<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[_] 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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
240 E. Chestnut Street, Olney, Illinois 62450-2295
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (618) 395-8676
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. [ ]
As of March 24, 1999, the aggregate market value of the 1,561,912 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $15,238,392 based on the closing sale price of $9.75
per share of the registrant's Common Stock on March 24, 1999 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 24, 1999: 2,242,612.
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, 1998. (Parts I, II and IV)
2. Portions of Proxy Statement for 1999 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
Subsidiaries"). 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 Holding Company Act ("BHCA"). At December 31, 1998, the Company had total
assets of $309.8 million, total deposits of $223.9 million and stockholders'
equity of $35.3 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 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, 1998, CB&T had total
assets of $214.2 million and total deposits of $148.1 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, 1998,
ABI had total assets of $23.9 million and total deposits of $19.9 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, 1998, Egyptian had total
assets of $24.5 million and total deposits of $21.2 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,
1998, Saline had total assets of $16.8 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, 1998,
MidAmerica had total assets of $25.8 million and total deposits of $20.3
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.
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
2
<PAGE>
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 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 Brunswick Bicycles, Prairie Farms, Golden Rule Insurance, Airtex, Grain
Systems, Inc., Trailmobile, Wal-Mart Stores and Distribution Center, 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, Smurfit Stone, 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 loan portfolio totaled $159.6 million at December
31, 1998, representing 51.5% 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, 1998, $68.1 million, or 42.7%, 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 $9.5 million, or 5.9%, of the total loan portfolio at December 31,
1998. 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, 1998, construction loans totaled $4.5
million, or 2.8% 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, 1998, commercial business
loans amounted to $24.7 million, or 15.5%, of the Company's total loan
portfolio, and agricultural loans amounted to $17.6 million, or 11.0%, of the
total loan portfolio, which included $7.0 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 $35.2 million, or 22.1%, of the total loan
portfolio at December 31, 1998.
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, 1998, the Company had no concentrations of
loans exceeding 10% of total loans other than as disclosed below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ----------------- ----------------- -----------------
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.. $ 68,057 42.65% $ 69,188 41.90% $ 46,501 37.52% $ 46,959 40.40% $ 49,140 43.20%
Construction............... 4,470 2.80 3,174 1.92 770 .62 576 .50 1,349 1.19
Multi-family residential
and commercial............ 9,451 5.92 9,682 5.86 2,494 2.01 2,994 2.57 2,976 2.61
Agricultural (1)............ 17,624 11.05 17,865 10.82 12,226 9.87 8,763 7.54 7,905 6.95
Commercial business......... 24,706 15.48 26,511 16.06 20,129 16.24 12,316 10.60 10,051 8.83
Consumer loans:
Automobile................. 24,199 15.17 27,104 16.41 30,360 24.50 33,506 28.83 31,347 27.56
Credit card................ 2,015 1.26 2,107 1.28 1,879 1.52 1,743 1.50 1,764 1.55
Mobile home................ 997 .63 905 .55 850 .69 978 .84 999 .88
Educational................ 13 .01 25 .01 29 .02 40 .03 55 .05
Deposit account............ 1,697 1.06 1,552 .94 807 .65 705 .61 628 .55
Home improvement........... 852 .53 560 .34 694 .56 819 .70 752 .66
Other...................... 5,486 3.44 6,448 3.91 7,184 5.80 6,836 5.88 6,789 5.97
-------- -------- -------- -------- -------- ------ -------- ------ -------- ------
159,567 100.00% 165,121 100.00% 123,923 100.00% 116,235 100.00% 113,755 100.00%
======== ======== ====== ====== ======
Less:
Loans in process........... 381 869 96 227 745
Allowance for loan losses.. 1,979 1,934 1,520 1,514 1,641
-------- -------- -------- -------- --------
Total..................... $157,207 $162,318 $122,307 $114,494 $111,369
======== ======== ======== ======== ========
</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, 1998 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,
1999 1998 1998 TOTAL
-------------- ------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate mortgage...... $26,112 $26,677 $15,268 $ 68,057
Real estate construction.. 4,470 0 0 4,470
Agricultural.............. 7,929 7,455 2,240 17,624
Commercial business....... 10,460 13,502 744 24,706
Consumer.................. 18,809 23,301 2,600 44,710
------- ------- ------- --------
Total.................... $67,780 $70,935 $20,852 $159,567
======= ======= ======= ========
</TABLE>
The following table sets forth at December 31, 1998 the dollar amount of
all loans due after December 31, 1999 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...... $28,066 $13,879
Real estate construction.. 0 0
Agricultural.............. 7,225 2,470
Commercial business....... 11,282 2,964
Consumer.................. 25,901 0
------- -------
Total................. $72,474 $19,313
======= =======
</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, 1998, CB&T had $4.2 million of participation loans
originated or purchased pursuant to this program.
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. 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 9.7% 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 charged 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 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 to make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status. 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,
-----------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real estate:
Residential.................................... $ 647 $ 469 $ 253 $ 195 $ 342
Commercial..................................... -- -- -- -- --
Agricultural.................................... -- -- -- -- --
Commercial business............................. 477 1,137 -- -- 60
Consumer........................................ 77 70 65 103 142
------ ------ ----- ----- -----
Total......................................... $1,201 $1,676 $ 318 $ 298 $ 544
====== ====== ===== ===== =====
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential................................... $ 742 $ 186 $ 130 $ 98 $ 144
Commercial.................................... -- -- -- -- --
Agricultural.................................... -- -- -- -- --
Commercial business............................. 282 153 -- -- --
Consumer........................................ 434 99 -- -- --
------ ------ ----- ----- -----
Total......................................... $1,458 438 130 98 144
------ ------ ----- ----- -----
Total nonperforming loans..................... $2,659 $2,114 $ 448 $ 396 $ 688
====== ====== ===== ===== =====
Percentage of total loans........................ 1.67% 1.29% .36% .34% .62%
====== ====== ===== ===== =====
Other nonperforming assets (2)................... $ 436 $ 126 $ 53 $ 137 $ 158
====== ====== ===== ===== =====
Loans modified in troubled debt
restructurings................................. $ 32 $ -- $ -- $ -- $ --
====== ====== ===== ===== =====
</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 applied to the outstanding principal balance.
(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, 1998, gross interest income of $113,000
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, 1998 amounted to $64,000.
At December 31, 1998, nonaccrual loans consisted of 17 single-family
residential real estate loans aggregating $604,000, and 16 consumer and
commercial loans aggregating $597,000 million.
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, 1998, the Company had $436,000 in real estate owned,
which consisted of 8 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 $979,000
at December 31, 1998. Such amount included 8 single-family residential mortgage
loans totaling $352,000, 6 commercial business loans totaling $282,000 and 4
consumer and other loans totaling $345,000. 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, 1998, the Company had $2.3 million in classified
assets, which consisted of $1.9 million in assets classified as substandard,
$7,000 in assets classified as doubtful and $331,000 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,
--------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $1,934 $1,520 $1,514 $1,641 $1,629
------ ------ ------ ------ ------
Loans charged off:
Real estate mortgage:
Single-family residential................. 91 43 1 34 24
Multi-family residential and commercial... -- -- -- -- --
Construction.............................. -- -- -- -- --
Agricultural............................... -- -- -- -- --
Commercial business........................ 61 48 -- 8 --
Consumer................................... 524 419 400 510 330
------ ------ ------ ------ ------
Total charge-offs........................... 676 510 401 552 354
------ ------ ------ ------ ------
Recoveries:
Real estate mortgage:
Single-family residential................. 20 9 39 1 16
Multi-family residential and commercial... -- -- -- -- --
Construction.............................. -- -- -- -- --
Agricultural............................... -- -- -- -- --
Commercial business........................ 33 -- 3 36 --
Consumer................................... 227 229 355 275 138
------ ------ ------ ------ ------
Total recoveries............................ 280 238 397 312 154
------ ------ ------ ------ ------
Net loans charged-off....................... 396 272 4 240 200
------ ------ ------ ------ ------
Provision for losses on loans............... 441 236 10 113 212
------ ------ ------ ------ ------
Adjustment for changes incident to mergers.. -- 450 -- -- --
Balance at end of period.................... $1,979 $1,934 $1,520 $1,514 $1,641
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period........ .25% .19% 0% .21% .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,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY OF CATEGORY OF CATEGORY OF CATEGORY OF CATEGORY OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Single-family residential.. $ 398 20.11% $ 612 20.00% $ 330 37.52% $ 340 40.40% $ 746 43.20%
Multi-family residential...
and commercial............ 374 18.90 37 19.00 125 2.01 141 2.57 348 2.61
Construction............... 20 1.01 14 1.00 5 .62 5 .50 50 1.19
Agricultural................ 120 6.07 211 6.00 315 9.87 308 7.54 87 6.95
Commercial business......... 360 18.19 527 18.00 345 16.24 308 10.60 87 8.83
Consumer.................... 707 35.72 533 36.00 400 33.74 412 38.39 323 37.22
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses............ $1,979 100.00% $1,934 100.00% $1,520 100.00% $1,514 100.00% $1,641 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</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.
At December 31, 1998, the Company had CMOs with an amortized cost of $10.4
million, representing 3.36% of total assets. The Company's CMOs had a weighted
average yield of 5.83% at December 31, 1998. 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.
12
<PAGE>
At December 31, 1998, the Company's mortgage-backed and related securities
held as available for sale had an amortized cost of $42.7 million, an
approximate market value of $42.8 million and a weighted average yield of 6.62%.
At December 31, 1998, the Company's mortgage-backed and related securities
held to maturity had an amortized cost of $442,000 and a market value of
$463,000.
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) insure compliance with all regulatory requirements. In
accordance with the investment policy, at December 31, 1998, 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, 1998, certain securities with a total amortized cost of
$52.2 million and a market value of $52.1 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, 1998,
the effect of the investments available for sale was $44,000 reduction to
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 $16.9 million and market value of $17.1
million as held to maturity. Investments classified as held to maturity are
recorded in the consolidated financial statements at amortized cost. The
Company has the intent and ability to hold these investments to maturity. The
Company currently has no investments classified as trading securities.
The following table sets forth the carrying value of the Company's
investments at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities available for sale (1)
U.S. government and agency securities... $48,769 $53,925 $11,886
State and municipal obligations......... 672 1,000 828
Other................................... -- 2 --
Securities held to maturity:
U.S. government and agency securities.. 11,450 14,464 --
State and municipal obligations........ 5,471 3,854 3,362
Equities and mutual funds.............. -- -- --
------- ------- -------
Total investment securities........... 66,362 73,245 16,076
Interest-bearing deposits................ 14,768 18,117 11,333
FRB stock................................ 381 381 381
FHLB stock............................... 2,280 1,975 895
------- ------- -------
Total investments..................... $83,791 $93,718 $28,685
======= ======= =======
</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, 1998.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
------------------ ------------------- ------------------- -------------------
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD
--------- ------- --------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for
sale:
U.S. government and agency
securities.............. $ 2,683 4.99% $22,750 6.02% $23,414 6.36% $ 0 0.00%
State and municipal
obligations............. 95 5.12 445 4.19 120 4.17 0 0.00
------- ------- ------- -------
Total................... 2,778 23,195 23,534 0
Securities held to maturity:
U.S. government and agency
securities.............. 2,650 5.79 8,800 5.62 0 0.00 0 0.00
State and municipal
obligations............. 1,493 5.13 2,555 4.93 1,432 4.99 0 0.00
------- ------- ------- -------
Total................... 4,143 11,355 1,432 0
Interest-bearing deposits
and time deposits........... 14,768 5.36 0 0.00 0 0.00 0 0.00
FRB stock..................... 381 6.00 0 0.00 0 0.00 0 0.00
FHLB stock.................... 2,280 6.49 0 0.00 0 0.00 0 0.00
------- ------- ------- -------
Total................... $24,350 $34,550 $24,957 $ 0
======= ======= ======= =======
<CAPTION>
TOTAL INVESTMENT PORTFOLIO
------------------------------
AMORTIZED MARKET AVERAGE
COST VALUE YIELD
--------- -------- -------
<S> <C> <C> <C>
Securities available for
sale:
U.S. government and agency
securities.............. $48,847 $48,769 6.13%
State and municipal
obligations............. 660 672 4.32
------- -------
Total................... 49,507 49,441
Securities held to maturity:
U.S. government and agency
securities.............. 11,450 11,494 5.66
State and municipal
obligations............. 5,471 5,639 5.00
------- -------
Total................... 16,921 17,133
Interest-bearing deposits
and time deposits........... 14,768 14,768 5.36
FRB stock..................... 381 381 6.00
FHLB stock.................... 2,280 2,280 6.49
------- -------
Total................... $83,857 $84,003
======= =======
</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 and ABI have 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,
------------------------------------------------------------
1998 1997 1996
------------------- ----------------- -----------------
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.. $ 41,279 1.72% $19,902 2.49% $35,388 2.85%
Savings deposits.................. 49,348 3.39 39,480 3.16 14,124 2.95
Time deposits..................... 132,459 5.66 99,272 5.48 87,252 5.61
</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,
1998 and at such date represented 15.0% of total deposits with a weighted
average rate of 5.35%. A significant portion of such deposits were
collateralized with mortgage-backed and related securities pledged by the
Company with a carrying value of $27.0 million at December 31, 1998. 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........... $15,671
Over three through six months.. 3,895
Over six through 12 months..... 9,572
Over 12 months................. 4,440
-------
Total......................... $33,538
=======
</TABLE>
Borrowings. Savings deposits historically have been the primary source of
funds for lending, investments and general operating activities. CB&T and ABI
are 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 member
financial institutions. Advances are pursuant to several different programs,
each of which has its own interest rate and range of maturities. CB&T and ABI
each have a Blanket Agreement for advances with the FHLB under which CB&T and
ABI each 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 and ABI's ownership of stock in the FHLB of Chicago and other eligible
assets. At December 31, 1998, the Company
15
<PAGE>
had $44.1 million of FHLB advances. The Bank Subsidiaries, in addition, also
obtain short-term borrowings consisting of repurchase agreements with deposit
customers totaling $4.3 million of short-term borrowings at December 31, 1998.
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,
----------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances.................................. $44,100 $ -- $7,500
Short-term notes............................... -- 5,600 --
Other short-term borrowings.................... 4,296 5,323 3,121
Rate paid on:
FHLB advances.................................. 5.37% --% 5.41%
Short-term notes............................... -- 8.50 --
Other short-term borrowings.................... 4.92 5.45 5.48
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
FHLB advances.................................. $44,100 $19,500 $8,500
Short-term notes............................... 5,600 5,600 --
Other short-term borrowings.................... 5,874 5,627 3,213
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances.................................. $43,742 $ 9,264 $6,000
Short-term notes............................... 3,554 568 --
Other short-term borrowings.................... 4,963 4,340 2,060
Approximate weighted average rate paid on: (1)
FHLB advances.................................. 5.45% 6.13% 5.07%
Short-term notes............................... 8.50 8.50 --
Other short-term borrowings.................... 5.26 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 Roger Haberer
(Chairman), Roger Charleston, Mike Bauman, and Clyde R. King. 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, 1998, the Company and its subsidiaries had 105 full-time
and 28 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 (1) 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.
Historically, the Holding Company Act prohibited 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. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Act") was enacted to ease restrictions on
17
<PAGE>
interstate banking. Effective September 29, 1995, the Act allows the FRB to
approve an application of an adequately capitalized and adequately managed bank
holding company to acquire control of, or acquire all or substantially all of
the assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The FRB may not approve the acquisition of a bank that has not been
in existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Act also prohibits the FRB from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
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, 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
19
<PAGE>
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.
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"
20
<PAGE>
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.
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.
21
<PAGE>
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, 1998, the Bank Subsidiaries all were
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, 1998. The Company
owns all of its offices with the exception of CB&T's branch at 1110 S. West St.,
with the land and building under a lease contract.
<TABLE>
<CAPTION>
NET BOOK VALUE
YEAR TOTAL AT DECEMBER APPROXIMATE
OPENED INVESTMENT 31, 1998 SQUARE FOOTAGE
------ ---------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Community Financial Corp.
240 E. Chestnut
P.O. Box 700
Olney, IL 62450 1994 $1,047 $ 1,003 --
Community Bank & Trust, N.A.
- ----------------------------
MAIN OFFICE:
240 E. Chestnut
P.O. Box 700
Olney, IL 62450 1883 (1) 2,238 1,055 9,200
BRANCH OFFICES:
Olney Branch
1110 S. West St.
Olney, IL 62450 1998 150 145 2,700
Lawrenceville Branch
1601 State
P.O. Box 477
Lawrenceville, IL 62439 1983 (1) 637 282 2,800
Fairfield Branch
303 W. Delaware
Fairfield, IL 62837 1983 (1) 494 208 2,400
Newton Branch
601 W. Jourdan
P.O. Box 361
Newton, IL 62448 1990 (1) 647 422 3,114
Charleston Branch
820 W. Lincoln
Charleston, IL 61920 1989 (1) 1,253 1,071 4,912
American Bank of Illinois in Highland
- -------------------------------------
Main Office:
12616 Route 143
Highland, IL 62249 1,129 982 1,600
Branch Office:
P.O. Box 158
Pocahontas, IL 62275 473 266 2,200
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
YEAR TOTAL AT DECEMBER APPROXIMATE
OPENED INVESTMENT 31, 1998 SQUARE FOOTAGE
------ ---------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
The Egyptian State Bank
- ---------------------------------------
2 South Main Street
Carrier Mills, IL 62917 1951 $ 570 $ 216 3,500
Saline County State Bank
- ---------------------------------------
Main Office:
1115 Wilson Street
P.O. Box 99
Stonefort, IL 62987 1904 108 6 4,000
Branch Office:
Route 166 & Blue Avenue
Creal Springs, IL 62922 1984 524 405 3,200
MidAmerica Bank of St. Clair County
- ---------------------------------------
350 Hartman Lane
P.O. Box 850
O'Fallon, IL 62269 1996 1,878 1,574 7,200
</TABLE>
- -------------------------
(1) Date of acquisition.
The net book value of the Company's investment in premises and
equipment totaled approximately $7.6 million at December 31, 1998. 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, 1998 (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 54 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 1999 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, 1998 and 1997
Consolidated Statements of Income - Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which provision
is made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
26
<PAGE>
(3) Exhibits. The following is a list of exhibits filed as part of
this Annual Report on Form 10-K and is also the Exhibit Index.
No. Description
-- -----------
3.1 Articles of Incorporation *
3.2 Bylaws *
4 Form of Common Stock Certificate of Community Financial
Corp. **
10.1 Community Financial Corp. Stock Option and Incentive Plan *
10.2 Community Financial Corp. Management Recognition Plan *
10.3(a) Employment Agreements between Community Financial Corp. and
Wayne H. Benson and Douglas W. Tompson *
10.3(b) Employment Agreements between Community Bank & Trust, N.A.
and Wayne H. Benson and Douglas W. Tompson *
10.4 Severance Agreements between each of Community Financial
Corp. and Community Bank & Trust, N.A. and Shirley B.
Kessler *
10.5 Community Bank & Trust, N.A. Deferred Compensation Plan *
10.6 Community Bank & Trust, N.A. Supplemental Executive
Retirement Agreements with Shirley B. Kessler,
Wayne H. Benson and Douglas W. Tompson *
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Larsson, Woodyard & Henson, CPAs
27 Financial Data Schedule
- ------------------
* Incorporated herein by reference from the Company's Registration Statement
on Form S-1 filed December 30, 1994 (File No. 33-88102).
** Incorporated herein by reference from the Company's Registration Statement
on Form 8-A (File No. 0-26292).
(B) REPORTS ON FORM 8-K. The Registrant did not file any Current Reports
-------------------
on Form 8-K during the last quarter of the fiscal year ending December 31, 1998.
(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 24, 1999
By: /s/ Shirley B. Kessler
----------------------------
Shirley B. Kessler
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Shirley B. Kessler March 24, 1999
- ----------------------------------------------
Shirley B. Kessler
President and Director
/s/ Wayne H. Benson March 24, 1999
- ----------------------------------------------
Wayne H. Benson
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Douglas W. Tompson March 24, 1999
- ----------------------------------------------
Douglas W. Tompson
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Roger A. Charleston March 24, 1999
- ----------------------------------------------
Roger A. Charleston
Chairman of the Board
/s/ Michael F. Bauman March 24, 1999
- ----------------------------------------------
Michael F. Bauman
Director
/s/ Roger L. Haberer March 24, 1999
- ----------------------------------------------
Roger L. Haberer
Director
/s/ Gary L. Graham March 24, 1999
- ----------------------------------------------
Gary L. Graham
Director
/s/ Brad A. Jones March 24, 1999
- ----------------------------------------------
Brad A. Jones
Director
/s/ Clyde R. King March 24, 1999
- ----------------------------------------------
Clyde R. King
Director
/s/ Allen D. Welker March 24, 1999
- ----------------------------------------------
Allen D. Welker
Director
<PAGE>
Exhibit 13
COMMUNITY FINANCIAL CORP.
[LOGO]
1998 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. At December 31, 1998, CB&T had
total assets of $214.2 million and total deposits of $148.1 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, 1998,
ABI had total assets of $23.9 million and total deposits of $19.9 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, 1998, Egyptian had total
assets of $24.5 million and total deposits of $21.2 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,
1998, Saline had total assets of $16.8 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, 1998,
MidAmerica had total assets of $25.8 million and total deposits of $20.3
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 2,242,612
shares of the common stock outstanding and approximately 609 holders of record
of the common stock. Since issuance of the common stock, on January 15, 1999,
the Company paid a cash dividend of $.25 per share to stockholders of record as
of December 25, 1998, on January 15, 1998, the Company paid a cash dividend of
$.25 per share to stockholders of record as of December 26, 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
---- ---
<S> <C> <C>
1997
- ----
First Quarter................ $ 16.625 $ 12.750
Second Quarter............... 15.688 14.000
Third Quarter................ 20.250 14.500
Fourth Quarter............... 19.750 16.250
High Low
---- ---
<S> <C> <C>
1998
- ----
First Quarter................ $ 21.000 $ 18.750
Second Quarter............... 23.500 16.250
Third Quarter................ 17.250 11.750
Fourth Quarter............... 13.125 11.000
</TABLE>
(i)
<PAGE>
Dear Stockholder:
It is a pleasure to present to you the annual report of Community
Financial Corp. for 1998. Community Financial Corp. is a multi-bank holding
company incorporated under the laws of the State of Illinois whose principal
office is located in Olney, Illinois. Our vision continues to focus on providing
top quality service to our clientele while taking great care to ensure our
endeavors contribute to the enhancement of shareholder value. The Company's
overriding strategy for the attainment of this vision has been to employ the
best people, armed with the latest proven technology, to service markets and/or
lines of business with which we have a unique familiarity. As a Company with
strong community ties, in the markets we serve, we are better positioned to
serve our customers than our larger competitors.
A number of actions are in motion that will position the Company for the
future. New computer equipment has been installed enabling us to achieve
compliance with the Year 2000 as mandated by our regulatory agencies. This
equipment, while helping us achieve compliance for the Year 2000, will also
allow us to better meet our customers' needs while retaining our competitive
edge.
Having announced my plan to retire at the end of 1999, I would like to
reassure you that the Board of Directors and Management have addressed the issue
of my retirement and completed a succession plan allowing for a seamless
transition in management.
You will find the detail of our financial results elsewhere in this annual
report showing that, during the year ended December 1998, our total assets
increased from $304.3 million to $309.8 million, or 1.81 percent with net income
of $1.2 million.
We welcome your comments as we move forward with the growth of our
company. I would like to thank the directors, officers, and staff for working
with me making my career with the Company both pleasant and fulfilling.
/s/ Shirley B. Kessler
Shirley B. Kessler
President
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Selected Financial Condition Data
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets...................................... $ 309,840 $ 304,265 $ 185,799 $ 186,513 $ 164,633
Loans receivable, net....................... 157,207 162,318 122,307 114,494 111,369
Investment securities:
Available for sale....................... 52,102 57,283 13,990 19,347 7,716
Held to maturity......................... 16,921 18,318 3,362 3,113 2,255
Cash and cash equivalents and time deposits. 22,902 26,724 12,618 9,877 5,638
Mortgage-backed and related securities
available for sale (1).................... 42,797 23,895 28,319 35,520 32,310
Mortgage-backed and related securities
held-to-maturity.......................... 442 891 -- -- --
Deposits.................................... 223,933 218,915 139,100 144,277 151,078
FHLB advances............................... 44,100 37,000 7,500 3,000 1,050
Other borrowings............................ 4,296 10,923 3,121 -- --
Stockholders' equity........................ 35,266 35,727 34,082 38,106 11,254
</TABLE>
- -------------------------------------------------------------------------------
Selected Operations Data
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ----------- ----------- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 22,231 $ 17,008 $ 13,875 $ 13,267 $ 11,776
Interest expense............................ (12,815) (8,670) (6,728) (6,747) (5,576)
----------- ---------- ---------- ---------- ---------
Net interest income......................... 9,416 8,338 7,147 6,520 6,200
Provision for loan losses................... (441) (236) (10) (113) (212)
------------ ---------- ---------- ---------- ---------
Net interest income after
provision for loan losses................. 8,975 8,102 7,137 6,407 5,988
Noninterest income.......................... 1,681 1,129 777 1,033 953
Noninterest expense......................... (8,880) (7,152) (6,798) (4,437) (4,691)
Gain (loss) on sale of assets............... (18) (2) -- 137 (26)
------------ ---------- ---------- ---------- ---------
Income before provision for income tax...... 1,758 2,077 1,116 3,140 2,224
Provision for income tax.................... (521) (675) (343) (1,107) (813)
------------ ---------- ---------- ---------- ---------
Income before extraordinary item and
cumulative effect of change in
accounting principle...................... 1,237 1,402 773 2,033 1,411
Extraordinary items......................... -- -- -- -- (701) (1)
------------ ---------- ---------- ---------- ---------
Net income.................................. $ 1,237 $ 1,402 $ 773 $ 2,033 $ 710
============ ========== ========== ========== =========
Basic earnings per share.................... $ .57 $ .62 $ .33 $ .42 N/A
============ ========== ========== ========== =========
Diluted earnings per share................. $ .55 $ .60 $ .33 $ .42
============ ========== ========== ========== =========
Cash dividends declared per share........... $ .25 $ .25 $ .25 $ -- 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
<PAGE>
Key Operating Ratios:
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets)...................... .40% .62% .42% (1)
Return on average equity (net income
divided by average stockholders' equity (2)........... 3.43 4.02 2.15 (1)
Interest rate spread (combined weighted average
interest rate earned less combined weighted
average interest rate cost)........................... 2.79 3.05 3.17
Net yield on interest-earning assets.................... 3.18 3.80 4.03
Ratio of average interest-earning assets
to average interest-bearing liabilities............... 109.02 119.04 122.58
Ratio of noninterest expense to average
total assets.......................................... 2.84 3.15 3.66
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period...................................... .53 .81 (3) .27
Nonperforming loans to total loans...................... .75 1.29 (4) .36
Allowance for loan losses to total
loans at end of period................................ 1.24 1.18 1.23
Allowance for loan losses to nonperforming
loans at end of period............................... 164.78 .91 (5) 339.29
Provision for loan losses to total loans
at end of period..................................... .28 .15 .01
Net charge-offs to average loans........................ .25 .19 --
Capital Ratios:
Stockholders' equity to total assets at end of period... 11.38 11.74 18.34
Average stockholders' equity to average assets.......... 11.54 15.33 19.19
</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 year ended December 31, 1996 and
average unrealized gains on securities available for sale for the years
ended December 31, 1997 and 1998 respectively.
(3) Nonperforming assets included 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.
Year 2000 Readiness Disclosure
The following information constitutes "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act.
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operations of the Company. Data
processing is also essential to most other financial institutions and many other
companies.
The Company has conducted a comprehensive review of its computer system
to identify applications that could be affected by the "Year 2000" issue, and
has developed an implementation plan to address the issue. All of the material
data processing of the Company that could be affected by this problem is
provided by third party suppliers. Management closely monitors the progress of
the suppliers in resolving this potential problem and reports the status
4
<PAGE>
of their progress to the Board of Directors on a monthly basis. During the
fourth quarter of 1998, the Company conducted testing of its mission critical
banking applications through the third party data processing suppliers. The
results of the testing were favorable. The Company has a contingency plan,
scheduled for testing in the first quarter of 1999, that addresses how it will
operate should a natural disaster affect any of the Company's operating segments
or mission critical data processing suppliers. The Company is developing a
business resumption plan, scheduled for completion in the first quarter of 1999,
which addresses how it will resume operations should an uncontrollable
situation, such as power failure or loss of telecommunication, occur due to a
"Year 2000" issue. The Company is developing a customer awareness plan,
scheduled for completion in the first quarter of 1999, that is designed to
promote and educate its customers and the general public on the issues of how
the Company and the entire banking industry is preparing for the "Year 2000". In
the fourth quarter of 1998 the Company completed a risk assessment of its
commercial and agricultural borrowers, with indebtedness to the company of
$250,000 for Community Bank & Trust, NA and $100,000 or more for all other
affiliates, concerning their compliance with the "Year 2000" issue. The Company
has projected that the expenses of these plans should not exceed $163,000. The
regulatory bodies, which regulate the Company, have established detailed
timeframes for compliance with the Federal Financial Institutions Examination
Council (FFIEC) specified time tables for "Year 2000" preparedness plans and the
Company has achieved those timeframes.
Comparison of Financial Condition at December 31, 1998, 1997 and 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 total assets remained fairly
unchanged for the 1998 period as reflected by a modest increase in total assets
of $5.5 million or 1.8% from $304.3 million at December 31, 1997 to $309.8
million at December 31, 1998.
The Company's net loans receivable increased by $40.0 million, or 32.7%
from $122.3 million at December 31, 1996 to $162.3 million at December 31, 1997.
The increase was primarily 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. Net loans receivable had a modest decrease of $5.1 million, or
3.1% from $162.3 million at December 31, 1997 to $157.2 million at December 31,
1998. The decrease is primarily due to a decrease in automobile loans of $2.9
million, or 10.7% from $27.1 million at December 31, 1997 to $24.2 million at
December 31, 1998, as competition against the rates offered by the major
automakers credit divisions was too low for the Company to compete against. The
market for used automobiles is strong and the Company works with numerous
automobile dealers to obtain this business. The credit risk associated with this
type of credit requires the Company's credit policy to be followed, resulting in
a reduced number of the dealer contracts being accepted.
The Company's investment securities increased by $58.2 million, or
334.5%, from $17.4 million at December 31, 1996 to $75.6 million at December 31,
1997. Investment securities decreased by $6.6 million or 8.7%, to $69.0 million
at December 31, 1998. 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 through leveraging Federal Home Loan Bank Advances. The primary
reason for the decrease during 1998 was due to a change in the investing
strategy from shorter term callable notes to longer-term mortgage-backed and
related securities.
The Company's mortgage-backed and related securities decreased by $3.5
million, or 12.4%, from $28.3 million at December 31, 1996 to $24.8 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.
Mortgage-backed and related securities increased by $18.4 million, or 74.2%, to
$43.2 million at December 31, 1998. The increase in 1998 is the result of a
change in the investment strategy from shorter term callable securities to
longer-term mortgage-backed and
5
<PAGE>
related securities. The increase was funded primarily through decreases in cash
and cash equivalents of $3.8 million, investment securities of $6.6 million and
an increase in deposits of $5.0 million.
Deposits were $139.1 million, $218.9 million and $223.9 million at
December 31, 1996, 1997 and 1998, 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. The increase of $5.0 million, or 2.3% from $218.9 million at December
31, 1997 to $223.9 million at December 31, 1998 was primarily due to an increase
of $4.7 million, or 3.6% in certificate of deposits from $130.2 million at
December 31, 1997 to $134.9 million at December 31, 1998.
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 Company's repurchase agreements decreased by $1.0 million, or 18.9%,
from $5.3 million at December 31, 1997 to $4.3 million at December 31, 1998. The
repurchase program was introduced in 1996 to attract large depositors. The FDIC
does not insure these liabilities.
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 as leverage to acquire investment securities.
The investments purchased had a weighted average yield of 6.8% with the advances
having a weighted average cost of 5.4%. Federal Home Loan Bank advances
increased $7.1 million, or 19.2%, from $37.0 million at December 31, 1997 to
$44.1 million at December 31, 1998. The increase was used as leverage to acquire
investment securities. The investments purchased have a weighted average yield
of 6.2% with the advances having weighted average cost of 5.1%.
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. During 1998, the Company retired the $5.6 million debt.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income was $1.2 million for the year ended December 31,
1998, as compared to $1.4 million for the year ended December 31, 1997. This
represents a decrease of $165,000, or 11.8%. The decrease in net income reflects
(on a pre-tax basis) a $1.1 million, or 13.3%, increase in net interest income,
a $536,000, or 47.6%, increase in non-interest income and a $1.7 million, or
23.6%, increase in non-interest expense. The results of operations for the year
ended December 31, 1997 does not reflect a full year of operations for all the
acquisitions made in 1997, while the results for the year ended December 31,
1998 includes all acquisitions. The decrease, is partly due to an increase in
provisions for loan losses of $205,000, or 86.9% from $236,000 for the year
ended December 31, 1997 to $441,000 for the year ended December 31, 1998. The
increase in the provision for loan losses is the result of the acquisition made
in 1997 as the loan review process determined that the reserves for the acquired
banks was not in compliance with the Company's policies. In the first quarter of
1998 was the final non-recurring pre-tax charge of $147,000 to terminate the
defined benefit plan. The following represents acquisition cost that are
reported for the year ended December 31, 1998: interest cost of $302,000 on
funds borrowed to make acquisitions in 1997 and $366,000 on goodwill and core
deposit intangibles.
Net Interest Income. Net interest income increased by $1.1 million, or
13.3%, from $8.3 million for the year ended December 31, 1997 to $9.4 million
for the year ended December 31, 1998. The increase in net interest income
reflects an increase in interest income of $5.2 million, or 30.6%, from $17.0
million for the year ended December 31, 1997 to $22.2 million for the year ended
December 31, 1998. The increase was due to an increase in volume, as the average
interest earning assets increased $77.2 million, or 35.2% from $219.3 million
for the year ended December 31, 1997 to $296.5 million for the year ended
December 31, 1998, while the average yield declined from 7.8% to 7.5% for the
years ended December 31, 1997 and 1998, respectively. The interest rate spread
declined .26%, from 3.05% at December 31, 1997 to 2.79% at December 31, 1998.
The decrease was primarily the result of the average yields on assets decreasing
by .26%. This decrease was primarily the result of declining average yields on
investment securities due to having $50.2 million of investment securities
available for sale invested in callable securities that were called
6
<PAGE>
during the year and invested in lower yielding securities. In the fourth quarter
of 1998, the investment committee changed the investment strategy to reduce the
volatile nature of callable securities and to invest in mortgage-backed
securities as funds became available. The cost of interest-bearing liabilities
increased by $4.1 million, or 47.1%, from $8.7 million for the year ended
December 31, 1997 to $12.8 million for the year ended December 31, 1998. The
increase was due to an increase in volume of $87.8 million, or 47.7%, in the
average balance of interest-bearing liabilities from $184.2 million for the year
ended December 31, 1997 to $272.0 million for the year ended December 31, 1998.
Interest Income. Interest income was $22.2 million for the year ended
December 31, 1998, as compared to $17.0 million for the year ended December 31,
1997, representing an increase of $5.2 million, or 30.6%. The increase was
primarily due to a volume increase in the average earning assets of $77.2
million, or 35.2% from $219.3 million at December 31, 1997 to $296.5 million for
the year ended December 31, 1998 as the yield decrease from 7.8% to 7.5% for the
years ended December 31, 1997 and 1998 respectively. Interest on loans increased
by $1.9 million, or 15.7%, from $12.1 million for the year ended December 31,
1997 to $14.0 million for the year ended December 31, 1998. This is due to a
volume increase of $18.4 million, or 13.1%, in the average loans receivable
(net), which reflects a full-year of operations in 1998 for the acquisitions of
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
$3.1 million, or 97.0%, from $3.2 million for the year ended December 31, 1997
to $6.3 million for the year ended December 31, 1998. The increase was primarily
the result of a volume increase in the average balance of investment securities
increasing $45.0 million, or 114.8%, from $39.2 million for the year ended
December 31, 1997 to $84.2 million for the year ended December 31, 1998. In
addition, the average balance of cash and cash equivalents experienced a volume
increase of $10.9 million, or 79.6%, from $13.7 million for the year ended
December 31, 1997 to $24.6 million for the year ended December 31, 1998.
Interest Expense. Interest expense, which consists primarily of
interest on deposits, increased by $4.1 million, or 47.1%, from $8.7 million for
the year ended December 31, 1997 to $12.8 million for the year ended December
31, 1998. Interest on deposits increased by $2.7 million or 37.5%, from $7.2
million for the year ended December 31, 1997 to $9.9 million for the year ended
December 31, 1998. The increase is due to a volume increase on average deposits
of $64.4 million, or 40.6%, from $158.7 million for the year ended December 31,
1997 to $223.1 million for the year ended December 31, 1998, which reflects a
full year of reporting for the acquisitions made in 1997. In addition, interest
on other borrowed funds increased $1.5 million, or 100.0%, from $1.5 million for
the year ended December 31, 1997 to $3.0 million for the year ended December 31,
1998. Of this increase $1.1 million was due to the increase of $23.1 million, or
112.1%, in the average balance in Federal Home Loan Bank advances from $20.6
million at December 31, 1997 to $43.7 million at December 31, 1998. The Company
leveraged these funds with higher yielding assets.
Provision for Loan Losses. The Company established provisions for loan
losses of $441,000 and $236,000 for the years ended December 31, 1998 and 1997,
respectively. The Company's provisions for loan losses has been increased to
reflect the net charge offs for the period. Net charge offs to average loans was
.25% and .19% for the periods ending December 31, 1998 and 1997 respectively.
Provisions for loan losses to total loans was .28% and .15% for the periods
ending December 31, 1998 and 1997 respectively.
Non-Interest Income. Non-interest income increased by $536,000, or
47.6%, from $1.1 million for the year ended December 31, 1997 to $1.7 million
for the year ended December 31, 1998. The increase is primarily due to the
report reflecting a full year of operations for the acquisitions of The Egyptian
State Bank in October 1997, Saline County State Bank in October 1997, and
MidAmerica Bank of St. Clair County in November 1997. Of the increase, $254,000
was contributed by the acquisitions made in 1997 reflecting on the 1998
balances. The remainder was primarily the increase of $191,000 in the collection
of late fees as the result of increased collection efforts.
Non-Interest Expense. Non-interest expense increased by $1.7 million,
or 23.6%, from $7.2 million for the year ended December 31, 1997 to $8.9 million
for the year ended December 31, 1998. The increase is primarily due to the
report reflecting a full year of operations for the acquisitions made in 1997
reflecting on the 1998 balances. A non-recurring pre-tax expense of $147,000 was
recognized in the first quarter of 1998 to close the defined benefit plan.
7
<PAGE>
Income Taxes. The Company's income tax was $521,000 and $675,000 for
the years ended December 31, 1998 and 1997, respectively, which resulted in
effective income tax rates of 29.6% and 32.5%, respectively.
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.
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.
8
<PAGE>
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.
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,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- ------ -------- -------- ------ -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)................. $158,716 $ 13,993 8.82% $140,306 $ 12,143 8.65% $119,828 $ 10,462 8.73%
Investment securities:
Securities available for sale.......... 64,934 4,006 6.17 35,853 2,250 6.28 16,007 852 5.32
Securities held to maturity............ 19,288 1,020 5.29 3,349 166 4.95 3,217 142 4.41
Mortgage-backed and related securities:
Securities available for sale.......... 28,388 1,862 6.56 25,939 1,696 6.54 31,453 2,038 6.48
Securities held-to-maturity............ 616 33 5.36 148 8 5.35 -- -- --
Cash and cash equivalents................. 24,578 1,317 5.36 13,681 745 5.45 7,029 381 5.42
------- ------- -------- --------- -------- --------
Total interest-earning assets.......... 296,520 22,231 7.50 219,276 17,008 7.76 177,534 13,875 7.82
Noninterest-earning assets.................. 16,198 8,079 7,982
-------- --------- ---------
Total assets........................... $312,718 $ 227,355 $185,516
======== ========= ========
Interest-bearing liabilities:
Deposits.................................. $223,086 9.865 4.42 $158,654 7,182 4.53 $136,764 6,322 4.62
Borrowings................................ 48,891 2,950 6.03 25,547 1,488 5.82 8,066 406 5.03
-------- ------ -------- --------- -------- ------
Total interest-bearing liabilities..... 271,977 12,815 4.71 184,201 8,670 4.71 144,830 6,728 4.65
------ --------- ------
Noninterest-bearing liabilities............. 4,647 8,303 5,080
-------- -------- --------
Total liabilities...................... 276,624 192,504 149,910
Stockholders' equity........................ 36,068 35,033 35,937
Unrealized losses on securities............. 26 (182) (331)
-------- -------- --------
Total liabilities and retained earnings..... $312,718 $ 227,355 $185,516
======== ========= ========
Net interest income......................... $ 9,416 $ 8,338 $7,147
======= ======== ======
Interest rate spread........................ 2.79% 3.05% 3.17%
===== ===== =====
Net yield on interest-earning assets........ 3.18% 3.80% 4.03%
===== ===== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities... 109.02% 119.04% 122.58%
====== ====== ======
</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,
-------------------------------------------------------------------------------------------
1998 vs.1997 1997 vs. 1996
------------------------------------------------- ---------------------------------------
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................ $ 1,593 $ 227 $ 30 $ 1,850 $1,788 $ (91) $ (16) $ 1,681
Investment securities:
Securities available for sale...... 1,826 (38) (32) 1,756 1,056 153 189 1,398
Securities held to maturity........ 790 11 53 854 6 17 1 24
Mortgage-backed and related
securities:
Securities available for sale...... 160 5 1 166 (357) 19 (4) (342)
Securities held-to-maturity........ 25 0 0 25 -- -- 8 8
Cash and cash equivalents............ 594 (12) 0 572 361 1 2 364
-------- -------- ------ ------ ------ ------- ------ -------
Total interest-earning assets....... 4,988 193 42 5,223 2,854 99 180 3,133
-------- --------- ------ ------ ------ ------- ------ -------
Interest expense:
Deposits............................. 2,917 (166) (68) 2,683 1,012 (131) (21) 860
Borrowings........................... 1,360 53 49 1,462 880 64 138 1,082
-------- ------- -------- -------- ------ ------- ------ -------
Total interest-bearing liabilities.. 4,277 (113) (19) 4,145 1,892 (67) 117 1,942
-------- ------- -------- -------- ------ ------- ------ -------
Change in net interest income.......... $ 711 $ 306 $ 61 $ 1,078 $ 962 $ 166 $ 63 $ 1,191
======== ======== ======== ======= ====== ======= ======= =======
</TABLE>
Asset/Liability Management
Net interest income, the primary component of the Company's net income, is
derived from the difference or "spread" between the yield on interest-earning
assets and the cost of interest-bearing liabilities. The Company has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities or repricing characteristics of its interest-earning assets
and interest-bearing liabilities. The matching of the Company's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on the Company's net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Company's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Company's net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates. The
Company's policy is to mitigate interest rate risk by avoidance of the
origination of long-term loans funded by short-term deposits and by pursuing
certain strategies designed to decrease the vulnerability of its earnings to
material and prolonged changes in interest rates.
11
<PAGE>
The Company has established an Asset and Liability Management Committee
which currently is comprised of five 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, 1998, the Company had a negative one-year
interest rate sensitivity gap of 11.2%, 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, 1998 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).................. $ 57,400 $ 11,121 $ 568 $ 0 $ 0 $ 69,089
Interest-earning deposits.................. 14,768 0 0 0 0 14,768
Fixed-rate single-family mortgage loans.... 22,955 26,677 15,278 0 0 64,910
Mortgage-backed and related securities (1). 4,845 903 37,421 0 0 43,169
Other loans................................ 37,228 51,464 5,584 0 0 94,276
-------- --------- --------- ------------ ------------- ---------
Total................................... 137,196 90,165 58,851 0 0 286,212
-------- --------- --------- ------------ ------------- --------
Interest-bearing liabilities:
Deposits.................................. 167,747 43,638 0 0 0 211,385
Borrowings................................ 4,296 37,000 7,100 0 0 48,396
---------- --------- --------- ------------ ------------ ---------
Total.................................. 172,043 80,638 7,100 0 0 259,781
-------- --------- --------- ------------ ------------ --------
Interest sensitivity gap.................... $(34,847) $ 9,527 $ 51,751 $ 0 $ 0 $ 26,431
======== ========= ======== =========== ============ ========
Cumulative interest sensitivity gap......... $(34,847) $(25,320) $ 26,431 $ 26,431 $ 26,431 $ 26,431
======== ======== ======== =========== ============ ========
Ratio of interest-earning assets
to interest-bearing liabilities.......... 79.7 % 111.8 % 828.9 % N/A % N/A % 110.2 %
======== ======== ======== =========== ============ ========
Ratio of cumulative gap to total assets..... (11.2)% (8.2)% 8.5 % 8.5 % 8.5 % 8.5 %
======== ======== ======== =========== ============ ========
</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
repricing. 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) adjustable-rate mortgage
loans are presented as of their earliest repricing schedule, (ii) commercial and
other loans are cash flowed based on their amortization schedule with no
prepayments, (iii) fixed- and adjustable-rate mortgage-backed and related
securities are analyzed at the cusip level for repricing date and average
remaining life. 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.
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.
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 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.
13
<PAGE>
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.
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 Company is accepting savings deposits and obtaining short-term
borrowings through FHLB advances.
The Company has other sources of liquidity if there is a need for funds.
The Company has a portfolio of unpledged investment securities and
mortgage-backed and related securities with an aggregate market value of $36.1
million at December 31, 1998 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, 1998, the Company had commitments
to originate loans of $16.8 million. Certificates of deposit which are scheduled
to mature in less than one year at December 31, 1998 totaled $91.2 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
Comprehensive Income. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997. The Company has adopted the provisions of the statement in
1998 and has presented comprehensive income information in the consolidated
statements of financial condition and statements of stockholders' equity.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The management of the Company has adopted the appropriate
provisions of the statement for 1998.
Employers' Disclosure about Pension and Other Postretirement Benefits. In
February 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 has adopted the appropriate
provisions of the statements at January 1, 1998.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes a new model for accounting for
derivatives and hedging activities and supersedes and amends a number of
existing standards. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999, but earlier application is permitted as of the beginning of any
fiscal quarters subsequent to June 15, 1998. Upon the statement's initial
application, all derivatives are required to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No. 133. Adoption of SFAS No. 133
is not expected to have a material effect on the Company's financial position or
operating results.
Accounting for Mortgage-Backed Securities. In October 1998, the FASB
issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 amends the earlier SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." The new statement requires that, after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities should classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. The statement is effective for the first fiscal quarter beginning
after December 15, 1998. The management of the Company does not currently
believe that its activities meet the definition of "mortgage banking
activities," and therefore does not anticipate that this statement will have a
material effect on the Company's financial position or operating results.
15
<PAGE>
[LETTERHEAD OF LARSSON WOODYARD & HENSON, LLP]
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Larsson Wodyard & Henson, LLP
February 5, 1999
Paris, Illinois
16
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------ -------------
(1,000's)
----------------------------
<S> <C> <C>
Cash $ 8,134 $ 8,607
Interest bearing deposits 14,768 18,117
------------ -------------
Total Cash and Cash Equivalents 22,902 26,724
Securities available for sale (amortized cost of $52,168
and $57,282 in 1998 and 1997, respectively) 52,102 57,283
Securities held to maturity (estimated market value of
$17,133 and $18,403 in 1998 and 1997, respectively) 16,921 18,318
Mortgage-backed and related securities available for sale (amortized
cost of $42,727 and $23,878 at 1998 and 1997, respectively) 42,797 23,895
Mortgage-backed and related securities held to maturity
(estimated market value of $463 and $927 at 1998 and 1997, respectively) 442 891
Loans receivable, net 157,207 162,318
Foreclosed real estate, net 436 126
Accrued interest receivable 3,094 2,675
Premises and equipment, net 7,635 5,853
Prepaid income taxes 0 0
Deferred income taxes 275 289
Goodwill and other intangibles 4,456 5,109
Core deposit intangibles 517 527
Other assets 1,056 257
------------ -------------
Total Assets $ 309,840 $ 304,265
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 223,933 $ 218,915
Federal Home Loan Bank advances 44,100 37,000
Repurchase agreements 4,296 5,323
Other borrowings 0 5,600
Advances from borrowers for taxes and insurance 32 41
Accrued interest payable 493 457
Accrued income taxes 58 46
Other liabilities 1,662 1,156
------------ -------------
Total Liabilities 274,574 268,538
------------ -------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock $0.01 par value; 1,000,000 shares authorized;
0 shares issued at December 31,1998 and 1997
Common stock $.01 par value; 7,000,000 shares authorized;
2,242,612 and 2,360,612 shares issued at December 31, 1998 and 1997, respectively 26 26
Additional paid-in capital 25,649 25,754
Treasury stock (5,273) (3,803)
Shares held for management recognition plan (569) (750)
Unallocated employee stock ownership plan (ESOP) shares (1,164) (1,428)
Accumulated other comprehensive income 4 11
Retained earnings 16,593 15,917
------------ -------------
Total Stockholders' Equity 35,266 35,727
------------ -------------
Total Liabilities and Stockholders' Equity $ 309,840 $ 304,265
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1998 1997 1996
------------- ------------ ----------
(1,000's)
---------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 13,993 $ 12,143 $ 10,462
Interest on mortgage-backed and related securities 1,895 1,651 2,038
Interest on securities and interest-bearing deposits 6,343 3,214 1,375
------------ ------------ -----------
Total interest income 22,231 17,008 13,875
------------ ------------ -----------
Interest expense:
Interest on deposits 9,865 7,182 6,322
Interest on other borrowed funds 2,950 1,488 406
------------ ------------ -----------
Total interest expense 12,815 8,670 6,728
------------ ------------ -----------
Net interest income 9,416 8,338 7,147
Provision for loan losses (441) (236) (10)
------------ ------------ -----------
Net interest income after provision for loan losses 8,975 8,102 7,137
Non-interest income 1,663 1,127 777
Non-interest expense 8,880 7,152 6,798
------------ ------------ -----------
Income before income taxes 1,758 2,077 1,116
Provision for income taxes 521 675 343
------------ ------------ -----------
Net income $ 1,237 $ 1,402 $ 773
============ ============ ===========
Basic earnings per share $ .57 $ .62 $ .33
Diluted earnings per share $ .55 $ .60 $ .33
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Unallocated Other Compre-
Common Paid-in Treasury ESOP MRP Retained hensive Comprehensive
Stock Capital Stock Shares Stock Earnings Income Total Income
------- ---------- --------- --------- -------- -------- ------------- ------- --------------
1,000's
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 26 $ 25,280 $ 0 $ (2,116) $ 0 $ 14,972 $ (56) $ 38,106
Comprehensive Income
Net income 773 773 $ 773
----------
Other comprehensive income
Unrealized gain (loss)
on securities (345)
Related tax effects 138
----------
Total other
comprehensive income (207) (207) (207)
----------
Total comprehensive income 566
==========
ESOP shares allocated 117 423 540
Common stock acquired for
Management Recognition Plan (1,123) (1,123)
Treasury stock (3,411) (3,411)
Dividends ($.25 per share) (596) (596)
----- -------- -------- --------- -------- -------- ------- -------
Balance, December 31, 1996 26 25,397 (3,411) (1,693) (1,123) 15,149 (263) 34,082
Comprehensive Income
Net income 1,402 1,402 $ 1,402
----------
Other comprehensive income
Unrealized gain (loss)
on securities 480
Related tax effects (192)
Less reclassification
adjustment for gains
included in net income (23)
Related tax effects 9
----------
Total other
comprehensive income 274 274 274
----------
Total comprehensive income $ 1,676
==========
ESOP shares allocated 213 265 478
Amortization of
Management Recognition Plan 144 373 517
Treasury stock (392) (392)
Other (44) (44)
Dividends ($.25 per share) (590) (590)
----- -------- -------- --------- -------- -------- ------- --------
Balance, December 31, 1997 26 25,754 (3,803) (1,428) (750) 15,917 11 35,727
Comprehensive Income
Net income 1,237 1,237 $ 1,237
----------
Other comprehensive income
Unrealized gain
(loss) on securities (11)
Related tax effects 4
----------
Total other
comprehensive income (7) (7) (7)
----------
Total comprehensive income $ 1,230
==========
ESOP shares allocated 66 264 330
Amortization of
Management Recognition Plan (111) 181 70
Treasury stock (1,470) (1,470)
Stock options exercised (60) (60)
Dividends ($.25 per share) (561) (561)
----- -------- ------- --------- -------- ------- ------- ---------
Balance, December 31, 1998 $ 26 $ 25,649 $(5,273) $ (1,164) $ (569) $16,593 $ 4 $ 35,266
===== ======== ======= ========= ======== ======= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1998 1997 1996
------------ --------------- ---------------
(1,000's)
----------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income 1,237 $ 1,402 $ 773
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 552 342 240
Provision for loan losses 441 236 10
Accretion of discounts on securities (160) (65) (56)
Amortization of premiums on securities 125 45 38
Amortization of intangibles 366 73 0
Increase in accrued interest receivable (419) (629) (21)
Decrease (increase) in deferred income taxes 14 120 (129)
Decrease (increase) in other assets (502) 567 (564)
Increase (decrease) in accrued income taxes 12 226 (701)
Increase (decrease) in accrued interest payable 36 (105) 46
(Decrease) increase in other liabilities 506 (871) 1,349
Gain on sale of securities and mortgage-backed
and related securities 0 (34) 0
Loss on sale of premises and equipment 18 2 0
------------ --------------- ---------------
Net cash provided by operating activities 2,226 1,309 985
------------ --------------- ---------------
Investing activities:
Proceeds from sales of securities available for sale 0 1,000 0
Proceeds from maturities of securities held to maturity 9,442 4,513 321
Proceeds from maturities of securities available for sale 50,226 24,647 6,500
Proceeds from maturities of mortgage-backed securities
available for sale 0 1,420 0
Proceeds from sales of mortgage-backed and related
securities available for sale 0 632 0
Purchase of securities available for sale (44,886) (58,043) (1,003)
Purchase of securities held to maturity (8,050) (4,480) (650)
Purchase of mortgage-backed securities available for sale (28,363) (1,812) 0
Acquisitions net of cash and cash equivalents
acquired of 14,573 0 (942) 0
Decrease (increase) in loans receivable 4,670 134 (7,823)
Principal collected on mortgage-backed and related securities 9,909 4,493 7,201
Increase in foreclosed real estate (310) (203) (48)
Decrease in real estate held for sale 0 0 132
Purchase of premises and equipment (2,352) (963) (485)
Proceeds from sale of premises and equipment 0 114 0
Purchase of Federal Reserve Bank stock 0 0 (49)
Purchase of Federal Home Loan Bank stock (125) (1,080) (200)
------------ --------------- ---------------
Net cash (used in) provided by investing activities (9,839) (30,570) 3,896
------------ --------------- ---------------
</TABLE>
20
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
(1,000's)
-------------------------------------------------
<S> <C> <C> <C>
Financing activities:
Net increase (decrease) in deposits $ 5,018 $ 6,055 $ (5,177)
Increase (decrease) in advances from borrowers
for taxes and insurance (9) (3) 6
Proceeds from borrowings 7,100 42,600 4,500
Repayments of borrowings (5,600) (7,500) 0
Decrease in repurchase agreements (1,027) 2,202 3,121
Purchase of treasury stock (1,470) (392) (3,411)
Retirement (purchase) of MRP stock 181 373 (1,123)
Amortization of MRP (111) 0 0
Stock options (60) 0 0
Earned ESOP stock 264 265 423
ESOP adjustment 66 357 117
Dividends paid (accrued) (561) (590) (596)
--------------- -------------- ---------------
Net cash provided by (used in) financing activities 3,791 43,367 (2,140)
--------------- -------------- ---------------
(Decrease) increase in cash and cash equivalents (3,822) 14,106 2,741
Cash and cash equivalents at beginning of year 26,724 12,618 9,877
--------------- -------------- ---------------
Cash and cash equivalents at end of year $ 22,902 $ 26,724 $ 12,618
=============== ============== ===============
Supplemental Disclosures:
Additional Cash Flows Information:
Cash paid for:
Interest on deposits, advances and other borrowings $ 12,779 $ 8,373 $ 6,682
Income taxes:
Federal $ 626 $ 264 $ 857
State $ 40 $ 0 $ 177
Schedule of Noncash Investing Activities:
Change in unrealized gain (loss)
on securities available for sale $ 14 $ 457 $ (348)
Change in deferred income taxes
attributed to unrealized gain (loss)
on securities available for sale $ (7) $ (183) $ 141
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
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 predecessor of 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 is registered with the Board of Governors of the Federal
Reserve System as a bank holding company.
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 American 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 Madison Counties, Illinois. The Egyptian
State Bank and Saline County State Bank has offices serving Saline and
Williamson Counties, Illinois. MidAmerica Bank of St. Clair County has an
office serving St. Clair County, Illinois.
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 the
difference between yields earned on interest-earning assets and rates paid
on interest-bearing liabilities ("interest rate spread") and 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.
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. and its wholly owned subsidiary American Bank of
Illinois, The Egyptian State Bank, Saline County State Bank and MidAmerica
Bank of St. Clair County.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. All significant
intercompany balances and transactions have been eliminated in
consolidation. 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 balance
sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
22
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses. In connection with the determination of the allowance for loan
losses, management generally obtains independent appraisals for
significant properties. A substantial portion of the Bank's loans are
secured by collateral in the State of Illinois. Accordingly, as with most
financial institutions in the market area, the collectibility of a
substantial portion of the carrying value of the Bank's loan portfolio is
susceptible to changes in market conditions.
Management believes the allowance for loan losses and real estate owned is
adequate. Management uses available information to recognize losses on
loans and foreclosed real estate. Future additions to the allowances may
be necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination.
Cash Equivalents
For purposes of the consolidated statements of cash flows, 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.
Securities and Mortgage-Backed Securities
Investment and mortgage-backed 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 has 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, 1998, 1997, and 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.
23
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Loans
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 to make periodic interest and principal
payments is back to normal, in which case the loan is returned to accrual
status.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb probable losses in the loan
portfolio. The amount of the allowance is based on management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. 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.
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.
Foreclosed Real Estate
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.
24
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
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, 1998 and 1997 was
$327,000 and 50,000, respectively.
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, 1998 and 1997 was $112,000 and
$23,000, respectively.
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.
Per Share Data
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share." SFAS No. 128 revises the manner in which
earnings per share (EPS) is calculated by replacing the presentation of
primary and fully diluted EPS with a presentation of basic and diluted
EPS. Basic earnings per common share is calculated by dividing net income
by the weighted average number of common shares outstanding during the
period less unvested MRP and unallocated ESOP shares. Diluted earnings per
common share is calculated by dividing net income by the weighted average
number of common shares used to compute basic EPS plus the incremental
amount of potential common stock determined by the treasury stock method.
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.
25
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
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
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This statement is effective
for fiscal years beginning after December 15, 1997. The Company has
adopted the provisions of the statement in 1998 and has presented
comprehensive income information in the consolidated statements of
financial condition and statements of stockholders' equity.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company has
adopted the appropriate provisions of the statement for 1998.
Employers' Disclosure about Pension and Other Postretirement Benefits
In February 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 Company has
adopted the appropriate provisions of the statements at January 1, 1998.
26
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supersedes and
amends a number of existing standards. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999, but earlier application is
permitted as of the beginning of any fiscal quarters subsequent to June
15, 1998. Upon the statement's initial application, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS No. 133. Adoption of SFAS No. 133 is not expected
to have a material effect on the Company's financial position or operating
results.
Accounting for Mortgage-Backed Securities
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends
the earlier SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities." The new statement requires that, after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking
activities should classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold
those investments. The statement is effective for the first fiscal quarter
beginning after December 15, 1998. The management of the Company does not
currently believe that its activities meet the definition of "mortgage
banking activities," and therefore does not anticipate that 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, 1997 and 1996, with no effect on net income, to be consistent with the
classifications adopted for December 31, 1998.
Note 2. Securities
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------
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 48,847 131 209 48,769
State and municipal obligations 660 12 0 672
FRB stock 381 0 0 381
FHLB stock 2,280 0 0 2,280
-------------- ------------ ------------- --------------
$ 52,168 $ 143 $ 209 $ 52,102
============== ============ ============= ==============
</TABLE>
27
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
<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 obligations 1,000 2 2 1,000
FRB stock 381 0 0 381
FHLB stock 1,975 0 0 1,975
Other 2 0 0 2
-------------- ------------ ------------- --------------
$ 57,282 $ 117 $ 116 $ 57,283
============== ============ ============= ==============
</TABLE>
The amortized cost and approximate market value of securities available
for sale, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities from call options.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
-------------- -------------- -------------- --------------
(1,000's)
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,325 $ 3,328 $ 11,443 $ 11,441
Due after one year through five years 22,646 22,615 12,038 12,041
Due after five years through ten years 23,534 23,496 31,442 31,442
Due after ten years 2,663 2,663 2,359 2,359
-------------- -------------- -------------- --------------
$ 52,168 $ 52,102 $ 57,282 $ 57,283
============== ============== ============== ==============
</TABLE>
Securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------
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 $ 11,450 $ 49 $ 5 $ 11,494
State and municipal obligations 5,471 171 3 5,639
-------------- -------------- -------------- ----------------
$ 16,921 $ 220 $ 8 $ 17,133
============== ============== ============== ================
</TABLE>
28
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
<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 $ 11,695 $ 23 $ 12 $ 11,706
State and municipal obligations 6,623 96 22 6,697
-------------- -------------- --------------- ---------------
$ 18,318 $ 119 $ 34 $ 18,403
============== ============== =============== ===============
</TABLE>
The amortized cost and approximate market value of securities held to
maturity, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities from call and prepayment options.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997
------------------------------- ------------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
-------------- -------------- ------------- --------------
(1,000's)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less 3,249 3,271 $ 7,021 $ 7,018
Due after one year through five years 12,269 12,412 8,879 8,929
Due after five years through ten years 1,403 1,450 2,418 2,456
Due after ten years 0 0 0 0
-------------- -------------- ------------- --------------
16,921 17,133 $ 18,318 $ 18,403
============== ============== ============= ==============
</TABLE>
Securities with a carrying amount of $41,011,000 and $29,681,000 at
December 31, 1998 and 1997 were pledged to secure public deposits,
repurchase agreements, 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,
-----------------------------------------------
1998 1997 1996
-------------- ------------ -------------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $ 0 $ 1,000 $ 0
============== ============ =============
Gross gains $ 0 $ 0 $ 0
Gross losses 0 0 0
-------------- ------------ -------------
$ 0 $ 0 $ 0
============== ============ =============
</TABLE>
29
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
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, 1998
--------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 26,843 88 19 26,912
GNMA collateralized
mortgage obligations 998 7 7 998
FNMA certificates 1,509 35 2 1,542
FNMA collateralized mortgage obligations 2,375 11 34 2,352
FHLMC certificates 3,960 55 33 3,982
FHLMC collateralized
mortgage obligations 7,042 14 45 7,011
-------------- ---- ---- -------
42,727 210 140 42,797
============== ==== ==== =======
<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>
Mortgage-backed and related securities held to maturity are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 364 $ 18 $ 0 $ 382
FHLMC certificates 78 3 0 81
-------------- ------------- ------------ -------------
$ 442 $ 21 $ 0 $ 463
============== ============= ============ =============
</TABLE>
30
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Mortgage-Backed and Related Securities
<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
$17,369,000 and $15,233,000 at December 31, 1998 and 1997, respectively,
were pledged to secure public deposits, repurchase agreements, and for
other purposes as required or permitted by law.
The weighted average interest rate on mortgage-backed and related
securities is 6.62% and 6.59% at December, 31, 1998 and 1997,
respectively.
Expected maturities of mortgage-backed securities will differ from
contractual maturities because issuers may have the right to prepay
obligations with or without penalties. The contractual weighted average
life of mortgage-backed securities is 20 years at December 31, 1998.
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. There were no sales of
mortgage-backed and related securities for the years ended December 31,
1998 and 1996.
31
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans Receivable
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
------------------------
(1,000's)
------------------------
<S> <C> <C>
Real estate loans:
Single-family residential $ 68,057 $ 69,188
Construction 4,470 3,174
Multi-family residential and commercial 9,451 9,682
Agricultural 6,988 5,482
Commercial 12,954 15,096
Other loans:
Agricultural 10,636 12,383
Commercial 11,752 11,415
Automobile 24,199 27,104
Credit card 2,015 2,107
Mobile home 997 905
Educational 13 25
Deposit accounts 1,697 1,552
Home improvement 852 560
Other 5,486 6,448
--------- -----------
159,567 165,121
Less:
Loans in process 381 869
Allowance for losses 1,979 1,934
--------- -----------
$ 157,207 $ 162,318
========= ===========
</TABLE>
Certain consumer loans are shown net of add on interest at December 31,
1998 and 1997. The add on interest amounted to $397,000 and $1,097,000,
respectively.
Changes in allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1998 1997 1996
----------------------------------------------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 1,934 $ 1,520 $ 1,514
Provision for loan losses 441 236 10
Recoveries 280 238 397
Loans charged off (676) (510) (401)
Adjustments: changes incident to acquisitions 0 450 0
-------------- ------------ -------------
Balance at December 31 $ 1,979 $ 1,934 $ 1,520
============== ============ =============
</TABLE>
32
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans Receivable
Principal balance of non-accrual loans totaled approximately $1,201,000
and $1,676,000 at December 31, 1998 and 1997, respectively. The interest
discontinues accruing when the loan becomes more than ninety days past due
and in management's judgment, the collection of interest is impaired. The
amount of interest not recognized was $49,000, $71,000, and $21,000 for
the years ended December,31, 1998, 1997, and 1996, respectively. Interest
income recognized on nonaccrual loans during the years ended December 31,
1998, 1997, and 1996 was insignificant.
Weighted average interest rate on loans consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Mortgage loans 8.44% 8.50%
Other loans 8.93% 9.09%
Total loans 8.68% 8.81%
</TABLE>
Note 5. Accrued Interest Receivable
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------------------------
(1,000's)
------------------------------
<S> <C> <C>
Loans $ 1,679 $ 1,547
Mortgage-backed and related securities 261 149
Securities 1,154 979
------------- --------------
$ 3,094 $ 2,675
============= ==============
</TABLE>
Note 6. Premises and Equipment
Premises and equipment are summarized by major classifications as
presented below:.
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
-----------------------------
(1,000's)
-----------------------------
<S> <C> <C>
Land $ 1,317 $ 890
Building 5,844 5,291
Furniture and equipment 4,009 2,779
---------- -----------
11,170 8,960
Accumulated depreciation (3,535) (3,107)
---------- -----------
$ 7,635 $ 5,853
========== ===========
</TABLE>
Depreciation included in the consolidated statements of income amounted to
$552,000, $342,000, and $240,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
Improvements to the bank facility are being constructed in Highland,
Illinois at a project cost of $837,000 with cost incurred in 1998 of
$396,000. Completion of this project is anticipated during second quarter
of 1999.
33
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposit Analysis
Deposits and weighted average interest rates are summarized as follows
(amounts in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1998 1997
----------------------------- ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Demand deposits, non-interest bearing $ 12,548 0.00% $ 13,530 0.00%
Demand deposits, interest bearing 27,933 2.17% 25,733 3.19%
Passbook 26,111 2.90% 25,999 2.89%
Money market 22,462 3.52% 23,499 3.70%
Certificates 134,879 5.55% 130,154 5.66%
------------- ------------
$ 223,933 4.31% $ 218,915 4.48%
============= ============
</TABLE>
Certificates had the following remaining maturities (amounts in
thousands):
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------------
Two
Less Than One to Two to Three After Three
Rate One Year Years Years Years Totals
---- ------------- --------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
2 - 3.99% $ 76 $ 0 $ 0 $ 1 $ 77
4 - 5.99% 70,791 18,751 7,480 4,096 101,118
6 - 7.99% 19,682 9,883 990 1,922 32,477
8 - 9.99% 691 516 0 0 1,207
------------- ------------- ------------ ------------- -------------
$ 91,240 $ 29,150 $ 8,470 $ 6,019 $ 134,879
============= ============= ============ ============= =============
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------
Two
Less Than One to Two to Three After Three
Rate One Year Years Years Years Totals
---- ------------- --------------- -------------- ----------------- ----------------
<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>
34
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposit Analysis
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
(1,000's)
--------------------------------------------
<S> <C> <C> <C>
Passbook $ 837 $ 577 $ 406
Demand deposits 713 487 351
Money market 838 679 662
Certificates 7,477 5,439 4,903
------------ ------------- -------------
$ 9,865 $ 7,182 $ 6,322
============ ============= =============
</TABLE>
At December 31, 1998 and 1997, the Bank had $43,713,000 and $33,758,000,
respectively, of deposit accounts with balances in excess of $100,000. The
Bank did not have brokered deposits at December 31, 1998 and 1997.
Deposits in excess of $100,000 are not federally insured.
The Bank has pledged mortgage-backed and related securities, when required
by depositors, for deposits of $100,000 or more. Deposits which had
securities pledged amounted to $27,032,000 and $31,837,000 at December,31,
1998 and 1997, respectively.
Note 8. Other Borrowed Funds
Advances from the FHLB consisted of fixed rate callable notes as of
December 31, 1998 and 1997. The advances all have a call date at one year
with quarterly calls thereafter. Advances are secured by FHLB stock,
investment securities, and a blanket assignment of unpledged qualifying
mortgage loans. Interest expense for advances amounted to $2,384,000,
$1,196,000, and $305,000 for the years ended December 31, 1998, 1997, and
1996, respectively. The advances at December 31, 1998 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%
January 16, 1998 January 16,2008 5,000 5.30%
February 19, 1998 February 19, 2008 1,000 4.75%
April 6, 1998 April 6, 2008 1,100 4.80%
-----------
$ 44,100
===========
</TABLE>
Scheduled principal reduction of these advances at December 31, 1998 is as
follows: 1999 - $0; 2000 - $5,000,000; 2001 - $0; 2002 - $32,000,000; and
2008 - $7,100,000.
35
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Other Borrowed Funds
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.
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 $264,000, $242,000, and
$101,000 for years ended December 31, 1998, 1997, and 1996, 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. The loan was paid off
during 1998 and interest expense amounted to $302,000 for year ended
December 31, 1998.
<TABLE>
<CAPTION>
FHLB
Advances
Term Repurchase Short Term
1998 Notes Agreements Notes
------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31 44,100 4,296 0
Average amount outstanding during the year 43,742 4,963 3,554
Maximum amount outstanding at any month end 44,100 5,874 5,600
Weighted average interest rate:
During the year 5.45% 5.26% 8.50%
End of year 5.37% 4.92% 0.00%
</TABLE>
36
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Other Borrowed Funds
<TABLE>
<CAPTION>
FHLB Advances
-------------------------
Open Line Term 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%
</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 1998, the amount of dividends that the
bank subsidiaries could pay to the Company without prior regulatory
approval was exceeded. The Company received $3,500,000 in dividends from
the bank subsidiaries to repay debt incurred with the 1997 bank
acquisitions with prior regulatory approval. 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.
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 probable 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, 1998, the Company and its
banking subsidiaries meet all capital adequacy requirements to which it is
subject.
37
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stockholders' Equity
The subsidiary banks' actual and minimum required capital amounts and
ratios as mandated by the Federal Reserve Board at December 31, 1998, 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. $ 32,438 20.69% $ 12,540 8.00% $ 15,675 10.00%
Community Bank and Trust, N.A. 20,137 17.84% 9,030 8.00% 11,287 10.00%
American Bank of Illinois 1,559 10.03% 1,243 8.00% 1,554 10.00%
Egyptian State Bank 3,183 20.02% 1.272 8.00% 1,590 10.00%
Saline County State Bank 1,273 18.12% 562 8.00% 703 10.00%
MidAmerica Bank of St. Clair County 3,536 16.45% 1,720 8.00% 2,150 10.00%
Tier 1 Capital to risk weighted assets
Community Financial Corp. 30,459 19.43% 6,270 4.00% 9,405 6.00%
Community Bank and Trust, N.A. 18,725 16.59% 4,515 4.00% 6,772 6.00%
American Bank of Illinois 1,439 9.26% 621 4.00% 932 6.00%
Egyptian State Bank 3,094 19.46% 636 4.00% 954 6.00%
Saline County State Bank 1,179 16.78% 281 4.00% 422 6.00%
MidAmerica Bank of St. Clair County 3,121 14.52% 860 4.00% 1,290 6.00%
Tier 1 Capital to average assets
Community Financial Corp. 30,459 9.84% 12,376 4.00% 15,470 5.00%
Community Bank and Trust, N.A. 18,725 8.64% 8,667 4.00% 10,834 5.00%
American Bank of Illinois 1,439 5.58% 1,031 4.00% 1,289 5.00%
Egyptian State Bank 3,094 13.11% 944 4.00% 1,180 5.00%
Saline County State Bank 1,179 7.36% 641 4.00% 801 5.00%
MidAmerica Bank of St. Clair County 3,121 13.86% 901 4.00% 1,126 5.00%
</TABLE>
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, $13,950,000, 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 account holders will be entitled to receive a
liquidation distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
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.
38
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stockholders' Equity
Treasury Stock
During 1998, the Company authorized purchasing 5% of the outstanding
shares of stock as of December 31, 1997. The Company purchased 118,500
shares, or 5.0% of outstanding shares, for $1,470,000 with an average cost
per share of $12.46.
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,
--------------------------------------
1998 1997 1996
----------- ------------- ----------
(1,000's)
--------------------------------------
<S> <C> <C> <C>
Non-interest income
Service fees $ 1,370 $ 830 $ 505
Insurance and annuity commissions 203 214 210
Net gain on sale of mortgage-backed securities 0 34 0
Net gain (loss) on sale of assets (18) (2) 0
Other 108 51 62
----------- ----------- -----------
$ 1,663 $ 1,127 $ 777
=========== =========== ===========
Non-interest expense
Salaries and employee benefits $ 4,322 $ 4,319 $ 3,580
Occupancy expense 503 328 221
Equipment and furnishing expense 563 484 383
Data processing expense 659 497 412
Professional fees 363 284 223
Federal insurance premium 97 89 1,275
Amortization of intangibles 366 73 0
Other 2,007 1,078 704
----------- ----------- -----------
$ 8,880 $ 7,152 $ 6,798
=========== =========== ===========
</TABLE>
39
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
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,
--------------------------------------
1998 1997 1996
---------- ------------- -----------
(1,000's)
--------------------------------------
<S> <C> <C> <C>
Currently payable: Federal $ 514 $ 662 $ 281
State 0 17 52
Deferred: Federal 7 (3) 8
State 0 (1) 2
------- ---------- -----------
$ 521 $ 675 $ 343
======= ========== ===========
</TABLE>
Income tax expense for the years ended December 31, 1998, 1997 and 1996
has been provided at an effective rate of approximately 29.64%, 32.50% and
30.74%, 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,
--------------------------------------
1998 1997 1996
---------- ----------- -----------
(1,000's)
--------------------------------------
<S> <C> <C> <C>
Computed tax at statutory rates $ 598 $ 706 $ 383
Increase (decrease) in tax expense resulting from:
State income tax, net 0 12 36
Other (8) 1 (28)
Tax exempt income - net (69) (44) (48)
----------- ---------- -----------
Income tax expense $ 521 $ 675 $ 343
=========== ========== ===========
</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,
1998 1997
------ ------
(1,000's)
---------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 606 $ 703
Acquisition adjustments 135 182
Other 5 21
----- -----
746 906
----- -----
Deferred tax liabilities:
Allowance for unrealized gains on securities available for sale 0 7
Recapture of bed debt reserves 180 270
Federal Home Loan Bank stock 29 29
Premises and equipment 86 118
Core deposit intangible 120 152
Other 56 41
----- -----
471 617
----- -----
Net deferred tax asset $ 275 $ 289
===== =====
</TABLE>
40
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
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, 1998 and 1997, 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 in 1996. The Company incurred $4,000 in fees during 1997 and
$147,000 additional funding with $7,000 administration fees during 1998.
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 specified percent of their compensation. The cost of
the plan was $44,000, $66,000 and $72,000 for the years ended December 31,
1998, 1997 and 1996, 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.
41
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Commitments and Contingencies
The subsidiary banks had outstanding firm commitments to originate loans
as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
----------- -----------
(1,000's)
--------------------------
<S> <C> <C>
Real estate $ 1,316 $ 869
Credit card loans 6,807 6,342
----------- -----------
Commitments to originate loans $ 8,123 $ 7,211
=========== ===========
Unused lines of credit $ 8,655 $ 8,453
=========== ===========
</TABLE>
Interest rates on the above commitments ranged from 6.66% to 16.90% and
7.25% to 16.90% at December 31, 1998 and 1997, respectively.
There were no outstanding commitments to purchase or sell securities at
December 31, 1998 and 1997, 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 banks 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.
42
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
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:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
---------- ----------
(1,000's)
-------------------------
<S> <C> <C>
Balance December 31 $ 967 $ 552
Loans incident to acquisitions 0 404
New loans 823 283
Repayments (78) (272)
---------- ----------
Balance December 31 $ 1,712 $ 967
========== ==========
</TABLE>
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.
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ----------- ----------- ------------
(1,000's) (1,000's)
------------------------- -------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 22,902 $ 22,902 $ 26,724 $ 26,724
Securities 69,023 69,235 75,601 75,686
Mortgage-backed and related securities 43,239 43,260 24,786 24,822
Loans receivable 157,207 157,632 162,318 162,876
Accrued interest receivable 3,094 3,094 2,675 2,675
Financial Liabilities
Deposits 223,933 222,240 218,915 215,738
FHLB advances 44,100 41,864 37,000 35,695
Repurchase agreements 4,296 4,296 5,323 5,323
Other borrowings 0 0 5,600 5,600
Accrued interest payable 493 493 457 457
Advances for taxes and insurance 32 32 41 41
</TABLE>
The fair value of cash and interest bearing deposits, including federal
funds sold, are considered short term investments and carrying value was
considered to be a reasonable estimate of fair value.
43
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
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 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 and 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 coupon
rates, maturities, prepayment assumptions and credit risk, and comparing
the values to prevailing market rates. 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,
1998 and 1997. 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 holding 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.
44
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Carrying Amounts and Fair Value of Financial Instruments
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.
Note 16. Employee Stock Ownership Plan (ESOP)
In June 1995, the Company established an Employee Stock Ownership Plan
(the ESOP) in connection with the stock conversion in which employees
meeting age and service requirements are eligible to participate. A
participant is 100% vested after three years of credit service. The ESOP
borrowed $2,116,000 from the Company and purchased 211,600 shares of
common stock of the Company at the date of the conversion. This debt
carries an interest rate at prime, as stated in the Wall Street Journal on
January 1, and requires annual principal and interest payments. The
Company has committed to make annual contributions to the ESOP necessary
to repay the loan including interest.
As the debt is repaid, ESOP shares which were initially pledged as
collateral for its debt, are released from collateral and allocated to
active employees, based on the proportion of debt service paid in the
year. The Company accounts for its ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
Accordingly, the shares pledged as collateral are reported as unearned
ESOP shares in the consolidated balance sheets. As shares are determined
to be ratably released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares
become outstanding for earnings per share computations. Dividends on
allocated ESOP shares are recorded as a reduction of stockholders' equity
and dividends on unallocated ESOP shares are used to 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 $403,000, $422,000 and
$270,000 for December 31, 1998, 1997 and 1996. The ESOP shares were as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Allocated shares 74,033 47,610
Shares ratably released for allocation 21,160 21,160
Unallocated shares 116,407 142,830
---------- ----------
Total ESOP shares 211,600 211,600
========== ==========
Fair value of unreleased shares at December 31 $1,310,000 $2,589,000
========== ==========
</TABLE>
Note 17. 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, which vest
over a five-year period at the rate of 20% per year, unless disabled or
retired, then the shares immediately vest. Under the plan, 105,800 shares
of stock were granted.
45
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Management Recognition Plans
During 1996, the Company purchased shares to fund the MRP plan on the open
market. The cost of these shares amounted to $1,403,000 or at an average
cost of $13.26 per share. The plan provides for additional shares to be
granted for new members of the Board of Directors. During 1998, the
Company purchased additional 6,348 shares for new board members at a cost
of $16.63 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.
Compensation expense for the Management Recognition Plan was as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997 1996
----- ------- ------
(1,000's)
<S> <C> <C> <C>
MRP vesting $ 253 $ 358 $ 275
MRP tax bonus 94 129 110
Retirement MRP vesting 31 48 0
Retirement MRP tax bonus 11 19 0
----- ----- -----
$ 389 $ 554 $ 385
===== ===== =====
</TABLE>
Note 18. 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 19. 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 during which 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:
<TABLE>
<CAPTION>
December 31,
1997
---------
(1,000's)
---------
<S> <C>
Stock options exercised $ 80,000
MRP allocation 91,000
MRP tax bonus 36,000
Compensation package 231,000
---------
$ 438,000
=========
</TABLE>
46
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. 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 reserved 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 received a grant 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 additional stock options to be granted
for new members to the Board of Directors. The additional stock options
are granted at a rate of two percent for each director of the original
offering. During the current year additional options were granted to new
directors. 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:
<TABLE>
<CAPTION>
1998 1997
------- -------
(1,000's)
------------------
<S> <C> <C>
Net income
----------
As reported $ 1,237 $ 1,402
======= =======
Pro forma $ 1,049 $ 1,142
======= =======
Basis earnings per share
------------------------
As reported $ .57 $ .62
======= =======
Pro forma $ .48 $ .50
======= =======
Diluted earnings per share
--------------------------
As reported $ .55 $ .60
======= =======
Pro forma $ .47 $ .49
======= =======
</TABLE>
The fair value of the options granted was estimated using the
Black-Scholes model with the following assumptions: dividend yield of
2.5%; expected life of 7 years; volatility of 25% and a risk-free interest
rate of 5.5%. No options were granted during the year ended December 31,
1996. The effects of applying SFAS No. 123 in this pro-forma disclosure
may not be indicative of future results.
The following is a summary of the status of the fixed plan:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------
Number of Exercise Number of Exercise
Shares Price Shares Price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 240,701 $13.125 0 $ 0
Granted 10,580 18.375 264,506 13.125
Exercised (9,919) 13.125 (23,805) 13.125
Forfeited 0 0
------- -------
Outstanding at end of year 241,362 13.125 to 18.375 240,701 13.125
======= ======
Options exercisable at end of year 241,362 $13.125 to 18.375 240,701 $13.125
======= =======
</TABLE>
47
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 20. Stock Option and Incentive Plan
The following is a summary of the status of fixed options outstanding at
December 31, 1998:
<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 to $18.375 241,362 8 years $ 13.355 241,362 $ 13.355
</TABLE>
The Company is considering a stock option reload plan for 1999. This plan
will allow exercising previously approved stock options by employees and
to reload the stock options for an additional 10 years at fair market
value of the stock at the reload date.
Note 21. 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>
1998 1997 1996
----------- ------------- -----------
(1,000's)
----------------------------------------
<S> <C> <C> <C>
Income available to common stockholders used in basic EPS $ 1,237 $ 1,402 $ 773
========== ========= =========
Income available to common stockholders after assumed
conversions of dilutive securities $ 1,237 $ 1,402 $ 773
========== ========= =========
Weighted average number of common shares used in basic EPS 2,189,020 2,275,233 2,319,798
Effect of dilutive securities:
Stock options 61,882 48,140 0
---------- --------- ---------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS 2,250,902 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 22. Employment Agreements
The Company has 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.
48
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23. Community Financial Corp. Condensed Financial Information
The parent company's principal assets are its investment in subsidiary
banks, investment securities, and receivables from subsidiaries. The
following are the condensed balance sheets for the parent company only as
of December 31, 1998 and 1997 and its condensed statements of income and
cash flows for the years ended December 31, 1998, 1997, and 1996.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
At December 31,
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 2,223 $ 2,827
Securities held to maturity 896 1,651
Securities available for sale 0 1,247
Investment in subsidiaries 29,496 34,237
Premise and equipment, net 1,003 5
Receivable from subsidiaries 1,203 1,428
Other assets 1,419 888
------------ -----------
$ 36,240 $ 42,283
============ ===========
Liabilities and Stockholders' Equity:
Accrued expenses and other liabilities $ 862 $ 956
Other borrowings 0 5,600
Payable to subsidiaries 112 0
------------ -----------
Total liabilities 974 6,556
------------ -----------
Stockholders' equity:
Common stock 26 26
Additional paid-in capital 25,649 25,754
Unearned MRP shares (569) (750)
Treasury stock (5,273) (3,803)
Unearned ESOP shares (1,164) (1,428)
Unrealized gain (loss) on securities
available for sale, net 4 11
Retained earnings, subject to certain restrictions 16,593 15,917
------------- -----------
Total stockholders' equity 35,266 35,727
------------- -----------
$ 36,240 $ 42,283
============ ===========
</TABLE>
49
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23. Community Financial Corp. Condensed Financial Information
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
----------- ------------ --------------
<S> <C> <C> <C>
Dividends from subsidiary banks $ 3,500 $ 6,500 $ 3,000
Interest income from subsidiary banks 117 136 151
Interest income 187 449 441
Non-interest income 7 0 0
Interest expense (302) (50) 0
Non-interest expense (1,183) (1,393) (648)
----------- ------------ --------------
Income before income taxes 2,326 5,642 2,944
Benefit from income taxes 419 356 46
----------- ------------ --------------
Income before undistributed earnings of subsidiaries 2,745 5,998 2,990
Undistributed (distributions in excess of) earnings of
subsidiaries (1,508) (4,596) (2,217)
----------- ------------ --------------
Net income $ 1,237 $ 1,402 $ 773
=========== ============ ==============
</TABLE>
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,237 $ 1,402 $ 773
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in earnings of subsidiaries (1,992) (1,904) (783)
Dividends received from subsidiaries 3,500 6,500 3,000
Stock employee benefit plans 456 1,016 387
Other, net (378) 564 194
------------ ------------ --------------
Net cash provided by operating activities 2,823 7,578 3,571
------------ ------------ --------------
Cash flows from investing activities:
Purchase investment in subsidiaries 0 (15,515) 0
Purchases of investment securities 0 (515) (11,490)
Maturities of investment securities 1,990 69 16,081
Receivable from subsidiaries 225 266 526
Purchase of premise and equipment (1,041) (5) 0
Proceeds from redemption of subsidiaries stock 3,030 0 0
------------ ------------ --------------
Net cash provided by (used in)
investing activities 4,204 (15,700) 5,117
------------ ------------ --------------
</TABLE>
50
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23. Community Financial Corp. Condensed Financial Information
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities:
Common stock repurchased $ (1,470) $ (392) $ (4,814)
Proceeds from other borrowings 0 5,600 0
Repayment of other borrowings (5,600) 0 0
Dividends paid on common stock (561) (590) 0
----------- ------------ --------------
Net cash (used in) provided by
financing activities (7,631) 4,618 (4,814)
----------- ------------ --------------
Net increase in cash and cash equivalents (604) (3,504) 3,874
Cash and cash equivalents at beginning of year 2,827 6,331 2,457
----------- ------------ --------------
Cash and cash equivalents at end of year $ 2,223 $ 2,827 $ 6,331
=========== ============ ==============
</TABLE>
Note 24. Acquisitions
During 1997, Community Financial Corp. completed cash acquisitions of two
bank holding companies and one bank accounted as purchase transactions.
The consolidated statement of income for 1997 includes the results of
operations from the 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 revaluation
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. The premiums paid and estimated fair value
adjustments have been pushed down to the acquired banks.
During 1998, the Company finalized its allocation of purchase price
related to the acquisitions. Changes in preliminary estimates of the fair
values were as follows:
<TABLE>
<S> <C>
Decrease in core deposit intangibles $ (367)
Increase in other assets 97
Decrease in deferred tax asset (173)
-----------
Increase in goodwill $ (443)
===========
</TABLE>
51
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25. Segment information
Information concerning operating segments by geographical locations
was as follows (in thousands):
<TABLE>
<CAPTION>
Financial Institutions
-------------------------------------
East West
Central Central Southern Central Adjust-
Illinois Illinois Illinois Illinois Company Other ments Total
---------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Interest Income:
Loans $ 10,462 $ $ $ $ 151 $ 0 $(151) $ 10,462
Other 2,973 440 0 0 3,413
-------- ------- --------- -------- -------- ------- ----- --------
13,435 591 0 (151) 13,875
-------- ------- --------- -------- -------- ------- ----- --------
Interest Expense:
Deposits 6,322 0 0 0 6,322
Other 406 0 0 0 406
-------- ------- --------- -------- -------- ------- ----- --------
6,728 0 0 0 6,728
-------- ------- --------- -------- -------- ------- ----- --------
Net interest income 6,707 591 0 (151) 7,147
Provision for loan losses 10 0 0 0 10
-------- ------- --------- -------- -------- ------- ----- --------
Net interest income
after provision 6,697 591 0 (151) 7,137
Non-interest income 566 1 210 0 777
Non-interest expense 6,301 648 0 (151) 6,798
-------- ------- --------- -------- -------- ------- ----- --------
Income before taxes 962 (56) 210 0 1,116
Provision for (benefit from) taxes 389 (46) 0 0 343
-------- ------- --------- -------- -------- ------- ----- --------
Net Income $ 573 $ 0 $ 0 $ 0 $ (10)$ 210 $ 0 $ 773
======== ======= ========= ======== ======== ======= ===== ========
Year Ended December 31, 1997
Interest Income:
Loans $ 10,822 $ 978 $ 238 $ 105 $ 135 $ 0 $(135) $ 12,143
Other 3,681 427 235 22 500 0 0 4,865
-------- ------- --------- -------- -------- ------- ----- --------
14,503 1,405 473 127 635 0 (135) 17,008
-------- ------- --------- -------- -------- ------- ----- --------
Interest Expense:
Deposits 6,287 602 221 72 0 0 0 7,182
Other 1,438 0 0 0 50 0 0 1,488
-------- ------- --------- -------- -------- ------- ----- --------
7,725 602 221 72 50 0 0 8,670
-------- ------- --------- -------- -------- ------- ----- --------
Net interest income 6,778 803 252 55 585 0 (135) 8,338
Provision for loan losses 194 1 29 12 0 0 0 236
-------- ------- --------- -------- -------- ------- ----- --------
Net interest income
after provision 6,584 802 223 43 585 0 (135) 8,102
Non-interest income 728 155 20 10 0 214 0 1,127
Non-interest expense 4,852 746 176 69 1,444 0 (135) 7,152
-------- ------- --------- -------- -------- ------- ----- --------
Income before taxes 2,460 211 67 (16) (859) 214 0 2,077
Provision for (benefit from) taxes 938 74 19 0 (356) 0 0 675
-------- ------- --------- -------- -------- ------- ----- --------
Net Income $ 1,522 $ 137 $ 48 $ (16) $ (503)$ 214 $ 0 $ 1,402
======== ======= ========= ======== ======== ======= ===== ========
Year Ended December 31, 1998
Interest Income:
Loans $ 10,294 $ 1,149 $ 1,402 $ 1,147 $ 117 $ 0 $(117) $ 13,992
Other 5,798 509 1,367 378 187 0 0 8,239
-------- ------- --------- -------- -------- ------- ----- --------
16,092 1,658 2,769 1,525 304 0 (117) 22,231
-------- ------- --------- -------- -------- ------- ----- --------
Interest Expense:
Deposits 6,856 746 1,321 943 0 0 0 9,866
Other 2,566 81 0 0 302 0 0 2,949
-------- ------- --------- -------- ------- ------- ----- --------
9,422 827 1,321 943 302 0 0 12,815
-------- ------- --------- -------- ------- ------- ----- --------
Net interest income 6,670 831 1,448 582 2 0 (117) 9,416
Provision for loan losses 271 10 58 102 0 0 0 441
-------- ------- --------- -------- ------- ------- ----- --------
Net interest income
after provision 6,399 821 1,390 480 2 0 (117) 8,975
Non-interest income 926 262 76 190 7 202 0 1,663
Non-interest expense 4,847 913 1,077 978 1,182 0 (117) 8,880
-------- ------- --------- -------- ------- ------- ----- --------
Income before taxes 2,478 170 389 (308) (1,173) 202 0 1,758
Provision for (benefit from) taxes 886 61 87 (94) (419) 0 0 521
-------- ------- --------- -------- ------- ------- ----- --------
Net Income $ 1,592 $ 109 $ 302 $ (214) $ (754)$ 202 $ 0 $ 1,237
======== ======= ========= ======== ======= ======= ===== ========
</TABLE>
52
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25. Segment information
During 1997, four additional geographical operating segments were
purchased. Accordingly, 1996 information does not include operating results
prior to the acquisition. The operating results for 1997 reflect only the
operations subsequent to the acquisitions. The 1998 operating results
consist of a full year of operations from all locations.
Other significant items:
<TABLE>
<CAPTION>
Financial Institutions
----------------------------------------
East West
Central Central Southern Central Adjust-
Illinois Illinois Illinois Illinois Company Other ments Total
---------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Depreciation $ 240 $ 0 $ 0 $ 0 $ 240
Expenditures for premise
and equipment 485 0 0 0 485
Dividends paid 3,000 596 0 (3,000) 596
Undistributed earnings (2,427) 0 210 2,217 0
Year Ended December 31, 1997
Depreciation $ 292 $ 39 $ 5 $ 5 $ 1 0 0 342
Amortization 0 35 26 12 0 0 0 73
Expenditures for premise
and equipment 941 9 8 0 5 0 0 963
Dividends paid 6,500 0 0 0 590 0 (6,500) 590
Undistributed earnings (4,978) 137 48 (16) 0 214 4,595 0
Year Ended December 31, 1998
Depreciation $ 337 $ 39 $ 26 $ 107 43 0 0 552
Amortization 0 60 153 153 0 0 0 366
Expenditures for premise
and equipment 390 823 93 5 1,041 0 0 2,352
Dividends paid 3,500 0 0 0 561 0 (3,500) 561
Undistributed earnings (1,908) 109 302 (214) 0 202 1,509 0
</TABLE>
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, during 1998. SFAS No. 131 establishes
standards for reporting information about operating segments in the annual
consolidated financial statements and requires selected financial
information about operating segments in the interim consolidated financial
statements. It also establishes standards for related disclosures about
products and services, and geographical areas. Operating segments are
defined as components of an enterprise about which separate financial
information is available and is evaluated regularly by the chief operating
officers and the Board of Directors. The Company has determined the
operating segments are the bank affiliates by geographical location. Each
operating segment is managed independently with separate Board of
Directors. The accounting policies of the operating segments are the same
as those described in the summary of significant policies. Other consists
of revenue generated by trust department, annuity sales, and broker
services which are evaluated from a gross revenue approach on a regular
basis with the operating segments.
53
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26. Condensed Quarterly Results of Operations
<TABLE>
<CAPTION>
1998
---------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Interest income $ 5,623 $ 5,566 $ 5,546 $5,496
Interest expense (3,234) (3,266) (3,183) (3,132)
Net interest income 2,389 2,300 2,363 2,364
--------- --------- ---------- --------
Provision for loan losses (84) (90) (132) (135)
Non-interest income 416 443 426 378
Non-interest expense (2,330) (2,057) (2,119) (2,374)
--------- --------- ---------- --------
Income before income tax expense 391 596 538 233
Income tax expense (65) (185) (191) (80)
--------- --------- ---------- --------
Net income $ 326 $ 411 $ 347 $ 153
========= ========= ========== ========
Earnings per share: Basic $ 0.15 $ 0.19 $ 0.16 $ 0.07
Diluted $ 0.15 $ 0.19 $ 0.15 $ 0.07
1997
---------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- ---------- --------
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)
Non-interest income 319 304 282 222
Non-interest expense (2,134) (1,672) ( 1,409) (1,937)
--------- --------- ---------- --------
Income before income tax expense 376 657 980 64
Income tax (expense) benefit 15 (271) (397) (22)
--------- --------- ---------- --------
Net income $ 391 $ 386 $ 583 $ 42
========= ========= ========== ========
Earnings per share: Basic $ 0.17 $ 0.18 $ 0.27 $ 0.02
Diluted $ 0.16 $ 0.18 $ 0.27 $ 0.02
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
Roger A. Charleston Shirley B. Kessler Brad A. Jones
Chairman of the Board President Co-Owner of Rural King Supply
Civil Engineer; Owner, Charleston
Engineering Allen D. Welker Roger L. Haberer
Retired Information Services
Michael F. Bauman Manager of Westaff
Retired Clyde R. King
Retired
Wayne H. Benson Gary L. Graham
Chief Executive Officer Mayor, City of O'Fallon, IL
Owner of LUCO, Inc. (River Barge Business)
EXECUTIVE OFFICERS
<CAPTION>
<S> <C> <C>
Shirley B. Kessler Wayne H. Benson Douglas W. Tompson
President Chief Executive Officer Chief Financial Officer
SUBSIDIARY BANKS
<CAPTION>
<S> <C> <C>
Community Bank & Trust, N.A. American Bank of Illinois in Highland The Egyptian State Bank
240 E. Chestnut 12616 Route 143 2 South Main Street
Olney, IL 62450 Highland, IL 62249 Carrier Mills, IL 62917
Saline County State Bank MidAmerica Bank of St. Clair County
1115 Wilson Street 350 Hartman Lane
Stonefort, IL 62987 O'Fallon, IL 62269
CORPORATE INFORMATION
<CAPTION>
<S> <C> <C>
Independent Certified Accountants Special Counsel Annual Report on Form 10-K
Larsson, Woodyard & Henson, CPAs Housley Kantarian & Bronstein, P.C.
702 E. Court Street 1220 19th Street, N.W., Suite 700 A copy of the Company's Annual Report on Form 10-K
Paris, Illinois 61944 Washington, D.C. 20036 for the fiscal year ended December 31, 1998 as filed
with the Securities and Exchange Commission will be
General Counsel Annual Meeting furnished without charge to stockholders as of the
Ray W. Vaughn, Attorney The 1999 Annual Meeting of Stockholders record date for the 1999 Annual Meeting upon written
308 S. Kitchell will be held on April 26, 1999 at 1:00 request to Corporate Secretary, Community Financial
Olney, Illinois 62450 p.m. at the Holiday Motel at 1300 S. Corporation, 240 E. Chestnut Street, Olney,
West Street, Olney, Illinois. Illinois 62450-2295
Transfer Agent and Registrar
Registrar and Transfer Co.,
Cranford, New Jersey
</TABLE>
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
State or Other
Jurisdiction of Percentage
Parent Incorporation Ownership
- ------ ------------- ---------
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%
CFC Acquisition Corp. Illinois 100%
Subsidiary of American Bancshares, Inc.
- ---------------------------------------
American Bank of Illinois in Highland Illinois 100%
- ---------------
(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 LARSSON, WOODYARD & HENSON, LLP]
March 23, 1999
The Board of Directors
Community Financial Corp.
240 East Chestnut
Olney, Illinois 62450
We consent to incorporation by reference in registration statements
(No. 33-92534 and 333-322) on Form S-8 of Community Financial Corp. of our
report dated February 5, 1999, relating to the consolidated statements of
financial condition of Community Financial Corp and Subsidiary as of December
31, 1998 and 1997 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, 1998, which report appears in the December 31, 1998
annual report on Form 10-K of Community Financial Corp.
/s/ Larsson, Woodyard & Henson, LLP
March 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,134
<INT-BEARING-DEPOSITS> 14,768
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,899
<INVESTMENTS-CARRYING> 17,363
<INVESTMENTS-MARKET> 17,596
<LOANS> 159,186
<ALLOWANCE> 1,979
<TOTAL-ASSETS> 309,840
<DEPOSITS> 223,933
<SHORT-TERM> 4,296
<LIABILITIES-OTHER> 2,245
<LONG-TERM> 44,100
0
0
<COMMON> 26
<OTHER-SE> 35,240
<TOTAL-LIABILITIES-AND-EQUITY> 309,840
<INTEREST-LOAN> 13,993
<INTEREST-INVEST> 8,238
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 22,231
<INTEREST-DEPOSIT> 9,865
<INTEREST-EXPENSE> 12,815
<INTEREST-INCOME-NET> 9,416
<LOAN-LOSSES> 441
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,880
<INCOME-PRETAX> 1,758
<INCOME-PRE-EXTRAORDINARY> 1,758
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,237
<EPS-PRIMARY> .57
<EPS-DILUTED> .55
<YIELD-ACTUAL> 3.18
<LOANS-NON> 1,201
<LOANS-PAST> 1,458
<LOANS-TROUBLED> 32
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,934
<CHARGE-OFFS> 676
<RECOVERIES> 280
<ALLOWANCE-CLOSE> 1,979
<ALLOWANCE-DOMESTIC> 1,979
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
