<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 0-26292
COMMUNITY FINANCIAL CORP.
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 37-1337630
-------------------------------- ------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF 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
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
--------------------------------------
(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 ___
---
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 20, 1998, the aggregate market value of the 1,683,596 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $34,092,819 based on the closing sale price of
$20.25 per share of the registrant's Common Stock on March 20, 1998 as listed on
the Nasdaq 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 20, 1998: 2,360,612.
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, 1997.
(Parts I, II and IV)
2. Portions of Proxy Statement for 1998 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
ITEM 1. BUSINESS
- -----------------
GENERAL
Community Financial Corp. Community Financial Corp. (the "Company") is a
bank holding company with five wholly owned bank subsidiaries headquartered in
Illinois: Community Bank & Trust, N.A. in Olney; American Bank of Illinois in
Highland; The Egyptian State Bank in Carrier Mills; Saline County State Bank in
Stonefort; and MidAmerica Bank of St. Clair County in O'Fallon (the "Bank
Subsidiaires"). The Company's principal business is overseeing the business of
its wholly owned bank subsidiaries and investing its assets. The Company is
registered with the Federal Reserve Board as a bank holding company under the
Bank Company Holding Act ("BHCA"). At December 31, 1997, the Company had total
assets of $304.3 million, total deposits of $218.9 million and stockholders'
equity of $35.7 million.
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.
The Bank Subsidiaries. Community Bank & Trust, N.A. ("CB&T") is a national
bank operating through five offices serving Richland, Coles, Jasper, Lawrence
and Wayne Counties and contiguous counties in Southeastern Illinois. CB&T was
chartered in 1883 as Olney Building and Loan Association. In 1961, the Bank
changed its name to Olney Savings and Loan Association. CB&T 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. CB&T 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. In
June 1995, CB&T became a national bank and adopted its present name. At
December 31, 1997, CB&T had total assets of $210.5 million and total deposits of
$147.2 million.
American Bank of Illinois in Highland ("ABI") is an Illinois commercial
bank operating through a two offices located in Highland and Pocahontas,
Illinois and serving Bond and Madison Counties in Western Illinois. At December
31, 1997, ABI had total assets of $20.6 million and total deposits of $19.0
million.
The Egyptian State Bank ("Egyptian") is an Illinois commercial bank
operating through a single office located in Carrier Mills, Illinois and serving
Saline County in Southern Illinois. At December 31, 1997, Egyptian had total
assets of $26.3 million and total deposits of $21.1 million.
Saline County State Bank ("Saline") is an Illinois commercial bank
operating through a two offices located in Stonefort and Creal Springs, Illinois
and serving Saline and Williamson Counties in Southern Illinois. At December
31, 1997, Saline had total assets of $17.6 million and total deposits of $14.8
million.
MidAmerica Bank of St. Clair County ("MidAmerica") is an Illinois
commercial bank operating through a single office located in O'Fallon, Illinois
and serving St. Clair County in Western Illinois. At December 31, 1997,
MidAmerica had total assets of $22.7 million and total deposits of $17.0
million.
CB&T's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") up to the
applicable limits for each depositor. CB&T is subject to comprehensive
examination, supervision, and regulation by the Office of the Comptroller of the
Currency ("OCC") and the FDIC. The deposits of ABI, Egyptian, Saline and
MidAmerica are insured by the Bank Insurance Fund ("BIF") of the FDIC up to the
applicable limits for each depositor. Each of those Illinois commercial banks
is subject to comprehensive examination, supervision, and regulation by the
Illinois Office of Banks and Real Estate ("OBRE") and the FDIC. This regulation
is intended primarily for the protection of depositors.
2
<PAGE>
The Company has been 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. Prior to 1997, the Company's only banking subsidiary was CB&T.
In fiscal 1997, the Company acquired ABI, Egyptian, Saline and MidAmerica. The
Company intends to continue to pursue growth through selective acquisitions of
other financial institutions to the extent suitable acquisitions are available
at prices deemed reasonable, but there is no assurance that further acquisitions
will be made.
MARKET AREAS
CB&T conducts its business through its main office in Olney, Illinois and
its four branch offices in Lawrenceville, Fairfield, Newton and Charleston,
Illinois. CB&T's primary market area consists of Richland, Jasper, Lawrence and
Wayne Counties and the eastern two-thirds of Coles County, Illinois, and each of
the Bank's offices is located in the county seat of one of those Counties. CB&T
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 CB&T's lending activities are
conducted in its primary market area.
CB&T'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.
Egyptian's and Saline's market area consists of Williamson and Saline
Counties in Southern Illinois. That market is largely rural. The main industry
in these Banks' 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 Kerr-McGee Coal Co., Brushey
Creek Coal Co. and Pepsi Cola. Coal mining has been present in the area since
the early 1900's, but with the passage of the Clean Air Act, production has been
significantly reduced due to the high sulphur content in the coal.
ABI's market area consists of Bond and Madison Counties in Western
Illinois. The economy is a very balanced mix of agriculture and light industry.
Most of the farms are relatively small and family-owned. Major employers in the
area consist of Highland Machine & Screw, Basler Electric, Wicks Organ, Korte
Construction, Beeline Manufacturing, Jefferson Smurfit, Highland Supply, Dow
Jones Midwest Publication of the Wall Street Journal, Jakel, Inc., Artex
International, Ducoa and Trionics. Madison County is located in what is called
the Metro-East area which consists of the area located in Illinois, across the
Mississippi River from St. Louis, Missouri. This area is one of the fastest
growing areas in Illinois.
MidAmerica's market area consists of St. Clair County in Western Illinois.
The economy is very stable and is mainly retail service oriented with some light
manufacturing. Major employers in the area consist of Land of Son Dairy and
MidAmerica Air Center, a shared air center with Scott Airforce Base. The retail
sector mainly consists of national chain stores, automobile dealers, hotel,
motel and a shopping mall anchored by national chain stores. MidAmerica's
market area, located in the Metro-East area, 15 miles from St. Louis, Missouri,
is experiencing a housing boom with subdivisions being established throughout
the area.
3
<PAGE>
LENDING ACTIVITIES
General. The Company's total loan portfolio totaled $165.1 million at
December 31, 1997, representing 54% of total assets at that date. It is the
Company's policy to concentrate each subsidiary bank's lending within its market
area. At December 31, 1997, $64.9 million, or 39.3%, 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 $9.7 million, or 5.9%, of the total loan portfolio at December
31, 1997. To a lesser extent and as an accommodation to its existing customers,
the Company makes mortgage loans for the purpose of constructing primarily
single-family residences. At December 31, 1997, construction loans totaled $3.2
million, or 1.9% of the total loan portfolio.
In addition, the banks originate commercial business loans and agricultural
loans, which include agricultural loans secured by real estate and agricultural
operating loans and equipment loans. At December 31, 1997, commercial business
loans amounted to $26.5 million, or 16.0%, of the Company's total loan
portfolio, and agricultural loans amounted to $17.9 million, or 10.8%, of the
total loan portfolio, which included $5.5 million of agricultural loans secured
by real estate.
The Company 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 $43.0 million, or 26.0%, of the total loan
portfolio at December 31, 1997.
4
<PAGE>
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, 1997, the Company had no concentrations of
loans exceeding 10% of total loans other than as disclosed below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------ ----------------- ----------------- ---------------- -----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
--------------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
- ------------
Real estate loans:
Single-family residential.. $ 64,893 39.30% $ 46,501 37.52% $ 46,959 40.40% $ 49,140 43.20% $ 47,247 46.59%
Construction............... 3,174 1.92 770 .62 576 .50 1,349 1.19 740 .73
Multi-family residential
and commercial.......... 9,682 5.86 2,494 2.01 2,994 2.57 2,976 2.61 3,561 3.51
Agricultural (1)............. 17,865 10.82 12,226 9.87 8,763 7.54 7,905 6.95 7,740 7.63
Commercial business.......... 26,511 16.06 20,129 16.24 12,316 10.60 10,051 8.83 6,303 6.22
Consumer loans:
Automobile................. 27,104 16.41 30,360 24.50 33,506 28.83 31,347 27.56 25,591 25.23
Credit card................ 2,107 1.28 1,879 1.52 1,743 1.50 1,764 1.55 1,003 .99
Mobile home................ 905 .55 850 .69 978 .84 999 0.88 731 .72
Educational................ 25 .01 29 .02 40 .03 55 0.05 102 .10
Deposit account............ 1,552 .94 807 .65 705 .61 628 0.55 710 .70
Home improvement........... 560 .34 694 .56 819 .70 752 0.66 746 .74
Other...................... 10,743 6.51 7,184 5.80 6,836 5.88 6,789 5.97 6,941 6.84
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
165,121 100.00% 123,923 100.00% 116,235 100.00% 113,755 100.00% 101,415 100.00%
====== ====== ====== ====== ======
Less:
Loans in process........... 869 96 227 745 145
Allowance for loan losses.. 1,934 1,520 1,514 1,641 1,629
-------- -------- -------- -------- --------
Total................... $162,318 $122,307 $114,494 $111,369 $ 99,641
======== ======== ======== ======== ========
</TABLE>
________________
(1) Includes agricultural loans secured by real estate and agricultural loans
to finance operating expenses or purchase farm equipment.
5
<PAGE>
Loan Maturities. The following table sets forth certain information at
December 31, 1997 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,
1998 1998 1998 Total
-------------- ------------- ------------ --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage...... $18,754 $35,548 $20,273 $ 74,575
Real estate construction.. 3,174 -- -- 3,174
Agricultural.............. 6,877 5,564 5,424 17,865
Commercial business....... 8,528 9,879 8,104 26,511
Consumer.................. 11,496 29,695 1,805 42,996
------- ------- ------- --------
Total................... $48,829 $80,686 $35,606 $165,121
======= ======= ======= ========
</TABLE>
The following table sets forth at December 31, 1997 the dollar amount of
all loans due after December 31, 1998 which have predetermined interest rates
and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates (1)
------------- -------------------
<S> <C> <C>
Real estate mortgage...... $31,910 $23,911
Real estate construction.. -- --
Agricultural.............. 10,286 722
Commercial business....... 17,891 92
Consumer.................. 31,462 18
------- -------
Total.................. $91,549 $24,743
======= =======
</TABLE>
- ---------------------------
(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 lending 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.
6
<PAGE>
Originations, Purchases and Sales of Loans. 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 Subsidiaries
originate a portion of their automobile loans on an indirect basis through
various automobile dealerships located in their market areas. 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 loan officers. All loan officers are salaried, and the
Company 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 branch offices. In all cases, however, the
originating bank has final approval of any loan application.
CB&T 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. CB&T will not originate a
loan or purchase a participation interest in any loan originated pursuant to
this program unless the loan meets CB&T's standard underwriting criteria. CB&T
retains the servicing on loans where it sells participation interests to other
lenders. At December 31, 1997, CB&T had $2.3 million of participation loans
originated or purchased pursuant to this program.
In 1989, CB&T 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. CB&T continues to service such loans,
which had an aggregate principal balance of $183,000 at December 31, 1997.
Between 1980 and 1990, CB&T originated long-term, residential mortgage
loans that are callable, at the option of CB&T, at any time after a one-, three-
or five-year period after origination. In the event CB&T calls the loan, the
borrowers may elect to renew the loan at the rate offered by CB&T or repay the
loan in full. Management estimates that approximately 17.2% of the Company's
single-family mortgage loan portfolio consists of callable loans originated
prior to 1990. Though these loans have fixed rates, because they are callable,
the Company considers these loans to be adjustable-rate loans.
Loan Fees and Servicing. In addition to interest earned on loans, the
Company 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, fees generally are not changed in connection with loan
originations, modifications or extensions. The Company 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 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
90 days past due. All other loans are charged off when management concludes
that they are uncollectible. See Note 4 of Notes to Consolidated Financial
Statements.
7
<PAGE>
The following table sets forth information with respect to the
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real estate:
Residential.................................. $ 469 $ 253 $ 195 $ 342 $ 407
Commercial................................... -- -- -- -- --
Agricultural................................... -- -- -- -- --
Commercial business............................ 1,137 -- -- 60 61
Consumer....................................... 70 65 103 142 112
------ ----- ----- ----- -----
Total....................................... $1,676 $ 318 $ 298 $ 544 $ 580
====== ===== ===== ===== =====
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential................................. $ 186 $ 130 $ 98 $ 144 $ 205
Commercial.................................. -- -- -- -- --
Agricultural................................... -- -- -- -- --
Commercial business............................ 153 -- -- -- --
Consumer....................................... 99 -- -- -- --
------ ----- ----- ----- -----
Total....................................... 438 130 98 144 205
------ ----- ----- ----- -----
Total nonperforming loans................... $2,114 $ 448 $ 396 $ 688 $ 785
====== ===== ===== ===== =====
Percentage of total loans........................ 1.29% .36% .34% .62 .79%
====== ===== ===== ===== =====
Other nonperforming assets (2)................... $ 126 $ 53 $ 137 $ 158 $ 403
====== ===== ===== ===== =====
Loans modified in troubled debt
restructurings............................... $ -- $ -- $ -- $ -- $ --
====== ===== ===== ===== =====
</TABLE>
_________________________
(1) 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.
(2) "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.
During the year ended December 31, 1997, gross interest income of $146,000,
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, 1997 amounted to $76,000.
At December 31, 1997, nonaccrual loans consisted of 19 single-family
residential real estate loans aggregating $469,000, and 18 consumer and
commercial loans aggregating $1.2 million. The $1.2 million in non-accruing
consumer and commercial loans was primarily due to one commercial loan totaling
$1.1 million. The Company expects a minimal loss on this credit as all property
had an appraised value of $785,000 and in addition $300,000 in cash has been
received.
8
<PAGE>
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
Company 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. See Note 1 of Consolidated Financial
Statements. At December 31, 1997, the Company had $126,000 in real estate
owned, which consisted of three 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 $438,000
at December 31, 1997. Such amount included 22 single-family residential
mortgage loans totaling $186,000, six commercial business loans totaling
$153,000 and 13 consumer and other loans totaling $99,000. The Company takes
such loans into consideration in establishing the allowance for loan losses.
Banks 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 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 bank to establish general allowances for
loan losses. If an asset or portion thereof is classified loss, a 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. The Company regularly
reviews its assets to determine whether any assets require classification or re-
classification. At December 31, 1997, the Company had $3.2 million in
classified assets, which consisted of $2.8 million in assets classified as
substandard, $74,000 in assets classified as doubtful and $325,000 in assets
classified as loss.
Allowance for Loan Losses. In originating loans, the Company 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 Company'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 bank examiners. The Company
increases its allowance for loan losses by charging provisions for possible loan
losses against the Company's income.
Management will continue to actively monitor the Company'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.
9
<PAGE>
The Company'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 Company'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 Company'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. At the date of
foreclosure or other repossession, the Company 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.
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,
--------------------------------------------------------
1997 1996 1995 1994 1993
----------- --------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............... $1,520 $1,514 $1,641 $1,629 $1,656
------ ------ ------ ------ ------
Loans charged off:
Real estate mortgage:
Single-family residential................ 43 1 34 24 110
Multi-family residential and commercial.. -- -- -- -- --
Construction............................. -- -- -- -- --
Agricultural............................... -- -- -- -- --
Commercial business........................ 48 -- 8 -- --
Consumer................................... 419 400 510 330 211
------ ------ ------ ------ ------
Total charge-offs............................ 510 401 552 354 321
------ ------ ------ ------ ------
Recoveries:
Real estate mortgage:
Single-family residential................ 9 39 1 16 16
Multi-family residential and commercial.. -- -- -- -- --
Construction............................. -- -- -- -- --
Agricultural............................... -- -- -- -- --
Commercial business........................ -- 3 36 -- --
Consumer................................... 229 355 275 138 134
------ ------ ------ ------ ------
Total recoveries............................. 238 397 312 154 150
------ ------ ------ ------ ------
Net loans charged-off........................ 272 4 240 200 171
------ ------ ------ ------ ------
Provision for losses on loans................ 236 10 113 212 144
------ ------ ------ ------ ------
Adjustment for changes incident to mergers... 450 -- -- -- --
Balance at end of period..................... $1,934 $1,520 $1,514 $1,641 $1,629
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period........ .19% 0% .21% .19% .19%
====== ====== ====== ====== ======
</TABLE>
10
<PAGE>
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>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995 1994
--------------------- --------------------- ---------------------- ---------------------
Percent Percent Percent Percent
Loans in Loans in Loans in Loans in
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Single-family residential. $ 612 31.65% $ 330 37.52% $ 340 40.40% $ 746 43.20%
Multi-family residential
and commercial.......... 37 1.91 125 2.01 141 2.57 348 2.61
Construction.............. 14 .72 5 .62 5 .50 50 1.19
Agricultural............... 211 10.91 315 9.87 308 7.54 87 6.95
Commercial business........ 527 27.25 345 16.24 308 10.60 87 8.83
Consumer................... 533 27.56 400 33.74 412 38.39 323 37.22
------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses............. $1,934 100.00% $1,520 100.00% $1,514 100.00% $1,641 100.00%
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
1993
---------------------
Percent
Loans in
Category to
Amount Total Loans
------ ------------
<S> <C> <C>
Real estate - mortgage:
Single-family residential. $ 743 46.59%
Multi-family residential
and commercial.......... 347 3.51
Construction.............. 49 .73
Agricultural............... 86 7.63
Commercial business........ 86 6.22
Consumer................... 318 35.32
------ ------
Total allowance for
loan losses............. $1,629 100.00%
====== ======
</TABLE>
11
<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 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.
12
<PAGE>
At December 31, 1997, the Company had CMOs with an amortized cost of $13.9
million, representing 4.6% of total assets. The Company's CMOs had a weighted
average yield of 6.1% at December 31, 1997. 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, 1997, the Company's mortgage-backed and related securities
held as available for sale had an amortized cost of $23.9 million, an
approximate market value of $23.9 million and a weighted average yield of 6.5%.
At December 31, 1997, the Company's mortgage-backed and related securities
held to maturity had an amortized cost of $891,000 and a market value of
$927,000.
INVESTMENT ACTIVITIES
The Company's investment policy currently allows for investment in various
types of liquid assets, including United States Government and Agency
securities, time deposits at the Federal Home Loan Bank ("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 Company's investment policy are to: (i)
maximize returns; (ii) provide and maintain liquidity within the guidelines of
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, 1997, 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, 1997, certain securities with a total amortized cost of
$57.3 million and a market value of $57.3 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, 1997,
the effect of the investments available for sale was $1,000 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 $18.3 million and market value of $18.4 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.
The following table sets forth the carrying value of the Company's
investments at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities available for sale (1)
U.S. government and agency securities... $53,925 $11,886 $17,409
State and municipal obligations......... 1,000 828 912
Other................................... 2 -- --
Securities held to maturity:
U.S. government and agency securities... 14,464 -- --
State and municipal obligations......... 3,854 3,362 3,113
Equities and mutual funds............... -- -- --
------- ------- -------
Total investment securities......... 73,245 16,076 21,434
Interest-bearing deposits................. 18,117 11,333 8,622
FRB stock................................. 381 381 --
FHLB stock................................ 1,975 895 1,026
------- ------- -------
Total investments................... $93,718 $28,685 $31,082
======= ======= =======
</TABLE>
____________
(1) The carrying value of securities available for sale is the market value.
13
<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, 1997.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
------------------- ------------------- ---------------------
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
--------- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Securities available for
sale:
U.S. government and
agency
securities........... $11,103 5.11% $11,614 6.12% $31,206 6.80%
State and municipal
obligations.......... 340 5.56 424 4.48 236 4.23
------- ------- -------
Total................ 11,443 5.12 12,038 6.06 31,442 6.78
Securities held to
maturity:
U.S. government and
agency
securities........... 5,900 5.36 7,268 5.49 1,296 5.09
State and municipal
obligations.......... 1,121 4.37 1,611 5.15 1,122 5.26
------- ------- -------
Total................ 7,021 5.20 8,879 5.43 2,418 5.17
Interest-bearing deposits
and time deposits........ 18,117 5.45 -- -- --
FRB stock.................. -- -- -- --
FHLB stock................. -- -- -- --
------- ------- -------
Total................ $36,581 5.29 $20,917 5.79 $33,860 6.66
======= ======= =======
<CAPTION>
MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO
-------------------------------------------------
AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST VALUE YIELD
--------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Securities available for
sale:
U.S. government and
agency
securities........... $ 3 --% $53,926 53,926 6.30%
State and municipal
obligations.......... -- -- 1,000 1,000 4.80
--------- ------- -------
Total................ 3 -- 54,926 54,926 6.28
Securities held to
maturity:
U.S. government and
agency
securities........... -- -- 14,464 14,464 5.40
State and municipal
obligations.......... -- -- 3,854 3,854 4.95
--------- ------- -------
Total................ -- -- 18,318 18,318 5.31
Interest-bearing deposits
and time deposits........ -- -- 18,117 18,117 5.45
FRB stock.................. 381 6.00 381 381 6.00
FHLB stock................. 1,975 6.85 1,975 1,975 6.85
--------- ------- -------
Total................ $2,359 6.70 $93,717 $93,803 5.93
========= ======= =======
</TABLE>
14
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
Deposits are the primary source of funds for lending, investment activities
and general operational purposes. In addition to deposits, the Company 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. CB&T has access to borrow from the FHLB
of Chicago.
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>
AT DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995
---------------------- -------------------- ---------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand deposits.. $19,902 2.49% $35,388 2.85% $39,392 2.91%
Savings deposits.................. 39,480 3.16 14,124 2.95 14,550 2.75
Time deposits..................... 99,272 5.48 87,252 5.61 93,534 5.49
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997 and at such date represented 15.4% of total deposits with a weighted
average rate of 5.7%. A significant portion of such deposits were
collateralized with mortgage-backed and related securities pledged by the
Company with a carrying value of $31.8 million at December 31, 1997. The
Company'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 Company bids against other financial institutions to retain
those deposits. As a result, these funds are less likely to remain on deposit
at the Company upon maturity than smaller certificates of deposit maintained by
the Company'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 Company with
numerous other deposit and loan relationships with the Company. To the extent
the Company 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........... $10,709
Over three through six months.. 9,710
Over six through 12 months..... 13,002
Over 12 months................. 337
-------
Total....................... $33,758
=======
</TABLE>
Borrowings. Savings deposits historically have been the primary source of
funds for lending, investments and general operating activities. CB&T 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. Advances are
pursuant to several different programs, each of which has its own interest rate
and range of maturities. CB&T has a
15
<PAGE>
Blanket Agreement for advances with the FHLB under which CB&T may borrow up to
25% of assets subject to normal collateral and underwriting requirements.
Advances from the FHLB of Chicago would be secured by CB&T's ownership of stock
in the FHLB of Chicago and other eligible assets. At December 31, 1997, CB&T
had $37.0 million of FHLB advances. CB&T also obtains short-term borrowings
consisting of repurchase agreements with deposit customers. At December 31,
1997, CB&T had $10.9 million of short-term borrowings and other short-term
notes, from a bank, used to fund acquisitions during 1997. CB&T 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 Company at the dates and for the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances.................................. $ -- $7,500 $3,000
Short-term notes............................... 5,600 -- --
Other short-term borrowings.................... 5,323 3,121 --
Rate paid on:
FHLB advances.................................. --% 5.41% 5.83%
Short-term notes............................... 8.50 -- --
Other short-term borrowings.................... 5.45 5.48 --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Maximum amount of borrowings outstanding
at any month end:
FHLB advances.................................. $19,500 $8,500 $3,000
Short-term notes............................... 5,600 -- --
Other short-term borrowings.................... 5,627 3,213 --
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances.................................. $ 9,264 $6,000 $1,500
Short-term notes............................... 568 -- --
Other short-term borrowings.................... 4,340 2,060 --
Approximate weighted average rate paid on: (1)
FHLB advances.................................. 6.13 5.07% 4.80%
Short-term notes............................... 8.50 -- --
Other short-term borrowings.................... 5.58 4.90 --
- -------------------------
</TABLE>
____________
(1) Based on month-end balances.
16
<PAGE>
TRUST DEPARTMENT ACTIVITIES
CB&T 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 Michael F. Bauman
(Chairman) Clyde R. King and William O. 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 Company's operations.
COMPETITION
The Company faces strong competition both in originating real estate,
agriculture, automobile, consumer and other loans and in attracting deposits.
The Company 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 in originating real estate loans comes
primarily from savings institutions, commercial banks and mortgage bankers
making loans secured by real estate located in the Company'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 Subsidiaries attract all their deposits through their 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 Subsidiaries compete 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 Company believes
that its banking subsidiaries have developed strong relationships with local
businesses, realtors and the public in general.
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries had 104 full-time
and 19 part-time employees, none of whom were represented by a collective
bargaining agreement, and management considers relationships with 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 Subsidiaries. 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.
17
<PAGE>
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.
Under the Holding Company Act, any company must obtain approval of the FRB
prior to acquiring control of the Company or any of the Bank Subsidiaries. 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 any of the Bank
Subsidiaries, 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 any of the Bank Subsidiaries.
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
any of the Bank Subsidiaries. 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. CB&T, as a national bank, is subject to the primary
supervision of the OCC under the National Bank Act. ABI, Egyptian, Saline and
MidAmerica are subject to the primary supervision of the OBRE and FDIC. The
prior approval of the banking regulators is required for a bank to establish or
relocate an additional branch office or to engage in any merger, consolidation
or significant purchase or sale of assets.
18
<PAGE>
The OCC regularly examines the operations of CB&T, and the OBRE and FDIC
regularly examine the remaining Bank Subsidiaries. These exams include but are
not limited to capital adequacy, reserves, loans, investments and management
practices. These examinations are for the protection of the Bank's
Subsidiaries' depositors and not their shareholders. In addition, the Bank
Subsidiaries are required to furnish quarterly and annual reports to the banking
regulators. The banking agencies' 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.
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, CB&T is prohibited
by federal statute from paying dividends or making any other capital
distribution that would cause CB&T 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.
CB&T 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. The deposits of ABI, Egyptian, Saline and MidAmerica are
insured by the BIF 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 Subsidiaries that are subject to regulation include reserve
requirements and disclosure requirements in connection with personal and
mortgage loans and savings deposit accounts. In addition, the Bank Subsidiaries
are 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 Subsidiaries are 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 Subsidiaries 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 Subsidiaries are generally limited in
amount as to the Company and as to any other affiliate to 10% of the Bank
Subsidiaries' capital and surplus and as to the Company and all other affiliates
to an aggregate of 20% of the Bank Subsidiaries' 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 federal banking regulations, 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,
19
<PAGE>
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 Subsidiaries are required to pay assessments based on a percent of
its insured deposits to the FDIC for insurance of its deposits by the SAIF or
the BIF. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for insured institutions to maintain the designated
reserve ratio of the insurance funds at 1.25% of estimated 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 or BIF.
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.
Until December 31, 1999, all SAIF-insured institutions, will be required to
pay additional 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 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.
20
<PAGE>
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 CAMELS 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 CAMELS 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. An institution's federal
banking regulator 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 regulator determines, after notice and an
opportunity for a hearing, that the institution is in an unsafe or unsound
condition or that the institution has received and not corrected a less-than-
satisfactory rating for any CAMELS rating category. The Bank Subsidiaries are
classified as "well-capitalized" under the regulations.
Regulatory Capital Requirements. The federal banking regulators have
established guidelines with respect to the maintenance of appropriate levels of
capital by bank holding companies and banks. 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 federal banking agency regulations require bank holding companies and
banks 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 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 federal banking agencies require bank
holding companies and 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.
21
<PAGE>
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.
Federal banking regulations classify banks by capital levels and which
provide for the federal banking agencies 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 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, 1997, the Bank was
well-capitalized as defined by the federal banking regulations.
TAXATION
The Company's federal income tax returns have not been audited in the past
five years. For additional information regarding taxation, see Note 11 of Notes
to Consolidated Financial Statements.
22
<PAGE>
ITEM 2. PROPERTIES
- -------------------
The following table sets forth the location and certain additional
information regarding the Company's offices at December 31, 1997. The Company
owns all of its offices with the exception of the main office of ABI on which
ABI has a ground lease.
<TABLE>
<CAPTION>
NET BOOK VALUE
YEAR TOTAL AT DECEMBER APPROXIMATE
OPENED INVESTMENT 31, 1997 SQUARE FOOTAGE
------ ---------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Community Financial Corp.
240 E. Chestnut
P.O. Box 700
Olney, IL 62450 1994 6 5 --
Community Bank & Trust, N.A.
- ----------------------------
MAIN OFFICE:
240 E. Chestnut
P.O. Box 700
Olney, IL 62450 1883 (1) $2,108 $ 998 9,200
BRANCH OFFICES:
Lawrenceville Branch
1601 State
P.O. Box 477
Lawrenceville, IL 62439 1983 (1) 647 327 2,800
Fairfield Branch
303 W. Delaware
Fairfield, IL 62837 1983 (1) 494 228 2,400
Newton Branch
601 W. Jourdan
P.O. Box 361
Newton, IL 62448 1990 (1) 653 465 3,114
Charleston Branch
820 W. Lincoln
Charleston, IL 61920 1989 (1) 1,268 1,128 4,912
American Bank of Illinois in Highland
- -------------------------------------
Main Office:
12616 Route 143
Highland, IL 62249 306 221 1,600
Branch Office:
P.O. Box 158
Pocahontas, IL 62275 473 245 2,200
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
YEAR TOTAL AT DECEMBER APPROXIMATE
OPENED INVESTMENT 31, 1997 SQUARE FOOTAGE
------ ---------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
The Egyptian State Bank
- -----------------------
2 South Main Street
Carrier Mills, IL 62917 1951 499 166 3,500
Saline County State Bank
- ------------------------
Main Office:
1115 Wilson Street
P.O. Box 99
Stonefort, IL 62987 1904 108 11 4,000
Branch Office:
Route 166 & Blue Avenue
Creal Springs, IL 62922 1984 524 384 3,200
MidAmerica Bank of St. Clair County
- -----------------------------------
350 Hartman Lane
P.O. Box 850
O'Fallon, IL 62269 1996 1,874 1,676 7,200
</TABLE>
- -------------------------
(1) Date of acquisition.
The net book value of the Company's investment in premises and equipment
totaled approximately $5.9 million at December 31, 1997. For a discussion of
premises and equipment, see Note 6 of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------
On October 18, 1996, a former depositor and borrower of CB&T filed a
complaint in the Circuit Court for the Second Judicial Circuit of Illinois,
naming CB&T's President and Chief Executive Officer and CB&T 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 CB&T: 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, CB&T 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.
24
<PAGE>
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, 1997 (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 15 in the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 4
through 15 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 16 through 52 in the Annual Report, which are listed under Item 14
herein, are incorporated herein by reference.
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 1998 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
25
<PAGE>
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.
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, 1997 and 1996
Consolidated Statements of Income - Years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996 and 1995
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
26
<PAGE>
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.
<TABLE>
<CAPTION>
No. Description
-- -----------
<S> <C>
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
</TABLE>
- -------------------------
* 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).
(B) REPORTS ON FORM 8-K. During the quarter ended December 31, 1997, the
-------------------
Registrant filed two Current Reports on Form 8-K: (i) The Company filed a
Current Report on Form 8-K dated November 3, 1997 reporting under Item 5 the
completion of its acquisition of Egyptian Bankshares, Inc., the holding company
for The Egyptian State Bank and Saline County State Bank; and (ii) the Company
filed a Current Report on Form 8-K dated December 2, 1997 reporting under Item
5 the completion of its acquisition of Mid America Bank of St. Clair County.
(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.
27
<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 27, 1998
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 27, 1998
- -------------------------------------------------
Shirley B. Kessler
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Douglas W. Tompson March 27, 1998
- -------------------------------------------------
Douglas W. Tompson
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Charles M. DiCiro March 27, 1998
- -------------------------------------------------
Charles M. DiCiro
Chairman of the Board
/s/ Michael F. Bauman March 27, 1998
- -------------------------------------------------
Michael F. Bauman
Director
/s/ William O. Cantwell March 27, 1998
- -------------------------------------------------
William O. Cantwell
Director
/s/ Roger A. Charleston March 27, 1998
- -------------------------------------------------
Roger A. Charleston
Director
/s/ Brad A. Jones March 27, 1998
- -------------------------------------------------
Brad A. Jones
Director
/s/ Clyde R. King March 27, 1998
- -------------------------------------------------
Clyde R. King
Director
/s/ Allen D. Welker March 27, 1998
- -------------------------------------------------
Allen D. Welker
Director
<PAGE>
COMMUNITY FINANCIAL CORP.
[LOGO]
1997 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Community Financial Corp.................................................. (i)
Market Information........................................................ (i)
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.......................................... 16
Corporate Information........................................Inside Back Cover
<PAGE>
COMMUNITY FINANCIAL CORP.
- -------------------------------------------------------------------------------
Community Financial Corp. (the "Company") is a bank holding company
with five wholly owned bank subsidiaries headquartered in Illinois: Community
Bank & Trust, N.A. in Olney; American Bank of Illinois in Highland; The Egyptian
State Bank in Carrier Mills; Saline County State Bank in Stonefort; and
MidAmerica Bank of St. Clair County in O'Fallon. The Company's principal
business is overseeing the business of its wholly owned bank subsidiaries and
investing its assets.
Community Bank & Trust, N.A. ("CB&T") is a national bank operating
through five offices serving Richland, Coles, Jasper, Lawrence and Wayne
Counties and contiguous counties in Southeastern Illinois. CB&T was chartered in
1883 as Olney Building and Loan Association. In 1961, the Bank changed its name
to Olney Savings and Loan Association. CB&T 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. CB&T 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. In June 1995, CB&T became a national bank
and adopted its present name. At December 31, 1997, CB&T had total assets of
$210.5 million and total deposits of $147.2 million.
American Bank of Illinois in Highland ("ABI") is an Illinois commercial
bank operating through two offices located in Highland and Pocahontas, Illinois
and serving Bond and Madison Counties in Western Illinois. At December 31, 1997,
ABI had total assets of $20.6 million and total deposits of $19.0 million.
The Egyptian State Bank ("Egyptian") is an Illinois commercial bank
operating through a single office located in Carrier Mills, Illinois and serving
Saline County in Southern Illinois. At December 31, 1997, Egyptian had total
assets of $26.3 million and total deposits of $21.1 million.
Saline County State Bank ("Saline") is an Illinois commercial bank
operating through two offices located in Stonefort and Creal Springs, Illinois
and serving Saline and Williamson Counties in Southern Illinois. At December 31,
1997, Saline had total assets of $17.6 million and total deposits of $14.8
million.
MidAmerica Bank of St. Clair County ("MidAmerica") is an Illinois
commercial bank operating through a single office located in O'Fallon, Illinois
and serving St. Clair County in Western Illinois. At December 31, 1997,
MidAmerica had total assets of $22.7 million and total deposits of $17.0
million.
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 2,360,612
shares of the common stock outstanding and approximately 641 holders of record
of the common stock. Since issuance of the common stock, on January 15, 1998 the
Company paid a cash dividend of $.25 per share to stockholders of record as of
December 30, 1997, and 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 High Low
---- --- ---- ---
1996 1997
- ---- ----
<S> <C> <C> <C> <C> <C>
First Quarter................ $ 11.750 $ 10.750 First Quarter............. $ 16.625 $ 12.750
Second Quarter............... 13.000 12.500 Second Quarter............ 15.688 14.000
Third Quarter................ 13.375 13.000 Third Quarter............. 20.250 14.500
Fourth Quarter............... 13.500 12.625 Fourth Quarter............ 19.750 16.250
</TABLE>
(i)
<PAGE>
Dear Shareholder:
Your company enters 1998 riding the wave of momentum from 1997's
dramatic growth. With a starting point of a one-bank holding company, we
acquired American Bancshares, owner of American Bank of Illinois in Highland,
with a branch in Pocahontas, in May. Combined assets of $17.5 million and the
location, 25 miles East of St. Louis, Missouri, will allow us to make an impact
in this area. In October, the acquisition of Egyptian Bancshares, owner of
Egyptian State Bank, Carrier Mills and Saline County State Bank, Stonefort with
a branch in Creal Springs, added another $40.9 million in combined assets and
provides a strong foundation for long-term generation of income. In November, we
acquired the newly-chartered MidAmerica Bank in O'Fallon with assets of $19.3
million increasing our penetration into the metro-East area and one of the
fastest growing communities in the state.
These acquisitions move us closer to our goals of expanding our market
share and contributing to the profitability of your company. As each of these
institutions will continue to operate as independent community banks, an
additional benefit is the quality of the management and associates already in
place. With this individual diversity and strength at the community level and
the integration of support services at the holding corporation level, Community
Financial Corp. will be a dominant force in community banking in Illinois.
Assets at the end of 1997 were $304 million with stockholders' equity
of $35.7 million, 11.7% of total assets. Average stockholders' equity to average
assets is 15.33%. The average return on assets was .62% and the average return
on equity was 4.02%. The earnings per share of $0.62 was the result of the
implementation of several steps taken this year to allow accelerated growth in
the future, specifically, the implementation and closing of an early retirement
package. Our higher than average ratio of non-performing assets to performing
assets was a result of a non-performing loan to one commercial borrower in the
aggregate amount of $1.1 million dollars. However, through the diligent efforts
of our staff, the bulk of the collateral on this loan has been liquidated and it
appears there will be minimal loss to the Bank.
Community Financial Corp. stock price performance reflected our efforts
toward acceleration of earnings and expansion of market share by soaring 42% in
value in 1997. This recognition of our value by the market is validating our
ability to build strong assets and increase earnings in order to continue the
recognition in the market.
We are consistently working toward the vision expressed in our Mission
Statement: COMMUNITY FINANCIAL CORP. WILL FULFILL THE FINANCIAL NEEDS OF THE
COMMUNITIES IN WHICH IT SERVES WHILE ENHANCING THE RETURN AND INCREASING THE
VALUE OF SHAREHOLDER INVESTMENT.
Our charge is to enhance shareholder value by improving earnings to
peer bank levels at all affiliates, standardizing procedures, and eliminating
duplication. Our dual plan is to strengthen our services to community bank
customers and to continue seeking potential acquisition candidates.
We are extremely proud and excited about the progress made this past
year and deeply appreciate the support and loyalty of our shareholders. We look
forward to the opportunity to serve you in the coming year.
Sincerely,
Shirley B. Kessler
President and Chief
Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
Selected Financial Condition Data
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets...................................... $ 304,265 $ 185,799 $ 186,513 $ 164,633 $ 163,226
Loans receivable, net....................... 162,318 122,307 114,494 111,369 99,641
Investment securities (1):
Available for sale....................... 57,283 13,990 19,347 7,716 --
Held to maturity......................... 18,318 3,362 3,113 2,255 10,289
Cash and cash equivalents and time deposits. 26,724 12,618 9,877 5,638 5,065
Mortgage-backed and related securities
available for sale (1).................... 23,895 28,319 35,520 32,310 44,260
Mortgage-backed and related securities
held-to-maturity.......................... 891 -- -- -- --
Deposits.................................... 218,915 139,100 144,277 151,078 150,290
FHLB advances............................... 37,000 7,500 3,000 1,050 --
Other borrowings............................ 10,923 3,121 -- -- --
Stockholders' equity........................ 35,727 34,082 38,106 11,254 12,228
</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.
- --------------------------------------------------------------------------------
Selected Operations Data
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 17,008 $ 13,875 $ 13,267 $ 11,776 $ 12,225
Interest expense............................ (8,670) (6,728) (6,747) (5,576) (6,224)
--------- ---------- ---------- ---------- ---------
Net interest income......................... 8,338 7,147 6,520 6,200 6,001
Provision for loan losses................... (236) (10) (113) (212) (144)
--------- ---------- ---------- ---------- ---------
Net interest income after
provision for loan losses................. 8,102 7,137 6,407 5,988 5,857
Noninterest income.......................... 1,129 777 1,033 953 703
Noninterest expense......................... (7,152) (6,798) (4,437) (4,691) (3,747)
Gain (loss) on sale of assets............... (2) -- 137 (26) 10
--------- ---------- ---------- ---------- ---------
Income before provision for income tax...... 2,077 1,116 3,140 2,224 2,823
Provision for income tax.................... (675) (343) (1,107) (813) (1,073)
--------- ---------- ---------- ---------- ---------
Income before extraordinary item and
cumulative effect of change in
accounting principle...................... 1,402 773 2,033 1,411 1,750
Extraordinary items......................... -- -- -- (701) (1) --
Cumulative effect of change in
accounting principle (2).................. -- -- -- -- (25)
--------- ---------- ---------- ---------- ---------
Net income.................................. $ 1,402 $ 773 $ 2,033 $ 710 $ 1,725
========= ========== ========== ========== =========
Net income per share........................ $ .62 $ .35 $ .42 N/A N/A
========= ========== ========== ========== =========
Cash dividends declared per share........... $ .25 $ .25 $ -- N/A N/A
========= ========== ========== ========== =========
</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,
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets)...................... .62% .42% (1) 1.15%
Return on average equity (net income
divided by average stockholders' equity (2)........... 4.02 2.15 (1) 8.09
Interest rate spread (combined weighted
average interest rate earned less
combined weighted average interest
rate cost)............................................ 3.05 3.17 3.17
Net yield on interest-earning assets.................... 3.80 4.03 3.79
Ratio of average interest-earning assets
to average interest-bearing liabilities............... 119.04 122.58 115.59
Ratio of noninterest expense to average
total assets.......................................... 3.15 3.66 2.51
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period...................................... .81 (3) .27 .28
Nonperforming loans to total loans (4).................. 1.29 .36 .34
Allowance for loan losses to total
loans at end of period................................ 1.18 1.23 1.31
Allowance for loan losses to nonperforming
loans at end of period............................... .91 (5) 339.29 382.32
Provision for loan losses to total loans
at end of period..................................... .15 .01 .10
Net charge-offs to average loans........................ .19 -- .21
Capital Ratios:
Stockholders' equity to total assets at end of period... 11.74 18.34 20.43
Average stockholders' equity to average assets.......... 15.33 19.19 14.21
</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) Average stockholders' equity reflects average unrealized losses on
securities available for sale for the years ended December 31, 1996 and
1995 and average unrealized gains on securities available for sale for
the year ended December 31, 1997.
(3) Nonperforming assets include a $1.1 million nonperforming loan on which
minimal losses are expected. The ratio for nonperforming assets to
total assets would be .46% restated to exclude this loan.
(4) Nonperforming loans consist of nonaccrual loans and accruing loans
which are contractually past due 90 days or more. Nonperforming loans
at December 31, 1997 included a $1.1 million nonperforming loan on
which minimal losses are expected. The ratio of nonperforming loans to
total loans would be .64% restated to exclude this loan.
(5) Nonperforming assets included a $1.1 million nonperforming loan on
which minimal losses are expected. The ratio of the allowance for loan
losses to nonperforming loans at December 31, 1997 would be 184.18%
restated to exclude this loan.
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.
Forward-Looking Statements
When used in this Annual Report, the words or phrases "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 certain risks and uncertainties
including 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 that 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. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
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
quarterly basis. The suppliers have advised the
4
<PAGE>
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 is 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.
Comparison of Financial Condition at December 31, 1997, 1996 and 1995
The Company's financial condition remained fairly unchanged for the
periods 1995 to 1996 as reflected by the decrease in total assets of $714,000,
or .4%, from $186.5 million at December 31, 1995 to $185.8 million at December
31, 1996. The Company's financial condition began to change in 1997 as assets
increased by $118.5 million, or 63.8%, from $185.8 million at December 31, 1996
to $304.3 million at December 31, 1997. The increase was primarily due to the
acquisitions of American Bank of Highland in May adding $20.6 million at
December 31, 1997, The Egyptian State Bank in October adding $26.2 million at
December 31, 1997, Saline County State Bank in October adding $17.6 million at
December 31, 1997 and MidAmerica Bank of St. Clair County in November adding
$22.7 million at December 31, 1997.
The Company's net loans receivable have increased steadily in recent
years, increasing by $7.8 million, or 6.8% from $114.5 million at December 31,
1995 to $122.3 million at December 31, 1996 and by $40.0 million, or 32.7% to
$162.3 million at December 31, 1997. The increase in net loans receivable during
the year ended December 31, 1997 was due to the acquisitions of American Bank of
Highland adding $11.2 million, Egyptian State Bank adding $8.8 million, Saline
County State Bank adding $8.0 million and MidAmerica Bank of St. Clair County
adding $13.1 million.
The Company's investment securities decreased by $5.1 million, or
22.7%, from $22.5 million at December 31, 1995 to $17.4 million at December 31,
1996. Investment securities increased by $58.2 million or 334.5%, to $75.6
million at December 31, 1997. The increase during 1997 was partly due to the
acquisitions of American Bank of Highland adding $5.9 million, Egyptian State
Bank adding $8.8 million, Saline County State Bank adding $5.8 million and
MidAmerica Bank of St. Clair County adding $2.9 million. The primary reason for
the increase was due to Community Bank & Trust investment securities increasing
$35.3 million mainly through using arbitrage.
The Company's mortgage-backed and related securities decreased by $7.2
million, or 20.3%, from $35.5 million at December 31, 1995 to $28.3 million at
December 31, 1996. Mortgage-backed and related securities decreased by $4.4
million, or 15.5%, to $23.9 million at December 31, 1997. The decrease is the
result of principal payback, sales and maturities. The proceeds were reinvested
in other interest-earning assets.
Deposits were $144.3 million, $139.1 million and $218.9 million at
December 31, 1995, 1996 and 1997, respectively. The increase of $79.8 million,
or 57.4% from $139.1 million at December 31, 1996 to $218.9 million at December
31, 1997 was due primarily to acquisitions. American Bank of Highland added
$19.0 million, The Egyptian State Bank added $21.3 million, Saline County State
Bank added $14.9 million and MidAmerica Bank of St. Clair County added $17.1
million. In addition, Community Bank & Trust deposits increased $7.5 million
primarily due to certain short-term jumbo certificates of deposit and money
market accounts by schools, municipalities and other local entities. As these
deposits mature, Community Bank & Trust bids against other financial
institutions to retain these deposits. As a result, these funds are less likely
to remain on deposit at maturity than smaller certificates of deposit maintained
by other customers.
The Company's repurchase agreements increased by $2.2 million, or
71.0%, from $3.1 million at December 31, 1996 to $5.3 million at December 31,
1997. The repurchase program was introduced in 1996 to attract large depositors.
These deposits are not insured by the FDIC.
The Company's Federal Home Loan Bank advances increased $29.5 million,
or 393.3%, from $7.5 million at December 31, 1996 to $37.0 million at December
31, 1997. The increase was used to arbitrage by acquiring
5
<PAGE>
investment securities. The investments purchased have a weighted average yield
of 7.1% with the advances having a weighted average cost of 5.4%. The arbitrage
is matched as both the investments and the advances have similar call features.
The Company entered into a line of credit agreement during 1997 which
provides the availability of a $10.0 million line of credit at the prime rate.
The Company used $5.6 million of this to acquire MidAmerica Bank of St. Clair
County in November 1997.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
Net Income. Net income was $1.4 million for the year ended December 31,
1997, as compared to $773,000 for the year ended December 31, 1996. This
represents an increase of $627,000, or 81.1%. The increase in net income
reflects (on a pre-tax basis) a $1.2 million, or 16.9%, increase in net interest
income, a $349,000, or 44.9%, increase in non-interest income and a $354,000, or
5.2%, increase in non-interest expense.
Net Interest Income. Net interest income increased by $1.2 million, or
16.9%, from $7.1 million for the year ended December 31, 1996 to $8.3 million
for the year ended December 31, 1997. The increase in net interest income
reflects an increase in interest income of $3.1 million, or 22.3%, from $13.9
million for the year ended December 31, 1996 to $17.0 million for the year ended
December 31, 1997 due to an increase of 23.5% in average interest-earning assets
from $177.5 million for the year ended December 31, 1996 to $219.3 million for
the year ended December 31, 1997. The cost of interest-bearing liabilities
increased by $2.0 million, or 29.9%, from $6.7 million for the year ended
December 31, 1996 to $8.7 million for the year ended December 31, 1997 due to an
increase of $39.4 million, or 27.2%, in the average balance of interest-bearing
liabilities from $144.8 million for the year ended December 31, 1996 to $184.2
million for the year ended December 31, 1997.
Interest Income. Interest income was $17.0 million for the year ended
December 31, 1997, as compared to $13.9 million for the year ended December 31,
1996, representing an increase of $3.1 million, or 22.3%. The increase is partly
due to interest on loans increasing by $1.6 million, or 15.2%, from $10.5
million for the year ended December 31, 1996 to $12.1 million for the year ended
December 31, 1997. This is due to an increase of $20.5 million, or 17.1%, in the
average loans receivable (net), which reflects the acquisitions of American Bank
of Illinois in Highland in May 1997, The Egyptian State Bank in October 1997,
Saline County State Bank in October 1997, and MidAmerica Bank of St. Clair
County in November 1997. The increase is also due to interest on investments and
interest-bearing deposits increasing by $1.8 million, or 128.6%, from $1.4
million for the year ended December 31, 1996 to $3.2 million for the year ended
December 31, 1997. This is due to the average balance of securities available
for sale increasing $19.9 million, or 124.4%, from $16.0 million for the year
ended December 31, 1996 to $35.9 million for the year ended December 31, 1997.
In addition, the average balance of cash and cash equivalents increased by $6.7
million, or 95.7%, from $7.0 million for the year ended December 31, 1996 to
$13.7 million for the year ended December 31, 1997 as a result of the arbitrage.
Interest Expense. Interest expense, which consists primarily of
interest on deposits, increased by $2.0 million, or 29.9%, from $6.7 million for
the year ended December 31, 1996 to $8.7 million for the year ended December 31,
1997. Interest on deposits increased by $900,000 or 14.3%, from $6.3 million for
the year ended December 31, 1996 to $7.2 million for the year ended December 31,
1997. The increase was partly due to the increase of $21.9 million, or 16.0%, in
the average balance of deposits, which reflects the acquisitions made in 1997.
In addition, interest and other borrowed funds increased $1.1 million, or
266.5%, from $406,000 for the year ended December 31, 1996 to $1.5 million for
the year ended December 31, 1997. This increase is due to the increase of $17.4
million, or 214.8%, in the average balance of borrowings which is primarily due
to borrowings used to arbitrage.
Provision for Loan Losses. The Company established provisions for loan
losses of $236,000 and $10,000 for the years ended December 31, 1997 and 1996,
respectively. A significant portion of the increase was related to a $1.1
million loan that became nonaccruing during the year ended December 31, 1997.
6
<PAGE>
Non-Interest Income. Non-interest income increased by $349,000, or
44.9%, from $777,000 for the year ended December 31, 1996 to $1.1 million for
the year ended December 31, 1997. The increase is primarily due to the
acquisitions of American Bank of Illinois in Highland in May 1997, The Egyptian
State Bank in October 1997, Saline County State Bank in October 1997, and
MidAmerica Bank of St. Clair County in November 1997.
Non-Interest Expense. Non-interest expense increased by $400,000, or
5.9%, from $6.8 million for the year ended December 31, 1996 to $7.2 million for
the year ended December 31, 1997. For the year ended December 31, 1996 two
non-recurring events totaling $1.6 million (pre-tax) were included. Restating
non-interest expense by 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. For the year ended December 31, 1997, non-interest
expense reflects a non-recurring charge of $506,000 for an early retirement
program offered to twelve employees of which seven accepted. Restating
non-interest expense by removing the early retirement expense of $506,000 would
have been $6.6 million. Restated non-interest expense increased by $1.5 million,
or 29.4%, from $5.1 million for the year ended December 31, 1996 to $6.6 million
for the year ended December 31, 1997. Restated compensation and benefits
increased $855,000, or 26.9%, from $3.0 million (restated $3.6 million less
$622,000) at the year ended December 31, 1996 to $3.8 million (restated $4.3
million less $506,000) at the year end December 31, 1997. This increase is
partly due to benefit expenses, that were approved by the stockholders, in total
amounting to $584,000 for the annual funding of the Management Recognition Plan
(MRP) for $372,000 and the Employee Stock Ownership Plan (ESOP) for $212,000.
The remaining portion of the increase in non-interest expense was primarily due
to the acquisitions made in 1997.
Income Taxes. The Company's income tax was $675,000 and $343,000 for
the years ended December 31, 1997 and 1996, respectively, which resulted in
effective income tax rates of 32.5% and 30.7%, respectively.
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
7
<PAGE>
million for the year ended December 31, 1996. Loans primarily increased through
the increased 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 totaling $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 of noninterest expense for the year
ended December 31, 1996 was primarily due to a full year of operation of the
Company in 1996
8
<PAGE>
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.
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,
--------------------------------
1997
--------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)................. $ 140,306 $ 12,143 8.65%
Investment securities:
Securities available for sale.......... 35,853 2,250 6.28
Securities held to maturity............ 3,349 166 4.95
Mortgage-backed and related securities:
Securities available for sale.......... 25,939 1,696 6.54
Securities held-to-maturity............ 148 8 5.35
Cash and cash equivalents................. 13,681 745 5.45
---------- --------
Total interest-earning assets.......... 219,276 17,008 7.76
Noninterest-earning assets.................. 8,079
----------
Total assets........................... $ 227,355
==========
Interest-bearing liabilities:
Deposits.................................. $ 158,654 7,182 4.53
Borrowings................................ 25,547 1,488 5.82
---------- --------
Total interest-bearing liabilities..... 184,201 8,670 4.71
--------
Noninterest-bearing liabilities............. 8,303
----------
Total liabilities...................... 192,504
Stockholders' equity........................ 35,033
Unrealized losses on securities............. (182)
----------
Total liabilities and retained earnings..... $ 227,355
==========
Net interest income......................... $ 8,338
========
Interest rate spread........................ 3.05%
=======
Net yield on interest-earning assets........ 3.80%
=======
Ratio of average interest-earning assets
to average interest-bearing liabilities... 119.04%
======
<CAPTION>
Year Ended December 31,
--------------------------------
1996
--------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)................. $ 119,828 $ 10,462 8.73%
Investment securities:
Securities available for sale.......... 16,007 852 5.32
Securities held to maturity............ 3,217 142 4.41
Mortgage-backed and related securities:
Securities available for sale.......... 31,453 2,038 6.48
Securities held-to-maturity............ -- -- --
Cash and cash equivalents................. 7,029 381 5.42
---------- --------
Total interest-earning assets.......... 177,534 13,875 7.82
Noninterest-earning assets.................. 7,982 --------
----------
Total assets........................... $ 185,516
==========
Interest-bearing liabilities:
Deposits.................................. $ 136,764 6,322 4.62
Borrowings................................ 8,066 406 5.03
---------- --------
Total interest-bearing liabilities..... 144,830 6,728 4.65
--------
Noninterest-bearing liabilities............. 5,080
----------
Total liabilities...................... 149,910
Stockholders' equity........................ 35,937
Unrealized losses on securities............. (331)
----------
Total liabilities and retained earnings..... $ 185,516
==========
Net interest income......................... $ 7,147
========
Interest rate spread........................ 3.17%
=======
Net yield on interest-earning assets 4.03%
=======
Ratio of average interest-earning assets
to average interest-bearing liabilities... 122.58%
======
<CAPTION>
Year Ended December 31,
--------------------------------
1995
--------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)................. $ 114,449 $ 9,823 8.58%
Investment securities:
Securities available for sale.......... 14,221 703 4.94
Securities held to maturity............ 2,754 122 4.43
Mortgage-backed and related securities:
Securities available for sale.......... 34,892 2,288 6.56
Securities held-to-maturity............ -- -- --
Cash and cash equivalents................. 5,892 331 5.62
---------- --------
Total interest-earning assets.......... 17,2084 13,267 7.70
Noninterest-earning assets.................. 4,578 --------
----------
Total assets........................... $ 176,786
==========
Interest-bearing liabilities:
Deposits.................................. $ 147,476 6,675 4.53
Borrowings................................ 1,500 72 4.80
---------- --------
Total interest-bearing liabilities..... 148,976 6,747 4.53
--------
Noninterest-bearing liabilities............. 2,693
----------
Total liabilities...................... 151,669
Stockholders' equity........................ 25,698
Unrealized losses on securities............. (581)
----------
Total liabilities and retained earnings..... $ 176,786
==========
Net interest income......................... $ 6,520
========
Interest rate spread........................ 3.17%
=======
Net yield on interest-earning assets........ 3.79%
=======
Ratio of average interest-earning assets
to average interest-bearing liabilities... 155.59%
======
</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,
-----------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------------- -------------------------------------------------
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............ $ 1,788 $ (91) $ (16) $ 1,681 $ 462 $ 169 $ 8 $ 639
Investment securities:
Securities available for sale.. 1,056 153 189 1,398 88 54 7 149
Securities held to maturity.... 6 17 1 24 21 (1) -- 20
Mortgage-backed and related
securities:
Securities available for sale.. (357) 19 (4) (342) (225) (28) 3 (250)
Securities held-to-maturity.... -- -- 8 8 -- -- -- --
Cash and cash equivalents........ 361 1 2 364 64 (12) (2) 50
------- ------- ------- ------- ------- ------ ------- ------
Total interest-earning assets.. 2,854 99 180 3,133 410 182 16 608
------- ------- ------- ------- ------- ------ ------- ------
Interest expense:
Deposits......................... 1,012 (131) (21) 860 (485) 142 (10) (353)
Borrowings....................... 880 64 138 1,082 315 4 15 334
------- ------- ------- ------- ------- ------ ------- ------
Total interest-bearing
liabilities.................. 1,892 (67) 117 1,942 (170) 146 5 (19)
------- ------- ------- ------- ------- ------ ------- ------
Change in net interest income...... $ 962 $ 166 $ 63 $ 1,191 $ 580 $ 36 $ 11 $ 627
======= ======= ======= ======= ======= ====== ======= ======
</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
11
<PAGE>
certain strategies designed to decrease the vulnerability of its earnings to
material and prolonged changes in interest rates.
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, 1997, the Company had a negative one-year
interest rate sensitivity gap of 4.2%, 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, 1997 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).................. $ 14,328 $ 20,230 $ 41,043 $ -- $ -- $ 75,601
Interest-earning deposits.................. 18,117 -- -- -- -- 18,117
Fixed-rate single-family mortgage loans.... 46,116 20,372 -- -- -- 66,488
Mortgage-backed and related securities (1). 4,711 6,744 13,331 -- -- 24,786
Other loans................................ 81,535 16,229 -- -- -- 97,764
--------- ---------- --------- --------- -------- ---------
Total................................... 164,807 63,575 54,374 -- -- 282,756
--------- ---------- --------- --------- -------- ---------
Interest-bearing liabilities:
Deposits................................... 172,211 34,921 -- -- -- 207,132
Borrowings................................. 5,323 42,600 -- -- -- 47,923
--------- ---------- --------- --------- -------- ---------
Total................................... 177,534 77,521 -- -- -- 255,055
--------- ---------- --------- --------- -------- ---------
Interest sensitivity gap..................... $ (12,727) $ (13,946) $ 54,374 $ -- $ -- $ 27,701
========= ========== ========= ========= ======== =========
Cumulative interest sensitivity gap.......... $ (12,727) $ (26,673) $ 27,701 $ 27,701 $ 27,701 $ 27,701
========= ========== ========= ========= ======== =========
Ratio of interest-earning assets
to interest-bearing liabilities........... 92.8% 82.0% N/A N/A N/A 11.09%
========= ========== ========= ========= ======== =========
Ratio of cumulative gap to total assets...... (4.2)% (8.8)% 9.1% 9.1% 9.1% 9.1%
========= ========== ========= ========= ======== =========
</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 interest rates
13
<PAGE>
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
The Company has no business other than that of its subsidiary banks and
investing its assets. Management believes that the Company's current assets,
earnings on such assets and principal and interest payments on the ESOP loan,
together with dividends that may be paid from the subsidiary banks 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.
The Company's primary sources of funds are deposits and borrowings, as
well as 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. In addition, during the year
ended December 31, 1997, the Company obtained a $10.0 million line of credit, of
which the Company had borrowed $5.6 million at December 31, 1997. The interest
rate on such borrowings is the prime rate, which currently is 8.5%.
The primary investing activity of the Company is the origination of
loans. Other investing activities include the purchase of investment securities
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 $81.2 million at
December 31, 1997 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 Company's most liquid assets are cash and cash equivalents, 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, 1997, the Company had commitments
to originate loans of $15.7 million. Certificates of deposit which are scheduled
to mature in less than one year at December 31, 1997 totaled $75.1 million.
Management believes that a significant portion of such deposits will remain with
the Company.
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.
14
<PAGE>
Impact of New Accounting Standards
Earnings per Share. In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, which is effective for financial statements issued for periods
ending after December 15, 1997. This Statement establishes standards for
computing and presenting earnings per share ("EPS"). It replaces the
presentation of primary EPS with a presentation of basic EPS. Management
believes the adoption of this Statement will not have a significant effect on
the Company's EPS.
Disclosure of Information About Capital Structure. In February 1997,
the FASB issued SFAS No. 129, which establishes standards for disclosing
information about capital structure. This Statement is effective for fiscal
years ending after December 15, 1997. Management believes the adoption of this
Statement will not have a material effect on the Company's financial statements.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No.
130, which establishes standards for the reporting and display of comprehensive
income and its components. This Statement is effective for fiscal years
beginning after December 15, 1997. Management believes the adoption of this
Statement will not have a material effect on the Company's financial statements.
Disclosures About Segments of an Enterprise and Related Income. In June
1997, the FASB issued SFAS No. 131, which establishes standards for the way
public companies report information about operating segments in the annual and
interim financial statements. This Statement is effective for fiscal years
beginning after December 15, 1997. Management believes the adoption of this
Statement will not have a material effect on the financial statements of the
Company.
15
<PAGE>
[LETTERHEAD OF LARSSON, WOODYARD & HENSON, LLP APPEARS HERE]
Independent Auditors Report
To the Board of Directors
Community Financial Corp.
and Subsidiaries
Olney, Illinois
We have audited the accompanying consolidated balance sheets of Community
Financial Corp. and Subsidiaries as of December 31, 1997 and 1996, 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, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Larsson, Woodyard & Henson, LLP
January 28, 1998
16
<PAGE>
COMMUNITY FINANCIAL CORP AND SUSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
--------------------------
1997 1996
----------- ------------
(1,000's)
--------------------------
<S> <C> <C>
Cash and Cash Equivalents
Cash $ 8,607 $ 1,285
Interest bearing deposits 18,117 11,333
-------- --------
Total Cash and Cash Equivalents 26,724 12,618
Securities available for sale (amortized cost of $57,282
and $14,213 in 1997 and 1996, respectively) 57,283 13,990
Securities held to maturity (estimated market value of
$18,403 and $3,378 in 1997 and 1996, respectively) 18,318 3,362
Mortgage-backed and related securities available for sale (amortized
cost of $23,878 and $28,535 at 1997 and 1996, respectively) 23,895 28,319
Mortgage-backed and related securities held to maturity
(estimated market value at $927 and $0 at 1997 and 1996,
respectively) 891 0
Loans receivable, net 162,318 122,307
Foreclosed real estate, net 126 53
Accrued interest receivable 2,675 1,239
Premises and equipment, net 5,853 2,609
Prepaid income taxes 0 166
Deferred income taxes 289 409
Goodwill 5,109 0
Core deposit intangible 527 0
Other assets 257 727
-------- --------
Total Assets $304,265 $185,799
======== ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
-------------------------
1997 1996
----------- -----------
(1,000's)
-------------------------
<S> <C> <C>
Deposits $218,915 $139,100
Federal Home Loan Bank advances 37,000 7,500
Repurchase agreements 5,323 3,121
Other borrowings 5,600 0
Advances from borrowers for taxes and insurance 41 40
Accrued interest payable 457 160
Accrued income taxes 46 0
Other liabilities 1,156 1,796
-------- --------
Total Liabilities 268,538 151,717
-------- --------
Commitments and contingencies
Stockholders' Equity:
Common stock $.01 par value, 7,000,000 shares authorized;
2,360,612 and 2,387,112 shares issued at December 31, 1997
and December 31, 1996, respectively 26 26
Additional paid-in capital 25,754 25,397
Treasury stock ( 3,803) ( 3,411)
Shares held for management recognition plan ( 750) ( 1,123)
Unearned employee stock ownership plan (ESOP) shares ( 1,428) ( 1,693)
Unrealized gain (loss) on securities available for sale,
net of related taxes 11 ( 263)
Retained earnings 15,917 15,149
-------- --------
Total Stockholders' Equity 35,727 34,082
-------- --------
Total Liabilities and Stockholders' Equity $304,265 $185,799
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(1,000's)
----------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 12,143 $ 10,462 $ 9,823
Interest on mortgage-backed and related securities 1,651 2,038 2,289
Interest on securities and interest-bearing deposits 3,214 1,375 1,155
-------- -------- --------
Total interest income 17,008 13,875 13,267
-------- -------- --------
Interest expense:
Interest on deposits 7,182 6,322 6,675
Interest on other borrowed funds 1,488 406 72
-------- -------- --------
Total interest expense 8,670 6,728 6,747
-------- -------- --------
Net interest income 8,338 7,147 6,520
Provision for loan losses ( 236) ( 10) ( 113)
-------- -------- --------
Net interest income after provision
for loan losses 8,102 7,137 6,407
-------- -------- --------
Non-interest income 1,127 777 1,170
-------- -------- --------
Non-interest expense 7,152 6,798 4,437
-------- -------- --------
Income before income taxes 2,077 1,116 3,140
Provision for income taxes 675 343 1,107
-------- -------- --------
Net income $ 1,402 $ 773 $ 2,033
======== ======== ========
Basic earnings per share $ .62 $ .33 $ .42
======== ======== ========
Dilutive earnings per share $ .60 $ .33 $ .42
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Management Gain (Loss)
Recognition Unearned Additional on 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, 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, at $0.25 per share ( 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
Net income 1,402 1,402
Income American Bank of Illinois
at time of acquisition ( 54) ( 54)
Dividends paid, at $0.25 per
share ( 590) ( 590)
Purchase of treasury stock ( 392) ( 392)
Shares held for MRP 373 144 517
Amortization of ESOP shares 265 213 478
Change in net unrealized gain
(loss) on securities
available for sale 10 274 284
------ ------- -------- -------- --------- ------- ------- -------
Balance, December 31, 1997 $ 26 ($ 3,803) ($ 750) ($ 1,428) $ 25,754 $15,917 $ 11 $35,727
====== ======= ======== ======== ========= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(1,000's)
----------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,402 $ 773 $ 2,033
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 342 240 220
Provision for loan losses 236 10 113
Accretion for discounts on securities ( 65) ( 56) ( 31)
Amortizaiton of premiums on securities 45 38 16
Amortization of intangibles 73 0 0
(Increase) decrease in accrued interest receivable ( 629) ( 21) ( 313)
Decrease (increase) in deferred income taxes 120 ( 129) 1,224
Decrease (increase) in other assets 567 ( 564) 122
Increase (decrease) in accrued income taxes 226 ( 701) ( 38)
Increase in accrued interest payable ( 105) 46 23
(Decrease) increase in other liabilities ( 871) 1,349 ( 97)
Federal Home Loan Bank stock dividends received 0 0 ( 11)
(Gain) loss on sale of securities and mortgage-backed and related securities ( 34) 0 5
Loss on sale of premises and equipment 2 0 0
-------- -------- --------
Net cash provided by (used in) operating activities 1,309 985 3,266
-------- -------- --------
Investing activities:
Proceeds from sales of securities available for sale 1,000 0 0
Proceeds from maturities of securities held to maturity 4,513 321 72
Proceeds from maturities of securities available for sale 24,647 6,500 3,713
Proceeds from maturities of mortgage-backed securities available for sale 1,420 0 0
Proceeds from sales of mortgage-backed and related securities available for sale 632 0 863
Proceeds from maturing time deposits 0 0 199
Purchase of securities available for sale ( 58,043) ( 1,003) ( 18,857)
Purchase of securities held to maturity ( 4,480) ( 650) ( 2,559)
Purchase of mortgage-backed securities available for sale ( 1,812) 0 0
Acquisitions net of cash and cash equivalents acquired of 14,573 ( 942) 0 0
Purchase of loans 0 0 ( 249)
Decrease (increase) in loans receivable 134 ( 7,823) ( 2,455)
Principal collected on mortgage-backed and related securities 4,493 7,201 2,483
(Increase) decrease in foreclosed real estate ( 203) ( 48) 25
Decrease in real estate held for sale 0 132 0
Purchase of premises and equipment ( 963) ( 485) ( 62)
Proceeds from sale of premises and equipment 114 0 0
Purchase of Federal Reserve Bank stock 0 ( 49) ( 332)
Purchase of Federal Home Loan Bank stock ( 1,080) ( 200) 0
-------- -------- --------
Net cash provided by (used in) investing activities ( 30,570) 3,896 ( 17,159)
-------- -------- --------
</TABLE>
21
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(1,000's)
----------------------------------
<S> <C> <C> <C>
Financing Activities:
Net increase (decrease) in deposits $ 6,055 ($ 5,177) ($ 6,801)
Increase (decrease) in advances from borrowers
for taxes and insurance ( 3) 6 ( 9)
Increase in borrowings 35,100 4,500 1,950
Increase in repurchase agreements 2,202 3,121 0
Proceeds from sale of stock 0 0 25,307
Purchase of treasury stock ( 392) ( 3,411) 0
Retirement (purchase) of MRP stock 373 ( 1,123) 0
Unearned employee stock ownership plan stock 265 423 ( 2,116)
ESOP adjustment 357 117 0
Dividends paid (accrued) ( 590) ( 596) 0
-------- -------- --------
Net cash provided by (used in) financing activities 43,367 ( 2,140) 18,331
-------- -------- --------
Increase in cash and cash equivalents 14,106 2,741 4,438
Cash and cash equivalents at beginning of year 12,618 9,877 5,439
-------- -------- --------
Cash and cash equivalents at end of year $ 26,724 $ 12,618 $ 9,877
======== ======== ========
Supplemental Disclosures:
Additional Cash Flows Information:
Cash paid for:
Interest on deposits, advances and other borrowings $ 8,373 $ 6,682 $ 6,724
Income taxes:
Federal $ 264 $ 857 $ 1,171
State $ 0 $ 177 $ 106
Schedule of Noncash Investing Activities:
Stock dividends were distributed by the
Federal Home Loan Bank of Chicago $ 0 $ 0 $ 11
Change in unrealized gain (loss) on
securities available for sale $ 478 ($ 348) $ 2,714
Change in deferred income taxes
attributed to unrealized gain (loss)
on securities available for sale ($ 183) $ 141 ($ 1,085)
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. 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 predecassor of the Community Bank & Trust, N.A., 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 Community
Bank & Trust, N.A. The Company's principal business is overseeing and
directing the business of the banks 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 Community Bank & Trust, N.A. is a national bank operating through five
offices serving Richland, Coles, Jasper, Lawrence, and Wayne Counties,
Illinois. During 1997 the Company acquired American Bancshares, Inc., a
single bank holding company for America Bank of Illinois, Egyptian
Bancshares, Inc., the holding company for the Egyptian State Bank and
Saline County State Bank, and MidAmerica Bank of St. Clair County. Egyptian
Bancshares, Inc. was dissolved in 1997. American Bank of Illinois has two
offices serving Bond and Clinton Counties, Illinois. The Egyptian State
Bank and Saline County State Bank has offices serving Saline County,
Illinois. MidAmerica Bank of St. Clair County has an office serving St.
Clair County, Illinois.
The principal business of the banks historically consists of attracting
deposits from the general public and investing these desposits in loans
secured by first mortgages on single-family residences in the banks' market
area. To an increasing extent, the banks originate 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 banks
origination of these loans arise from management's perception of minimal
anticipated growth in residential loan demand within the Banks' 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 subsidiaries Community Bank & Trust, N.A., American
Bancshares, Inc., The Egyptian State Bank, Saline County State Bank and
MidAmerica Bank of St. Clair County. 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.
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.
23
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Cash Equivalents
For purposes of the consolidated statements of cash flows, cash equivalents
consist of daily interest bearing demand deposits, federal funds sold, and
interest bearing deposits and securities having original maturities of
three months or less.
Investments and Mortgage-Backed Securities
Investment and mortgage-based securities available for sale include
securities that management intends to use as part of its overall
asset/liability management strategy and that may be sold in response to
changes in interest rates and resultant prepayment risk and other related
factors. Securities available for sale are carried at fair value, and
unrealized gains and losses (net of related tax effects) are excluded from
earnings but are included in stockholders' equity. Upon realization, such
gains and losses will be included in earnings using the specific
identification method. Investment securities and mortgage-backed
securities, other than those designated as available for sale or trading,
are comprised of debt securities for which the Bank as positive intent and
ability to hold to maturity and are carried at cost, adjusted for
amortization of premiums and accretion of discounts using the level-yield
method over the estimated lives of the securities. Trading account
securities are adjusted to market value through earnings. There were no
trading account securities during the years ended December 31, 1997 or
1996.
Management determines the appropriate classification of investment and
mortgage-backed securities as either available for sale, held to maturity,
or held for trading at the purchase date.
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.
Loans are placed on nonaccrual when collection of principal or interest is
considered doubtful ( generally loans past due 90 days or more). Any unpaid
interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on nonaccrual 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 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. The allowance is
increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries. Loans are charged off when
management believes there has been permanent impairment of their carrying
values.
24
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Loans
The Bank also provides a reserve for losses on specific loans which are
deemed to be impaired. Groups of small balance homogeneous basis loans
(generally residential real estate and consumer loans) are evaluated for
impairment collectively. A loan is considered impaired when, based upon
current information and events, it is probable that the bank will be unable
to collect, on a timely basis, all principal and interest according to the
contractual terms of the loan's original agreement. When a specific loan is
determined to be impaired, the reserve for possible loan losses is
increased through a charge to expense for the amount of the impairment. For
all non-consumer loans, impairment is measured based on value of the
underlying collateral. The value of the underlying collateral is determined
by reducing the collateral's estimated current value by anticipated selling
costs. The bank's impaired loans are the same as those non-consumer loans
currently reported as nonaccrual. The Bank recognizes interest income on
impaired loans only to the extent that cash payments are received.
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.
Goodwill
Goodwill reflects the excess of cost over fair value of net assets which
were acquired during 1997. Note 22 more fully describes the purchase
transaction. Goodwill is amortized over 15 years which approximates the
periods estimated to be benefited from the assets acquired and liabilities
assumed. Accumulated amortization at December 31, 1997 was $50,000.
Core Deposit Intangible
Core deposit intangible represents the intangible value of deposit
relationships resulting from deposit liabilities assumed in the 1997
acquisitions and is amortized using an accelerated method based on an
estimated runoff of the related deposits, not exceeding 7 years.
Accumulated amortization at December 31, 1997 was $23,000.
25
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
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.
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 are not
considered common shares outstanding for this calculation. 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.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Company's subsidiaries have entered
into off-balance-sheet financial instruments consisting of commitments to
extend credit, commitments under credit card arrangements, commercial
letters of credit and standby letters of credit. Such instruments are
recorded in the consolidated financial statements when they become payable.
Trust Assets
Assets held by the Company's subsidiaries in fiduciary or agency capacity
for customers are not included in the consolidated financial statements as
such items are not assets of the Company or its subsidiaries.
New Accounting Standards
If February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," that specifies standards for
disclosing information about an entity's capital structure. SFAS is
effective for financial statements ending after December 15, 1997.
Implementation of SFAS No. 129 had no disclosure effect of its financial
statements.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. This statement requires classification of items of
other comprehensive income by their nature in the financial statements and
display of the accumulated balance of other comprehensive income separately
from retained earnings and additional paid in capital in the equity section
of the statement of financial position. This statement is effective for
fiscal years beginning after December 15, 1997 and the Company will
implement this for its year ended December 31, 1998.
26
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
New Accounting Standards
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which establishes standards for
reporting information about operating segments in annual financial
statements and requires that the businesses report selective information
about operating segments an interim financial reports to shareholders. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement is
effective for fiscal years beginning after December 31, 1997. This
statement requires disclosure in information in the financial statements
and the Company will implement this for their year ended December 31, 1998.
In February of 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132
standardizes the disclosure requirements for pensions and other
postretirement benefits. This statement is effective for financial
statements for periods beginning after December 15, 1997. The management of
the Company plans to adopt the appropriate provisions of the statements at
January 1, 1998, and does not currently believe that the future adoption of
this statement will have a material effect on the Company's financial
position or operating results.
Reclassifications
Certain reclassifications have been made to the balances as of December 31,
1996 and 1995, with no effect on net income, to be consistent with the
classifications adopted for December 31, 1997.
Note 2. Securities
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
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 $ 53,924 $ 115 $ 114 $ 53,925
State and municipal 1,000 2 2 1,000
FRB stock 381 0 0 381
FHLB stock 1,975 0 0 1,975
Other securities 2 0 0 2
--------- ---------- ---------- ----------
$ 57,282 $ 117 $ 116 $ 57,283
========= ========== ========== ==========
</TABLE>
<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 836 0 8 828
FRB stock 381 0 0 381
FHLB stock 895 0 0 895
------- -------- -------- ----------
$14,213 $ 5 $ 228 $ 13,990
======== ======== ======== ==========
</TABLE>
27
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
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,
----------------------------------------------------
1997 1996
----------------------------------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
--------- ----------- --------- ------------
(1,000)
----------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 11,443 $ 11,441 $ 2,687 $ 2,670
Due after one year through five years 12,038 12,041 8,017 7,913
Due after five years through ten years 31,442 31,442 2,233 2,131
Due after ten years 2,359 2,359 1,276 1,276
----------------------------------------------------
$ 57,282 $ 57,283 $14,213 $13,990
====================================================
</TABLE>
<TABLE>
<CAPTION>
Securities held to maturity are summarized as follows:
December 31, 1997
--------------------------------------------------------
(1,000's)
--------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Government and agency securities $ 11,695 $ 23 $ 12 $ 11,706
State and municipal obligations 6,623 96 22 6,697
----------- ---------- ---------- -----------
$ 18,318 119 $ 34 $ 18,403
=========== ========== ========== ===========
<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>
28
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
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 and prepayment options
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996
-------------------------- -------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
--------- ----------- --------- -----------
(1,000's)
------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 7,021 $ 7,018 $ 330 $ 330
Due after one year through five years 8,879 8,929 1,636 1,636
Due after five years through ten years 2,418 2,456 1,396 1,412
Due after ten years 0 0 0 0
--------- ----------- --------- -----------
$ 18,318 $ 18,403 $ 3,362 $ 3,378
========= =========== ========= ===========
</TABLE>
Securities with a carrying amount of $29,681,000 and $0 at December 31,
1997 and 1996 were pledged to secure public deposits and for other purposes
as required or permitted by law.
Proceeds from sales of securities, gross gains and gross losses from such
sales were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996 1995
-------- -------- --------
(1,000's)
-----------------------------
<S> <C> <C> <C>
Proceeds from sales $ 1,000 $ 0 $ 0
======== ======== ========
Gross gains $ 0 $ 0 $ 0
Gross losses 0 0 0
-------- -------- --------
$ 0 $ 0 $ 0
======== ======== ========
</TABLE>
Note 3. Mortgage-Backed and Related Securities
Mortgage-backed and related securities available for sale are summarized
as follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
1,000's
--------------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 2,454 $ 130 $ 0 $ 2,584
GNMA collateralized
mortgage obligations 1,121 8 29 1,100
FNMA certificates 2,158 55 18 2,195
FNMA collateralized
mortgage obligations 3,077 2 67 3,012
FHLMC certificates 5,358 99 80 5,377
FHLMC collateralized
mortgage obligations 9,710 40 123 9,627
-------- ---------- ---------- -----------
$ 23,878 $ 334 $ 317 $ 23,895
======== ========== ========== ===========
</TABLE>
29
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARYS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Mortgage-Backed and Related Securities
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>
Mortgage-backed and related securities held to maturity are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
1,000's
-------------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 475 $ 30 $ 0 $ 505
FNMA collateralized
mortgage obligations 314 2 0 316
FHLMC certificates 102 4 0 106
--------- ---------- ---------- -----------
$ 891 $ 36 $ 0 $ 927
========= ========== ========== ===========
</TABLE>
Mortgage-backed and related securities with a carrying amount of $15,233,000
and $24,562,000 at December 31, 1997 and 1996, respectively, 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
6.59% and 6.46% at December 31, 1997 and 1996, respectively.
The Bank had gross realized gains of $36,000 and gross realized losses of
$2,000 on $632,000 of sales proceeds on mortgage-backed and related
securities for the year ended December 31, 1997. 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
year ended December 31, 1996.
30
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans Receivable
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
------- -------
(1,000's)
-----------------
<S> <C> <C>
Real estate loans:
Single-family residential $64,893 $46,501
Construction 3,174 770
Multi-family residential and commercial 9,682 2,494
Agricultural 17,865 12,226
Commercial 26,511 20,129
-------- --------
122,125 82,120
Consumer loans:
Automobile 27,104 30,360
Credit Card 2,107 1,879
Mobile Home 905 850
Educational 25 29
Deposit accounts 1,552 807
Home Improvement 560 694
Other 10,743 7,184
-------- --------
165,121 123,923
Less:
Loans in process 869 96
Allowance for losses 1,934 1,520
-------- --------
$162,318 $122,307
======== ========
</TABLE>
Certain consumer loans are shown net of add on interest at December 31, 1997
and 1996. The add on interest amounted to $1,097,000 and $1,621,000,
respectively.
Changes in allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
(1,000's)
----------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 1,520 $ 1,514 $ 1,641
Provision for loan losses 236 10 113
Recoveries 238 397 312
Loans charged off ( 510) ( 401) ( 552)
Adjustments: charges incident to acquisitions 450 0 0
--------- --------- ---------
Balance at December 31 $ 1,934 $ 1,520 $ 1,514
========= ========= =========
</TABLE>
31
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans Receivable
Principal balance of non-accrual loans totaled approximately $1,676,000 and
$318,000 at December 31, 1997 and 1996, respectively. The interest discontinues
accruing when the loan becomes more than ninety days past due and in manage-
ment's judgment the collection of interest is impaired. The amount of interest
not recognized was $71,000, $21,000, and $20,000 for the years ended December
31, 1997, 1996, and 1995, respectively. Interest income recognized on nonaccrual
loans during the years ended December 31, 1997, 1996, and 1995 was insignifi-
cant. The Bank has sold a 95% participation interest in single-family mortgage
loans to FHLMC in prior years. The participation amounted to $183,000 and
$257,000 at December 31, 1997 and 1996, respectively.
Weighted average interest rate on loans consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
------------------------
<S> <C> <C>
Mortgage loans 8.50% 8.51%
Nonmortgage loans 9.09% 8.78%
Total loans 8.81% 8.68%
</TABLE>
Note 5. Accrued Interest Receivable
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
-------- ------
(1,000's)
-------------------
<S> <C> <C>
Loans $ 1,547 $ 845
Mortgage-backed and related securities 149 181
Securities 979 213
-------- -------
$ 2,675 $ 1,239
======== =======
</TABLE>
Note 6. Premises and Equipment
Premises and equipment are summarized by major classifications as presented
below.
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
--------- ---------
(1,000's)
-----------------------
<S> <C> <C>
Land $ 890 $ 690
Building 5,291 2,291
Furniture and equipment 2,779 1,540
--------- ---------
8,960 1,540
Accumulated depreciation ( 3,107) ( 1,830)
--------- ---------
$ 5,853 $ 4,439
========= =========
</TABLE>
Depreciation included in the consolidated statements of income amounted to
$342,000, $240,000, and $220,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
32
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes 7. Deposit Analysis
Deposits and weighted average interest rates are summarized as follows
(amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1997 1996
--------------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Demand deposits, non-interest bearing $ 13,530 0.00% $ 6,172 0.00%
Demand deposits, interest bearing 25,733 3.19% 12,395 2.82%
Passbook 25,999 2.89% 14,045 2.75%
Money market 23,499 3.70% 19,272 3.26%
Certificates 130,154 5.66% 87,216 5.58%
---------- ---------
$ 218,915 4.48% $ 139,100 4.48%
========== =========
</TABLE>
Certificates had the following remaining maturities (amounts in thousands):
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Two
Less Than One to Two to Three After Three
Rate One Year Years Years Years Total
---- -------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
2 - 3.99% $ 73 $ 0 $ 0 $ 0 $ 73
4 - 5.99% 66,100 28,028 4,310 2,498 100,936
6 - 7.99% 8,226 9,001 9,250 1,469 27,946
8 - 9.99% 691 0 508 0 1,199
------- ---------- -------- ----------- ---------
$75,090 $ 37,029 $ 14,068 $ 3,967 $ 130,154
======= ========== ======== =========== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Two
Less Than One to Two to Three After Three
Rate One Year Years Years Years Total
---- -------- ---------- -------- ----------- ---------
<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>
33
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposit Analysis
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995
--------- --------- ---------
(1,000's)
--------------------------------------
<S> <C> <C> <C>
Passbook $ 577 $ 406 $ 438
Demand deposits 487 351 351
Money market 679 662 752
Certificates 5,439 4,903 5,134
--------- --------- ---------
$ 7,182 $ 6,322 $ 6,675
========= ========= =========
</TABLE>
At December 31, 1997 and 1996, the Bank had $33,758,000 and $15,540,000,
respectively, of deposit accounts with balances in excess of $100,000. The
Bank did not have brokered deposits at December 31, 1997 and 1996. Deposits
in excess of $100,000 are not federally insured.
The Bank has pledged mortgage-based and related securities, when requested
by depositors, for deposits of $100,000 or more. Deposits which had
securities pledged amounted to $31,837,000 and $11,240,000 at December 31,
1997 and 1996, respectively.
Note 8. Other Borrowed Funds
Advances from the FHLB consisted of fixed rate callable notes as of
December 31, 1997. The advances all have a call date at one year with
quarterly calls after that. Advances at December 31, 1996 consisted of an
open line of credit of $7,500,000 at 5.41% interest rate. Advances are
secured for both years by FHLB stock and a blanket assignment of Community
Bank & Trust N.A.'s unpledged qualifying mortgage loans. Interest expense
for advances amounted to $1,196,000, $305,000, and $72,000 for the years
ended December 31, 1997, 1996, and 1995, respectively. The advances at
december 31, 1997 consisted of the following (amounts in thousands);
<TABLE>
<CAPTION>
Issue Maturity Interest
Date Date Amount Rate
---------------- ----------------- ---------- ----------
<S> <C> <C> <C>
June 17, 1997 June 18, 2002 $ 5,000 5.71%
July 28, 1997 July 31, 2000 5,000 5.71%
August 6, 1997 August 8, 2002 15,000 5.40%
December 8, 1997 December 11, 2002 6,000 5.19%
December 8, 1997 December 11, 2002 6,000 5.19%
----------
$ 37,000
==========
</TABLE>
Scheduled principal reduction of these advances at December 31, 1997 is as
follows: 1998 - $0, 1999 - $0; 2000 - $5,000,000; 2001 - $0;
and 2002 - $32,000,000.
34
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Other Borrowed Funds
The subsidiary banks have entered into repurchase agreements with customers at
various interest rates and average maturities of less than three months.
Interest expense amounted to $242,000, $101,000, and $0 for years ended
December 31, 1997, 1996, and 1995, respectively. These agreements are not
insured by FDIC.
The Company entered into a loan agreement with UMB Bank of St. Louis during
1997 which provides the availability of $10,000,000 at prime interest rate
payable quarterly. The Company borrowed $5,600,000 during 1997. At maturity of
this loan on October 31, 1998, the loan will be converted to a one year note,
at prime rate of interest, with a ten year amortization period and renewed on
an annual basis subject to approval of UMB Bank. This loan is secured by 100%
of the outstanding stock of Community Bank & Trust, N.A., The Egyptian State
Bank, Saline County State Bank, and MidAmerica Bank of St. Clair County.
Interest expense amounted to $50,000 for the year ended December 31, 1997.
<TABLE>
<CAPTION>
FHLB Advances
---------------------
Open Line Item Repurchase Short Term
1997 of Credit Notes Agreements Notes
-------------------------------------------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at December 31 $ 0 $ 37,000 $ 5,323 $ 5,600
Average amount outstanding during the year 9,264 11,375 4,340 568
Maximum amount outstanding at any month end 19,500 37,000 5,627 5,600
Weighted average interest rate:
During the year 6.13% 5.53% 5.58% 8.50%
End of year 0.00% 5.45% 5.37% 8.50%
<CAPTION>
FHLB
Open Line Repurchase
1996 of Credit Agreements
-------------------------------------------- --------- ----------
<S> <C> <C>
Balance at December 31 $ 7,500 $ 3,121
Average amount outstanding during the year 6,000 2,066
Maximum amount outstanding at any month end 9,000 3,213
Weighted average interest rate:
During the year 5.08% 4.88%
End of year 5.41% 4.90%
</TABLE>
Note 9. Stockholders' Equity
Regulatory Restrictions and Capital Requirements
The principal source of income and funds for the Company is dividends from
its banking subsidiaries. During 1997, the amount of dividends that the
banking subsidiaries could pay to the Company without prior regulatory
approval was exceeded. The Company received $6,500,000 in dividends from
banking subsidiaries to fund acquisitions in 1997 with prior regulatory
approval. As a practical matter, the banks may restrict dividends to a
lesser amount because of the need to maintain adequate capital structures.
35
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stockholders' Equity
The Company and its banking subsidiaries are subject to various regulatory
capital requirements administered by the regulatory banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory, and probably additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and its
banking subsidiaries must meet specific capital guidelines that involve
quantitative measures of their respective assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company and its banking subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the Company
and its banking subsidiaries to maintain minimum amounts and ratios.
Management believes, that as of December 31, 1997, the Company and its
banking subsidiaries meet all capital adequacy requirements to which it is
subject.
The subsidiary banks' actual and minimum required capital amounts and
ratios as mandated by the Federal Reserve Board at December 31, 1997, were
as follows:
<TABLE>
<CAPTION>
Requirements
Minimum To be Classified
Actual Requirements as "Well Capitalized"
Risk-Based Capital to ------------------ ----------------- -----------------------
risk weighted assets Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Community Financial Corp. $32,267 20.35% $12,681 8.00% $15,851 10.00%
Community Bank and Trust N.A. 21,958 11.37% 15,453 8.00% 19,317 10.00%
American Bank of Illinois 1,438 13.02% 883 8.00% 1,104 10.00%
Egyptian State Bank 5,081 29.77% 1,366 8.00% 1,707 10.00%
Saline County State Bank 2,016 15.46% 1,043 8.00% 1,304 10.00%
MidAmerica Bank of St. Clair County 5,735 25.80% 1,778 8.00% 2,223 10.00%
Tier 1 Capital to risk weighted assets
Community Financial Corp. 30,333 19.14% 6,341 4.00% 9,511 6.00%
Community Bank and Trust N.A. 20,451 10.59% 7,727 4.00% 11,590 6.00%
American Bank of Illinois 1,322 11.97% 442 4.00% 662 6.00%
Egyptian State Bank 4,991 29.24% 683 4.00% 1,024 6.00%
Saline County State Bank 1,947 14.93% 522 4.00% 782 6.00%
MidAmerica Bank of St. Clair County 5,584 25.12% 889 4.00% 1,334 6.00%
Tier 1 Capital to average assets
Community Financial Corp. 30,333 10.52% 11,528 4.00% 14,410 5.00%
Community Bank and Trust N.A. 20,451 10.43% 7,845 4.00% 9,806 5.00%
American Bank of Illinois 1,322 6.72% 787 4.00% 983 5.00%
Egyptian State Bank 4,991 19.62% 1,018 4.00% 1,272 5.00%
Saline County State Bank 1,947 11.92% 653 4.00% 817 5.00%
MidAmerica Bank of St. Clair County 5,584 27.74% 805 4.00% 1,006 5.00%
</TABLE>
36
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stockholders' Equity
At the time of the conversion of Community Bank & Trust, N.A. to a stock
organization, a special liquidation account was established for the benefit
of eligible account holders and the supplemental eligible account holders
in an amount equal to the net worth of the Bank. The special liquidation
account will be maintained for the benefit of eligible account holders and
the supplemental eligible accounts holders who continue to maintain their
accounts in the Bank after the conversion in June of 1995. In the event of
a complete liquidation, each eligible and the supplemental eligible
accounts holders will be entitled to receive a liquidation distribution
from the liquidation account in an amount proportionate to the current
adjusted qualifying balances for account then held. Community Bank & Trust
N.A. may not declare or pay cash dividends on or repurchase any of its
common stock if stockholders' equity would be reduced below applicable
regulatory capital requirements or below the special liquidation account.
Treasury Stock
During 1997, the Company authorized purchasing 5% of the outstanding shares
of stock as of December 31, 1996. The Company purchased 26,500 shares, or
1.11% of outstanding shares, for $392,000 with an average cost per share of
$14.80.
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.
Note 10. Non-Interest Income and Expense
Non-interest income and expense is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
(1,000's)
------------------------------
<S> <C> <C> <C>
Non-interest income
Service fees $ 830 $ 505 $ 432
Insurance and annuity commissions 214 210 282
Net gain (loss) on sale of securities 34 0 0
Net loss on sale of mortgage-backed
and related securities 0 0 ( 5)
Net gain (loss) on sale of assets ( 2) 0 0
Recovery of litigation fees 0 0 249
Other 51 62 212
------- ------ ------
$ 1,127 $ 777 $1,170
======= ====== ======
Non-interest expense
Salaries and employee benefits $ 4,319 $3,580 $2,323
Occupancy expense 328 221 216
Equipment and furnishing expense 484 383 353
Data processing expense 497 412 461
Federal insurance premium 89 1,275 378
Other 1,435 927 706
------- ------ ------
$ 7,152 $6,798 $4,437
======= ====== ======
</TABLE>
37
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Income Tax
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
-------- -------- ---------
(1,000's)
---------------------------
<S> <C> <C> <C>
Currently payable: Federal $ 662 $ 281 $ 950
State 17 52 184
Deferred: Federal ( 3) 8 ( 22)
State ( 1) 2 ( 5)
------- ------- -------
$ 675 $ 343 $ 1,107
======= ======= =======
</TABLE>
Income tax expense for the years ended December 31, 1997, 1996 and 1995 has been
provided at an effective rate of approximately 32.50%, 30.74% and 35.25%,
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,
---------------------------
1997 1996 1995
-------- -------- ---------
(1,000's)
---------------------------
<S> <C> <C> <C>
Computed tax at statutory rates $ 706 $ 383 $ 1,067
Increase (decrease) in tax expense resulting from:
State income tax, net 12 36 130
Other 1 ( 28) 20
Tax exempt income - net ( 44) ( 48) ( 47)
Nontaxable gains 0 0 ( 63)
------ ------ -------
Income tax expense $ 675 $ 343 $ 1,107
====== ====== =======
</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,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for unrealized losses on
securities available for sale $ 0 $ 176
Allowance for loan losses 331 496
NOL carryover 173 0
Acquisition adjustments 182 0
Other 21 8
---------- ----------
707 680
---------- ----------
Deferred tax liabilities:
Allowance for unrealized gains on
securities available for sale 7 0
Federal Home Loan Bank stock 39 39
Premises and equipment 227 214
Core deposit intangible 100 0
Other 45 18
---------- ----------
418 271
---------- ----------
Net deferred tax asset $ 289 $ 409
========== ==========
</TABLE>
38
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Income Tax
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the existence of, or generation of, taxable income
in the periods which those temporary differences are deductible. Management
considers the scheduled reversal of deferred tax liabilities, taxes paid in
carryback years, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical
taxable income and projection for future taxable income over the periods
which the deferred tax assets are deductible, at December 31, 1997 and
1996, management believes it is more likely than not that the Bank will
realize the benefits of these deductible differences.
During 1995, the Community Bank & Trust N.A. 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.
Note 12. Employee Benefit Plans
The Olney Savings and Loan Association Defined Benefit Pension Plan was
terminated and benefits were frozen as of May 31, 1996. Olney Savings and
Loan Association was predecessor of Community Bank & Trust N.A. The plan
termination date was tentatively set at 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. This liability was
accrued and is included in other liabilities, for the year ended December
31, 1996. This plan was not terminated in 1997 as originally planned.
Additional expense will be incurred from the delay in termination which has
not been determined.
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
------------
(1,000's)
------------
<S> <C>
Actuarial present value of benefit obligations:
Acccumulated benefit obligation, including vested benefits of
$546,000 (1995) $ 785
Effect of projected future compensation 353
------------
Projected benefit obligation for service rendered to date 1,138
Plan assets at fair value 831
------------
Plan assets in excess of projected benefit obligation ( 307)
Unrecognized net gain 138
Unrecognized net transition obligation (asset) ( 77)
------------
Accrued pension cost ($ 246)
============
</TABLE>
39
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Employee Benefit Plans
The components of net pension expense for the years ended December 31, 1995
are:
Year Ended
December 31,
------------
1995
------------
(1,000's)
------------
Service cost-benefits earned during the period $ 99
Interest cost on projected benefit obligation 74
Actual return on plan assets ( 19)
Amortization and deferral ( 55)
------------
Net pension expense $ 99
============
1995
------------
Assumptions used to develop the net periodic
pension cost were:
Discount rate 7.5%
Expected long-term rate of return on assets 7.0%
Rate of increase in compensation levels 6.0%
The Company participates in the Manulife 401K Plan. Under the plan voluntary
contributions made by eligible employees are matched 100% by contributions up
to a specific percent of their compensation. The cost of the plan was $66,000,
$72,000 and $64,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, and is included in compensation and employee benefits in the
consolidated statements of income.
Note 13. Commitments and Contingencies
In the ordinary course of business, the Banks have various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Banks are
defendants in various matters of litigation generally incidental to their
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 Banks.
40
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Commitments and Contingencies
The subsidiary banks had outstanding firm commitments to originate loans as
follows:
December 31,
-------------------------
1997 1996
---------- -----------
(1,000's)
-------------------------
Real estate $ 869 $ 96
Other loans 0 0
Credit card loans 6,342 5,889
----------- -----------
Commitments to originate loans $ 7,211 $ 5,985
=========== ===========
Unused lines of credit $ 8,453 $ 6,973
=========== ===========
Interest rates on the above commitments ranged from 7.25% to 16.90% and 6.00% to
13.90% at December 31, 1997 and 1996, respectively.
There were no outstanding commitments to purchase or sell securities at December
31, 1997 and 1996, respectively.
The subsidiary banks are 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 subsidiary 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 same credit policies are used in making commitments
and conditional obligations as 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. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount and type of collateral obtained,
if deemed necessary upon extension of credit, varies and is based on
management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued 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. Policy for
obtaining collateral, and the nature of such collateral, is essentially the same
as that involved in making commitments to extend credit. Generally, signed notes
are required to be executed when a letter of credit is exercised.
41
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Related Parties
The Banks have 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:
December 31,
----------------------------
1997 1996
---------- ----------
(1,000's)
----------------------------
Balance December 31 $ 552 $ 426
Loans incident to acquisitions 404 0
New loans 283 293
Repayments ( 272) ( 167)
-------- --------
Balance December 31 $ 967 $ 552
======== ========
Note 15. 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.
1997 1996
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(1,000's) (1,000's)
---------------------- ----------------------
Financial Assets
Cash and cash equivalents $ 26,724 $ 26,724 $ 12,618 $ 12,618
Securities 75,601 75,686 17,352 17,368
Mortgage-backed and related
securities 24,786 24,822 28,319 28,319
Loans receivable 162,318 162,876 122,307 118,707
Accrued interest receivable 2,675 2,675 1,239 1,239
Financial Liabilities
Deposits 218,915 215,738 139,100 139,894
FHLB advances 37,000 35,695 7,500 7,497
Repurchase agreements 5,323 5,323 3,121 3,121
Other borrowings 5,600 5,600 0 0
Accrued interest payable 457 457 160 160
The fair value of cash and interest bearing deposit, including federal funds
sold, are considered short term investments and carrying value was considered to
be a reasonable estimate of fair value.
42
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. 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 Company 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 for Federal Home Loan Bank advances was based upon the
discounted value of the cash flows. The discount rates utilized were based on
rates currently available with similar terms and maturities.
The fair value of repurchase agreements and other borrowings are considered
short term liabilities and the carrying value was considered to be a
reasonable estimate of fair value.
The fair value of noninterest bearing deposits, savings and NOW accounts, and
money market accounts is the amount payable on demand at December 31, 1997 and
1996. 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.
The foregoing fair value estimates are made at a specific point in time, based
on pertinent market data and relevant information on the financial instrument.
These estimates do not include any premium or discount that could result from
an offer to sell, at one time, an entire holdings of a particular financial
instrument or category thereof. Since no market exists for a substantial
portion of the financial instruments, fair value estimates were necessarily
based on judgements with respect to future expected loss experience, current
economic conditions, risk assessments of various financial instruments
involving a myriad of individual borrowers, and other factors. Given the
innately subjective nature of these estimates, the uncertainties surrounding
them and the matters of significant judgement that must be applied, these fair
value estimations cannot be calculated with precision. Modifications in such
assumptions could meaningfully alter these estimates.
Since these fair value approximations were made solely for on- and off-balance
sheet financial instruments, no attempt was made to estimate the value of
anticipated future business and the value of nonfinancial statement assets and
liabilities. Other important elements which are not deemed to be financial
assets or liabilities include the value of the retail branch delivery system,
its existing core deposit base, premises and equipment and goodwill. Further,
certain tax implications related to the realization of the unrealized gains
and losses could have a substantial impact on these fair value estimates and
have not been incorporated into any of the estimates.
43
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUMMARY INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Service Corporation Activities
Olney Savings Corporation (OSSC) was involved in partnership to conduct
business agency. In 1993 this partnership was dissolved with OSSC acquiring
the insurance agency. As part of this transaction, OSSC recorded goodwill and
non competition agreement as an asset in the amount of $120,000. The Company
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 Company recognized no gain or loss on the dissolution.
Note 17. 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 included 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 shared 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
earning 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 release additional shares. 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 $422,00, $270,000 and $275,000 for December 31, 1997,1996, and 1995.
The ESOP shares were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Allocated shares 47,610 21,160
Shares ratable released for allocation 21,160 21,160
Unallocated shares 142,830 169,280
---------- -----------
Total ESOP shares 211,600 211,600
========== ===========
Pair value of unreleased shares at December 31 $2,589,000 $2,158,000
========== ===========
</TABLE>
Note 18. 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, unless
disabled or retired, then immediately. Under the plan, 105,800 shares of
stock were granted.
During 1996, the Company purchased shares of fund the MRP plan on the open
market. The cost of these shares amounted to $1,403,000 or at a 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.
44
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUMMARY INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26. Acquisitions
During 1997, Community Financial Corp. completed acquisitions of two bank
holding companies and one bank accounted as purchase transactions. The
consolidated statement for 1997 includes the results of operations from the a
acquisition dates. Under this method of accounting, assets and liabilities of
the acquired are adjusted to their estimated fair value and combined with the
historical recorded book values of the assets and liabilities of Community
Financial Corp. The actual recalculation of the acquired net assets is
subject to the completion of studies and evaluations by management. Community
Financial Corp. purchased all of the outstanding shares of the businesses
acquired for cash of $15,515,000. Community Financial Corp. borrowed
$5,600,000 from UMB Bank of St. Louis to fund these acquisitions. For
additional information please see note 8, Other Borrowed Money. Egyptian
Bancshares, Inc. was acquired as of October 31, 1997 and was dissolved as of
November 1, 1997. Egyptian Bancshares, Inc. was the holding company for
Egyptian State Bank and Saline County State Bank. For presentation in the
following schedules, Egyptian State Bank and Saline County State Bank have
been presented as if their parent had not existed at the time of acquisition.
The premiums paid and estimated fair value adjustments have been pushed down
to the acquired banks. The preliminary allocations of the purchase price are
subject to the change as the fair values are finalized.
<TABLE>
<CAPTION>
American Egyptian Saline MidAmerica
Bancshares, State Bank County Bank
Inc. October 31, October 31, November 30,
May 22, 1997 1997 1997 1997
------------ ------------ ------------ --------------
(1,000's)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash consideration paid to shareholders $2,150 $5,000 2,764 5,601
Historical net assets acquired 1,254 3,493 1,930 3,402
------------ ------------- ----------- --------------
Premium paid 896 1,507 834 2,199
============ ============= =========== ==============
</TABLE>
Increased (decreased) in net asset values as result of estimated fair values
adjustments are as follows:
<TABLE>
<CAPTION>
American Egyptian Saline MidAmerica
Bancshares, State Bank County Bank
Inc. October 31, October 31, November 30,
May 22, 1997 1997 1997 1997
------------ ------------ ------------ --------------
(1,000's)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Intangible assets:
Goodwill $ 492 $ 1,303 $ 567 $ 2,111
Core deposit intangible 355 353 235 101
------------ ------------ ------------ --------------
Total intangible assets 847 1,656 802 2,212
Securities 0 73 42 0
Loans 80 ( 317) 10 (21)
Fixed assets 0
Deferred income tax ( 31) 95 ( 20) 8
------------ ------------ ------------ --------------
$ 896 $ 1,507 $ 834 $ 2,199
============ ============ ============ ==============
</TABLE>
45
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Management Recognition Plans
Compensation expense for the Management Recognition Plan was as follows:
December 31,
-----------------------------
1997 1996
-------------- ------------
(1,000's)
-----------------------------
MRP vesting $ 358 $ 275
MRP tax bonus 129 110
Retirement MRP vesting 48 0
Retirement MRP tax bonus 19 0
-------------- ------------
$ 554 $ 385
============== ============
Note 19. 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 20. 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. Employees exercised stock options, a
total of 23,805 shares, in February of 1997. Total estimated cost to the
Company for the early retirement plan was as follows:
December 31,
1997
------------
Stock options exercised $ 80,000
MRP allocation 91,000
MRP tax bonus 36,000
Compensation package 231,000
------------
$ 438,000
============
46
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 21. Stock Option and Incentive Plan
Also on January 12, 1996, the stockholders of the Company approved a fixed
stock option and incentive plan. The option plan provides for the granting of
stock options and stock appreciation rights to certain employees and directors
and has a term of ten years from the effective date of the plan after which no
awards may be granted. The plan intends to reserve 264,506 authorized, but
unissued shares (or treasury shares) of common stock for issuance upon the
future exercise of options or stock appreciation rights. At the effective date
of the plan, certain executive officers and directors will receive a grant of an
option under the plan to purchase up to 264,506 shares of common stock at an
exercise price per share equal to its fair market value on that date. The plan
provides for one-fifth of the options granted to be exercisable on each of the
first five anniversaries of the date the option was granted. The Company
applies APB Opinion 25 in accounting for its fixed stock option plan.
Recognition of compensation expense for stock options is not required when
options are granted at an exercise price equal to or exceeding the fair market
value of the Company's common stock on the date the option is granted.
Therefore, no expense related to the fixed stock option plan is reflected on
the accompanying financial statements.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net income and earnings per share would have been
reduced as follows:
1997
-------------
(1,000's)
-------------
Net Income
- ----------
As reported $ 1,402
=============
Pro forma $ 1,142
=============
Basis earnings per share
- ------------------------
As reported $ .62
=============
Pro forma $ .50
=============
Diluted earnings per share
- --------------------------
As reported $ .60
=============
Pro forma $ .49
=============
The following is a summary of the status of the fixed plan during 1997:
Number of Exercise
Shares Price
----------- ----------
Outstanding at January 1, 1997 0 $ 0
Granted 264,606 13.125
Exercised ( 23,805) 13.125
Forfeited 0 0
----------- ---------
Outstanding at December 31, 1997 240,701 $ 13.125
=========== =========
Options exercisable at December 31, 1997 48,146 $ 13.125
=========== =========
47
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Stock Option and Incentive Plan
The following is a summary of the status of fixed options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
---------------------------------- ---------------------
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life Price Number Price
----------- ------- ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$ 13.125 240,701 9 years $ 13.125 48,146 $ 13.125
</TABLE>
Note 22. Earnings per Share
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
1997 1996
---------- -----------
(1,000's)
---------------------------
<S> <C> <C>
Income available to common stockholders used in basic EPS $ 1,402 $ 773
========== ===========
Income available to common stockholders after assumed conversions
of dilutive securities $ 1,402 $ 773
========== ===========
Weighted average number of common shares used in basic EPS 2,275,233 2,319,798
Effect of dilutive securities:
Stock options 48,140 0
---------- -----------
Weighted number of common shares and dilutive potential common
stock used in diluted EPS 2,323,373 2,319,798
========== ===========
</TABLE>
Earnings per share amounts for 1996 have been restated to give effect to the
application of SFAS No. 128 which was adopted by the Company in 1997.
Note 23. Employment Agreements
The Company and the Banks have entered into separate employment agreements
with certain officers of the Company. These agreements provide for salary
terms, potential severance benefits, and potential benefits which could be due
to these officers in the event of a change in control of the Company.
Note 24. Savings Association Insurance Fund (SAIF) Assessment
Banking legislation enacted September 30, 1996 required Community Bank & Trust
N.A. 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, 1995, was approximately $1,015,000 and has been
included in noninterest expense in the accompanying 1996 consolidated
financial statements. In addition, this banking legislation included
provisions for a substantial reduction in SAIF premiums paid, 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.
48
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 25. Community Financial Corp. Condensed Financial Information
The parent company's principal assets are its investment in subsidiary
banks investment securities and receivable from subsidiaries. The following
are the condensed statements of financial condition for the parent company
only as of December 31, 1997 and 1996 and its condensed statements of
operations and cash flows for the years ended December 31, 1997, and 1996
and for the period from July 1, 1995 to December 31, 1995.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 2,827 $ 6,331
Securities held to maturity 1,651 1,205
Securities available for sale 1,247 2,357
Investment in subsidiaries 34,237 23,264
Receivable from subsidiaries 1,428 1,693
Other assets 893 49
-------- --------
$ 42,283 $ 34,899
======== ========
Liabilities and Stockholders' Equity:
Accrued expenses and other liabilities $ 6,556 $ 817
-------- --------
Stockholders' equity:
Common stock 26 26
Additional paid-in capital 25,754 25,397
Unearned MRP shares ( 750) ( 1,123)
Treasury stock ( 3,803) ( 3,411)
Unearned ESOP shares ( 1,428) ( 1,693)
Unrealized gain (loss) on securities
available for sale, net 11 ( 263)
Retained earnings, subject to certain restrictions 15,917 15,149
-------- --------
Total stockholders' equity 35,727 34,082
-------- --------
$ 42,283 $ 34,899
======== ========
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended
--------------------- Period Ended
Dec. 31, Dec. 31, Dec. 31,
-------- -------- --------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Dividends from subsidiaries bank $ 6,500 $ 3,000 $ 0
Interest income 585 592 439
Non-interest expense ( 1,443) ( 648) ( 83)
-------- -------- --------
Income before income taxes 5,642 2,944 356
Income taxes 356 46 ( 127)
-------- -------- --------
Income before undistributed earnings of subsidiaries 5,998 2,990 229
Undistributed (distributions in excess of) earnings of
subsidiaries ( 4,596) ( 2,217) 793
-------- -------- --------
Net income $ 1,402 $ 773 $ 1,022
======== ======== ========
</TABLE>
49
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25. Community Financial Corp. Condensed Financial Information
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended
-------------------------- Period Ended
Dec. 31, Dec. 31, Dec. 31,
----------- --------- -------------
1997 1996 1995
----------- --------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,402 $ 773 $ 1,022
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in earnings of subsidiaries ( 1,904) ( 783) ( 793)
Dividends received from subsidiaries 6,500 3,000 0
Stock employee benefit plans 1,016 387 0
Other, net 559 194 ( 12)
----------- --------- -------------
Net cash provided by operating activities 7,573 3,571 217
----------- --------- -------------
Cash flows from investing activities:
Purchase investment in subsidiaries ( 15,515) 0 ( 12,692)
Purchase of investment securities ( 515) ( 11,490) ( 11,490)
Maturities of investment securities 69 16,081 3,334
Receivable from subsidiaries 266 526 ( 2,219)
----------- --------- -------------
Net cash provided by (used in)
investing activities ( 15,695) 5,117 ( 23,067)
----------- --------- -------------
Cash flows from financing activities:
Proceeds from stock issuance 0 0 25,307
Common stock repurchased ( 392) ( 4,814) 0
Proceeds from long-term debt 5,600 0 0
Dividends paid on common stock ( 590) 0 0
----------- --------- -------------
Net cash provided by (used in)
financing activities 4,618 ( 4,814) 25,307
----------- --------- -------------
Net increase in cash and cash equivalents ( 3,504) 3,874 2,457
Cash and cash equivalents at beginning of period 6,331 2,457 0
----------- --------- -------------
Cash and cash equivalents at end of period $ 2,827 $ 6,331 $ 2,457
=========== ========= =============
</TABLE>
50
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26. Acquisitions
Estimated fair values of net assets at the acquisition date are summarized as
follows:
<TABLE>
<CAPTION>
American Egyptian Saline MidAmerica
Bancshares, State Bank County Bank
Inc. October 31, October 31, November 30,
May 22, 1997 1997 1997 1997
------------ ----------- ----------- ------------
(1,000's)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,468 $ 7,710 $ 2,315 $ 1,080
Securities, held to maturity 0 10,814 5,221 0
Securities, available for sale 4,602 984 976 2,898
Loans 10,287 8,732 7,815 13,299
Foreclosed Real Estate 0 184 92 0
Premises and equipment 489 167 398 1,685
Goodwill 492 1,303 567 2,111
Core deposit intangible 355 353 235 101
Other assets 177 482 124 426
--------- --------- --------- ---------
19,870 30,729 17,743 21,600
--------- --------- --------- ---------
Deposits 17,492 25,471 14,916 15,879
Other liabilities 228 258 63 120
--------- --------- --------- ---------
17,720 25,729 14,979 15,999
--------- --------- --------- ---------
Fair value of assets acquired $ 2,150 $ 5,000 $ 2,764 $ 5,601
========= ========= ========= =========
</TABLE>
The information below presents on a proforma basis, amounts as if the
acquisitions had been acquired as of the beginning of each year presented:
Year Ended December 31,
-----------------------
1997 1996
-----------------------
Interest income $ 20,647 $ 18,385
Interest expense 10,351 8,794
--------- ----------
Net interest income 10,296 9,591
Provision for loan losses 390 116
--------- ----------
Net interest income after provision for loan losses 9,906 9,475
Security transactions 35 0
Noninterest income 1,197 1,120
Noninterest expense ( 9,340) ( 9,678)
--------- ----------
Income before income taxes 1,798 917
Income taxes ( 636) ( 251)
--------- ----------
Pro forma net income 1,162 666
========= ==========
Pro forma net income per share of common stock $ 0.51 $ 0.29
========= ==========
Included in the pro forma information above is net amortization of approximately
$368,000 before income taxes related to acquisition-related premium, discounts
and intangible assets for the years ended December 31, 1997 and 1996.
51
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 27. Condensed Quarterly Results of Operations
<TABLE>
<CAPTION>
1997
-------------------------------------------------
Forth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income $ 5,064 $ 4,311 $ 4,131 $ 3,502
Interest expense ( 2,751) ( 2,227) ( 2,002) ( 1,690)
-------- -------- -------- --------
Net interest income 2,313 2,084 2,129 1,812
Provision for loan losses ( 122) ( 59) ( 22) ( 33)
Noninterest income 319 304 282 222
Noninterest expense ( 2,134) ( 1,672) ( 1,409) ( 1,937)
-------- -------- -------- --------
Income (loss) before income tax expense 376 657 980 64
Income tax (expense) benefit 15 ( 271) ( 397) ( 22)
-------- -------- -------- --------
Net income (loss) $ 391 $ 386 $ 583 $ 42
======== ======== ======== ========
Earnings (loss) per share $ 0.17 $ 0.17 $ 0.26 $ 0.02
======== ======== ======== ========
<CAPTION>
1996
------------------------------------------------
Forth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $ 3,492 $ 3,510 $ 3,418 $ 3,455
Interest expense ( 1,682) ( 1,696) ( 1,657) ( 1,693)
-------- -------- -------- --------
Net interest income 1,810 1,814 1,761 1,762
Provision for loan losses 24 ( 45) ( 40) 51
Noninterest income 192 192 196 197
Noninterest expense ( 1,386) ( 2,883) ( 1,211) ( 1,318)
-------- -------- -------- --------
Income (loss) before income tax expense 640 ( 922) 706 692
Income tax (expense) benefit ( 136) 351 ( 310) ( 248)
-------- -------- -------- --------
Net income (loss) $ 504 ($ 571) $ 396 $ 444
======== ======== ======== ========
Earnings (loss) per share ($ 0.22) ($ 0.25) $ 0.17 $ 0.19
======== ======== ======== ========
</TABLE>
52
<PAGE>
BOARD OF DIRECTORS
Charles M. DiCiro
Chairman of the Board
Allen D. Welker
Retired
Michael F. Bauman
Retired
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
SUBSIDIARY BANKS
Community Bank & Trust, N.A.
240 E. Chestnut
Olney, IL 62450
Saline County State Bank
1115 Wilson Street
Stonefort, IL 62987
American Bank of Illinois in Highland
12616 Route 143
Highland, IL 62249
MidAmerica Bank of St. Clair County
350 Hartford Lane
O'Fallon, IL 62269
The Egyptian State Bank
2 South Main Street
Carrier Mills, IL 62917
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 1998 Annual Meeting of Stockholders
will be held on May 4, 1998 at 1:00 p.m. at
501 East Main Street, 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, 1997 as filed with the Securities and Exchange Commission will be
furnished without charge to stockholders as of the record date for the 1998
Annual Meeting upon written request to Corporate Secretary, Community Financial
Corporation, 240 E. Chestnut Street, Olney, Illinois 62450-2295
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Incorporation Ownership
------------- ---------
Parent
- ------
<S> <C> <C>
Community Financial Corp. Illinois
Subsidiary (1)
- ----------
Community Bank & Trust, N.A. United States 100%
American Bancshares, Inc. Illinois 100%
The Egyptian State Bank Illinois 100%
Saline County State Bank Illinois 100%
MidAmerica Bank of St. Clair County Illinois 100%
Subsidiary of American Bancshares, Inc.
- ---------------------------------------
American Bank of Illinois in Highland 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>
[LETTERHEAD OF LARRSON, WOODYARD & HENSON, LLP APPEARS HERE]
March 27, 1998
The Board of Directors
Community Financial Corp.
240 East Chestnut
Olney, Illinois 62450
We consent to incorporation by reference in the registration statements (No.
33-92534 and 333-322) on Form S-8 of Community Financial Corp. of our report
dated January 28, 1998, relating to the consolidated statements of financial
condition of Community Financial Corp. and Subsidiary as of December 31, 1997
and 1996 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,
1997, which report appears in the December 31, 1997 annual report on Form 10-K
of Community Financial Corp.
/s/ LARSSON, WOODYARD & HENSON, LLP
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,607
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0
0
<COMMON> 26
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<EPS-PRIMARY> .62
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</TABLE>
