<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26292
COMMUNITY FINANCIAL CORP.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 37-1337630
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
240 E. Chestnut Street, Olney, Illinois 62450-2295
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(618)395-8676
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes X No
--- ---
As of November 13, 1998, the Registrant had 2,320,612
shares of Common Stock issued and outstanding.
<PAGE>
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CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 . . . 3
Consolidated Statements of Income for
the Three-Month and Nine-Month Periods
Ended September 30, 1998 and 1997. . . . . . . 4
Consolidated Statements of Cash Flows
for the Three-Month and Nine-Month
Periods Ended September 30, 1998 and 1997. . . 5
Consolidated Statements of Stockholders'
Equity for the Nine-Month Period
Ended September 30, 1998.. . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings. . . . . . . . . . . . . . 15
Item 2. Changes in Securities. . . . . . . . . . . . 15
Item 3. Defaults Upon Senior Securities. . . . . . . 15
Item 4. Submission of Matters to a Vote of
Security-Holders . . . . . . . . . . . . . . 15
Item 5. Other Information. . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
ASSETS 1998 1997
- ------ ------------ -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
CASH $ 6,499 $ 8,607
INTEREST BEARING DEPOSITS 21,140 18,117
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 27,639 26,724
TIME DEPOSITS 0 0
SECURITIES AVAILABLE FOR SALE (amortized cost 63,954 57,283
of $63,919 (1998) and $57,282 (1997))
SECURITIES HELD TO MATURITY (estimated market value 19,026 18,318
of $19,217 (1998) and $18,403 (1997))
MORTGAGE-BACK & RELATED SECURITIES AVAILABLE FOR SALE 31,712 23,895
(amortized cost of $31,598 (1998) and $23,878(1997))
MORTGAGE-BACK & RELATED SECURITIES HELD TO MATURITY 490 891
(estimated market value of $527 (1998) and $927 (1997))
LOANS RECEIVABLE, net 157,718 162,318
FORECLOSED REAL ESTATE, net 301 126
REAL ESTATE HELD FOR SALE 0 0
ACCRUED INTEREST RECEIVABLE 2,899 2,675
PREMISES AND EQUIPMENT, net 6,858 5,853
PREPAID INCOME TAXES 0 0
DEFERRED INCOME TAXES 222 289
GOODWILL 4,873 5,109
CORE DEPOSIT INTANGIBLE 512 527
OTHER ASSETS 466 257
-------- --------
TOTAL ASSETS $316,670 $304,265
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $227,031 $218,915
FEDERAL HOME LOAN BANK ADVANCES 42,000 37,000
REPURCHASE AGREEMENTS 7,973 5,323
OTHER BORROWINGS 1,100 5,600
ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE 40 41
ACCRUED INTEREST PAYABLE 732 457
ACCRUED INCOME TAXES 79 46
OTHER LIABILITIES 853 1,156
-------- --------
TOTAL LIABILITIES $279,808 $268,538
-------- --------
STOCKHOLDERS' EQUITY:
COMMON STOCK, $.01 PAR VALUE PER SHARE:
7,000,000 SHARES AUTHORIZED; 2,360,612
AND 2,360,612 SHARES ISSUED AT SEPTEMBER 30, 1998
AND DECEMBER 31, 1997 $ 26 $ 26
ADDITIONAL PAID-IN CAPITAL 25,729 25,754
TREASURY STOCK (3,803) (3,803)
UNALLOCATED ESOP SHARES (1,376) (1,428)
SHARES HELD FOR MANAGEMENT RECOGNITION PLAN (649) (750)
RETAINED EARNINGS 16,829 15,917
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) NET OF
RELATED TAXES OF $27,000 AND ($7,000) AT SEPTEMBER 30, 1998
AND DECEMBER 31, 1997 106 11
-------- --------
TOTAL STOCKHOLDER EQUITY $ 36,862 $ 35,727
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $316,670 $304,265
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3<PAGE>
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
INTEREST ON LOANS $ 3,455 $ 2,991 $10,455 $ 8,857
INTEREST ON MORTGAGE-BACKED AND RELATED SECURITIES 369 395 1,018 1,276
INTEREST ON INVESTMENTS AND INTEREST-BEARING DEPOSITS 1,742 925 5,137 2,134
------- ------- ------- -------
TOTAL INTEREST INCOME $ 5,566 $ 4,311 $16,610 $12,267
------- ------- ------- -------
INTEREST EXPENSE:
INTEREST ON DEPOSITS $ 2,527 $ 1,706 $ 7,355 $ 5,083
INTEREST ON OTHER BORROWED FUNDS 739 521 2,226 974
------- ------- ------- -------
TOTAL INTEREST EXPENSE $ 3,266 $ 2,227 $ 9,581 $ 6,057
------- ------- ------- -------
NET INTEREST INCOME $ 2,300 $ 2,084 $ 7,029 $ 6,210
PROVISIONS FOR LOAN LOSSES 90 59 358 115
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $ 2,210 $ 2,025 $ 6,671 $ 6,095
------- ------- ------- -------
NON-INTEREST INCOME:
SERVICE FEES $ 346 $ 198 $ 1,000 $ 598
INSURANCE AND ANNUITY COMMISSIONS 40 61 153 176
NET GAIN (LOSS) ON SALE OF SECURITIES 0 34 0 33
NET GAIN (LOSS) ON SALE OF FIXED ASSETS 0 0 0 0
OTHER 57 11 94 38
------- ------- ------- -------
TOTAL NON-INTEREST INCOME $ 443 $ 304 $ 1,247 $ 845
------- ------- ------- -------
NON-INTEREST EXPENSE:
COMPENSATION AND BENEFITS $ 1,006 $ 1,014 $ 3,298 $ 3,276
OCCUPANCY 125 74 362 218
EQUIPMENT AND FURNISHING 145 114 402 333
DATA PROCESSING 132 117 438 360
FEDERAL DEPOSIT INSURANCE PREMIUMS 23 22 68 67
GOODWILL & CORE DEPOSIT INTANGIBLE 109 0 304 0
OTHER 517 331 1,678 943
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE $ 2,057 $ 1,672 $ 6,550 $ 5,197
------- ------- ------- -------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY
ITEM, AND CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLE $ 596 $ 657 $ 1,368 $ 1,743
PROVISION FOR INCOME TAXES 185 271 456 697
------- ------- ------- -------
NET INCOME $ 411 $ 386 $ 912 $ 1,046
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.19 $ 0.18 $ 0.42 $ 0.49
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.19 $ 0.18 $ 0.40 $ 0.48
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4 <PAGE>
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
NET INCOME $ 411 $ 386 $ 912 $ 1,046
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
INCOME AT ACQUISITION OF ABI 0 0 0 (54)
PROVISION FOR DEPRECIATION 132 76 380 225
PROVISION FOR LOAN LOSSES 90 59 358 115
ACCRETION OF DISCOUNTS ON SECURITIES (39) (15) (92) (34)
AMORTIZATION OF PREMIUMS ON SECURITIES 9 12 32 29
AMORTIZATION OF MRP (24) 62 101 310
AMORTIZATION OF GOODWILL & CORE DEPOSIT INTANGIBLES 109 15 304 20
(INCREASE) DECREASE IN ACCRUED INTEREST RECEIVABLE 173 (660) (224) (1,192)
(INCREASE) DECREASE IN OTHER ASSETS (516) 43 (209) (790)
(DECREASE) INCREASE IN ACCRUED INCOME TAXES (19) 91 33 581
(INCREASE) DECREASE IN DEFERRED INCOME TAXES 71 80 67 108
INCREASE (DECREASE) IN ACCRUED INTEREST PAYABLE 50 102 275 192
INCREASE (DECREASE) IN OTHER LIABILITIES 22 277 (302) (1,099)
LOSS (GAIN) ON SALE OF SECURITIES AND MORTGAGE-BACKED
AND RELATED SECURITIES 0 (34) 0 (33)
LOSS (GAIN) IN SALE OF PREMISES AND EQUIPMENT 0 0 0 0
-------- -------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ 469 $ 494 $ 1,635 $ (576)
-------- -------- -------- --------
INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 0 1,000 0 1,000
PROCEEDS FROM SALES OF SECURITIES HELD TO MATURITY 0 0 0 0
PROCEEDS FROM MATURITIES OF SECURITIES HELD TO MATURITY 2,324 (86) 11,267 126
PROCEEDS FROM MATURITIES OF SECURITIES
AVAILABLE FOR SALE 24,349 8,382 45,828 10,185
PROCEEDS FROM SALES OF MORTGAGE-BACKED AND RELATED
SECURITIES 0 649 0 649
PURCHASE OF MORTGAGE-BACKED AND RELATED SECURITIES (14,923) 0 (14,923) 0
PURCHASE OF SECURITIES AVAILABLE FOR SALE (12,500) (24,874) (52,465) (44,333)
PURCHASE OF SECURITIES HELD TO MATURITY 0 (290) (11,975) (290)
PROCEEDS FROM MATURING TIME DEPOSITS 0 0 0 0
PURCHASE OF LOANS 0 0 0 0
DECREASE (INCREASE) IN LOAN RECEIVABLE (2,605) (313) 4,600 (10,258)
PRINCIPAL COLLECTED ON MORTGAGE-BACKED AND RELATED
SECURITIES 1,976 1,886 7,622 4,248
DECREASE (INCREASE) IN FORECLOSED REAL ESTATE 403 (13) (175) (86)
PURCHASE OF PREMISES AND EQUIPMENT (588) (105) (1,385) (1,070)
PROCEEDS FROM SALE OF EQUIPMENT 0 0 0 5
PURCHASE OF FEDERAL HOME LOAN BANK STOCK 0 (875) (305) (1,080)
PURCHASE OF FEDERAL RESERVE BANK STOCK 0 0 0 0
PROCEEDS FROM SALE OF FEDERAL HOME LOAN BANK STOCK 0 0 0 0
-------- -------- -------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES $ (1,564) $(14,639) $(11,911) $(40,904)
-------- -------- -------- --------
</TABLE>
5<PAGE>
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
NET INCREASE (DECREASE) IN DEPOSITS $ 3,041 $(1,431) $ 8,116 $15,462
(DECREASE) INCREASE IN ADVANCES FROM BORROWERS
FOR TAXES AND INSURANCE (33) (19) (1) 17
INCREASE (DECREASE) IN BORROWINGS (2,704) 15,229 3,150 30,712
PROCEEDS FROM SALE OF STOCK 0 0 0 0
UNEARNED EMPLOYEE STOCK OWNERSHIP PLAN 0 30 52 35
MARKET ADJUSTMENT OF EMPLOYEE STOCK OWNERSHIP PLAN 0 141 0 167
PURCHASE OF SHARES FOR MRP (106) 0 (106) 0
MARKET ADJUSTMENT OF MRP 5 48 5 73
STOCK OPTION PLAN 35 0 (25) 0
PURCHASE OF TREASURY STOCK 0 (75) 0 (392)
------- ------- ------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES $ 238 $13,923 $11,191 $46,074
------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (857) (222) 915 4,594
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,496 17,434 26,724 12,618
------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $27,639 $17,212 $27,639 $17,212
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES:
ADDITIONAL CASH FLOWS INFORMATION:
CASH PAID FOR:
INTEREST ON DEPOSITS, ADVANCES AND
OTHER BORROWINGS $ 2,268 $ 2,126 $ 8,808 $ 5,865
INCOME TAXES:
FEDERAL $ 161 $ 180 $ 381 $ 180
STATE $ 20 $ 0 $ 40 $ 0
SCHEDULE OF NONCASH INVESTING ACTIVITIES:
STOCK DIVIDENDS DISTRIBUTED BY THE
FEDERAL HOME LOAN BANK OF CHICAGO $ 0 $ 0 $ 0 $ 0
SECURITIES, MORTGAGE-BACKED AND RELATED SECURITIES
TRANSFERRED TO AVAILABLE FOR SALE $ 0 $ 0 $ 0 $ 0
CHANGE IN UNREALIZED GAIN (LOSS)
ON SECURITIES AVAILABLE FOR SALE $ 208 $ 126 $ 133 $ 165
CHANGE IN DEFERRED INCOME TAXES
ATTRIBUTED TO UNREALIZED GAIN (LOSS)
ON SECURITIES AVAILABLE FOR SALE $ (59) $ (41) $ (38) $ (67)
</TABLE>
6<PAGE>
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL UNALLOCATED UNALLOCATED OTHER COMPRE-
COMMON PAID-IN TREASURY ESOP MRP RETAINED COMPREHENSIVE HENSIVE
STOCK CAPITAL STOCK SHARES SHARES EARNINGS INCOME TOTAL INCOME
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1997 $26 $25,754 ($3,803) ($1,428) ($ 750) $15,917 $11 $35,727
COMPREHENSIVE INCOME
NET INCOME $912 $912 $ 912
------
OTHER COMPREHENSIVE INCOME
UNREALIZED GAINS (LOSS)
ON SECURITIES $133
RELATED TAX EFFECTS ($38)
------
OTHER COMPREHENSIVE INCOME $95 $95 $95
------
COMPREHENSIVE INCOME $1,007
======
SALE OF COMMON STOCK $0
UNALLOCATED ESOP SHARES $52 $52
SHARES HELD FOR
FOR MANAGEMENT
RECOGNITION PLAN $101 $101
TREASURY STOCK $0
ESOP SOP 93-6
ADJUSTMENT 35 $35
STOCK OPTION PLAN ($60) ($60)
DIVIDENDS $0
-----------------------------------------------------------------------------
BALANCE
SEPTEMBER 30, 1998 $26 $25,729 ($3,803) ($1,376) ($649) $16,829 $106 $36,862
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7<PAGE>
<PAGE>
COMMUNITY FINANCIAL CORP. and SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) DESCRIPTION OF THE BUSINESS
Community Financial Corp. (the Company), an Illinois
corporation, is a bank holding company for Community Bank &
Trust, N.A., American Bancshares, Inc., Saline County State
Bank, Egyptian State Bank, and MidAmerica Bank of St. Clair
County. Community Financial Corp. is primarily engaged in
the business of directing, planning and coordinating the
business activities of its subsidiaries, which primarily
consist of accepting deposits from the general public
through its subsidiaries and investing these funds in loans
in their market areas and investment securities and
mortgage-backed securities.
(2) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements were prepared in accordance with instructions
for Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete
presentation of financial position, results of operations,
changes in stockholders' equity, and cash flows in
conformity with generally accepted accounting principles.
However, all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management,
are necessary for a fair presentation of the unaudited
consolidated financial statements, have been included in
the results of operations for the three months ended and
nine months ended September 30, 1998 and 1997.
(3) PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial
statements include the accounts of Community Financial
Corp., Community Bank & Trust, N.A., American Bancshares,
Inc. and its wholly owned subsidiary, American Bank of
Illinois, Saline County State Bank, Egyptian State Bank,
and MidAmerica Bank of St. Clair County. All significant
intercompany items have been eliminated.
(4) NEW ACCOUNTING STANDARDS
The Company adopted FASB Statement No. 130, Reporting
Comprehensive Income, during the first quarter of 1998. The
statement establishes standards for reporting and display
of comprehensive income and its components. Comprehensive
income includes net income and other comprehensive income,
which for the Company includes unrealized gains and losses
on securities available for sale.
The following table presents comprehensive income for the
three months and nine months periods ending September 30,
1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------ -----------------
<S> <C> <C> <C> <C>
Other Comprehensive Income
Unrealized gains (loss)
on securities $ 208 $ 208 $ 133 $ 273
Related tax effect (59) (82) (38) (108)
------ ----- ------- -------
Other Comprehensive Income $ 149 $ 126 $ 95 $ 165
Net Income 411 386 912 1,046
------- ----- ------- -------
Comprehensive Income $ 560 $ 512 $1,007 $ 1,211
====== ===== ======= =======
</TABLE>
8<PAGE>
(5) EARNINGS PER SHARE
<TABLE>
<CAPTION>
Income Shares Per Share
Amount
--------------------------------------------
For the three months ended September 30, 1998
---------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Income available to Common
Shareholders $ 411,000 2,166,457 $ 0.19
Effect of dilutive activities:
Stock options 28,740
Management recognition plan 7,539
Dilutive earnings per share:
Income available to Common
Shareholders $ 411,000 2,202,736 $ 0.19
Restated for the three months ended September 30, 1997
------------------------------------------------------
Basic earnings per share:
Income available to Common
Shareholders $ 386,000 2,134,055 $ 0.18
Effect of dilutive activities:
Stock options 51,357
Management recognition plan 16,093
Dilutive earnings per share:
Income available to Common
Shareholders $ 386,000 2,201,505 $ 0.18
For the nine months ended September 30, 1998
--------------------------------------------
Basic earnings per share:
Income available to Common
Shareholders $ 912,000 2,166,457 $ 0.42
Effect of dilutive activities:
Stock options 67,757
Management recognition plan 17,773
Dilutive earnings per share:
Income available to Common
Shareholders $ 912,000 2,251,987 $ 0.40
Restated for the nine months ended September 30, 1997
-----------------------------------------------------
Basic earnings per share:
Income available to Common
Shareholders $1,046,000 2,142,714 $ 0.49
Effect of dilutive activities:
Stock options 35,024
Management recognition plan 10,975
Dilutive earnings per share:
Income available to Common
Shareholders $1,046,000 2,188,713 $ 0.48
</TABLE>
9
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings by the Company
with the Securities and Exchange Commission, in the Company's
press releases or other public or shareholder communications, or
in oral statements made with the approval of an authorized
executive officer, the words or phrases "would be," "will
allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in
economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition,
all or some of which could cause actual results to differ
materially from historical earnings and those presently
anticipated or projected.
The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak
only as of the date made, and advises readers that various
factors, including regional and national economic conditions,
substantial changes in levels of market interest rates, credit
and other risks of lending and investment activities and
competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual
results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the
date of such statements.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND
DECEMBER 31, 1997.
Total assets increased by $12.4 million, or 4.1%, from $304.3
million at December 31, 1997 to $316.7 million at September 30,
1998. Total cash and cash equivalents (which includes federal
funds sold) increased by $ 900,000 or 3.4% from $26.7 million at
December 31, 1997 to $27.6 million at September 30, 1998. The
Company's loan portfolio decreased by $4.6 million, or 2.8%
from $162.3 million at December 31, 1997 to $157.7 million at
September 30, 1998. The decrease was primarily caused by
declines in real estate lending ($1.8 million decline) and
installment lending ($2.0 million decline). Securities available
for sale increased by $6.7 million or 11.7% from $57.3 million
at December 31, 1997 to $64.0 million at September 30, 1998.
Mortgage-backed and related securities available for sale
increased by $7.8 million or 32.7% from $23.9 million at
December 31, 1997 to $31.7 million at September 30, 1998. The
increase in the investments available for sale portfolio was
funded by an increase in deposits of $8.1 million or 3.7% from
$218.9 million at December 31, 1997 to $227.0 million at
September 30, 1998 and an increase in Federal Home Loan Bank
advances of $5.0 million or 13.5% from $37.0 million at December
31, 1997 to $42.0 million at September 31, 1998. The increase
in deposits is due primarily to an increase in money market
demand accounts of $2.4 million and certificates of deposits
less than $100,000 increasing $5.3 million. The $5.0 million
advance from the Federal Home Loan Bank with a cost of 5.3% was
used as leverage to purchase an investment with similar call
options and maturity with a yield of 6.2%. During the nine
months ended September 30, 1998, the Company's portfolio of
investment securities and mortgage-backed and related
securities, classified as available for sale pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 115,
increased capital by $106,000 (net of taxes) as a result of an
increase in the market value. Total liabilities increased by
$11.3 million or 4.2% from $268.5 million at December 31, 1997
to $279.8 million at September 30, 1998. The increase was
primarily due to an increase of $8.1 million in deposits and
an increase in Federal Home Loan Bank advances of $5.0 million.
10
<PAGE>
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.
NET INCOME. Net income increased by $25,000 or 6.5%, from
$386,000 for the three months ended September 30, 1997, to
$411,000 for the three months ended September 30, 1998. The
results of operations for the three months ended September 30,
1997 does not reflect all the acquisitions made in 1997 while
the results for the three months ended September 30, 1998
includes all acquisitions. The following represents acquisition
costs that are reported for the three months ended September
30, 1998: interest cost of $125,000 on funds borrowed to make
acquisitions in 1997 and $109,000 on amortization of goodwill
and core deposit intangibles.
Net income was $912,000 for the nine months ended September 30,
1998, as compared to $1.0 million for the nine months ended
September 30, 1997. This represents a decrease of $134,000, or
12.8%. The results of operations for the nine months ended
September 30, 1997 does not reflect all the acquisitions made in
1997 while the results for the nine months ended September 30,
1998 includes all acquisitions. The decrease is partly due to an
increase in provisions for loan losses of $243,000 or 211.3%,
from $115,000 for the nine months ended September 30, 1997 to
$358,000 for the nine months ended September 30, 1998. The
increase in the provision for loan losses is the result of the
acquisitions made in 1997 as the loan review process determined
that the reserves for the acquired banks was not in compliance
with the Company's policies. In the first quarter of 1998 was
the final non-recurring pre-tax charge of $147,000 to terminate
the defined benefit plan. The following represents acquisition
costs that are reported for the nine months ended September 30,
1998: interest cost of $244,000 on funds borrowed to make
acquisitions in 1997 and $304,000 on goodwill and core deposit
intangibles.
NET INTEREST INCOME. Net interest income was $2.3 million for
the three months ended September 30, 1998 as compared to $2.0
million for the three months ended September 30, 1997. This
represents an increase of $216,000, or 10.4%. The increase was
due to an increase in volume as the average interest earning
assets increased by $76.9 million or 35.1%, from $218.8 million
for the three months ended September 30, 1997 to $295.7 million
for the three months ended September 30, 1998 while the average
yield declined from 7.9% to 7.6% for the three months ended
September 30, 1997 and 1998 respectively. The average balance of
interest bearing liabilities increased $76.4 million or 41.4%,
from $184.6 million for the three months ended September 30,
1997 to $261.0 million for the three months ended September 30,
1998 while the average cost of funds increased from 4.8% to 5.0%
for the three months ended September 30, 1997 and 1998
respectively.
Net interest income was $7.0 million for the nine months ended
September 30, 1998, as compared to $6.2 million for the nine
months ended September 30, 1997. This represents an increase of
$819,000, or 13.2%. The increase was due to an increase in
volume as the average interest earning assets increased $83.5
million or 40.6%, from $205.5 million for the nine months ended
September 30, 1997 to $289.0 million for the nine months ended
September 30, 1998 while the average yield declined from 8.0% to
7.7% for the nine months ended September 30, 1997 and 1998,
respectively. The average balance of interest bearing
liabilities increased $88.4 million or 52.7%, from $167.7
million for the nine months ended September 30, 1997 to $256.1
million for the nine months ended September 30, 1998 while the
average cost of funds increased from 4.8% to 5.0% for the nine
months ended September 30, 1997 and 1998, respectively.
INTEREST INCOME. Interest income was $5.6 million for the
three months ended September 30, 1998, as compared to $4.3
million for the three months ended September 30, 1997,
representing an increase of $1.3 million, or 29.1%. Interest
income on loans increased $464,000 or 15.5%, from $3.0 million
for the three months ended September 30, 1997 to $3.5 million
for the three months ended September 30, 1998. The increase in
loan interest is due to a volume increase in the average balance
of loans of $22.5 million or 16.5%, from $136.4 million for the
three months ended September 30, 1997 to $158.9 million for the
three months ended September 30, 1998. Interest on investments
and interest-bearing deposits increased $817,000, or 88.3%, from
$925,000 for the three months ended September 30, 1997 to $1.7
million for the three months ended September 30, 1998.The
increase in investments and interest-earning deposits is due to
a volume increase in the average balance of $48.3 million or
89.0%, from $54.3 million for the three months ended September
30, 1997 to $102.6 million for the three months ended September
30, 1998 while the average yield remained the same at 6.8%.
11
<PAGE>
<PAGE>
Interest income was $16.6 million for the nine months ended
September 30, 1998, as compared to $12.3 million for the nine
months ended September 30, 1997, representing an increase of
$4.3 million, or 35.4%. The increase was primarily due to a
volume increase in the average earning assets of $83.5 million,
or 40.6% from $205.5 million for the nine months ended September
30, 1997 to $289.0 million for the nine months ended September
30, 1998, as the yield decreased from 8.0% to 7.7% for the nine
months ended September 30, 1997 and 1998, respectively.
Interest on loans increased $1.6 million or 18.0%, from $8.9
million for the nine months ended September 30, 1997 to $10.5
million for the nine months ended September 30, 1998. The
increase was due to a volume increase in average loans of $26.4
million or 20.0%, from $131.8 million for the nine months ended
September 30, 1997 to $158.2 million for the nine months ended
September 30, 1998 while the average yield decreased from 9.0%
to 8.8 % for the nine months ended September 30, 1997 and 1998,
respectively. Interest on investments and interest-bearing
deposits increased $3.0 million or 140.7%, from $2.1 million for
the nine months ended September 30, 1997 to $5.1 million for the
nine months ended September 30, 1998. The increase was primarily
the result of a volume increase in the average balance of
investments and interest-bearing deposits of $59.0 million or
149.0%, from $39.6 million for the nine months ended September
30, 1997 to $98.6 million for the nine months ended September
30, 1998 while the yield decreased from 7.2% to 6.9% for the
nine months ended September 30, 1997 and 1998, respectively.
INTEREST EXPENSE. Interest expense increased by $1.0 million
or 51.3%, from $2.2 million for the three months ended September
30, 1997 to $3.3 million for the three months ended September
30, 1998. The increase is primarily due to the increase of
interest on deposits in the amount of $821,000 or 48.1%, from
$1.7 million for the three months ended September 30, 1997 to
$2.5 million for the three months ended September 30, 1998. The
increase is due to a volume increase in the average balance of
deposits of $59.1 million or 39.5%, from $149.5 million for the
three months ended September 30, 1997 to $208.6 million for the
three months ended September 30, 1998. Interest on other
borrowed funds increased $218,000, or 41.8%, from $521,000 for
the three months ended September 30, 1997 to $739,000 for the
three months ended September 30, 1998. This increase reflects
the increased average balance in Federal Home Loan Bank Advances
as the Company leveraged these funds with higher yielding assets
with corresponding call options and maturities.
Interest expense increased by $3.5 million or 58.2%, from $6.1
million for the nine months ended September 30, 1997 to $9.6
million for the nine months ended September 30, 1998. The
increase was partly due to the increase of $2.3 million or 44.7%
in interest on deposits from $5.1 million for the nine months
ended September 30, 1997 to $7.4 million for the nine months
ended September 30, 1998. The increase is due to a volume
increase on average deposits of $60.2 million or 41.1%, from
$146.4 million for the nine months ended September 30, 1997 to
$206.6 million for the nine months ended September 30, 1998.
Interest expense on other borrowed funds increased $1.3 million
or 128.5%, from $1.0 million for the nine months ended September
30, 1997 to $2.2 million for the nine months ended September 30,
1998. This increase reflects the increased average balance in
Federal Home Loan Bank Advances as the Company leveraged these
funds with higher yielding assets with corresponding call
options and maturities.
PROVISION FOR LOAN LOSSES. The Company established provisions
for loan losses of $90,000 and $59,000 for the three months
ended September 30, 1998 and 1997, respectively. For the first
nine months ended September 30, 1998 and 1997, respectively, the
provision account has been charged $358,000 and $115,000. The
Company's provisions for loan losses has been increased to
maintain reserves at current policy limits.
NON-INTEREST INCOME. Non-interest income increased by $139,000
or 45.7%, from $304,000 for the three months ended September 30,
1997 to $443,000 for the three months ended September 30, 1998.
Of the increase, $74,000 was due to the acquisitions made in
1997 reflecting on the 1998 balances.
Non-interest income increased by $402,000 or 47.6%, from
$845,000 for the nine months ended September 30, 1997 to $1.2
million for the nine months ended September 30, 1998. Of the
increase, $196,000 was due to the acquisitions made in 1997
reflecting on the 1998 balances.
12
<PAGE>
<PAGE>
NON-INTEREST EXPENSE. Non-interest expense increased by
$385,000, or 23.0%, from $1.7 million for the three months
ended September 30, 1997 to $2.1 million for the three months
ended September 30, 1998. Of the increase, $485,000 was
contributed by the acquisitions made in 1997 reflecting on the
1998 balances.
Non-interest expense increased by $1.4 million, or 26.0%, from
$5.2 million for the nine months ended September 30, 1997 to
$6.6 million for the nine months ended September 30, 1998. Of
the increase, $1.9 million was contributed by the acquisitions
made in 1997 reflecting on the 1998 balances. In addition,
during the first quarter of 1998, a non-recurring pre-tax
expense of $147,000 to close the defined benefit plan was
recorded.
INCOME TAX EXPENSE. The Company's income tax expense was
estimated at $185,000 and $271,000 for the three months ended
September 30, 1998 and 1997, respectively. For the nine months
ended September 30, 1998 and 1997, income taxes were estimated
to be $456,000 and $697,000, respectively.
13<PAGE>
<PAGE>
POSSIBLE YEAR 2000 COMPUTER PROGRAM PROBLEMS
A great deal of information has been disseminated about the
global computer crash that may occur in the year 2000. Many
computer programs that can only distinguish the final two digits
of the year entered (a common programming practice in earlier
years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on
the wrong date or are expected to be unable to compute payment,
interest or delinquency. Rapid and accurate data processing is
essential to the operations of the Company. Data processing is
also essential to most other financial institutions and many
other companies.
The Company has conducted a comprehensive review of its
computer system to identify applications that could be affected
by the "Year 2000" issue, and has developed an implementation
plan to address the issue. All of the material data processing
of the Company that could be affected by this problem is
provided by third party suppliers. Management closely monitors
the progress of the suppliers in resolving this potential
problem and reports the status of their progress to the Board of
Directors on a monthly basis. The suppliers have advised the
Company that they expect to resolve this potential problem
before the year 2000 by completing all implementation procedures
by December 31, 1998 to allow for testing to occur in 1999.
However, if any of the suppliers are unable to resolve this
potential problem in time and the Company is unable to find an
alternative supplier, the Company would likely experience
significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse
impact on the financial condition and results of operations of
the Company. The Company has projected that the expenses should
not exceed $151,000 for completion of the plan. The Company has
also contacted its commercial and agricultural borrowers, with
indebtedness to the company of $250,000 for Community Bank &
Trust NA and $100,000 or more for all other affiliates,
concerning their compliance with the "Year 2000" issue.
LIQUIDITY AND CAPITAL RESOURCES
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
payments 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 origination of loans and purchases of mortgage-backed
and related securities. The primary financing activity of the
Company 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 $95.7 million at September 30, 1998
classified as available for sale. Another source of liquidity is
the Bank's ability to obtain advances from the FHLB of Chicago.
In addition, the Company maintains a significant portion of its
investments in interest-bearing deposits at other financial
institutions that will be available when needed.
The Company anticipates that it will have sufficient funds
available to meet commitments outstanding and to meet loan
demands. As of September 30, 1998, the Company's ratios of Tier
1 capital to average total assets was 10.0%, as compared to the
required level of 4.0%, respectively. The risk-based capital
ratio at that date was 21.2%, as compared to the requirement of
8.0%.
RECENT DEVELOPMENTS
American Bank of Highland has experienced a 42% growth rate
since being acquired by the Company in May of 1997 with total
assets at September 30, 1998 being $26.9 million. With this
growth rate and the expectation of further growth, it has become
necessary to expand the size of the facility. The present
building is owned by the Bank but the land is leased. The Bank
has purchased the land for $350,000 and entered into a
construction contract to renovate and add-on to the existing
building at a cost not to exceed $837,000 which includes new
bank equipment. The expected completion date for the project is
late fourth quarter 1998. The amortization of the new facility
will approximate the annual cost of the land lease. The Bank
will remain open during the construction and renovation.
14<PAGE>
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibit is filed herewith:
(a) Exhibit 27.1 Financial Data Schedule for the nine
month period ended September 30, 1998
Exhibit 27.2 Restated Financial Data Schedule for the
nine month period ended September 30,
1997
Exhibit 27.3 Restated Financial Data Schedule for the
six month period ended June 30, 1997
Exhibit 27.4 Restated Financial Data Schedule for the
three month period ended March 31, 1997
(b) Reports on Form 8-K. None.
15<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the 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.
Date: November 13, 1998 /s/ Wayne H. Benson
-------------------
Wayne H. Benson
(Chief Executive Officer)
Date: November 13, 1998 /s/ Douglas W. Tompson
----------------------------
Douglas W. Tompson
(Principal Financial Officer)
16
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