<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
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 June 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 August 12, 1998, the Registrant had 2,360,612 shares
of Common Stock issued and outstanding.
<PAGE>
<PAGE>
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 . . . . . 3
Consolidated Statements of Income for
the Three-Month and Six-Month Periods
Ended June 30, 1998 and 1997 . . . . . . . . 4
Consolidated Statements of Cash Flows
for the Three-Month and Six-Month
Periods Ended June 30, 1998 and 1997 . . . . 5
Consolidated Statements of Stockholders'
Equity for the Six-Month Period
Ended June 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 . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . 14
Item 4. Submission of Matters to a Vote of
Security-Holders. . . . . . . . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
ASSETS 1998 1997
- ------ --------- ---------
<C> <C> <C>
CASH AND CASH EQUIVALENTS:
CASH $ 5,541 $ 8,607
INTEREST BEARING DEPOSITS 22,955 18,117
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 28,496 26,724
TIME DEPOSITS 0 0
SECURITIES AVAILABLE FOR SALE (amortized cost 75,658 57,283
of $75,787 (1998) and $57,282 (1997))
SECURITIES HELD TO MATURITY (estimated market value 21,326 18,318
of $21,430 (1998) and $18,403 (1997))
MORTGAGE-BACK & RELATED SECURITIES AVAILABLE FOR SALE 18,412 23,895
(amortized cost of $18,358 (1998) and $23,878(1997))
MORTGAGE-BACK & RELATED SECURITIES HELD TO MATURITY 681 891
(estimated market value of $710 (1998) and $927 (1997))
LOANS RECEIVABLE, net 155,113 162,318
FORECLOSED REAL ESTATE, net 704 126
REAL ESTATE HELD FOR SALE 0 0
ACCRUED INTEREST RECEIVABLE 3,072 2,675
PREMISES AND EQUIPMENT, net 6,402 5,853
PREPAID INCOME TAXES 0 0
DEFERRED INCOME TAXES 293 289
GOODWILL 4,979 5,109
CORE DEPOSIT INTANGIBLE 512 527
OTHER ASSETS 95 257
--------- ---------
TOTAL ASSETS $ 315,743 $ 304,265
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
DEPOSITS $ 223,990 $ 218,915
FEDERAL HOME LOAN BANK ADVANCES 44,100 37,000
REPURCHASE AGREEMENTS 5,077 5,323
OTHER BORROWINGS 4,600 5,600
ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE 73 41
ACCRUED INTEREST PAYABLE 682 457
ACCRUED INCOME TAXES 98 46
OTHER LIABILITIES 832 1,156
--------- ---------
TOTAL LIABILITIES $ 279,452 $ 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 JUNE 30, 1998
AND DECEMBER 31, 1997 $ 26 $ 26
ADDITIONAL PAID-IN CAPITAL 25,694 25,754
TREASURY STOCK (3,803) (3,803)
UNALLOCATED ESOP SHARES (1,376) (1,428)
SHARES HELD FOR MANAGEMENT RECOGNITION PLAN (625) (750)
RETAINED EARNINGS 16,418 15,917
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) NET OF RELATED
TAXES OF $32 AND ($7) AT JUNE 30, 1998 AND DECEMBER 31, 1997 (43) 11
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 36,291 $ 35,727
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 315,743 $ 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
INTEREST ON LOANS $ 3,467 $ 2,966 $ 7,000 $ 5,866
INTEREST ON MORTGAGE-BACKED AND RELATED SECURITIES 272 430 649 881
INTEREST ON INVESTMENTS AND INTEREST-BEARING DEPOSITS 1,807 735 3,395 1,209
-------- -------- -------- --------
TOTAL INTEREST INCOME $ 5,546 $ 4,131 $ 11,044 $ 7,956
-------- -------- -------- --------
INTEREST EXPENSE:
INTEREST ON DEPOSITS $ 2,445 $ 1,720 $ 4,828 $ 3,376
INTEREST ON OTHER BORROWED FUNDS 738 282 1,487 453
-------- -------- -------- --------
TOTAL INTEREST EXPENSE $ 3,183 $ 2,002 $ 6,315 $ 3,829
-------- -------- -------- --------
NET INTEREST INCOME $ 2,363 $ 2,129 $ 4,729 $ 4,127
PROVISIONS FOR LOAN LOSSES 132 22 $ 268 $ 56
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $ 2,231 $ 2,107 $ 4,461 $ 4,071
-------- -------- -------- --------
NON-INTEREST INCOME:
SERVICE FEES $ 332 $ 204 $ 654 $ 400
INSURANCE AND ANNUITY COMMISSIONS 71 72 113 115
NET GAIN (LOSS) ON SALE OF SECURITIES 0 (1) 0 (1)
NET GAIN (LOSS) ON SALE OF FIXED ASSETS 0 0 0 0
OTHER 23 7 37 27
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME $ 426 $ 282 $ 804 $ 541
-------- -------- -------- --------
NON-INTEREST EXPENSE:
COMPENSATION AND BENEFITS $ 1,029 $ 815 $ 2,292 $ 2,262
OCCUPANCY 117 72 237 144
EQUIPMENT AND FURNISHING 123 115 257 219
DATA PROCESSING 153 119 306 243
FEDERAL DEPOSIT INSURANCE PREMIUMS 23 23 45 45
GOODWILL & CORE DEPOSIT INTANGIBLE 105 5 195 5
OTHER 569 260 1,161 608
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE $ 2,119 $ 1,409 $ 4,493 $ 3,526
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY
ITEM, AND CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLE $ 538 $ 980 $ 772 $ 1,086
PROVISION FOR INCOME TAXES 191 397 271 426
-------- -------- -------- --------
NET INCOME $ 347 $ 583 $ 501 $ 660
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.16 $ 0.27 $ 0.23 $ 0.30
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.15 $ 0.27 $ 0.22 $ 0.29
======== ======== ======== ========
</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 SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
NET INCOME $ 348 $ 583 $ 501 $ 660
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
INCOME AT ACQUISITION OF ABI 0 (19) 0 (54)
PROVISION FOR DEPRECIATION 124 62 248 149
PROVISION FOR LOAN LOSSES 133 23 268 56
ACCRETION OF DISCOUNTS ON SECURITIES (23) (8) (53) (19)
AMORTIZATION OF PREMIUMS ON SECURITIES (10) 9 23 17
AMORTIZATION OF MRP 63 63 125 248
AMORTIZATION OF GOODWILL & CORE DEPOSIT INTANGIBLES 105 5 195 5
(INCREASE) DECREASE IN ACCRUED INTEREST RECEIVABLE (608) (534) (397) (532)
(INCREASE) DECREASE IN OTHER ASSETS 371 (796) 307 (833)
(DECREASE) INCREASE IN ACCRUED INCOME TAXES (48) 469 52 490
(INCREASE) DECREASE IN DEFERRED INCOME TAXES (9) 134 (4) 28
INCREASE (DECREASE) IN ACCRUED INTEREST PAYABLE 47 16 225 90
INCREASE (DECREASE) IN OTHER LIABILITIES 27 (662) (324) (1,376)
LOSS (GAIN) ON SALE OF SECURITIES AND MORTGAGE-BACKED
AND RELATED SECURITIES 0 1 0 1
LOSS (GAIN) IN SALE OF PREMISES AND EQUIPMENT 0 0 0 0
------- -------- ------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ 520 $ (654) $ 1,166 $ (1,070)
------- -------- ------- --------
INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 0 0 0 0
PROCEEDS FROM SALES OF SECURITIES HELD TO MATURITY 0 0 0 0
PROCEEDS FROM MATURITIES OF SECURITIES
HELD TO MATURITY 2,141 0 8,943 212
PROCEEDS FROM MATURITIES OF SECURITIES
AVAILABLE FOR SALE 8,385 0 21,479 1,803
PROCEEDS FROM SALES OF MORTGAGE-BACKED AND RELATED
SECURITIES 142 0 2,145 0
PURCHASE OF MORTGAGE-BACKED AND RELATED SECURITIES 0 0 0 0
PURCHASE OF SECURITIES AVAILABLE FOR SALE (16,291) (16,420) (39,965) (19,459)
PURCHASE OF SECURITIES HELD TO MATURITY (3,575) 0 (11,975) 0
PROCEEDS FROM MATURING TIME DEPOSITS 0 0 0 0
PURCHASE OF LOANS 0 0 0 0
DECREASE (INCREASE) IN LOAN RECEIVABLE 2,290 (11,628) 7,205 (9,945)
PRINCIPAL COLLECTED ON MORTGAGE-BACKED AND RELATED
SECURITIES 2,178 1,342 3,501 2,362
DECREASE (INCREASE) IN FORECLOSED REAL ESTATE 90 (2) (578) (73)
PURCHASE OF PREMISES AND EQUIPMENT (672) (802) (797) (965)
PROCEEDS FROM SALE OF EQUIPMENT 0 5 0 5
PURCHASE OF FEDERAL HOME LOAN BANK STOCK (94) (205) (305) (205)
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 $(5,406) $(27,710) $(10,347) $(26,265)
------- -------- ------- --------
</TABLE>
5<PAGE>
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
NET INCREASE (DECREASE) IN DEPOSITS $ 6,601 $ 17,564 $ 5,075 $ 16,893
(DECREASE) INCREASE IN ADVANCES FROM BORROWERS
FOR TAXES AND INSURANCE 5 9 32 36
INCREASE (DECREASE) IN BORROWINGS 160 17,141 5,854 15,483
PROCEEDS FROM SALE OF STOCK 0 0 0 0
UNEARNED EMPLOYEE STOCK OWNERSHIP PLAN 52 0 52 5
MARKET ADJUSTMENT OF EMPLOYEE STOCK OWNERSHIP PLAN 0 0 0 26
PURCHASE OF SHARES FOR MRP 0 0 0 0
MARKET ADJUSTMENT OF MRP 0 0 0 25
STOCK OPTION PLAN 0 0 (60) 0
PURCHASE OF TREASURY STOCK 0 (73) 0 (317)
-------- -------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES $ 6,818 $ 34,641 $ 10,953 $ 32,151
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,932 6,277 1,772 4,816
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,564 11,157 26,724 12,618
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,496 $ 17,434 $ 28,496 $ 17,434
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES:
ADDITIONAL CASH FLOWS INFORMATION:
CASH PAID FOR:
INTEREST ON DEPOSITS, ADVANCES AND
OTHER BORROWINGS $ 3,230 $ 2,119 $ 6,540 $ 3,739
INCOME TAXES:
FEDERAL $ 50 $ 0 $ 220 $ 0
STATE $ 20 $ 0 $ 20 $ 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 $ (135)$ 198 $ (75)$ 39
CHANGE IN DEFERRED INCOME TAXES
ATTRIBUTED TO UNREALIZED GAIN (LOSS)
ON SECURITIES AVAILABLE FOR SALE $ 57 $ (132) $ 21 $ (26)
</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 $501 $501 $501
----
OTHER COMPREHENSIVE INCOME
UNREALIZED GAINS (LOSS)
ON SECURITIES ($75)
RELATED TAX EFFECTS $21
----
OTHER COMPREHENSIVE INCOME ($54) ($54) ($54)
----
COMPREHENSIVE INCOME $447
====
SALE OF COMMON STOCK $0
UNALLOCATED ESOP SHARES $52 $52
SHARES HELD FOR
FOR MANAGEMENT
RECOGNITION PLAN $125 $125
TREASURY STOCK $0
ESOP SOP 93-6
ADJUSTMENT $0
STOCK OPTION PLAN ($60) ($60)
DIVIDENDS $0
-----------------------------------------------------------------------------
BALANCE
JUNE 30, 1998 $26 $25,694 ($3,803) ($1,376) ($625) $16,418 ($43) $36,291
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7<PAGE>
<PAGE>
COMMUNITY FINANCIAL CORP. and SUBSIDIARIES
Notes to Consolidated Financial Statements
June 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 six months ended June 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 six months periods ending June 30, 1998
and 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
------------------ -----------------
<S> <C> <C> <C> <C>
Other Comprehensive Income
Unrealized gains (loss)
on securities ($ 142) ($ 330) ($ 75) $ 65
Related tax effect 64 132 21 ( 26)
------------------ -----------------
Other Comprehensive Income ($ 78) ($ 198) ($ 54) $ 39
Net Income 347 583 501 660
------------------ -----------------
Comprehensive Income $ 269 $ 385 $ 447 $ 699
================== =================
</TABLE>
8<PAGE>
(5) EARNINGS PER SHARE
<TABLE>
<CAPTION>
Income Shares Per Share
Amount
--------------------------------------------
For the three months ended June 30, 1998
----------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Income available to Common
Shareholders $ 347,000 2,166,457 $ 0.16
Effect of dilutive activities:
Stock options 85,170
Management recognition plan 20,876
Dilutive earnings per share:
Income available to Common
Shareholders $ 347,000 2,272,503 $ 0.15
Restated for the three months ended June 30, 1997
-------------------------------------------------
Basic earnings per share:
Income available to Common
Shareholders $ 583,000 2,132,925 $ 0.27
Effect of dilutive activities:
Stock options 25,026
Management recognition plan 7,842
Dilutive earnings per share:
Income available to Common
Shareholders $ 583,000 2,165,793 $ 0.27
For the six months ended June 30, 1998
--------------------------------------
Basic earnings per share:
Income available to Common
Shareholder $ 501,000 2,166,457 $ 0.23
Effect of dilutive activities:
Stock options 82,323
Management recognition plan 20,178
Dilutive earnings per share:
Income available to Common
Shareholders $ 501,000 2,268,958 $ 0.22
Restated for the six months ended June 30, 1997
-----------------------------------------------
Basic earnings per share:
Income available to Common
Shareholders $ 660,000 2,230,420 $ 0.30
Effect of dilutive activities:
Stock options 25,585
Management recognition plan 8,017
Dilutive earnings per share:
Income available to Common
Shareholders $ 660,000 2,264,022 $ 0.29
</TABLE>
9
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER
31, 1997.
Total assets increased by $11.4 million, or 3.7%, from $304.3
million at December 31, 1997 to $315.7 million at June 30, 1998.
Total cash and cash equivalents (which includes federal funds
sold) increased by $1.8 million or 6.7% from $26.7 million at
December 31, 1997 to $28.5 million at June 30, 1998. The
Company's loan portfolio decreased by $7.2 million, or 4.4%
from $162.3 million at December 31, 1997 to $155.1 million at
June 30, 1998. The decrease was primarily caused by a soft
market in real estate lending ($3.5 million decline) and
installment lending ($2.6 million decline). Securities available
for sale increased by $18.4 million or 321.1% from $57.3 million
at December 31, 1997 to $75.7 million at June 30, 1998 due
primarily to a decrease of $5.5 million in mortgage-backed and
related securities, an increase of $5.1 million in deposits and
an increase in Federal Home Loan Bank advances of $7.0 million.
The $7.0 million advance from the Federal Home Loan Bank with a
cost of 5.3% was used as leverage to purchase investments with
similar call options and maturities with a yield of 6.2%.
Mortgage-backed and related securities available for sale
declined by $5.5 million or 22.9% from $23.9 million at December
31, 1997 to $18.4 million at June 30, 1998 as a result of
maturities and principal paybacks. During the six months ended
June 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, decreased capital by $43,000 (net of
taxes) as a result of a decrease in the market value. Total
liabilities increased by $11.0 million or 4.1% from $268.5
million at December 31, 1997 to $279.5 million at June 30, 1998.
The increase was primarily due to an increase of $5.1 million or
2.3% in deposits from $218.9 million at December 31, 1997 to
$224.0 million at June 30, 1998, and an increase in Federal Home
Loan Bank advances of $7.1 million or 19.2% from $37.0 million
at December 31, 1997 to $44.1 million at June 30, 1998.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 1998 AND 1997.
NET INCOME. Net income decreased by $236,000 or 40.5%, from
$583,000 for the three months ended June 30, 1997, to $347,000
for the three months ended June 30, 1998. The results of
operations for the three months ended June 30, 1997 does not
reflect all the acquisitions made in 1997 while the results for
the three months ended June 30, 1998 includes all acquisitions.
The decrease is partly due to an increase in provisions for loan
losses of $110,000 or 500.0%, from $22,000 for the three months
ended June 30, 1997 to $132,000 for the three months ended June
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 were inadequate. The
following represents acquisition costs that are reported for the
three months ended June 30, 1998: interest cost of $119,000 on
funds borrowed to make acquisitions in 1997 and $105,000 on
goodwill and core deposit intangibles.
Net income was $501,000 for the six months ended June 30, 1998,
as compared to $660,000 for the six months ended June 30, 1997.
This represents a decrease of $159,000, or 24.1%. The results of
operations for the six months ended June 30, 1997 does not
reflect all the acquisitions made in 1997 while the results for
the six months ended June 30, 1998 includes all acquisitions.
The decrease is partly due to an increase in provisions for loan
losses of $212,000 or 378.6%, from $56,000 for the six months
ended June 30, 1997 to $268,000 for the six months ended June
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 were inadequate. 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 six
months ended June 30, 1998: interest cost of $238,000 on funds
borrowed to make acquisitions in 1997 and $195,000 on goodwill
and core deposit intangibles.
10<PAGE>
<PAGE>
NET INTEREST INCOME. Net interest income was $2.4 million for
the three months ended June 30, 1998 as compared to $2.1 million
for the three months ended June 30, 1997. This represents an
increase of $234,000, or 11.0%. The increase was due to an
increase in volume as the average interest earning assets
increased by $88.1 million or 43.7%, from $201.5 million for the
three months ended June 30, 1997 to $289.6 million for the three
months ended June 30, 1998 while the average yield declined from
8.2% to 7.7% for the three months ended June 30, 1997 and 1998
respectively. The average balance of interest bearing
liabilities increased $80.5 million or 46.3%, from $174.1
million for the three months ended June 30, 1997 to $254.6
million for the three months ended June 30, 1998 while the
average cost of funds increased from 4.6% to 5.0% for the three
months ended June 30, 1997 and 1998 respectively.
Net interest income was $4.7 million for the six months ended
June 30, 1998, as compared to $4.1 million for the six months
ended June 30, 1997. This represents an increase of $602,000, or
14.6%. The increase was due to an increase in volume as the
average interest earning assets increased $86.8 million or
43.6%, from $198.9 million for the six months ended June 30,
1997 to $285.7 million for the six months ended June 30, 1998
while the average yield declined from 8.0% to 7.7% for the six
months ended June 30, 1997 and 1998, respectively. The average
balance of interest bearing liabilities increased $94.5 million
or 59.4%, from $159.2 million for the six months ended June 30,
1997 to $253.7 million for the six months ended June 30, 1998
while the average cost of funds increased from 4.8% to 5.0% for
the six months ended June 30, 1997 and 1998, respectively.
INTEREST INCOME. Interest income was $5.5 million for the
three months ended June 30, 1998, as compared to $4.1 million
for the three months ended June 30, 1997, representing an
increase of $1.4 million, or 34.1%. The increase is primarily
the result of an increase in interest on investments and
interest-bearing deposits of $1.1 million or 145.9%, from
$735,000 for the three months ended June 30, 1997 to $1.8
million for the six months ended June 30, 1998. The increase is
primarily due to a volume increase in the average balance of
investment and interest-bearing deposits of $74.3 million or
187.2%, from $39.7 million for the three months ended June 30,
1997 to $114.0 million for the three months ended June 30, 1998
while the average yield declined from 7.4% to 6.3% for the three
months ended June 30, 1997 and 1998, respectively. Interest
income on loans increased $501,000 or 16.9%, from $3.0 million
for the three months ended June 30, 1997 to $3.5 million for the
three months ended June 30, 1998. The increase in loan interest
is due to an increase in yield from 8.8% to 9.0% for the three
months ended June 30, 1997 and 1998, respectively.
Interest income was $11.0 million for the six months ended June
30, 1998, as compared to $8.0 million for the six months ended
June 30, 1997, representing an increase of $3.0 million, or
37.5%. The increase was primarily due to a volume increase in
the average earning assets of $86.8 million, or 43.6% from
$198.9 million for the six months ended June 30, 1997 to $285.7
million for the six months ended June 30, 1998, as the yield
decreased from 8.0% to 7.7% for the six months ended June 30,
1997 and 1998, respectively. Interest on investments and
interest-bearing deposits increased $2.2 million or 183.3%, from
$1.2 million for the six months ended June 30, 1997 to $3.4
million for the six months ended June 30, 1998. The increase was
primarily the result of a volume increase in the average balance
of investments and interest-bearing deposits of $73.3 million or
215.0%, from $34.1 million for the six months ended June 30,
1997 to $107.4 million for the six months ended June 30, 1998
while the yield decreased from 7.1% to 6.3% for the six months
ended June 30, 1997 and 1998, respectively. Interest on loans
increased $1.1 million or 18.6% from $5.9 million for the six
months ended June 30, 1997 to $7.0 million for the six months
ended June 30, 1998. The increase was due to a volume increase
in loans of $28.4 million or 21.9%, from $129.5 million for the
six months ended June 30, 1997 to $157.9 million for the six
months ended June 30, 1998.
11<PAGE>
<PAGE>
INTEREST EXPENSE. Interest expense increased by $1.2 million
or 59.0%, from $2.0 million for the three months ended June 30,
1997 to $3.2 million for the three months ended June 30, 1998.
The increase is primarily due to the increase of interest on
deposits in the amount of $725,000 or 42.2%, from $1.7 million
for the three months ended June 30, 1997 to $2.4 million for the
three months ended June 30, 1998. The increase is due to a
volume increase in the average balance of deposits of $54.8
million or 36.4%, from $150.6 million for the three months ended
June 30, 1997 to $205.4 million for the three months ended June
30, 1998. Interest on other borrowed funds increased $456,000,
or 161.7%, from $282,000 for the three months ended June 30,
1997 to $738,000 for the three months ended June 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 $2.5 million or 65.8%,
from $3.8 million for the six months ended June 30, 1997 to $6.3
million for the six months ended June 30, 1998. The increase was
partly due to the increase of $1.4 million or 41.2% in interest
on deposits from $3.4 million for the six months ended June 30,
1997 to $4.8 million for the six months ended June 30, 1998. The
increase is due to a volume increase on average deposits of
$60.6 million or 418.2%, from $144.9 million for the six months
ended June 30, 1997 to $205.5 million for the six months ended
June 30, 1998. Interest expense on other borrowed funds
increased $1.0 million or 220.8%, from $453,000 for the six
months ended June 30, 1997 to $1.5 million for the six months
ended June 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 $132,000 and $22,000 for the three months
ended June 30, 1998 and 1997, respectively. For the first six
months ended June 30, 1998 and 1997, respectively, the provision
account has been charged $268,000 and $56,000. The Company's
provisions for loan losses has increased due to the loan review
process indicating that the reserve balance was inadequate. To
bring the reserve account into an adequate position, another
estimated charge of $50,000 will be required.
NONINTEREST INCOME. Noninterest income increased by $144,000,
from $282,000 for the three months ended June 30, 1997 to
$426,000 for the three months ended June 30, 1998. Of the
increase, $111,000 was due to the acquisitions made in 1997
reflecting on the 1998 balances.
Noninterest income increased by $263,000, from $541,000 for the
six months ended June 30, 1997 to $804,000 for the six months
ended June 30, 1998. Of the increase, $205,000 was due to the
acquisitions made in 1997 reflecting on the 1998 balances.
Noninterest Expense. Noninterest expense increased by
$710,000, or 50.4%, from $1.4 million for the three months ended
June 30, 1997 to $2.1 million for the three months ended June
30, 1998. Of the increase, $683,000 was contributed by the
acquisitions made in 1997 reflecting on the 1998 balances.
Noninterest expense increased by $1.0 million, or 27.4%, from
$3.5 million for the six months ended June 30, 1997 to $4.5
million for the six months ended June 30, 1998. Of the increase,
$1.4 million was contributed by the acquisitions made in 1997
reflecting on the 1998 balances. In addition, during the first
quarter 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 $191,000 and $397,000 for the three months ended
June 30, 1998 and 1997, respectively. For the six months ended
June 30, 1998 and 1997, income taxes were estimated to be
$271,000 and $426,000, respectively.
12<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.
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.
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
originations 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 $116.2 million at June 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 June 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 20.9%, as compared to the requirement of
8.0%.
RECENT DEVELOPMENTS
American Bancshares, Inc. has experienced a 20% growth rate
since being acquired by the Company in May of 1997. 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.
American Bancshares, Inc. is the sole remaining Community Bank
in Highland.
13<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
The Company's Annual Meeting of Stockholders was held on May
4, 1998. 1,786,465 shares of the Company's common stock were
represented at the Annual Meeting in person or by proxy.
Stockholders voted in favor of the election of three
nominees for directors. The voting results for each nominee
were as follows:
Votes in Favor Votes
Nominee of Election Withheld
------- -------------- --------
Michael F. Bauman 1,768,109 18,356
Roger A. Charleston 1,775,409 11,056
Brad A. Jones 1,774,009 12,456
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibit is filed herewith:
(a) Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated June 8, 1998,
reporting under Item 5 the addition of three new directors, the
promotion of Wayne H. Benson to the position of Chief Executive
Officer of the Company and the resignation of Charles M. DiCiro
and the appointment of Roger A. Charleston as Chairman of the
Board of the Company.
14<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: August 12, 1998 /s/ Wayne H. Benson
-------------------
Wayne H. Benson
(Chief Executive Officer)
Date: August 12, 1998 /s/ Douglas W. Tompson
----------------------------
Douglas W. Tompson
(Principal Financial Officer)
15
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