC require bank
holding companies and national banks to maintain minimum regulatory capital
levels based upon a weighting of their assets and off-balance sheet obligations
according to risk. The risk-based capital rules have two basic components: a
core capital (Tier 1) requirement and a supplementary capital (Tier 2)
requirement. Core capital consists primarily of common stockholders' equity,
certain perpetual preferred stock (which must be noncumulative with respect to
banks), and minority interests in the equity accounts of consolidated
subsidiaries; less all intangible assets, except for certain purchased mortgage
servicing rights and purchased credit card relationships. Supplementary capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify as Tier 1
capital and long-term preferred stock with an original maturity of at least 20
years from issuance; hybrid capital instruments, including perpetual debt and
mandatory convertible securities; and subordinated debt and intermediate-term
preferred stock.
The risk-based capital regulations assign balance sheet assets and
credit equivalent amounts of off-balance sheet obligations to one of four broad
risk categories based principally on the degree of credit risk associated with
the obligor. The assets and off-balance sheet items in the four risk categories
are weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total risk-
weighted assets.
The federal bank regulatory agencies, including the OCC, have proposed
to revise their risk-based capital requirements to ensure that such requirements
provide for explicit consideration by commercial banks of interest rate risk.
Under the proposed rule, a bank's interest rate risk exposure would be
quantified using either the measurement system set forth in the proposal or the
bank's internal model for measuring such exposure, if such model is determined
to be adequate by the bank's examiner. If the dollar amount of a bank's
interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets, the bank would be required under the
proposed rule to hold additional capital equal to the dollar amount of the
excess. Management of the Bank does not believe that adoption of the proposed
rule would have a material adverse effect on the required levels of capital.
The proposed interest rate risk component rule would not apply to bank holding
companies on a consolidated basis.
OCC regulations classify national banks by capital levels and which
provide for the OCC to take various prompt corrective actions to resolve the
problems of any bank that fails to satisfy the capital standards. Under such
regulations, a well-capitalized bank is one that is not subject to any
regulatory order or directive to meet any specific capital level and that has or
exceeds the following capital levels: a total risk-based capital ratio of 10%, a
Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. An
adequately capitalized bank is one that does not qualify as well-capitalized but
meets or exceeds the following capital requirements: a total risk-based capital
ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of
either (i) 4% or (ii) 3% if the bank has the highest composite examination
rating. A bank not meeting these criteria is treated as undercapitalized,
significantly undercapitalized, or critically undercapitalized depending on the
extent to which the bank's capital levels are below these standards. A national
bank that falls within any of the three undercapitalized categories established
by the prompt corrective action regulation will be subject to severe regulatory
sanctions. As of December 31, 1996, the Bank was well-capitalized as defined by
the OCC's regulations.
29
<PAGE>
Taxation
The Bank's federal income tax returns have not been audited in the
past five years. For additional information regarding taxation, see Note K of
Notes to Consolidated Financial Statements.
Item 2. Properties
- -------------------
The following table sets forth the location and certain additional
information regarding the Company's offices at December 31, 1996. The Bank
owns all of its offices.
<TABLE>
<CAPTION>
Net Book Value
Year Total at December Approximate
Opened Investment 31, 1996 Square Footage
------ ---------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Main Office:
240 E. Chestnut
Olney, IL 62450 1883 $2,069 $ 1,079 9,200
Branch Offices:
Lawrenceville Branch
1601 State
Lawrenceville, IL 62439 1983(1) 623 354 2,800
Fairfield Branch
303 W. Delaware
Fairfield, IL 62837 1983(1) 471 236 2,400
Newton Branch
601 W. Jourdan, P.O. Box 361
Newton, IL 62448 1990(1) 620 476 3,114
Charleston Branch
511 Jackson
Charleston, IL 61920 1989(1) 655 464 2,870
</TABLE>
- -------------------
(1) Date of acquisition.
The net book value of the Company's investment in premises and
equipment totaled approximately $2.6 million at December 31, 1996. For a
discussion of premises and equipment, see Note 1 of Notes to Consolidated
Financial Statements.
30
<PAGE>
Item 3. Legal Proceedings.
- -------------------------
On October 18, 1996, a former depositor and borrower of the Bank filed
a complaint in the Circuit Court for the Second Judicial Circuit of Illinois,
naming the Bank's President and Chief Executive Officer and the Bank itself as
defendants. The complaint seeks total damages of $200,000 (including $50,000
against the President in her individual capacity) plus costs. The complaint
alleges the following actions on the part of the Bank: unilaterally lowering
the credit line on the individual's credit card; wrongfully dishonoring the
individual's check; and wrongfully debiting money from the individual's account.
Management believes that the claims brought against it in this proceeding are
without merit. There are no pending regulatory proceedings to which the
Company, the Bank or its subsidiaries is a party or to which any of their
properties is subject which are currently expected to result in a material loss.
From time to time, the Bank is a party to various legal proceedings incident to
its business.
Item 4. Submission of Matters to Vote of Security Holders.
- ----------------------------------------------------------
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders'
- ----------------------------------------------------------------------------
Matters
- -------
The information contained under the sections captioned "Market
Information" in the Company's Annual Report to Stockholders for the Fiscal Year
Ended December 31, 1996 (the "Annual Report") filed as Exhibit 13 hereto is
incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the table captioned "Selected
Consolidated Financial and Other Data" on page 2 in the Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 4 through 17 in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, Independent Auditors' Report and Selected Financial Data contained
on pages 19 through 47 in the Annual Report, which are listed under Item 14
herein, are incorporated herein by reference.
31
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
For information concerning the Board of Directors and executive
officers of the Company, the information contained under the section captioned
"Proposal I -- Election of Directors" in the Company's definitive proxy
statement for the Company's 1997 Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
Item 11. Management Remuneration
- ---------------------------------
The information contained under the sections captioned "Proposal I --
Election of Directors -- Executive Compensation" " -- Director Compensation," "
- -- Employment Agreements" and " -- Supplemental Executive Retirement Agreements"
in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Security Ownership" in
the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities and Security Ownership"
and "Proposal I -- Election of Directors" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Transactions with Management" in the Proxy Statement.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) List of Documents Filed as Part of this Report
----------------------------------------------
(1) Financial Statements. The following consolidated financial
statements are incorporated by reference from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity - Years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which provision
is made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of
this Annual Report on Form 10-K and is also the Exhibit Index.
No. Description
-- -----------
3.1 Articles of Incorporation *
3.2 Bylaws *
4 Form of Common Stock Certificate of Community Financial Corp. **
10.1 Community Financial Corp. Stock Option and Incentive Plan *
10.2 Community Financial Corp. Management Recognition Plan *
10.3(a) Employment Agreements between Community Financial Corp.
and Wayne H. Benson and Douglas W. Tompson *
10.3(b) Employment Agreements between Community Bank & Trust, N.A.
and Wayne H. Benson and Douglas W. Tompson *
10.4 Severance Agreements between each of Community Financial Corp.
and Community Bank & Trust, N.A. and Shirley B. Kessler *
10.5 Community Bank & Trust, N.A. Deferred Compensation Plan *
10.6 Community Bank & Trust, N.A. Supplemental Executive
Retirement Agreements with Shirley B. Kessler,
Wayne H. Benson and Douglas W. Tompson *
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Larsson, Woodyard & Henson, CPAs
27 Financial Data Schedule
- ------------------
* Incorporated herein by reference from the Company's Registration Statement on
Form S-1 filed December 30, 1994 (File No. 33-88102).
** Incorporated herein by reference from the Company's Registration Statement
on Form 8-A (File No. 0-26292).
33
<PAGE>
(b) Reports on Form 8-K. During the quarter ended December 31, 1996, the
-------------------
Registrant did not file any Current Reports on Form 8-K.
(c) Exhibits. The exhibits required by Item 601 of Regulation S-K are either
--------
filed as part of this Annual Report on Form 10-K or incorporated by reference
herein.
(d) Financial Statements and Schedules Excluded from Annual Report. There
--------------------------------------------------------------
are no other financial statements and financial statement schedules which were
excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b) which
are required to be included herein.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMMUNITY FINANCIAL CORP.
March 24, 1997
By: /s/ Shirley B. Kessler
--------------------------------------
Shirley B. Kessler
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Shirley B. Kessler March 24, 1997
- ----------------------------------------------
Shirley B. Kessler
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Douglas W. Tompson March 24, 1997
- ----------------------------------------------
Douglas W. Tompson
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Charles M. DiCiro March 24, 1997
- ----------------------------------------------
Charles M. DiCiro
Chairman of the Board
/s/ Michael F. Bauman March 24, 1997
- ----------------------------------------------
Michael F. Bauman
Director
/s/ William O. Cantwell March 24, 1997
- ----------------------------------------------
William O. Cantwell
Director
/s/ Roger A. Charleston March 24, 1997
- ----------------------------------------------
Roger A. Charleston
Director
/s/ Brad A. Jones March 24, 1997
- ----------------------------------------------
Brad A. Jones
Director
/s/ Clyde R. King March 24, 1997
- ----------------------------------------------
Clyde R. King
Director
/s/ Allen D. Welker March 24, 1997
- ----------------------------------------------
Allen D. Welker
Director
<PAGE>
COMMUNITY FINANCIAL CORP.
[LOGO OF COMMUNITY FINANCIAL CORP. APPEARS HERE]
1996 ANNUAL REPORT
<PAGE>
COMMUNITY FINANCIAL CORP.
================================================================================
Community Financial Corp. (the "Company") was incorporated in December 1994
at the direction of the Board of Directors of Community Bank & Trust, sb, the
predecessor of Community Bank & Trust, N.A. (the "Bank"), to become the holding
company for the Bank upon its conversion from mutual to stock form (the
"Conversion"). In June 1995, the Company used the proceeds from its initial
public offering to acquire all the outstanding capital stock of the Bank. The
Company has no significant assets other than the outstanding stock of the Bank,
the portion of and earnings on the net proceeds from its initial public offering
that it retained and a note receivable from the Company's Employee Stock
Ownership Plan ("ESOP"). The Company's principal business is overseeing and
directing the business of the Bank and investing the Company's assets. The
Company has registered with the Board of Governors of the Federal Reserve System
as a bank holding company.
The Bank is a national bank operating through five offices serving
Richland, Coles, Jasper, Lawrence and Wayne Counties, Illinois and contiguous
counties in southeastern Illinois. The Bank was chartered in 1883 as Olney
Building and Loan Association. In 1961, the Bank changed its name to Olney
Savings and Loan Association. The Bank expanded its branch office network
through a series of acquisitions of other financial institutions, acquiring its
Lawrenceville and Fairfield offices in 1983, its Charleston office in 1989 and
its Newton office in 1990. The Bank became an Illinois state savings bank in
July 1992, at which time it adopted the title Community Bank & Trust, sb,
converted to a federally chartered mutual savings bank under the name Community
Bank & Trust, fsb in February 1995 and converted to a national bank in June
1995, at which time it adopted its present name.
In December 1996, the Company signed an agreement for the purchase of all
the outstanding stock of American Bancshares, Inc., the holding company for
American Bank of Illinois in Highland, an $18 million asset commercial bank with
branches in Highland and Pocohontas, Illinois. The acquisition is expected to
be completed in the second quarter of 1997.
The principal business of the Bank historically consists of attracting
deposits from the general public and investing these deposits in loans secured
by first mortgages on single-family residences in the Bank's market area. To an
increasing extent, the Bank originates agricultural loans because of the
economic base of the surrounding communities, and has recently placed more
emphasis on the origination of automobile loans and commercial business loans.
The Bank's origination of agricultural, automobile and commercial business loans
arises from management's perception of minimal anticipated growth in residential
loan demand within the Bank's market area and a local demand for nonresidential
loans.
MARKET INFORMATION
================================================================================
The Company's common stock began trading under the symbol "CFIC" on the
Nasdaq National Market System on June 30, 1995. There are currently 2,387,112
shares of the common stock outstanding and approximately 703 holders of record
of the common stock. Since issuance of the common stock, on January 15, 1997
the Company paid a cash dividend of $.25 per share to stockholders of record as
of December 30, 1996. No other dividends have been paid on the common stock.
Following are the high and low closing sale prices, by fiscal quarter, as
reported by Nasdaq during the periods indicated.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1995
----
Second quarter.. $ 11.75 $ 10.75
Third quarter... 13.00 12.50
Fourth quarter.. 13.375 13.00
1996
----
First quarter... $ 13.75 12.25
Second quarter.. 13.25 12.00
Third quarter... 13.625 11.75
Fourth quarter.. 13.50 12.625
</TABLE>
<PAGE>
TABLE OF CONTENTS
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Community Financial Corp............................................................... Inside Front Cover
Market Information..................................................................... Inside Front Cover
Letter to Stockholders................................................................. 1
Selected Consolidated Financial and Other Data......................................... 2
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 4
Consolidated Financial Statements...................................................... 19
Corporate Information.................................................................. 48
</TABLE>
<PAGE>
Dear Stockholder:
The Directors, Officers, and Staff of Community Financial Corp. and Community
Bank & Trust, N.A. proudly present our Annual Report to Stockholders. This
report presents an exciting and productive year for our bank.
We recently announced the signing of an agreement for the acquisition of
American Bancshares Inc., the holding company for American Bank of Illinois in
Highland, with branches in Highland and Pocohontas, Illinois, a strong bank with
assets of $18 million. This opens up a new market area and adds diversity to
our organization's geography. We continue to search for acquisitions that will
enhance our performance and fit into our long range plans.
The performance of the bank remains strong. Net income was $773,000, which
included a one-time special assessment of $703,000, net of taxes, paid to
recapitalize the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation. Also during the year, we completed a ten percent (10%)
stock repurchase, and have regulatory permission to repurchase another five
percent (5%). We continue to maintain very good asset quality. The company
declared a dividend of $.25 per share to stockholders of record on December 30,
1996.
We remain committed to the "Community Bank" concept. Decision making is left in
the hands of local management and their boards. We encourage our employees to
become involved in the communities in which they serve and live. A new facility
is being constructed at the Charleston location to better serve the community
and to enhance our growth in the market area. It is this strong "local
community" presence and involvement that will be the key to Community Bank &
Trust's future success.
The Directors and Officers of Community Financial Corp. and Community Bank &
Trust, N.A. want to thank our stockholders and customers for their confidence
and support of our organization. We especially want to thank our employees for
the loyalty and support they put forth on a daily basis that truly makes our job
easier and the organization a team effort. We will continue to endeavor to
maintain a high level of customer satisfaction and enhance shareholder value in
the year to come.
Sincerely,
/s/ Shirley B. Kessler
- ----------------------
Shirley B. Kessler
President and Chief
Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
================================================================================
SELECTED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands)
Assets........................................ $185,799 $186,513 $164,633 $163,226 $164,613
Loans receivable, net......................... 122,307 114,494 111,369 99,641 86,587
Investment securities (1):
Available for sale.......................... 13,990 19,347 7,716 -- --
Held to maturity............................ 3,362 3,113 2,255 10,289 3,874
Cash and cash equivalents and time deposits... 12,618 9,877 5,638 5,065 16,766
Mortgage-backed and related
securities (1)............................... 28,319 35,520 32,310 44,260 52,848
Deposits...................................... 139,100 144,277 151,078 150,290 151,545
FHLB advances................................. 7,500 3,000 1,050 -- --
Other borrowings.............................. 3,121 -- -- -- 1,959
Retained earnings - substantially restricted.. 34,082 38,106 11,254 12,228 10,503
- ------------------
</TABLE>
(1) In connection with its adoption of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," on January 1, 1994, the Bank
classified certain investment securities and all mortgage-backed and
related securities as available for sale.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED OPERATIONS DATA
Year Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income.................................. $13,875 $13,267 $11,776 $12,225 $13,634
Interest expense................................. (6,728) (6,747) (5,576) (6,224) (7,972)
------- ------- ------- ------- -------
Net interest income.............................. 7,147 6,520 6,200 6,001 5,662
Provision for loan losses........................ (10) (113) (212) (144) (112)
------- ------- ------- ------- -------
Net interest income after
provision for loan losses....................... 7,137 6,407 5,988 5,857 5,550
Noninterest income............................... 777 1,033 953 703 578
Noninterest expense.............................. (6,798) (4,437) (4,691) (3,747) (3,562)
Gain (loss) on sale of assets.................... -- 137 (26) 10 203
------- ------- ------- ------- -------
Income before provision for income tax........... 1,116 3,140 2,224 2,823 2,769
Provision for income tax......................... (343) (1,107) (813) (1,073) (1,016)
------- ------- ------- ------- -------
Income before extraordinary item and cumulative
effect of change in accounting principle........ 773 2,033 1,411 1,750 1,753
Extraordinary items.............................. -- -- (701)(1) -- --
Cumulative effect of change in
accounting principle (2)........................ -- -- -- (25) --
------- ------- ------- ------- -------
Net income....................................... $ 773 $ 2,033 $ 710 $ 1,725 $ 1,753
======= ======= ======= ======= =======
- ------------------
</TABLE>
(1) Consists of a $701,000 expense representing the recapture of the Bank's tax
bad debt reserve taken in the quarter ended December 31, 1994 in connection
with the Board of Directors' determination to effectuate the conversion to
a national bank.
(2) For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of New Accounting
Standards -- Accounting for Income Taxes."
2
<PAGE>
KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
At or for the
--------------------------------
Year Ended December 31,
---------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income
divided by average total assets).......... .42%(1) 1.15% .86%(2)
Return on average equity (net income
divided by average retained earnings (3).. 2.15 (1) 8.09 12.17 (2)
Interest rate spread (combined weighted
average interest rate earned less
combined weighted average interest
rate cost)................................ 3.17 3.17 3.78
Net yield on interest-earning assets........ 4.03 3.79 3.95
Ratio of average interest-earning assets
to average interest-bearing liabilities... 122.58 115.59 104.86
Ratio of noninterest expense to average
total assets.............................. 3.66 2.51 2.86
ASSET QUALITY RATIOS:
Nonperforming assets to total assets
at end of period.......................... .20 .28 .51
Nonperforming loans to total loans.......... .26 .34 .62
Allowance for loan losses to total
loans at end of period.................... 1.23 1.31 1.45
Allowance for loan losses to nonperforming
loans (4) at end of period............... 477.99 382.32 238.52
Provision for loan losses to total loans
at end of period......................... .01 .10 .19
Net charge-offs to average loans............ -- .21 .19
CAPITAL RATIOS:
Retained earnings to total assets at
end of period............................. 18.34 20.43 7.86
Average retained earnings to average
assets.................................... 19.19 14.21 7.85
- ------------------
</TABLE>
(1) Ratios are based on net income, which includes a one-time special
assessment of $703,000, net of taxes, paid to recapitalize the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). After restating to eliminate this expense, return on
average assets and return on average equity would have been .80% and 4.11%,
respectively.
(2) Ratios are based on net income before extraordinary item. After including
the extraordinary item, for the year ended December 31, 1994, return on
average assets was 0.43%, and return on average equity was 6.13%.
(3) Average retained earnings reflects unrealized losses on securities
available for sale for the years ended December 31, 1996 and 1995.
(4) Nonperforming loans consist of nonaccrual loans and accruing loans which
are contractually past due 90 days or more.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
===============================================================================
GENERAL
The Company's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan and mortgage-
backed and related securities portfolio and interest paid on interest-bearing
liabilities. Net interest income is determined by (i) the difference between
yields earned on interest-earning assets and rates paid on interest-bearing
liabilities ("interest rate spread") and (ii) the relative amounts of interest-
earning assets and interest-bearing liabilities. The Company's interest rate
spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. To a lesser extent,
the Company's net income also is affected by the level of general and
administrative expenses and the level of other income, which primarily consists
of service charges and other fees.
The operations of the Company are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Company's market area.
RECENT DEVELOPMENTS
In December 1996, the Company signed an agreement for the purchase of all
the outstanding stock of American Bancshares, Inc., the holding company for
American Bank of Illinois in Highland, an $18 million asset commercial bank with
branches in Highland and Pocohontas, Illinois. The acquisition is expected to
be completed in the second quarter of 1997.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1994, 1995 AND 1996
The Company's financial condition increased by $21.9 million, or 13.3%,
from $164.6 million at December 31, 1994 to $186.5 million at December 31, 1995
due to the receipt of proceeds from the sale of the Company's common stock in
connection with the conversion from mutual to a stock form during 1995. Assets
decreased by $714,000, or .4%, from $186.5 million at December 31, 1995 to
$185.8 million at December 31, 1996.
The Company's net loans receivable have increased steadily in recent years,
increasing by $3.1 million, or 2.8% from $111.4 million at December 31, 1994 to
$114.5 million at December 31, 1995 and by $7.8 million, or 6.8% to $122.3
million at December 31, 1996. The increases in net loans receivable during the
year ended December 31, 1996 were due to increases in agricultural and
commercial business lending. The Company has increasingly emphasized such
lending in recent years by offering more competitive rates in response to demand
in its market area and the higher yields on such loans relative to yields on
single-family residential mortgage loans. Agricultural loans and commercial
business loans generally involve greater risks than loans secured by single-
family residential real estate.
The Company's investment securities increased by $12.3 million, or 125.3%,
from $10.0 million at December 31, 1994 to $22.5 million at December 31, 1995.
Investment securities decreased by $5.1 million, or 22.7%, to $17.4 million at
December 31, 1996. The decrease during 1996 was due to reinvestment of proceeds
from maturing investment securities in other interest earning assets. Cash and
cash equivalents and time deposits increased by $4.2 million, or 75.2% to $5.6
million at December 31, 1994 to $9.9 million at December 31, 1995. The 1995
increases were primarily due to the investment of net Conversion proceeds in
investment securities and cash and cash
4
<PAGE>
equivalents and time deposits. Cash and cash equivalents increased by $2.7
million, or 27.8%, to $12.6 million at December 31, 1996.
The Company's mortgage-backed and related securities increased by $3.2
million, or 9.9%, from $32.3 million at December 31, 1994 to $35.5 million at
December 31, 1995 primarily due to the investment of net Conversion proceeds in
mortgage-backed and related securities. Mortgage-backed and related securities
decreased by $7.2 million, or 20.3%, to $28.3 million at December 31, 1996. The
decrease is the result of principal payback and maturities. The proceeds were
reinvested in other interest-earning assets.
Deposits were $151.1 million, $144.3 million and $139.1 million at December
31, 1994, 1995 and 1996, respectively. The primary reason for the decrease in
deposits in 1995 was the non-renewal of certain short-term jumbo certificates of
deposit and money market accounts by schools, municipalities and other local
entities. As these deposits mature, the Bank bids against other financial
institutions to retain these deposits. As a result, these funds are less likely
to remain on deposit at the Bank upon maturity than smaller certificates of
deposit maintained by the Bank's retail customers. In 1996, a repurchase
program was introduced to attract large depositors. At December 31, 1996, this
program had a balance of $3.1 million.
Historically, the Company has not made significant use of borrowings.
However, the Bank has obtained FHLB advances as needed for liquidity purposes.
At December 31, 1996, the Bank had $7.5 million in FHLB advances with an
interest rate of 5.8%.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income. Net income was $773,000 for the year ended December 31, 1996,
as compared to $2.0 million for the year ended December 31, 1995. This
represents a decrease of $1.2 million, or 62.0%. The decrease in net income
reflects (on a pre-tax basis) a $627,000, or 9.6%, increase in net interest
income, a $393,000, or 33.6%, decrease in non-interest income and a $2.4
million, or 53.2%, increase in non-interest expense.
Net Interest Income. Net interest income increased by $627,000, or 9.6%,
from $6.5 million for the year ended December 31, 1995 to $7.1 million for the
year ended December 31, 1996. The increase in net interest income reflects an
increase in the ratio of average interest-earning assets to average interest-
bearing liabilities from 115.6% for the year ended December 31, 1995 to 122.6%
for the year ending December 31, 1996. The interest received on interest-
earning assets increased by $608,000, or 4.6%, from $13.3 million for the year
ended December 31, 1995 to $13.9 million for the year ended December 31, 1996
due to a 3.1% increase in average interest-earning assets coupled with a 12
basis point improvement in average yields from 7.70% at December 31, 1995 to
7.82% at December 31, 1996. The cost of interest-bearing liabilities decreased
by $19,000, or .3%, as the average interest-bearing liabilities decreased by
$4.1 million, or 2.8%, from $149.0 million at December 31, 1995 to $144.8
million at December 31, 1996, while the average cost increased by 12 basis
points from 4.53% at December 31, 1995 to 4.65% at December 31, 1996.
Interest Income. Interest income was $13.9 million for the year ended
December 31, 1996, as compared to $13.3 million for the year ended December 31,
1995, representing an increase of $608,000, or 4.6%. The increase is primarily
due to a $5.3 million, or 3.1%, increase in average earning assets from $172.2
million for the year ended December 31, 1995 to $177.5 million for the year
ended December 31, 1996. The increase in the average earning assets is
primarily due to the averages reflecting a full year performance of proceeds
obtained from the sale of the Company's common stock in connection with the
Bank's conversion from mutual to stock form (the "Conversion").
Interest on loans increased by $639,000, or 6.5%, from $9.8 million for the
year ended December 31, 1995 to $10.5 million for the year ended December 31,
1996. The increase in interest on loans was due to an increase of $5.4 million,
or 4.7%, in the average balance of loans from $114.4 million for the year ended
December 31, 1995 to $119.8 million for the year ended December 31, 1996. Loans
primarily increased through the increased
5
<PAGE>
origination of agricultural and commercial business loans. Interest on
mortgage-backed and related securities decreased by $251,000, or 11.0%, from
$2.3 million for the year ended December 31, 1995 to $2.0 million for the year
ended December 31, 1996. Such decrease was due to a decrease of $3.4 million,
or 9.9%, in the average balance of mortgage-backed and related securities from
$34.9 million for the year ended December 31, 1995 to $31.5 million for the year
ended December 31, 1996. The decrease in the average balance of mortgage-backed
and related securities was the result of changes in the portfolio mix of
interest-earning assets. Interest on securities available for sale increased
$149,000, or 21.2%, from $703,000 for the year ended December 31, 1995 to
$852,000 for the year ended December 31, 1996. The increase was due to an
increase in the average balance of $1.8 million, or 12.6%, from $14.2 million
for the year ended December 31, 1995 to $16.0 million for the year ended
December 31, 1996. Interest on cash and cash equivalents increased by $50,000,
or 15.1%, from $331,000 for the year ended December 31, 1995 to $381,000 for the
year ended December 31, 1996. The increase was due to an increase in the
average balance of $1.1 million, or 19.3%, from $5.9 million for the year ended
December 31, 1995 to $7.0 million for the year ended December 31, 1996.
Interest Expense. Interest expense, which consists primarily of interest
on deposits, decreased by $19,000, or 0.3%, from $6.7 million for the year ended
December 31, 1995 to $6.7 million for the year ended December 31, 1996.
Interest on deposits decreased $353,000, or 5.3%, from $6.7 million for the year
ended December 31, 1995 to $6.3 million for the year ended December 31, 1996.
The decrease is primarily due to the decrease in the average balance of deposit
accounts. The average balance of deposit accounts decreased by $10.7 million,
or 7.3%, from $147.5 million for the year ended December 31, 1995 to $136.8
million for the year ended December 31, 1996. To offset the decrease in average
deposits, the Company used other borrowings in the form of Federal Home Loan
Bank ("FHLB") advances and repurchase agreements. This is reflected in the
increase in average borrowings of $6.6 million, or 437.7%, from $1.5 million for
the year ended December 31, 1995 to $8.1 million for the year ended December 31,
1996. The Company has used FHLB advances in the past as indicated by the
average balance increasing $4.5 million, or 300.0%, from $1.5 million for the
year ended December 31, 1995 to $6.0 million for the year ended December 31,
1996. The average cost of the FHLB advances increased $233,000, or 323.6%, from
$72,000 for the year ended December 31, 1995 to $305,000 for the year ended
December 31, 1996. The increase in the average cost of FHLB advances was not
only due to the average balance increase but also due to a 28 basis point
increase in the average rate from 4.8% for the year ended December 31, 1995 to
5.1% for the year ended December 31, 1996. The increase in the average balance
of borrowings also reflected the introduction in 1996 of repurchase agreements.
Repurchase agreements had an average balance of $2.1 million and an average cost
of 4.9% for the year ended December 31, 1996.
Provision for Loan Losses. The Company established provisions for loan
losses of $10,000 and $113,000 for the years ended December 31, 1996 and 1995,
respectively. The Company's provisions for loan losses approximated net charge-
offs during such periods and were made to maintain the allowance for loan losses
at an adequate level during those periods.
Non-Interest Income. Noninterest income decreased by $393,000, or 33.6%,
from $1.2 million for the year ended December 31, 1995 to $777,000 for the year
ended December 31, 1996. For the year ended December 31, 1995 two non-recurring
events totaling $391,000 (pre-tax) were included. Restating noninterest income
for the year ended December 31, 1995, removing the gain from the sale of the
insurance agency of $142,000 and the recovery of the litigation settlement of
$249,000, would have been $779,000. Other than these non-recurring events in
1995, non-interest income remained stable.
Non-Interest Expense. Noninterest expense increased by $2.4 million, or
53.2%, from $4.4 million for the year ended December 31, 1995 to $6.8 million
for the year ended December 31, 1996. For the year ended December 31, 1996 two
non-recurring events totalling $1.6 million (pre-tax) were included. Restating
noninterest expense for the year ended December 31, 1996, removing the one time
SAIF assessment of $1.0 million and the approximated cost to close a defined
benefit plan of $622,000, would have been $5.1 million. The restated
noninterest expense reflected an increase for the year ended December 31, 1996
of $724,000, or 16.3%. The increase after restatement
6
<PAGE>
of noninterest expense for the year ended December 31, 1996 was primarily due to
a full year of operation of the Company in 1996 and the benefit expenses that
were approved following the Conversion. The Management Recognition Plan (MRP)
amounted to $393,000 and the allocation of the Employee Stock Ownership Plan
(ESOP) amounted to $116,000.
Income Taxes. The Company's income tax was $343,000 and $1.1 million for
the years ended December 31, 1996 and 1995, respectively, which resulted in
effective income tax rates of 30.7% and 35.3%, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Income. Net income was $2.0 million for the year ended December 31,
1995, as compared to $710,000 for the year ended December 31, 1994. This
represents an increase of $1.3 million, or 186.3%. The increase in net income
reflects a $225,000, or 23.7%, increase in non-interest income and a decrease of
$925,000 or 18.0% in non-interest expense, as well as a $701,000 expense during
fiscal 1994 representing the recapture of the Bank's tax bad debt reserve in
connection with the Board of Directors' determination to effectuate the
conversion to a national bank.
Net Interest Income. Net interest income increased by $320,000 or 5.2%,
from $6.2 million for the year ended December 31, 1994 to $6.5 million for the
year ended December 31, 1995. The increase in net interest income reflects an
increase in the ratio of average interest-earning assets to average interest-
bearing liabilities from 104.86% for the year ended December 31, 1994 to 115.59%
for the year ended December 31, 1995. The increase in the ratio of average
interest-earning assets to average interest-bearing liabilities was due to the
investment of net income earned during the year ended December 31, 1995 and
investing the proceeds from the Conversion in interest-earning assets. The
investment of Conversion proceeds in interest-earning assets caused average
interest-earning assets to increase by $15.4 million, or 9.8%, from $156.8
million for the year ended December 31, 1994 to $172.2 million for the year
ended December 31, 1995. The cost of interest-bearing liabilities increased by
$1.2 million, or 21.0%, from $5.6 million for the year ended December 31, 1994
to $6.7 million for the year ended December 31, 1995 as rising interest rates
caused an 80 basis point increase in the cost of interest-bearing liabilities
from 3.73% for the year ended December 31, 1994 to 4.53% for the year ended
December 31, 1995. The average yield on interest-earning assets increased by
only 19 basis points from 7.51% for the year ended December 31, 1994 to 7.70%
for the year ended December 31, 1995, while average cost of funds increased by
80 basis points from 3.73% for the year ended December 31, 1994 to 4.53% for the
year ended December 31, 1995. This is reflected in the average spread declining
61 basis points from 3.78% for the year ended December 31, 1994 to 3.17% for the
year ended December 31, 1995. After the time that the Company received and
invested the net Conversion proceeds, interest rates subsequently increased,
which contributed to the yield on interest-earning assets increasing less than
the cost of interest-bearing liabilities. The net Conversion proceeds were
invested in short-term (less than three years to maturity) investments, and as
these investments mature, the proceeds have been and will be reinvested at
prevailing interest rates.
Interest Income. Interest income was $13.3 million for the year ended
December 31, 1995, as compared to $11.8 million for the year ended December 31,
1994, representing an increase of $1.5 million, or 12.7%. The increase was
primarily due to the investment of Conversion proceeds and a 19 basis point
increase in the average yield.
Interest on loans increased by $1.1 million, or 12.5%, from $8.7 million
for the year ended December 31, 1994 to $9.8 million for the year ended December
31, 1995. The increase in interest on loans was due to an increase of $7.8
million, or 7.3%, in the average balance of loans from $106.7 million for the
year ended December 31, 1994 to $114.4 million for the year ended December 31,
1995 and a 40 basis point increase in the average yield from 8.18% for the year
ended December 31, 1994 to 8.58% for the year ended December 31, 1995. Loans
primarily increased through the increased origination of commercial business
loans and automobile loans. Interest on mortgage-backed and related securities
decreased by $102,000 or 4.3%, from $2.4 million for the year ended December 31,
1994 to $2.3 million for the year ended December 31, 1995. Such decrease was
due to a decrease
7
<PAGE>
of $1.9 million, or 5.1% in the average balance of mortgage-backed and related
securities from $36.8 million for the year ended December 31, 1994 to $34.9
million for the year ended December 31, 1995. Interest on securities available
for sale increased $342,000, or 94.7%, from $361,000 for the year ended December
31, 1994 to $703,000 for the year ended December 31, 1995. The increase was due
to an increase in the average balance of $6.8 million, or 90.8%, from $7.5
million for the year ended December 31, 1994 to $14.2 million for the year ended
December 31, 1995. The increase was due to short-term investments of the
Conversion proceeds. Interest on cash and cash equivalents increased $147,000,
or 79.9%, from $184,000 for the year ended December 31, 1994 to $331,000 for the
year ended December 31, 1995. The increase was due to an increase in the
average balance of $2.8 million, or 88.6%, from $3.1 million for the year ended
December 31, 1994 to $5.9 million for the year ended December 31, 1995. The
increase was due to short-term investment of Conversion proceeds.
Interest Expense. Interest expense, which consists primarily of interest
on deposits, increased by $1.1 million, or 19.6%, from $5.6 million for the year
ended December 31, 1994 to $6.7 million for the year ended December 31, 1995.
The average balance of deposit accounts remained fairly unchanged with an
increase of $445,000, or .30%, from $147.0 million for the year ended December
31, 1994 to $147.4 million for the year ended December 31, 1995. Interest on
the deposits increased $1.2 million, or 22.8%, from $5.4 million for the year
ended December 31, 1994 to $6.7 million for the year ended December 31, 1995.
The increase is reflected in the increase in the average cost of 83 basis
points, from 3.70% for the year ended December 31, 1994 to 4.53% for the year
ended December 31, 1995. This increase is due to higher prevailing market rates
and a shift in the composition of deposits from lower rate products to the
higher rate products. During the year ended December 31, 1995 and 1994, the
Company also made use of FHLB advances for liquidity purposes. The company
incurred interest expense of $72,000 and $139,000 during the years ended
December 31, 1995 and 1994, respectively, on FHLB advances.
Provision for Loan Losses. The Company established provisions for loan
losses of $113,000 and $212,000 for the years ended December 31, 1995 and 1994,
respectively. The Company's provisions for loan losses approximated net charge-
offs during such periods and were made to maintain the allowance for loan losses
at an adequate level during those periods.
Non-Interest Income. Noninterest income increased by $248,000, or 36.8%,
from $927,000 for the year ended December 31, 1994 to $1.2 million for the year
ended December 31, 1995. The increase was due to the gain on the sale of the
insurance agency of $142,000 and the recovery of the litigation settlement of
$249,000 which was booked in 1994.
Non-Interest Expense. Noninterest expense decreased by $250,000 or 5.3%,
from $4.7 million for the year ended December 31, 1994 to $4.4 million for the
year ended December 31, 1995. The decrease was due to the $257,000 expense for
litigation that was recorded on the financials at year end December 31, 1994.
Extraordinary Item. During the year ended December 31, 1994, the Bank had
a $701,000 extraordinary expense reflecting the recapture of the tax bad debt
reserve taken in connection with the Board of Directors' determination to
effectuate the conversion to a national bank. No comparable extraordinary item
was recorded during the year ended December 31, 1995.
Income Taxes. The Company's income tax was $1.1 million and $813,000 for
the years ended December 31, 1995 and 1994, respectively, which resulted in
effective income tax rates of 35.3% and 36.6%, respectively.
8
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods and at the date indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily balances has caused any material difference
in the information presented.
The table also presents information for the periods and at the date
indicated with respect to the difference between the average yield earned on
interest-earning assets and average rate paid on interest-bearing liabilities,
or "interest rate spread," which institutions have traditionally used as an
indicator of profitability. Another indicator of an institution's net interest
income is its "net yield on interest-earning assets," which is its net interest
income divided by the average balance of interest-earning assets. Net interest
income is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ---------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)............. $119,828 $10,462 8.73% $114,449 $ 9,823 8.58% $106,684 $ 8,730 8.18%
Investment securities:
Securities available for sale...... 16,007 852 5.32 14,221 703 4.94 7,454 361 4.84
Securities held to maturity........ 3,217 142 4.41 2,754 122 4.43 2,738 111 4.05
Mortgage-backed and related
securities.......................... 31,453 2,038 6.48 34,892 2,288 6.56 36,786 2,390 6.50
Cash and cash equivalents............. 7,029 381 5.42 5,892 331 5.62 3,124 184 5.89
-------- ------- -------- ------- -------- -------
Total interest-earning assets...... 177,534 13,875 7.82 172,208 13,267 7.70 156,786 11,776 7.51
------- ------- -------
Noninterest-earning assets.............. 7,982 4,578 7,472
-------- -------- --------
Total assets....................... $185,516 $176,786 $164,258
======== ======== ========
Interest-bearing liabilities:
Deposits.............................. $136,764 6,322 4.62 $147,476 6,675 4.53 $147,031 5,437 3.70
Borrowings............................ 8,066 406 5.03 1,500 72 4.80 2,485 139 5.59
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities...................... 144,830 6,728 4.65 148,976 6,747 4.53 149,516 5,576 3.73
------- ------- ------- ------
Noninterest-bearing liabilities......... 5,080 2,693 3,152
-------- -------- --------
Total liabilities.................. 149,910 151,669 152,668
Retained earnings....................... 35,937 25,698 12,900
Unrealized losses on securities......... (331) (581) (1,310)
-------- -------- --------
Total liabilities and retained
earnings.............................. $185,516 $176,786 $164,258
======== ======== ========
Net interest income..................... $ 7,147 $ 6,520 $ 6,200
======= ======= =======
Interest rate spread.................... 3.17% 3.17% 3.78%
====== ====== ======
Net yield on interest-earning assets.... 4.03% 3.79% 3.95%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing]
liabilities........................... 122.58% 115.59% 104.86%
====== ====== ======
- --------------------
</TABLE>
(1) Includes nonaccrual loans.
10
<PAGE>
RATE/VOLUME ANALYSIS
The following table below sets forth certain information regarding changes
in interest income and interest expense of the Company for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to: (i) changes in
volume (changes in volume multiplied by old rate); (ii) changes in rate (changes
in rate multiplied by old volume); and (iii) changes in rate/volume (changes in
rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------------------ -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------ -------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ------ ------ ----- ------ ------ ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable, net................. $ 462 $ 169 $ 8 $ 639 $ 635 $ 427 $ 31 $ 1,093
Investment securities:
Securities available for sale....... 88 54 7 149 328 7 7 342
Securities held to maturity......... 21 (1) -- 20 1 10 1 12
Mortgage-backed and related
securities.......................... (225) (28) 3 (250) (123) 22 (1) (102)
Cash and cash equivalents............. 64 (12) (2) 50 163 (8) (8) 147
------ ------ ---- ----- ------ ------ --- -------
Total interest-earning assets....... 410 182 16 608 1,004 458 30 1,492
------ ------ ---- ----- ------ ------ --- -------
Interest expense:
Deposits.............................. (485) 142 (10) (353) 16 1,220 3 1,239
Borrowings............................ 315 4 15 334 (55) (20) 8 (67)
------ ------ ----- ---- ----- ------ ---- -------
Total interest-bearing liabilities.. (170) 146 5 (19) (39) 1,200 11 1,172
------ ------ ----- ---- ----- ------ ---- -------
Change in net interest income........... $ 580 $ 36 $ 11 $ 627 $1,043 $ (742) $ 19 $ 320
====== ====== ====== ===== ====== ====== ==== =======
</TABLE>
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of the Company's net income, is
derived from the difference or "spread" between the yield on interest-earning
assets and the cost of interest-bearing liabilities. The Company has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities or repricing characteristics of its interest-earning assets
and interest-bearing liabilities. The matching of the Company's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on the Company's net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Company's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Company's net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates. The
Company's policy is to mitigate interest rate risk by avoidance of the
origination of long-term loans funded by short-term deposits and by pursuing
certain strategies designed to decrease the vulnerability of its earnings to
material and prolonged changes in interest rates.
11
<PAGE>
The Company has established an Asset and Liability Management Committee
which currently is comprised of four non-employee directors and senior
management of the Company. This Committee meets on a quarterly basis and reviews
the maturities of the Company's assets and liabilities and establishes policies
and strategies designed to regulate the Company's flow of funds and to
coordinate the sources, uses and pricing of such funds. The first priority in
structuring and pricing the Company's assets and liabilities is to maintain an
acceptable interest rate spread while reducing the net effects of changes in
interest rates.
Management's principal strategy in managing interest rate risk has been to
maintain short- and intermediate-term assets in portfolio, including locally
originated one- to five-year balloon mortgage loans, as well as increased levels
of agricultural, commercial business and consumer loans, which typically are for
short or intermediate terms and carry higher interest rates than residential
mortgage loans. In addition, in managing the Company's portfolio of investment
securities and mortgage-backed and related securities, management seeks to
purchase securities that mature on a basis that approximates as closely as
possible the estimated maturities of the Company's liabilities. The Company does
not engage in hedging activities. On January 1, 1994, the Bank adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," at
which time it transferred investment and mortgage-backed and related securities
to a portfolio of investment and mortgage-backed and related securities
available for sale. The Company is holding these investment and mortgage-backed
and related securities as available for sale because it may sell these
securities prior to maturity should it need to do so for liquidity or asset and
liability management purposes.
In addition to shortening the average repricing period of its assets, the
Company has sought to lengthen the average maturity of its liabilities by
adopting a tiered pricing program for its certificates of deposit, which
provides higher rates of interest on its longer term certificates in order to
encourage depositors to invest in certificates with longer maturities.
The Company's Board of Directors is responsible for reviewing the Company's
asset and liability policies. The Board meets monthly to review interest rate
risk and trends, as well as liquidity and capital ratios and requirements.
Management is responsible for administering the policies and determinations of
the Board of Directors with respect to asset and liability goals and strategies.
INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. At December 31, 1996, the Company had a negative one-year
interest rate sensitivity gap of 2.4%, as a result of which its net interest
income could be adversely affected by rising interest rates and positively
affected by falling interest rates. Generally, during a period of rising
interest rates, a negative gap would adversely affect net interest income while
a positive gap would result in an increase in net interest income, while
conversely during a period of falling interest rates, a negative gap would
result in an increase in net interest income and a positive gap would adversely
affect net interest income.
12
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 which are expected
to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Over One Over Five Over Ten Over
One Year Through Through Through Twenty
or Less Five Years Ten Years Twenty Years Years Total
-------- ---------- --------- ------------ ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities (1)................... $ 7,791 $ 6,865 $ 2,721 $ 198 $ -- $17,575
Interest-earning deposits................... 11,333 -- -- -- -- 11,333
Fixed-rate single-family mortgage loans..... 3,526 22,016 6,772 7,124 664 40,102
Mortgage-backed and related securities (1).. 11,162 12,721 3,193 1,422 37 28,535
Other loans................................. 27,343 49,768 6,353 261 -- 83,725
------- -------- ------- ------- ------- --------
Total..................................... 61,155 91,370 19,039 9,005 701 181,270
------- -------- ------- ------- ------- --------
Interest-bearing liabilities:
Deposits.................................... 54,901 80,359 -- -- -- 135,260
Borrowings.................................. 10,621 -- -- -- -- 10,621
------ ------- ------- ------- ------- --------
Total..................................... 65,522 80,359 -- -- -- 145,881
------ ------- ------- ------- ------- --------
Interest sensitivity gap..................... $(4,367) $11,011 $19,039 $ 9,005 $ 701 $35,389
======= ======= ======= ======= ======= ========
Cumulative interest sensitivity gap.......... $(4,367) $ 6,644 $25,683 $34,688 $35,389 $35,389
======= ======= ======= ======= ======= ========
Ratio of interest-earning assets
to interest-bearing liabilities............ 93.3% 113.70% N/A % N/A % N/A % 124.3%
======= ======= ======= ======= ======= ========
Ratio of cumulative gap to total assets...... (2.4)% 3.6% 13.8% 18.7% 19.0% 19.0%
======= ======= ======= ======= ======= ========
- --------------------
</TABLE>
(1) Investment securities and mortgage-backed and related securities are
included at amortized cost. These securities have not been adjusted for
any available for sale valuation reserves.
The preceding table was prepared utilizing certain assumptions regarding
prepayment and decay rates provided by a private data processing and research
firm. While management believes that these assumptions are reasonable, the
actual interest rate sensitivity of the Company's assets and liabilities could
vary significantly from the information set forth in the table due to market and
other factors. The following assumptions were used: (i) the current prepayment
rate on fixed-rate mortgage loans is assumed to be 5%, (ii) adjustable-rate
mortgage loans are presented as of their earliest repricing schedule, (iii)
commercial and other loans are cash flowed based on their amortization schedule
with no prepayments, (iv) fixed- and adjustable-rate mortgage-backed and related
securities are analyzed at the cusip level with prepayment assumptions dependent
upon the underlying collateral mortgage rates. In addition, it is assumed that
fixed maturity deposits are not withdrawn prior to maturity and that other
deposits are withdrawn or repriced at an annual rate of 20%.
The interest rate-sensitivity of the Company's assets and liabilities
illustrated in the table above could vary substantially if different assumptions
were used or actual experience differs from the assumptions used. If passbook
and NOW accounts were assumed to mature in one year or less, the Company's one-
year gap would have been more negative.
Certain shortcomings are inherent in the method of analysis presented in
the above table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in
13
<PAGE>
interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the table.
The ability of many borrowers to service their adjustable-rate debt may decrease
in the event of an interest rate increase.
LIQUIDITY AND CAPITAL RESOURCES
Since the completion of the Conversion, the Company has had no business
other than that of the Bank and investing the Conversion proceeds retained by
it. Management believes that the net proceeds retained by the Company, earnings
on such proceeds and principal and interest payments on the ESOP loan, together
with dividends that may be paid from the Bank to the Company, will provide
sufficient funds for its initial operations and liquidity needs; however, no
assurance can be given that the Company will not have a need for additional
funds in the future.
At December 31, 1996, the Bank exceeded all regulatory minimum capital
requirements. The following table sets forth the Bank's capital levels relative
to OCC requirements.
<TABLE>
<CAPTION>
Percent
Amount of Assets
------- -----------
<S> <C> <C>
Tier 1 (core) capital to total assets.......... $25,219 14.28%
Tier 1 capital requirement..................... 5,292 3.00
------- -----
Excess...................................... $19,927 11.28%
======= =====
Tier 1 (core) capital to risk-weighted assets.. $25,219 21.86%
Tier 1 capital requirement..................... 4,615 3.00
------- -----
Excess...................................... $20,604 18.86%
======= =====
Total capital to risk-weighted assets.......... $26,662 23.11%
Total capital requirement...................... 9,231 8.00
------- -----
Excess...................................... $17,431 15.11%
======= =====
</TABLE>
The Company's primary sources of funds are deposits and proceeds from
maturing mortgage-backed and related securities and principal and interest
payments on loans and mortgage-backed and related securities. While maturities
and scheduled amortization of mortgage-backed and related securities and loans
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions, competition
and other factors.
The primary investing activity of the Company is the purchase of investment
securities. Other investing activities include originations of loans and
purchases of mortgage-backed and related securities. The primary financing
activity of the Bank is accepting savings deposits and obtaining short-term
borrowings through FHLB advances.
The Company has other sources of liquidity if there is a need for funds.
The Company has a portfolio of investment securities and mortgage-backed and
related securities with an aggregate market value of $42.3 million at December
31, 1996 classified as available for sale. Another source of liquidity is the
ability to obtain advances from the FHLB of Chicago. In addition, the Company
maintains a portion of its investments in interest-bearing deposits that will be
available when needed.
The Bank is required to maintain minimum levels of liquid assets as defined
by OCC regulations. This requirement is based upon a percentage of deposits and
short-term borrowings. Management seeks to maintain a relatively high level of
liquidity in order to retain flexibility in terms of investment opportunities
and deposit pricing.
14
<PAGE>
Because liquid assets generally provide for lower rates of return, the Company's
relatively high liquidity will, to a certain extent, result in lower rates of
return on assets.
The Company's most liquid assets are cash and interest-bearing deposits
and time deposits, which are short-term, highly liquid investments with original
maturities of less than three months that are readily convertible to known
amounts of cash, and include interest-bearing deposits. The levels of these
assets are dependent on the Company's operating, financing and investing
activities during any given period.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1996, the Bank had commitments to
originate loans of $13.0 million. Certificates of deposit which are scheduled
to mature in less than one year at December 31, 1996 totaled $45.8 million.
Management believes that a significant portion of such deposits will remain with
the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Certain Investments in Debt and Equity Securities. In May
1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." This statement addresses the accounting and reporting
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. SFAS No. 115 is effective for
fiscal years beginning after December 15, 1993 as of the beginning of the fiscal
year (i.e., January 1, 1994 for the Bank).
SFAS No. 115 requires classification of investments into three categories.
Debt securities that the Bank has the positive intent and ability to hold to
maturity must be reported at amortized cost. Debt and equity securities that
are bought and held principally for the purpose of selling them in the near term
must be reported at fair value, with unrealized gains and losses included in
earnings. All other debt and equity securities must be considered available for
sale and must be reported at fair value, with unrealized gains and losses
excluded from earnings but reported as a separate component of stockholder's
equity (net of tax effects).
The Bank adopted SFAS No. 115 as of January 1, 1994. Upon implementation
of SFAS No. 115, certain investment securities and all mortgage-backed and
related securities at December 31, 1993 with a carrying amount aggregating $52.2
million and an approximate market value of $52.9 million were transferred to a
portfolio of securities available for sale. At January 1, 1994, the after-tax
impact of adoption on the Bank's consolidated financial statements was an
increase in retained earnings of approximately $401,000. At December 31, 1996,
investment securities and mortgage-backed and related securities with an
aggregate amortized cost of $42.7 million and an aggregate market value of $42.3
million were included in the portfolio of securities available for sale. The
aggregate impact on retained earnings of the adoption of SFAS No. 115 was an
after-tax decrease of $263,000 as of December 31, 1996.
Accounting for Impairment of a Loan. In May 1993, the FASB issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan," which was amended
by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures," and is effective for fiscal years beginning after
15
<PAGE>
December 15, 1994, i.e., January 1, 1995 for the Bank. Earlier application is
permitted. The statement addresses the accounting by creditors for impairment
of certain loans. It is generally applicable for all loans except large groups
of smaller balance homogeneous loans that are collectively evaluated for
impairment, including residential mortgage loans and consumer installment loans.
It also applies to all loans that are restructured in a trouble debt
restructuring involving a modification of terms. However, if a loan that was
restructured in a troubled debt restructuring involving a modification of terms
before the effective date of this Statement is not impaired based on the terms
specified by the restructuring agreement, a creditor may continue to account for
the loan in accordance with the provisions of SFAS No. 15, "Accounting for
Troubled Debt Restructurings" prior to its amendment by this statement.
SFAS No. 114, as amended by SFAS No. 118, requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or at the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent. A loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Bank adopted the provisions of
SFAS No. 114, as amended by SFAS No. 118, effective January 1, 1995. Adoption
of these statements did not have a material effect on the Bank's financial
position.
Accounting for Postretirement and Postemployment Benefits. SFAS No. 106,
"Employers' Accounting for Postretirement Benefits other than Pensions," was
issued by the FASB in December 1990. The statement is effective for fiscal
years beginning after December 15, 1992, except that the application of the
statement for certain small nonpublic enterprises such as the Bank and certain
other entities is delayed to fiscal years beginning after December 15, 1994.
SFAS No. 112 "Employers' Accounting for Postemployment Benefits" was issued by
the FASB in November 1992. The statement is effective for fiscal years
beginning after December 15, 1994. The statements generally require a
calculation of the actuarial present value of anticipated benefits to be
provided and an accrual and allocation of those benefits through a charge to
operating expense in the periods in which employees must render the services to
receive such benefits. Currently, the Bank does not offer any postretirement
benefit plans or postemployment benefit plans. However, in the future, such
plans may be offered and the provisions of SFAS Nos. 106 and 112 would apply.
Accounting for Employee Stock Ownership Plans. The Accounting Standards
Division of the AICPA approved SOP 93-6, "Employers' Accounting for Employee
Stock Ownership Plans," which is effective for fiscal years beginning after
December 15, 1993 and applies to shares of capital stock of sponsoring employers
acquired by employee stock ownership plans after December 31, 1992 that had not
been committed to be released as of January 1, 1992. SOP 93-6 will, among other
things, change the measure of compensation recorded by employers from the cost
of ESOP shares to the fair value of employee stock ownership plan shares. To
the extent that the fair value of the Bank's ESOP shares, committed to be
released directly to compensate employees, differs from the cost of such shares,
compensation expenses and a related charge or credit to additional paid-in
capital will be reported in the Company's consolidated financial statements.
Accounting for Stock-Based Compensation. In June 1993, the FASB issued an
exposure draft entitled "Accounting for Stock-Based Compensation." The exposure
draft would establish new financial accounting and reporting standards for
stock-based compensation paid to employees. Employee stock compensation
arrangements would be classified as either an equity or liability instrument.
The proposed statement would require that entities recognize the fair value of
an award of stock or stock options as additional equity on the grant date with
an offsetting charge to expense. Amounts attributable to future services would
be recognized as prepaid compensation and amortized ratably over the period the
employee services are rendered. If the plan requires a cash payment or if the
employee can compel the employer to settle a stock award by cash payment, the
plan would be considered compensatory liability and compensation expense would
be recognized based on the estimated liability. The proposed effective date for
the proposed statement is for awards granted after December 31, 1996. The Bank
is unable to predict whether or not the exposure draft will become a final
statement in its present form without major revisions,
16
<PAGE>
or whether, if adopted in its present form, the exposure draft would have a
material effect on the Bank's financial position or results of operations.
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires
the Bank to recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. If the Bank acquires
mortgage servicing rights through either the purchase or origination of mortgage
loans and sells those loans with servicing rights retained, the Bank should
allocate the total cost of the mortgage loans to mortgage servicing rights
retained, the Bank should allocated the total cost of the mortgage loans to
mortgage servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values. The mortgage servicing rights should be
amortized in proportion to and over the period of estimated net servicing
income. SFAS No. 122 is effective for fiscal years beginning after December 15,
1995. The Bank was required to adopt SFAS No. 122 for the year ended December
31, 1996; however, the Bank does not have any loans with mortgage servicing
rights.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In June 1996, the FASB issued SFAS No. 124,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 125 requires that an entity should only recognize
those assets that it controls and liabilities it has incurred. Assets should be
recognized until control has been surrendered, and liabilities should be
recognized until they have been extinguished. Recognition of financial assets
and liabilities will not be affected by the sequence of transactions unless the
effect of the transactions is to maintain effective control over a transferred
financial asset. SFAS No. 125 is effective for transactions after December 31,
1996. The Bank believes the adoption of SFAS No. 125 will not have a material
effect on the consolidated financial statements.
17
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
18
<PAGE>
[LETTERHEAD OF LARSON, WOODYARD & HENSON LLP]
Independent Auditors' Report
To the Board of Directors
Community Financial Corp.
and Subsidiary
Olney, Illinois
We have audited the accompanying consolidated balance sheets of Community
Financial Corp. and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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
Corp. and Subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Larsson Woodyard & Henson LLP
January 30, 1997, except for Note V, as to which the
date is February 28, 1997
19
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
-----------------------
1996 1995
--------- ---------
(1,000's)
-----------------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash $ 1,285 $ 1,255
Interest bearing deposits 11,333 8,622
--------- ---------
Total Cash and Cash Equivalents 12,618 9,877
Securities available for sale (amortized cost of $14,213
and $19,527 in 1996 and 1995, respectively) (Note B) 13,990 19,347
Securities held to maturity (estimated market value of
$3,378 and $3,112 in 1996 and 1995, respectively) (Note B) 3,362 3,113
Mortgage-backed and related securities available for sale
(amortized cost of $28,535 and $35,434 at 1996 and 1995,
respectively) (Note C) 28,319 35,520
Loans receivable, net (Note D) 122,307 114,494
Foreclosed real estate, net 53 5
Real estate held for sale 0 132
Accrued interest receivable (Note E) 1,239 1,218
Premises and equipment, net (Note F) 2,609 2,364
Prepaid income taxes (Note K) 166 0
Deferred income taxes (Note K) 409 280
Other assets 727 163
--------- ---------
Total Assets $185,799 $186,513
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note G) $139,100 $144,277
Federal Home Loan Bank advances (Note H) 7,500 3,000
Repurchase agreements (Note H) 3,121 0
Advances from borrowers for taxes and insurance 40 34
Accrued interest payable 160 114
Accrued income taxes (Note K) 0 535
Other liabilities (Note L) 1,796 447
--------- ---------
Total Liabilities 151,717 148,407
--------- ---------
Commitments and contingencies (Note N)
Stockholders' Equity:
Common stock $.01 par value; 7,000,000 shares
authorized; 2,387,112 and 2,645,000 shares
issued at December 31, 1996 and
December 31, 1995, respectively 26 26
Additional paid-in capital 25,397 25,280
Treasury stock (3,411) 0
Shares held for management recognition plan (1,123) 0
Unearned employee stock ownership plan (ESOP) shares (1,693) (2,116)
Unrealized loss on securities available for sale,
net of related taxes (Notes B and C) (263) (56)
Retained earnings (Note I) 15,149 14,972
--------- ---------
Total Stockholders' Equity 34,082 38,106
--------- ---------
Total Liabilities and Stockholders' Equity $185,799 $186,513
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995 1994
-------- -------- --------
(1,000's)
----------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 10,462 $ 9,823 $ 8,730
Interest on mortgage-backed and related securities 2,038 2,289 2,390
Interest on securities and interest-bearing deposits 1,375 1,155 656
-------- -------- --------
Total interest income 13,875 13,267 11,776
-------- -------- --------
Interest expense:
Interest on deposits (Note G) 6,322 6,675 5,437
Interest on other borrowed funds (Note H) 406 72 139
-------- -------- --------
Total interest expense 6,728 6,747 5,576
-------- -------- --------
Net interest income 7,147 6,520 6,200
Provision for loan losses (Note D) (10) (113) (212)
-------- -------- --------
Net interest income after provision
for loan losses 7,137 6,407 5,988
-------- -------- --------
Non-interest income (Note J) 777 1,170 927
-------- -------- --------
Non-interest expense (Note J and X) 6,798 4,437 4,691
-------- -------- --------
Income before income taxes and
extraordinary item 1,116 3,140 2,224
Provision for income taxes (Note K) 343 1,107 813
-------- -------- --------
Income before extraordinary item 773 2,033 1,411
Extraordinary item - recapture of income tax basis
tax reserves (Note I) 0 0 (701)
-------- -------- --------
Net income $ 773 $ 2,033 $ 710
======== ======== ========
Earnings per share $ .35 $ .42
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Management Loss on
Recognition Unearned Additional Securities
Common Treasury Plan ESOP Paid-in Retained Available
Stock Stock Stock Shares Capital Earnings For Sale Total
------ -------- ----------- -------- ---------- -------- ---------- ---------
(1,000's)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 0 $ 0 $ 0 $ 0 $ 0 $ 12,229 $ 0 $ 12,229
Change in accounting for securities as of
January 1, 1994, net of related tax 401 401
Net income 710 710
Change in unrealized loss on securities
available for sale ( 2,086)( 2,086)
------ -------- ----------- -------- ---------- -------- ---------- ---------
Balance, December 31, 1994 0 0 0 0 0 12,939 ( 1,685) 11,254
Net income 2,033 2,033
Sale of common stock 26 25,280 25,306
Guarantee of ESOP indebtedness ( 2,116) ( 2,116)
Change in net unrealized loss on securities
available for sale 1,629 1,629
------ -------- ----------- -------- ---------- -------- ---------- ---------
Balance, December 31, 1995 26 0 0 ( 2,116) 25,280 14,972 ( 56) 38,106
Net income 773 773
Dividends paid ( 596) ( 596)
Purchase of treasury stock ( 3,411) ( 3,411)
Shares held for MRP ( 1,123) ( 1,123)
Amortization of ESOP shares 423 117 540
Change in net unrealized loss on securities
available for sale ( 207)( 207)
------ -------- ----------- -------- ---------- -------- ---------- ---------
Balance, December 31, 1996 $ 26 ($ 3,411)($ 1,123) ($ 1,693) $ 25,397 $ 15,149 ($ 263) $ 34,082
====== ======== =========== ======== ========== ======== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1996 1995 1994
---------- ---------- ----------
(1,000's)
---------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 773 $ 2,033 $ 710
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 240 220 180
Provision for loan losses 10 113 212
Accretion of discounts on securities (56) (31) (5)
Amortization of premiums on securities 38 16 25
(Increase) decrease in accrued interest receivable (21) (313) 118
(Increase) decrease in deferred income taxes (129) 1,224 (1,175)
(Increase) decrease in other assets (564) 122 (196)
(Decrease) increase in accrued income taxes (701) (38) 537
Increase in accrued interest payable 46 23 32
Increase (decrease) in other liabilities 1,349 (97) 30
Federal Home Loan Bank stock dividends received 0 (11) 0
Dividends on securities 0 0 (77)
Loss (gain) on sale of securities and mortgage-backed
and related securities 0 5 26
Loss on sale of premises and equipment 0 0 83
---------- ---------- ----------
Net cash provided by operating activities 985 3,266 500
---------- ---------- ----------
Investing activities:
Proceeds from sales of securities available for sale 0 0 366
Proceeds from maturities of securities held to maturity 321 72 409
Proceeds from maturities of securities available for sale 6,500 3,713 600
Proceeds from sales of mortgage-backed and related
securities available for sale 0 863 0
Proceeds from maturing time deposits 0 199 743
Purchase of securities available for sale (1,003) (18,857) (350)
Purchase of securities held to maturity (650) (2,559) (1,122)
Purchase of time deposits 0 0 (344)
Purchase of loans 0 (249) (32)
Increase in loans receivable (7,823) (2,455) (11,908)
Principal collected on mortgage-backed and related securities 7,201 2,483 10,266
(Increase) decrease in foreclosed real estate (48) 25 61
Decrease in real estate held for sale 132 0 0
Purchase of premises and equipment (485) (62) (456)
Proceeds from sale of premises and equipment 0 0 11
Purchase of Federal Reserve Bank stock (49) (332) 0
Purchase of Federal Home Loan Bank stock (200) 0 0
Proceeds from sale of Federal Home Loan Bank stock 0 0 369
---------- ---------- ----------
Net cash provided by (used in) investing activities 3,896 (17,159) (1,387)
---------- ---------- ----------
</TABLE>
23
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1996 1995 1994
---------------- --------------- -------------
(1,000's)
------------------------------------------------------------------------
<S> <C> <C> <C>
Financing activities:
Net (decrease) increase in deposits ($ 5,177) ($ 6,801) $ 788
Increase (decrease) in advances from borrowers
for taxes and insurance 6 ( 9) ( 56)
Increase in short-term borrowings 4,500 1,950 1,050
Increase in repurchase agreements 3,121 0 0
Proceeds from sale of stock 0 25,307 0
Purchase of treasury stock ( 3,411) 0 0
Purchase of MRP stock ( 1,123) 0 0
Unearned employee stock ownership plan stock 423 ( 2,116) 0
ESOP adjustment 117 0 0
Dividends accrued ( 596) 0 0
---------------- --------------- -------------
Net cash (used in) provided by
financing activities ( 2,140) 18,331 1,782
---------------- --------------- -------------
Increase in cash and cash equivalents 2,741 4,438 895
Cash and cash equivalents at beginning of year 9,877 5,439 4,544
---------------- --------------- -------------
Cash and cash equivalents at end of year $ 12,618 $ 9,877 $ 5,439
================ =============== =============
Supplemental Disclosures:
Additional Cash Flows Information:
Cash paid for:
Interest on deposits, advances and
other borrowings $ 6,682 $ 6,724 $ 5,544
Income taxes:
Federal $ 857 $ 1,171 $ 645
State $ 177 $ 106 $ 340
Schedule of Noncash Investing Activities:
Stock dividends were distributed by the
Federal Home Loan Bank of Chicago $ 0 $ 11 $ 0
Securities, mortgage-backed and related
securities transferred to available for sale $ 0 $ 0 $ 52,213
Change in unrealized gain (loss)
on securities available for sale ($ 348) $ 2,714 ($ 2,808)
Change in deferred income taxes
attributed to unrealized gain (loss)
on securities available for sale $ 141 ($ 1,085) $ 1,123
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
Description of the Business
Community Financial Corp. (the Company) was incorporated in December 1994 at
the direction of the Board of Directors of Community Bank & Trust, sb, the
predecessor of Community Bank & Trust, N.A. (the Bank), to become the
holding company for the Bank upon its conversion from mutual to stock form
(the Conversion). In June 1995, the Company used the proceeds from its
initial public offering to acquire all the outstanding capital stock of the
Bank. The Company has no significant assets other than the outstanding stock
of the Bank, the portion of the net proceeds from its initial public
offering that it retained and a note receivable from the Company's Employee
Stock Ownership Plan (ESOP). The Company's principal business is overseeing
and directing the business of the Bank and investing the Company's assets.
The Company has registered with the Board of Governors of the Federal
Reserve System as a bank holding company.
The Bank is a national bank operating through five offices serving Richland,
Coles, Jasper, Lawrence, and Wayne Counties, Illinois and contiguous
counties in southeastern Illinois. The Bank was chartered in 1883 as Olney
Building and Loan Association. In 1961, the Bank changed its name to Olney
Savings and Loan Association. The Bank expanded its branch office network
through a series of acquisitions of other financial institutions, acquiring
its Lawrenceville and Fairfield offices in 1983, its Charleston office in
1989 and its Newton office in 1990. The Bank became an Illinois state
savings bank in July 1992, at which time it adopted the title Community Bank
& Trust, sb, converted to a national bank in June 1995, at which time it
adopted its present name.
The principal business of the Bank historically consists of attracting
deposits from the general public and investing these deposits in loans
secured by first mortgages on single-family residences in the Bank's market
area. To an increasing extent, the Bank originates agricultural loans
because of the economic base of the surrounding communities, and has
recently placed more emphasis on the origination of automobile loans,
commercial business loans and other consumer credit loans. The Bank's
origination of these loans arises from management's perception of minimal
anticipated growth in residential loan demand within the Bank's market area
and a local demand for nonresidential loans.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary Community Bank & Trust, N.A. All material
intercompany transactions and accounts have been eliminated.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the consolidated balance sheet and revenues and expenses for the
year. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
25
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
Management believes the allowance for loan losses and real estate owned is
adequate. Management uses available information to recognize losses on loans
and foreclosed real estate. Future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and foreclosed
real estate. Such agencies may require the Bank to recognize additions to
the allowances based on their judgments about information available to them
at the time of their examination.
Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all cash, daily interest demand deposits, federal funds sold, and
interest bearing deposits and securities having original maturities of three
months or less to be cash equivalents.
Securities Held to Maturity
Securities classified as held to maturity are those debt securities the
Company has the positive intent and ability to hold to maturity regardless
of changes in market conditions, liquidity needs or changes in general
economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, which are recognized in
interest income using the interest method over the period to maturity.
Securities Available for Sale
Securities classified as available for sale are those debt securities that
the Company intends to hold for an indefinite period of time, but not
necessarily to maturity and marketable equity securities. Any decision to
sell a security classified as available for sale would be based on various
factors, including significant movements in interest rates, changes in the
maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. The difference between fair
value and amortized cost, adjusted for amortization of premium and accretion
of discounts, which are recognized in interest income using the interest
method over their contractual lives, results in an unrealized gain or loss.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect. Realized gains
or losses, determined on the basis of the cost of specific securities sold,
are included in earnings.
Loans
Loans are considered a held-to-maturity asset and, accordingly, are carried
at historical cost. Loans are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan fees and unearned discounts.
Unearned discounts on installment loans are recognized as income over the
term of the loans using the interest method. Loan origination and commitment
fees, as well as certain direct origination costs, are deferred and
amortized as a yield adjustment over the lives of the related loans using
the interest method when in excess of loan origination cost. Amortization of
deferred loan fees is discontinued when a loan is placed on nonaccrual
status.
26
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
Loans
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired. Any unpaid interest previously accrued on those loans is reversed
from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is back to normal, in which case the loan is
returned to accrual status.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb probable losses in the loan
portfolio. The amount of the allowance is based on management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the present
value of estimated cash flows. The allowance is increased by a provision for
loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are charged
or credited to the provision for loan losses.
Real Estate Held for Investment and Foreclosed Real Estate
Direct investments in real estate properties held for investment are carried
at the lower of cost, including cost of improvements and amenities
subsequent to acquisition, or net realizable value.
Foreclosed real estate held for sale is carried at the lower of cost or
estimated fair market value, net of estimated selling costs. Costs of
holding foreclosed property are charged to expense in the current period,
except for significant property improvements, which are capitalized to the
extent that carrying value does not exceed estimated fair market value, net
of estimated selling cost.
Premises and Equipment
Land is carried at cost. Buildings and furniture, fixtures, and equipment
are carried at cost, less accumulated depreciation and amortization.
Buildings and furniture, fixtures, and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives are ten to fifty years for buildings and improvements
and five to fifteen years for equipment.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the consolidated financial statements and tax basis of
assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment. Income tax expense is the tax payable or refundable
for the period plus or minus the change during the period in deferred tax
assets and liabilities.
27
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
Earnings Per Share
Earnings per share is computed based on the weighted average common shares
outstanding during the period. Unallocated shares held for the ESOP and the
MRP are not considered common shares outstanding for this calculation. The
weighted average common shares outstanding for 1996 was 2,226,644. Earnings
per share for 1995 have been computed by dividing net earnings ($1,022,000),
from the date of conversion, June 29, 1995, by the weighted average number
of common stock shares (2,433,400) outstanding. The earnings per share
amount has not been presented for the year ended December 31, 1994, which
was prior to the stock conversion.
New Accounting Standards
Accounting for Mortgage Servicing Rights
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 (FAS 122), "Accounting for Mortgage
Servicing Rights." FAS 122 requires the Bank to recognize as separate
assets rights to service mortgage loans for others, however those
servicing rights are acquired. If the Bank acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and
sells those loans with servicing rights retained, the Bank should allocate
the total cost of the mortgage loans to mortgage servicing rights and the
loans (without the mortgage servicing rights) based on their relative fair
values. The mortgage servicing rights should be amortized in proportion to
and over the period of estimated net servicing income. FAS 122 is
effective for fiscal years beginning after December 15, 1995. The Bank was
required to adopt FAS 122 for the year ended December 31, 1996; however,
the Bank does not have any loans with mortgage servicing rights.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (FAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." FAS 125 requires that an entity should only recognize those
assets that it controls and liabilities it has incurred. Assets should be
recognized until control has been surrendered, and liabilities should be
recognized until they have been extinguished. Recognition of financial
assets and liabilities will not be affected by the sequence of
transactions unless the effect of the transactions is to maintain
effective control over a transferred financial asset. FAS 125 is effective
for transactions after December 31, 1996. The Bank believes the adoption
of FAS 125 will not have a material effect on the consolidated financial
statements.
Reclassifications
Certain reclassifications have been made to the balances as of December 31,
1995 and 1994, with no effect on net income, to be consistent with the
classifications adopted for December 31, 1996.
28
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B. Securities
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
U. S. government and
agency securities $12,101 $ 5 $220 $11,886
State and municipal obligations 836 0 8 828
FRB stock 381 0 0 381
FHLB stock 895 0 0 895
---------- ---------- ---------- -----------
$14,213 $ 5 $228 $13,990
========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
U. S. government and
agency securities $17,576 $44 $212 $17,408
State and municipal obligations 924 0 12 912
FRB stock 332 0 0 332
FHLB stock 695 0 0 695
---------- ---------- ---------- -----------
$19,527 $44 $224 $19,347
========== ========== ========== ===========
</TABLE>
The amortized cost and approximate market value of securities available for
sale, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities from call options.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1996 1995
---------------------- -----------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- -----------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,687 $ 2,670 $ 7,681 $ 7,491
Due after one year through
five years 8,017 7,913 9,474 9,500
Due after five years through
ten years 2,233 2,131 1,345 1,329
Due after ten years 1,276 1,276 1,027 1,027
---------- ---------- ---------- -----------
$14,213 $13,990 $19,527 $19,347
========== ========== ========== ===========
</TABLE>
29
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B. Securities
Securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
State and municipal obligations $3,362 $ 33 $ 17 $3,378
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
State and municipal obligations $3,113 $ 24 $ 25 $3,112
========== ========== ========== ===========
</TABLE>
The amortized cost and approximate market value of securities held to maturity,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities from call options.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------
1996 1995
----------------------- -----------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- -----------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 330 $ 330 $ 366 $ 362
Due after one year through five years 1,636 1,636 843 833
Due after five years through ten years 1,396 1,412 1,707 1,718
Due after ten years 0 0 197 199
---------- ---------- ---------- -----------
$3,362 $3,378 $3,113 $3,112
========== ========== ========== ===========
</TABLE>
Proceeds from sales of securities, gross gains and gross losses from such sales
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------ ------ ------
1996 1995 1994
------ ------ ------
(1,000's)
---------------------------------
<S> <C> <C> <C>
Proceeds from sales $ 0 $ 0 $ 366
====== ====== ======
Gross gains $ 0 $ 0 $ 0
Gross losses 0 0 (26)
------ ------ ------
$ 0 $ 0 ($ 26)
====== ====== ======
</TABLE>
30
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C. Mortgage-Backed and Related Securities Available for Sale
Mortgage-backed and related securities available for sale are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 3,072 $ 129 $ 0 $ 3,201
GNMA collateralized
mortgage obligations 1,469 0 17 1,452
FNMA certificates 2,397 21 5 2,413
FNMA collateralized
mortgage obligations 4,135 1 111 4,025
FHLMC certificates 7,883 135 115 7,903
FHLMC collateralized
mortgage obligations 9,579 1 255 9,325
---------- ---------- ---------- -----------
$28,535 $ 287 $ 503 $28,319
========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 3,669 $ 211 $ 0 $ 3,880
GNMA collateralized
mortgage obligations 2,001 0 6 1,995
FNMA certificates 2,659 76 18 2,717
FNMA collateralized
mortgage obligations 5,416 0 83 5,333
FHLMC certificates 10,288 199 102 10,385
FHLMC collateralized
mortgage obligations 11,401 3 194 11,210
---------- ---------- ---------- -----------
$35,434 $ 489 $ 403 $35,520
========== ========== ========== ===========
</TABLE>
Mortgage-backed and related securities with a carrying amount of $24,562,000 and
$19,624,000 at December 31, 1996 and 1995 were pledged to secure public deposits
and for other purposes as required or permitted by law.
The weighted average interest rate on mortgage-backed and related securities is
6.46% and 6.51% at December 31, 1996 and 1995, respectively.
The Bank had gross realized losses of $5,000 on $863,000 of sales proceeds on
mortgage-backed and related securities for the year ended December 31, 1995.
There were no sales for the years ended December 31, 1996 and 1994.
31
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D. Loans Receivable
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
-------- --------
(1,000's)
------------------
<S> <C> <C>
Real estate loans:
Single-family residential $ 46,501 $ 46,959
Construction 770 576
Multi-family residential and commercial 2,494 2,994
Agricultural 12,226 8,763
Commercial 20,129 12,316
-------- -------
82,120 71,608
Consumer loans:
Automobile 30,360 33,506
Credit card 1,879 1,743
Mobile home 850 978
Educational 29 40
Deposit accounts 807 705
Home improvement 694 819
Other 7,184 6,836
-------- -------
123,923 116,235
Less:
Loans in process 96 227
Allowance for losses 1,520 1,514
-------- -------
$122,307 $114,494
======== ========
</TABLE>
Certain consumer loans are shown net of add on interest at December 31, 1996 and
1995. The add on interest amounted to $1,621,000 and $2,639,000, respectively.
Changes in allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995 1994
------ ------ ------
(1,000's)
------------------------
<S> <C> <C> <C>
Balance at January 1 $1,514 $1,641 $1,629
Provision for loan losses 10 113 212
Recoveries 397 312 154
Loans charged off (401) (552) (354)
------ ------- ------
Balance at December 31 $1,520 $1,514 $1,641
====== ====== ======
</TABLE>
32
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D. Loans Receivable
Principal balance of non-accrual loans totaled approximately $318,000 and
$389,000 at December 31, 1996 and 1995, respectively. The interest discontinues
accruing when the loan becomes more than ninety days past due and in
management's judgment the collection of interest is impaired. The amount of
interest not recognized was $21,000, $20,000, and $52,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. The Bank has sold a 95%
participation interest in single-family mortgage loans to FHLMC in prior years.
The participation amounted to $257,000 and $388,000 at December 31, 1996 and
1995, respectively.
Weighted average interest rate on loans consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
Mortgage loans 8.51% 8.50%
Nonmortgage loans 8.78% 8.20%
Total loans 8.68% 8.33%
</TABLE>
Note E. Accrued Interest Receivable
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
(1,000's)
-------------------
<S> <C> <C>
Loans $ 845 $ 656
Mortgage-backed and related securities 181 224
Securities 213 338
------ ------
$1,239 $1,218
====== ======
</TABLE>
Note F. Premises and Equipment
Premises and equipment are summarized by major classifications as presented
below:.
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
(1,000's)
-------------------
<S> <C> <C>
Land $ 608 $ 475
Building 2,291 2,195
Furniture and equipment 1,540 1,283
------- -------
4,439 3,953
Accumulated depreciation (1,830) (1,589)
------- -------
$2,609 $2,364
======= =======
</TABLE>
Depreciation included in the consolidated statements of income amounted to
$240,000, $220,000, and $180,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
The Bank is building a new branch facility in Charleston, Illinois. It is
anticipated the branch will be completed by July, 1997. It is anticipated the
total cost of this new branch facility to be $1,000,000.
33
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G. Deposit Analysis
Deposits and weighted average interest rates are summarized as follows
(amounts in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1996 1995
----------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Passbook $ 14,045 2.75% $ 14,598 2.75%
Demand deposits 18,567 1.88% 18,299 2.04%
Money market 19,272 3.26% 21,027 3.27%
Certificates 87,216 5.58% 90,353 5.69%
-------- --------
$139,100 4.48% $144,277 4.58%
======== ========
</TABLE>
Certificates had the following remaining maturities (amounts in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------
Two After
Less Than One to Two to Three Three
Rate One Year Years Years Years Totals
--------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
2 - 3.99% $ 638 $ 0 $ 0 $ 0 $ 638
4 - 5.99% 40,095 13,268 6,401 2,410 62,174
6 - 7.99% 4,437 3,284 6,511 8,995 23,227
8 - 9.99% 676 5 0 496 1,177
------- ------- ------- ------- -------
$45,846 $16,557 $12,912 $11,901 $87,216
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------
Two After
Less Than One to Two to Three Three
Rate One Year Years Years Years Totals
--------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
2 - 3.99% $ 3,235 $ 608 $ 0 $ 0 $ 3,843
4 - 5.99% 33,089 7,258 6,840 3,051 50,238
6 - 7.99% 12,175 4,222 3,735 14,989 35,121
8 - 9.99% 662 5 5 479 1,151
------- -------- ------- ------- -------
$49,161 $ 12,093 $10,580 $18,519 $90,353
======= ======== ======= ======= =======
</TABLE>
34
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G. Deposit Analysis
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
------- ------ ------
(1,000's)
-----------------------
<S> <C> <C> <C>
Passbook $ 406 $ 438 $ 564
Demand deposits 351 351 343
Money market 662 752 1,045
Certificates 4,903 5,134 3,485
------ ------ ------
$6,322 $6,675 $5,437
====== ====== ======
</TABLE>
At December 31, 1996 and 1995, the Bank had $15,540,000 and $15,499,000,
respectively, of deposits accounts with balances of $100,000. The Bank
did not have brokered deposits at December 31, 1996 and 1995. Deposits in
excess of $100,000 are not federally insured.
The Bank has pledged mortgage-backed and related securities, when requested by
depositors, for deposits of $100,000 or more. Deposits which had securities
pledged amounted to $11,240,000 and $11,876,000 at December 31, 1996 and 1995,
respectively.
Note H. Other Borrowed Funds
Federal Home Loan Bank (FHLB) advances consisted of the following (amounts in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
---------------- ----------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
<S> <C> <C> <C> <C>
Open line of credit $7,500 5.41% $3,000 5.83%
====== ==== ====== ====
</TABLE>
Advances are pursuant to several different programs each of which has its own
interest rates and range of maturities. The Bank has borrowed on the daily
overnight basis which requires collateral of the FHLB stock and up to 100% of
real estate mortgage loans for this type of advance. The Bank's interest
expense for FHLB advances amounted to $305,000, $72,000, and $139,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
The Bank has entered into repurchase agreements with its customers during the
current year. These agreements are not insured by SAIF. These agreements have
an average maturity of less than three months. For 1996, the average balance
was $2,066,000 with the highest month end balance of $3,213,000 at an average
rate of 4.90%. The Bank incurred interest expense for the year of $101,000
which was included in interest on other borrowed funds.
35
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I. Stockholders' Equity
Regulatory Capital Requirements
National banks are required to satisfy three capital requirements: (i) a
requirement that "core capital" equal or exceed 3% of adjusted total assets,
(ii) a requirement that "core capital" equal or exceed 4% of risk-weighted
assets, and (iii) a requirement that "risk-based capital" equal or exceed 8%
of risk-weighted assets. At December 31, 1996, the Bank exceeded each of
the three capital requirements.
The following is a summary of the Bank's regulatory capital position at
December 31, 1996 (amounts in thousands):
<TABLE>
<CAPTION>
Actual Requirement Excess
----------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bank's stockholders' equity $24,956 $ $
Adjustment for unrealized
losses on securities available
for sale, net 263
-----------
Core capital to total assets $25,219 14.28% $5,292 3.00% $19,927 11.28%
========== ========== ==========
Core capital to risk-weighted
assets $25,219 21.86% $4,615 4.00% $20,604 18.86%
========== ========== =========
Plus allowable portion of general
allowance for loan losses 1,443
----------
Risk-based capital $26,662 23.11% $9,231 8.00% $17,431 15.11%
========== ========== =========
</TABLE>
The Bank's total risk-weighted assets at December 31, 1996, were approximately
$115,386,000.
Restricted Retained Earnings
The Bank may not declare or pay a cash dividend to the Company in excess of
100% of its net income to date during the current calendar year plus the two
preceding year's net income less any dividends paid or declared during the two
prior years. Additional limitation on dividends declared or paid on, or
repurchases of, the Bank's capital stock are tied to the Bank's level of
compliance with its regulatory capital requirements.
Treasury Stock
During 1996, the Company authorized the purchase of up to 257,888 shares of
the Company's stock which represented approximately 9.75% of the outstanding
stock at December 31, 1995. These shares were purchased in 1996 at a cost of
$3,411,000 with an average cost per share of $13.23.
36
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note J. Non-Interest Income and Expense
Non-interest income and expense is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
------ ------ ------
(1,000's)
---------------------------
<S> <C> <C> <C>
Non-interest income
Service fees $ 505 $ 432 $ 379
Insurance and annuity commissions 210 282 497
Net loss on sale of securities (Note B) 0 0 (26)
Net loss on sale of mortgage-backed
and related securities (Note C) 0 (5) 0
Net gain on sale of assets 0 142 0
Recovery of litigation fees 0 249 0
Other 62 70 77
------ ------ ------
$ 777 $1,170 $ 927
====== ====== ======
Non-interest expense
Salaries and employee benefits (Notes L and R) $3,580 $2,323 $2,311
Occupancy expense 221 216 201
Equipment and furnishing expense 383 353 300
Data processing expense 412 461 344
Federal insurance premium (Note X) 1,275 378 342
Litigation settlement 0 0 257
Other (Note Q) 0 0 120
Other 927 706 816
------ ------ ------
$6,798 $4,437 $4,691
====== ====== ======
</TABLE>
Note K. Income Tax
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
(1,000's)
----------------------------
<S> <C> <C> <C>
Currently payable: Federal $ 281 $ 950 $ 633
State 52 184 128
Deferred: Federal 8 (22) 42
State 2 (5) 10
------ ------ ------
$ 343 $1,107 $ 813
====== ====== ======
</TABLE>
37
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K. Income Tax
Income tax expense for the years ended December 31, 1996, 1995 and 1994 has
been provided at an effective rate of approximately 30.74%, 35.25% and 36.56%,
respectively. An analysis of such expense for the three years setting forth
the reasons for the variations from the federal statutory rates is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
------ ------ ------
(1,000's)
---------------------------
<S> <C> <C> <C>
Computed tax at statutory rates $ 383 $1,067 $ 756
Increase (decrease) in tax expenseresulting from:
State income tax, net 36 130 85
Other ( 28) 20 11
Tax exempt income - net ( 48) (42) (39)
Stock dividends on FHLB stock 0 (5) 0
Nontaxable gains 0 (63) 0
------ ------ ------
Income tax expense $ 343 $1,107 $ 813
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
----- -----
(1,000's)
------------
<S> <C> <C>
Deferred tax assets:
Allowance for unrealized losses on
securities available for sale $ 176 $ 38
Allowance for loan losses 496 508
Other 8 8
----- -----
680 554
----- -----
Deferred tax liabilities:
Federal Home Loan Bank stock $ 39 $ 39
Premises and equipment 214 214
Other 18 21
----- -----
271 274
----- -----
Net deferred tax asset $ 409 $ 280
===== =====
</TABLE>
No valuation allowance was required for deferred tax assets at December 31, 1996
and 1995. As a result of the Bank's decision to convert to a national bank, the
excess tax bad debt deduction allowed for thrifts has been restored to income
and taxes thereon has been accrued in the 1994 consolidated financial
statements. The Bank's 1994 consolidated financial statements reflected a
$701,000 expense for the recapture of the excess tax bad debt deduction and is
included in accrued income taxes. The taxes will be paid ratably over a six-
year period beginning in 1995.
During 1995, the Bank sold the insurance agency of the service corporation at a
gain of $187,000. This gain, for tax purposes, has been offset against the
capital loss carryover. The capital loss carryover, as of December 31, 1996,
amounts to $329,000 and will start to expire in 2006. No deferred taxes have
been recorded for this carryover.
38
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L. Employee Benefit Plans
The Olney Savings and Loan Association Defined Benefit Pension Plan was
terminated and benefits were frozen as of May 31, 1996. The plan termination
date will be April 30, 1997. The actuary for the plan, performed a preliminary
calculation and has determined that the plan assets are underfunded by
approximately $622,000. The Bank has accrued this liability and is included in
other liabilities, for the year ended December 31, 1996.
The Olney Savings and Loan Association Defined Benefit Pension Plan was a
noncontributory plan which covered all employees who qualify as to age and
length of service.
The following table sets forth the plan's funded status:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- --------
(1,000's)
--------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$546,000 (1995) and $480,000 (1994) $ 785 $ 689
Effect of projected future compensation 353 334
------- -------
Projected benefit obligation for service rendered to date 1,138 1,023
Plan assets at fair value 831 870
------- -------
Plan assets in excess of projected benefit obligation ( 307) ( 153)
Unrecognized net gain 138 91
Unrecognized net transition obligation (asset) ( 77) ( 85)
------- -------
Accrued pension cost ($ 246) ($ 147)
======= =======
</TABLE>
The components of net pension expense for the years ended December 31, 1995
and 1994 are:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
------- --------
(1,000's)
--------------------
<S> <C> <C>
Service cost-benefits earned during the period $ 99 $ 90
Interest cost on projected benefit obligation 74 68
Actual return on plan assets ( 19) (29)
Amortization and deferral ( 55) (49)
-------- -------
Net pension expense $ 99 $ 80
======== =======
1995 1994
------- -------
Assumptions used to develop the net periodic
pension cost were:
Discount rate 7.5% 7.5%
Expected long-term rate of return on assets 7.0% 7.0%
Rate of increase in compensation levels 6.0% 6.0%
</TABLE>
The Bank participates in the Manual Life 401K Plan. Under the plan voluntary
contributions made by eligible employees are matched 100% by Bank
contributions up to a specified percent of their compensation. The cost of the
plan was $72,000, $64,000 and $64,000 for the years ended December 31, 1996,
1995 and 1994, respectively, and is included in compensation and employee
benefits in the consolidated statements of income.
39
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M. Economic Dependency
The Bank is a nondiscriminatory lender in their market area as defined by
their Community Reinvestment Act. The Bank is a full service institution with
facilities located in Richland, Lawrence, Wayne, Jasper, and Coles counties in
southeastern central Illinois. The Bank has no economic dependency other than
the general market area. Concentration of credit risk has been disclosed in
Note D concerning lending portfolio.
Note N. Commitments and Contingencies
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Bank is a
defendant in certain claims and legal actions arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial position, liquidity, and
operating results of the Bank.
The Bank had outstanding firm commitments to originate loans as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
------ ------
(1,000's)
-----------------
<S> <C> <C>
Real estate $ 96 $ 294
Other loans 0 1,195
Credit card loans 5,889 5,810
------ ------
Commitments to originate loans $5,985 $7,299
====== ======
Unused lines of credit $6,973 $4,106
====== ======
</TABLE>
Interest rates on the above commitments ranged from 6.00% to 13.90% and 6.00%
to 13.90% at December 31, 1996 and 1995, respectively.
There were no outstanding commitments to purchase or sell securities at
December 31, 1996 and 1995, respectively.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
these instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. 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 Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount and type of
collateral obtained, if deemed necessary by the Bank upon extension of credit,
varies and is based on management's credit evaluation of the counterparty.
40
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N. Commitments and Contingencies
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities
to customers. The Bank's policy for obtaining collateral, and the nature of
such collateral, is essentially the same as that involved in making
commitments to extend credit. The Bank generally requires signed notes to be
executed when a letter of credit is exercised.
Note O. Related Parties
The Bank has entered into transactions with its directors, key management and
their affiliates (Related Parties). Such transactions were made in the
ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers, and did not, in the opinion
of management, involve more than normal credit risk or present other
unfavorable features. A summary of loans to such related parties is as
follows:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
------ ------
(1,000's)
------------------
<S> <C> <C>
Balance December 31 $426 $512
New loans 293 224
Repayments ( 167) ( 310)
----- -----
Balance December 31 $552 426
===== =====
</TABLE>
Note P. Carrying Amounts and Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued Standard
No.107, "Disclosures about Fair Value of Financial Instruments," which
requires disclosing information about the fair value of all financial
instruments, both assets and liabilities on and off balance sheet, for which
it is practicable to estimate their values and pertinent descriptions of those
instruments for which such values are not readily available. Accordingly, the
following information is set forth below.
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ----------- -------- ----------
(1,000's) (1,000's)
--------------------- ---------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 12,618 $ 12,618 $ 9,877 $9,877
Securities 17,352 17,368 22,460 22,459
Mortgage-backed and related securities 28,319 28,319 35,520 35,520
Loans receivable 122,307 118,107 114,494 112,541
Allowance for loan losses
Accrued interest receivable 1,239 1,239 1,218 1,218
Financial Liabilities
Deposits 139,100 139,894 144,277 147,069
FHLB advances 7,500 7,497 3,000 3,000
Repurchase agreements 3,121 3,121 0 0
Accrued interest payable 160 160 114 114
</TABLE>
41
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P. Carrying Amounts and Fair Value of Financial Instruments
The fair value of securities and mortgage-backed securities is based on quoted
market prices or dealer quotes. The fair value of certain of these financial
instruments represent the estimated amount the Bank would receive or pay to
terminate the contracts or agreements, taking into account current interest
rates and, when appropriate, the current creditworthiness of the
counterparties. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Fair values are estimated for loans with similar financial characteristics.
These loans are segregated by type of loan, considering credit risk and
prepayment characteristics. Each loan category is further segmented into fixed
and adjustable rate categories.
The fair values of performing loans for all portfolios, except residential
mortgage loans, are calculated by discounting scheduled cash flows through
estimated maturity dates. Expected cash flows are discounted using estimated
market yields that reflect the credit and interest rate risks inherent in each
category of loans. Estimated market yields also reflect a component for the
estimated cost of servicing the portfolio.
For performing residential mortgage loans, fair values are estimated by
segmenting the loan portfolio into homogeneous pools based on loan types,
coupon rates, maturities, prepayment assumptions and credit risk, and
comparing the values of the individual pools to mortgage-backed securities
with similar characteristics. It is not considered practicable to calculate a
fair value for nonperforming loans less than $1,000,000. Accordingly, they are
included in fair value disclosures at net cost.
The fair value of noninterest bearing deposits, savings and NOW accounts, and
money market accounts is the amount payable on demand at December 31, 1996 and
1995. The fair value of fixed-maturity certificates of deposit is estimated
based on the discounted value of contractual cash flows using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above do not include the benefit that results from the low-cost
funding provided by deposit liabilities compared to the cost of borrowing
funds in the market. This value, which includes such cost assumptions related
to interest rates, deposit run-off, maintenance costs and float opportunity
costs, is presented on a discounted cash flow basis. The value related to the
recorded cost of acquired deposits is also included therein.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Bank has a trust department that
contributes net fee income annually. The trust department is not considered a
financial instrument, and its value has not been incorporated into the fair
value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the brokerage network,
deferred tax assets, and premises and equipment. 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 any of the estimates. The Bank has not disclosed the estimated
fair value of the off-balance sheet financial instruments as they are issued
at fair value.
Core deposit estimated fair value was based on the discounting of future cash
flows. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Bank's financial instruments, fair value estimates are based on judgments
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 judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
42
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Q. Service Corporation Activities
Olney Savings Service Corporation (OSSC) was involved in a partnership to
conduct business as an insurance agency. In 1993 this partnership was
dissolved with OSSC acquiring the insurance agency. As part of this
transaction, OSSC recorded goodwill and noncompetition agreement as an asset
in the amount of $120,000. With the plan of conversion to a national bank,
OSSC will no longer be able to conduct an insurance agency. The Bank sold the
insurance agency on May 9, 1995. The gain on sale is recorded in non-interest
income for the year ended December 31, 1995. OSSC was dissolved in 1996. The
Bank recognized no gain or loss on the dissolution.
Note R. Employee Stock Ownership Plan (ESOP)
In June 1995 the Company established an Employee Stock Ownership Plan (the
ESOP) in connection with the stock conversion in which employees meeting age
and service requirements are eligible to participate. A participant is 100%
vested after three years of credit service. The ESOP borrowed $2,116,000 from
the Company and purchased 211,600 shares of common stock of the Company at the
date of the conversion. This debt carries an interest rate at prime, as stated
in the Wall Street Journal on January 1, and requires annual principal and
interest payments. The Company has committed to make annual contributions to
the ESOP necessary to repay the loan including interest.
As the debt is repaid, ESOP shares which were initially pledged as collateral
for its debt, are released from collateral and allocated to active employees,
based on the proportion of debt service paid in the year. The Company accounts
for its ESOP in accordance with Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans." Accordingly, the shares
pledged as collateral are reported as unearned ESOP shares in the consolidated
balance sheets. As shares are determined to be ratably released from
collateral, the Company reports compensation expense equal to the current
market price of the shares, and the shares become outstanding for earnings per
share computations. Dividends on allocated ESOP shares are recorded as a
reduction of stockholders' equity and dividends on unallocated ESOP shares are
used to pay debt servicing costs. The trustees' of the plan may direct
payments of cash dividends be paid to the participants or to be credited to
participant accounts and invested. Compensation expense for the ESOP was
$270,000 and $275,000 for December 31, 1996 and 1995. The ESOP shares were as
follows:
<TABLE>
<S> <C>
Allocated shares $ 21,160
Shares ratably released for allocation 21,160
Unallocated shares 169,280
----------
Total ESOP shares 211,600
==========
Fair value of unreleased shares at December 31, 1996 $2,158,000
==========
</TABLE>
Note S. Management Recognition Plans
The Company adopted a Management Recognition Plan (the MRP) on January 12,
1996 in connection with the stock conversion. The plan provides for the
granting of shares of stock to eligible directors and officers in the form of
stock, which vest over a five-year period at the rate of 20% per year. Under
the plan, 105,800 shares of stock were granted.
During 1996, the Company purchased shares to fund the MRP plan on the open
market. The cost of these shares amounted to $1,403,000 or at an average cost
of $13.26 per share. In addition to the MRP plan, the Company approved the tax
bonus plan for the recipients of the MRP shares in the amount of 40% of the
MRP amount. For the current year, the Company had $275,000 and $110,000 of
compensation expense for the MRP and tax bonus plan, respectively.
43
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note T. Stock Option Plan
The Company adopted a stock option plan on January 12, 1996 in connection with
the stock conversion. The plan provides for the granting of options for the
purpose of attracting and retaining key personnel and to facilitate their
purchase of a stock interest in the Company. Options on 264,500 shares were
granted at an exercise price of $13.125 per share. Stock options are
exercisable at 20% per year for a five-year period starting January 12, 1997;
if unused, the options expire January 12, 2006. No stock options were
exercised during 1996 and market value of the stock was 12.75 at December 31,
1996.
Note U. Stock Appreciation Rights
The Company, at its sole discretion, may from time to time grant stock
appreciation rights (SARs) to employees either in conjunction with, or
independently of, any options granted. The exercise price as to any SARs shall
not be less than the market value of the shares at the time of the grant. No
SARs had been granted.
Note V. Early Retirement Plan
In December of 1996, the Board approved an early retirement plan for all
employees age 50 or older. This plan effective date was in January of 1997 and
was offered to twelve employees of which seven took early retirement. This
plan includes provisions for length of employment, one month of salary per
year of service, and immediate vesting in the MRP plan, stock option plan, and
bonus plan on the MRP plan amount. The stock option plan had a ninety day
period the options could be exercised. Both employees that had stock options,
a total of 23,805 shares, exercised these options in February of 1997. Total
estimated cost to the Company for the early retirement plan is $438,000 which
will be recorded as an expense in 1997.
Note W. Acquisitions
In December 1996, the Company signed an agreement for the purchase of all the
outstanding stock of American Bancshares, Inc.; the holding company of
American Bank of Illinois located in Highland; which is an $18 million asset
commercial bank with branches in Highland and Pocohontas, Illinois. The
acquisition is expected to be completed in the second quarter of 1997 at a
cost not to exceed $2,150,000.
Note X. Savings Association Insurance Fund (SAIF) Assessment
Banking legislation enacted September 30, 1996 requires the Bank to pay a one-
time special assessment to capitalize the SAIF, payable on November 27, 1996.
The assessment, 65.7 basis points of the assessment base calculated as of
March 31, 1996, is approximately $1,015,000 and has been included in
noninterest expense in the accompanying 1996 consolidated financial
statements. In addition, this banking legislation includes provisions that
provide for a substantial reduction in SAIF premiums paid by the Bank,
beginning January 1, 1997. Other provisions provide for the mergers of the
bank and savings association charters, and the SAIF and the Bank Insurance
Fund (BIF) by January 1, 1999.
44
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note X. Community Financial Corp. Condensed Financial Information
The parent company's principal assets are its investment in the Bank,
investment securities and receivable from subsidiary. The following are the
condensed statements of financial condition for the parent company only as of
December 31, 1996 and 1995 and its condensed statements of operations and cash
flows for the year ended December 31, 1996, and for the period from July 1,
1995 to December 31, 1995.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At December 31,
---------------------
1996 1995
-------- ---------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 6,331 $ 2,457
Securities held to maturity 1,205 720
Securities available for sale 2,357 7,448
Investment in subsidiary 11,007 13,416
Receivable from subsidiary 1,693 2,219
Other assets 49 160
------- -------
$22,642 $26,420
======= =======
Liabilities and Stockholders' Equity:
Accrued expenses and other liabilities $ 817 $ 148
------- -------
Stockholders' equity:
Common stock 26 26
Additional paid-in capital 25,397 25,280
Unearned MRP shares ( 1,123) 0
Treasury stock ( 3,411) 0
Unrealized loss on securities available for sale, net ( 263) (56)
Retained earnings, subject to certain restrictions 1,199 1,022
------- -------
Total stockholders' equity 21,825 26,272
------- -------
$22,642 $26,420
======= =======
</TABLE>
45
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note X. Community Financial Corp. Condensed Financial Information
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Period Ended
Dec. 31, Dec. 31,
1996 1995
---------- ------------
<S> <C> <C>
Interest income $ 592 $ 439
Equity in earnings of subsidiary 783 793
Compensation and employee benefits ( 507) 0
Professional service expenses ( 80) ( 11)
Other ( 61) ( 72)
---------- ----------
Income before income taxes 727 1,149
Income tax benefit (expense) 46 ( 127)
---------- ----------
Net income $ 773 $1,022
========== ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31,
1996 1995
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 773 $ 1,022
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in earnings of subsidiary ( 783) ( 793)
Dividends received from subsidiary 3,000 0
Stock employee benefit plans 387 0
Other, net 194 ( 12)
-------- --------
Net cash provided by operating activities 3,571 217
-------- --------
Cash flows from investing activities:
Purchase investment in subsidiary 0 ( 12,692)
Purchases of investment securities ( 11,490) ( 11,490)
Maturities of investment securities 16,081 3,334
Receivable from subsidiary 526 ( 2,219)
-------- --------
Net cash provided by (used in) investing
activities 5,117 ( 23,067)
-------- --------
Cash flows from financing activities:
Proceeds from stock issuance 0 25,307
Common stock repurchased ( 4,814) 0
Dividends paid on common stock 0 0
-------- --------
Net cash (used in) provided by financing
activities ( 4,814) 25,307
-------- --------
Net increase in cash and cash equivalents 3,874 2,457
Cash and cash equivalents at beginning of period 2,457 0
-------- --------
Cash and cash equivalents at end of period $ 6,331 $ 2,457
======== =======
</TABLE>
46
<PAGE>
BOARD OF DIRECTORS
CHARLES M. DICIRO
Chairman of the Board
ALLEN D. WELKER
Retired
MICHAEL F. BAUMAN
Co-Owner of Bauman Cement, Inc.
SHIRLEY B. KESSLER
President and Chief Executive Officer
ROGER A. CHARLESTON
Civil Engineer; Owner, Charleston Engineering
WILLIAM O. CANTWELL
Retired
CLYDE R. KING
Retired
BRAD A. JONES
Co-Owner of Rural King Supply
ROGER L. HABERER*
Information Services Manager of Western Staff Services (Midwest Region)
* Director of Bank only
EXECUTIVE OFFICERS
SHIRLEY B. KESSLER
President and Chief Executive Officer
WAYNE H. BENSON
Executive Vice President
DOUGLAS W. TOMPSON
Chief Financial Officer
OFFICE LOCATIONS
MAIN OFFICE:
240 E. Chestnut
Olney, IL 62450
BRANCH OFFICES:
Fairfield Branch
303 W. Delaware
Fairfield, IL 62837
Charleston Branch
511 Jackson
Charleston, IL 61920
Lawrenceville Branch
1601 State
Lawrenceville, IL 62439
Newton Branch
601 W. Jourdan, P.O. Box 361
Newton, IL 62448
CORPORATE INFORMATION
INDEPENDENT CERTIFIED ACCOUNTANTS
Larsson, Woodyard & Henson, CPAs
702 E. Court Street
Paris, Illinois 61944
GENERAL COUNSEL
Ray W. Vaughn, Attorney
308 S. Kitchell
Olney, Illinois 62450
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Co., Cranford, New Jersey
SPECIAL COUNSEL
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
ANNUAL MEETING
The 1997 Annual Meeting of Stockholders will be held on April 28, 1997 at 1:00
p.m. at the Holiday Motel, located at 1300 South West, Olney, Illinois.
ANNUAL REPORT ON FORM 10-K
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE
FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR THE 1997
ANNUAL MEETING UPON WRITTEN REQUEST TO CORPORATE SECRETARY, COMMUNITY FINANCIAL
CORPORATION, 240 E. CHESTNUT STREET, OLNEY, ILLINOIS 62450-2295
47
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Incorporation Ownership
------------- ---------
<S> <C> <C>
Parent
- ------
Community Financial Corp. Illinois 100%
Subsidiary (1)
- ----------
Community Bank & Trust, N.A. United States 100%
Subsidiaries of Community Bank &
Trust, N.A. (1)
- --------------------------------
Olney Savings Service Corporation Illinois 100%
</TABLE>
- --------------------
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in the Annual Report to
Stockholders attached hereto as an exhibit.
<PAGE>
Exhibit 23
[LOGO OF LARSSON, WOODYARD & HENSON, LLP]
LARSSON, WOODYARD & HENSON, LLP
CERTIFIED PUBLIC ACCOUNTANTS
MEMBER OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS -
ILLINOIS CPA SOCIETY
702 E. COURT STREET . P.O. BOX 426 . PARIS, ILLINOIS 61944
TEL. (217) 465-6494 . FAX (217) 485-8499
March 27, 1997
The Board of Directors
Community Financial Corp.
240 East Chestnut
Olney, Illinois 62450
We consent to incorporation by referene in the registration statements (No.
33-92534 and 333-322) on Form S-8 of Community Financial Corp. of our report
dated January 30, 1997, relating to the consolidated statements of financial
condition of Community Financial Corp. and Subsidiary as of December 31, 1996
and 1995 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1996, which report appears in the December 31, 1996 annual report
on Form 10-K of Community Financial Corp.
/s/ Larsson, Woodyard & Henson, LLP
March 27, 1997
107 W. Alabama . P.O. Box 167 . Casey, Illinois 82420. Tel (217) 832-5241
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,285
<INT-BEARING-DEPOSITS> 11,333
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,362
<INVESTMENTS-CARRYING> 42,748
<INVESTMENTS-MARKET> 42,309
<LOANS> 123,827
<ALLOWANCE> 1,520
<TOTAL-ASSETS> 185,799
<DEPOSITS> 139,100
<SHORT-TERM> 10,621
<LIABILITIES-OTHER> 1,996
<LONG-TERM> 0
0
0
<COMMON> 26
<OTHER-SE> 34,056
<TOTAL-LIABILITIES-AND-EQUITY> 185,799
<INTEREST-LOAN> 10,462
<INTEREST-INVEST> 3,413
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,875
<INTEREST-DEPOSIT> 6,322
<INTEREST-EXPENSE> 6,728
<INTEREST-INCOME-NET> 7,147
<LOAN-LOSSES> 10
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,798
<INCOME-PRETAX> 1,116
<INCOME-PRE-EXTRAORDINARY> 773
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 773
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<YIELD-ACTUAL> 4.03
<LOANS-NON> 318
<LOANS-PAST> 130
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 778
<ALLOWANCE-OPEN> 1,514
<CHARGE-OFFS> 401
<RECOVERIES> 397
<ALLOWANCE-CLOSE> 1,520
<ALLOWANCE-DOMESTIC> 1,520
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
