<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, 1999
[_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________________
Commission File No. 0-26292
COMMUNITY FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 37-1337630
- ---------------------------------------- -------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
240 E. Chestnut Street, Olney, Illinois 62450-2295
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 395-8676
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 20, 2000, the aggregate market value of the 1,485,980 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $14,581,179 based on the closing sale price of
$9.8125 per share of the registrant's Common Stock on March 20, 2000 as listed
on the Nasdaq National Market System. For purposes of this calculation, it is
assumed that directors, executive officers and beneficial owners of more than 5%
of the registrant's outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of March 20, 2000: 2,213,645.
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, 1999. (Parts I, II and IV)
2. Portions of Proxy Statement for 2000 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, 1999, the Company had total
assets of $309.9 million, total deposits of $225.2 million and stockholders'
equity of $33.8 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, 1999, CB&T had
total assets of $207.7 million and total deposits of $141.5 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,
1999, ABI had total assets of $31.1 million and total deposits of $26.3 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, 1999, Egyptian had total
assets of $24.1 million and total deposits of $20.7 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, 1999, Saline had total assets of $16.5 million and total deposits of $14.3
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, 1999,
MidAmerica had total assets of $28.0 million and total deposits of $22.7
million.
CB&T's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") up to the
applicable limits for each depositor. CB&T is subject to comprehensive
examination, supervision, and regulation by the Office of the Comptroller of the
Currency ("OCC") and the FDIC. The deposits of ABI, Egyptian, Saline and
MidAmerica are insured by the Bank Insurance Fund ("BIF") of the FDIC up to the
applicable limits for each depositor. Each of those Illinois commercial banks
is subject to comprehensive examination, supervision, and regulation by the
Illinois Office of Banks and Real Estate ("OBRE") and the FDIC. This regulation
is intended primarily for the protection of depositors.
2
<PAGE>
Market Areas
CB&T conducts its business through its main office in Olney, Illinois and
its five branch offices in Olney, 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, Ruckers
Wholesale, Trim Masters Inc., 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, Johnson, Pope
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., A.R.
Clar Company 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 $181.0 million at December
31, 1999, representing 58.4% 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, 1999, $74.3 million, or 41.0%, 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 $16.5 million, or 9.1%, of the total loan portfolio at December 31,
1999. 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, 1999, construction loans totaled $5.8
million, or 3.2% 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, 1999, commercial business
loans amounted to $21.1 million, or 11.7%, of the Company's total loan
portfolio, and agricultural loans amounted to $20.4 million, or 11.3%, of the
total loan portfolio, which included $11.4 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 $42.9 million, or 23.7%, of the total loan
portfolio at December 31, 1999.
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, 1999, the Company had no concentrations of
loans exceeding 10% of total loans other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------- -------------------- ------------------- -------------------
Amount % Amount % Amount % Amount %
--------- --------- --------- --------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
- ----------------------------
Real estate loans:
Single-family residential.. $ 74,299 41.04% $ 68,057 42.65% $ 69,188 41.90% $ 46,501 37.52%
Construction............... 5,752 3.18 4,470 2.80 3,174 1.92 770 .62
Multi-family residential
and commercial............ 16,526 9.13 9,451 5.92 9,682 5.86 2,494 2.01
Agricultural (1)............ 20,406 11.27 17,624 11.05 17,865 10.82 12,226 9.87
Commercial business......... 21,116 11.66 24,706 15.48 26,511 16.06 20,129 16.24
Consumer loans:
Automobile................. 34,355 18.97 24,199 15.17 27,104 16.41 30,360 24.50
Credit card................ 1,831 1.01 2,015 1.26 2,107 1.28 1,879 1.52
Mobile home................ 1,207 .67 997 .63 905 .55 850 .69
Educational................ 5 .01 13 .01 25 .01 29 .02
Deposit account............ 1,231 .68 1,697 1.06 1,552 .94 807 .65
Home improvement........... 254 .14 852 .53 560 .34 694 .56
Other...................... 4,065 2.24 5,486 3.44 6,448 3.91 7,184 5.80
-------- -------- ------- ------- ------- ------- -------- -------
181,047 100.00% 159,567 100.00% 165,121 100.00% 123,923 100.00%
======== ======= ======= =======
Less:
Loans in process........... 0 381 869 96
Allowance for loan losses.. 1,580 1,979 1,934 1,520
-------- -------- -------- --------
Total..................... $179,467 $157,207 $162,318 $122,307
======== ======== ======== ========
<CAPTION>
At December 31,
------------------
1995
------------------
Amount %
--------- -----
<S> <C> <C>
Type of Loan:
- ----------------------------
Real estate loans:
Single-family residential.. $46,959 40.40
Construction............... 576 .50
Multi-family residential
and commercial............ 2,994 2.57
Agricultural (1)............ 8,763 7.54
Commercial business......... 12,316 10.60
Consumer loans:
Automobile................. 33,506 28.83
Credit card................ 1,743 1.50
Mobile home................ 978 .84
Educational................ 40 .03
Deposit account............ 705 .61
Home improvement........... 819 .70
Other...................... 6,836 5.88
-------- -------
166,235 100.00%
=======
Less:
Loans in process........... 227
Allowance for loan losses.. 1,514
--------
Total..................... $114,494
========
</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, 1999 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,
2000 1999 1999 Total
-------------- ------------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage...... $18,207 $34,235 $21,857 $ 74,299
Real estate construction.. 5,752 0 0 5,752
Agricultural.............. 6,510 7,497 6,399 20,406
Commercial business....... 6,125 10,411 4,580 21,116
Consumer.................. 23,504 33,010 2,960 59,474
------- ------- ------- --------
Total.................... $60,098 $85,153 $35,796 $181,047
======= ======= ======= ========
</TABLE>
The following table sets forth at December 31, 1999 the dollar amount of
all loans due after December 31, 2000 which have predetermined interest rates
and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates (1)
------------- ----------------
Real estate mortgage...... $ 39,312 $16,780
Real estate construction.. 0 0
Agricultural.............. 12,441 1,455
Commercial business....... 13,573 1,418
Consumer.................. 35,970 0
-------- -------
Total................. $101,296 $19,653
======== =======
___________________________
(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 banks pursuant to which
such participating banks will make loans to assist in community development or
the expansion of local business. Under this program, 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, 1999, CB&T had $4.8 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 4.2% of the Company's single-family
mortgage loan portfolio consists of callable loans originated prior to 1990.
Though these loans have fixed rates, because they are callable, the Company
considers these loans to be adjustable-rate loans.
Loan Fees and Servicing. In addition to interest earned on loans, the
Company receives fees in connection with late payments and for miscellaneous
services related to its loans. Due to competition from other lenders in its
market area, fees generally are not 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,
------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real estate:
Residential.................................... $ 344 $ 647 $ 469 $ 253 $ 195
Commercial..................................... 104 -- -- -- --
Agricultural.................................... 110 -- -- -- --
Commercial business............................. 87 477 1,137 -- --
Consumer........................................ 151 77 70 65 103
------ ------ ------ ----- -----
Total......................................... $ 796 $1,201 $1,676 $ 318 $ 298
====== ====== ====== ===== =====
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential................................... $ 515 $ 742 $ 186 $ 130 $ 98
Commercial.................................... 210 -- -- -- --
Agricultural.................................... -- -- -- -- --
Commercial business............................. 16 282 153 -- --
Consumer........................................ 90 434 99 -- --
------ ------ ------ ----- -----
Total......................................... 831 1,458 438 130 98
------ ------ ------ ----- -----
Total nonperforming loans..................... $1,627 2,659 $2,114 $ 448 $ 398
====== ====== ====== ===== =====
Percentage of total loans........................ .90% 1.67% 1.29% .36% .34%
====== ====== ====== ===== =====
Other nonperforming assets (2)................... $ 257 $ 436 $ 126 $ 53 $ 137
====== ====== ====== ===== =====
Loans modified in troubled debt
restructurings................................. $ 28 $ 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, 1999, gross interest income of $63,000
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, 1999 amounted to $27,000.
At December 31, 1999, nonaccrual loans consisted of 9 single-family
residential real estate loans aggregating $344,000, 2 commercial real estate
loans aggregating $104,000, 3 agricultural loans aggregating $110,000 and 20
consumer and commercial loans aggregating $238,000.
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 cost to sell, declines. See Note 1 of Consolidated Financial
Statements. At December 31, 1999, the Company had $257,000 in real estate
owned, which consisted of 5 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 $831,000
at December 31, 1999. Such amount included 16 single-family residential
mortgage loans totaling $725,000, 1 commercial business loan totaling $16,000
and 13 consumer and other loans totaling $90,000. 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, 1999, the Company had $1.6 million in
classified assets, which consisted of $1.4 million in assets classified as
substandard, $130,000 in assets classified as doubtful and $41,000 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 allowance 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 allowance 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,
--------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $1,979 $1,934 $1,520 $1,514 $1,641
------ ------ ------ ------ ------
Loans charged off:
Real estate mortgage:
Single-family residential................. 309 91 43 1 34
Multi-family residential and commercial... -- -- -- -- --
Construction.............................. -- -- -- -- --
Agricultural............................... 2 -- -- -- --
Commercial business........................ 466 61 48 -- 8
Consumer................................... 701 524 419 400 510
------ ------ ------ ------ ------
Total charge-offs........................... 1,478 676 510 401 552
------ ------ ------ ------ ------
Recoveries:
Real estate mortgage:
Single-family residential................. 31 20 9 39 1
Multi-family residential and commercial... -- -- -- -- --
Construction.............................. -- -- -- -- --
Agricultural............................... -- -- -- -- --
Commercial business........................ 98 33 -- 3 36
Consumer................................... 243 227 229 355 275
------ ------ ------ ------ ------
Total recoveries............................ 372 280 238 397 312
------ ------ ------ ------ ------
Net loans charged-off....................... 1,106 396 272 4 240
------ ------ ------ ------ ------
Provision for losses on loans............... 707 441 236 10 113
------ ------ ------ ------ ------
Adjustment for changes incident to mergers.. -- -- 450 -- --
Balance at end of period.................... $1,580 $1,979 $1,934 $1,520 $1,514
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period........ .65% .25% .19% 0% .21%
====== ====== ====== ====== ======
</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,
-------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------- ------------------- ------------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of of of of of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ --------- ------- -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Single-family residential $ 316 20.00% $ 398 20.11% $ 612 20.00% $ 330 37.52% $ 340 40.40%
Multi-family residential
and commercial.......... 300 18.99 374 18.90 37 19.00 125 2.01 141 2.57
Construction............. 16 1.01 20 1.01 14 1.00 5 .62 5 .50
Agricultural............... 95 6.01 120 6.07 211 6.00 315 9.87 308 7.54
Commercial business........ 284 17.97 360 18.19 527 18.00 345 16.24 308 10.60
Consumer................... 569 36.02 707 35.72 533 36.00 400 33.74 412 38.39
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses........... $1,580 100.00% $1,979 100.00% $1,934 100.00% $1,520 100.00% $1,514 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</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, 1999, the Company had CMOs with an amortized cost of $10.8
million, representing 3.47% of total assets. The Company's CMOs had a weighted
average yield of 6.01% at December 31, 1999. The Company's
12
<PAGE>
investment policy permits investments in individual issues of CMOs or REMICs up
to one percent (per issue) of the Company's assets so long as the issue is rated
AA or better at the time of purchase by nationally recognized rating services or
issued by U.S. government agencies.
At December 31, 1999, the Company's mortgage-backed and related securities
held as available for sale had an amortized cost of $36.2 million, an
approximate market value of $34.3 million and a weighted average yield of 6.52%.
At December 31, 1999, the Company's mortgage-backed and related securities
held to maturity had an amortized cost of $338,000 and a market value of
$352,000.
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, 1999, 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, 1999, certain securities with a total amortized cost of
$45.4 million and a market value of $43.8 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, 1999,
the effect of the investments available for sale was $1.6 million 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 $18.4 million and market value of $18.2
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,
------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Securities available for sale (1)
U.S. government and agency securities... $40,675 $48,769 $53,925
State and municipal obligations......... 105 672 1,000
Other................................... -- -- 2
Securities held to maturity:
U.S. government and agency securities.. 14,198 11,450 14,464
State and municipal obligations........ 4,209 5,471 3,854
Equities and mutual funds.............. -- -- --
------- ------- -------
Total investment securities........... 59,187 66,362 73,245
Interest-bearing deposits................ 6,714 14,768 18,117
FRB stock................................ 381 381 381
FHLB stock............................... 2,610 2,280 1,975
------- ------- -------
Total investments..................... $68,892 $83,791 $93,718
======= ======= =======
</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, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
-------------------- -------------------- -------------------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- ---------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities..... $ 3,641 6.45% $15,245 5.88% $23,416 6.28%
State and municipal
obligations............................ 105 4.25 0 0.00 0 0.00
------- ------- ------- ------
Total.................................. 3,746 6.38 15,245 5.88 23,416 6.28
Securities held to maturity:
U.S. government and agency
securities............................. 3,500 5.38 10,698 5.49 0 0.00
State and municipal
obligations............................ 539 5.06 2,598 5.00 1,072 4.85
------- ------- -------
Total.................................. 4,039 5.32 13,296 5.39 1,072 4.85
Interest-bearing deposits
and time deposits.......................... 6,714 5.07 0 0.00 0 0.00
FRB stock.................................... 0 0.00 0 0.00 0 0.00
FHLB stock................................... 0 0.00 0 0.00 0 0.00
------- ------- -------
Total.................................. $14,499 5.07 $28,541 0.00 $24,488 0.00
======= ======= =======
<CAPTION>
More than Ten Years Total Investment Portfolio
--------------------- ----------------------------
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- -------- --------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities......... $ 0 0.00% $ 42,302 $ 40,675 6.15%
State and municipal
obligations................................ 0 0.00 105 105 4.25
--------- -------- ---------
Total...................................... 0 0.00 42,407 40,780 6.15
Securities held to maturity:
U.S. government and agency
securities................................. 0 0.00 14,198 14,014 5.46
State and municipal
obligations................................ 0 0.00 4,209 4,235 4.96
--------- -------- ---------
Total...................................... 0 0.00 18,407 18,249 5.35
Interest-bearing deposits
and time deposits.............................. 0 0.00 6,714 6,714 5.07
FRB stock........................................ 381 6.00 381 381 6.00
FHLB stock....................................... 2,610 6.60 2,610 2,610 6.60
--------- -------- ---------
Total...................................... $ 2,991 6.52 $ 70,519 $ 68,734 5.85
========= ======== =========
</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, ABI, and Egyptian 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,
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
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.. $ 43,401 1.64% $41,279 1.72% $19,902 2.49%
Savings deposits.................. 48,208 3.37 49,348 3.39 39,480 3.16
Time deposits..................... 132,175 5.38 132,459 5.66 99,272 5.48
</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,
1999 and at such date represented 13.0% of total deposits with a weighted
average rate of 5.36%. A significant portion of such deposits were
collateralized with mortgage-backed and related securities pledged by the
Company with a carrying value of $15.6 million at December 31, 1999. 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.
Certificates
Maturity Period of Deposit
--------------- ----------
(In thousands)
Three months or less........... $10,259
Over three through six months.. 6,381
Over six through 12 months..... 7,442
Over 12 months................. 5,123
-------
Total......................... $29,205
=======
Borrowings. Savings deposits historically have been the primary source of
funds for lending, investments and general operating activities. CB&T, ABI and
Egyptian 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, ABI and Egyptian
15
<PAGE>
each have a Blanket Agreement for advances with the FHLB under which CB&T, ABI
and Egyptian 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, ABI's and Egyptian's ownership of stock in the FHLB of
Chicago and other eligible assets. At December 31, 1999, the Company had $42.0
million of FHLB advances. The Bank Subsidiaries, in addition, also obtain short-
term borrowings consisting of repurchase agreements with deposit customers
totaling $6.9 million of short-term borrowings at December 31, 1999. 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,
-----------------------------------
1999 1998 1997
---- ---- ------
(In thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances.................................. $38,900 $44,100 $ --
Short-term notes & Lines of credit............. 3,100 -- 5,600
Other short-term borrowings.................... 6,891 4,296 5,323
Rate paid on:
FHLB advances.................................. 5.61% 5.37% --%
Short-term notes & Lines of credit............. 4.74 -- 8.50
Other short-term borrowings.................... 5.54 4.92 5.45
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
----- ---- -----
(In thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
FHLB advances.................................. $44,100 $44,100 $19,500
Short-term notes & Lines of credit............. 16,115 5,600 5,600
Other short-term borrowings.................... 8,635 5,874 5,627
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances.................................. $43,223 $43,742 $ 9,264
Short-term notes & Lines of credit............. 3,767 3,554 568
Other short-term borrowings.................... 6,248 4,963 4,340
Approximate weighted average rate paid on: (1)
FHLB advances.................................. 5.49% 5.45% 6.13%
Short-term notes & Lines of credit............. 5.31 8.50 8.50
Other short-term borrowings.................... 4.75 5.26 5.58
</TABLE>
- -------------------------
(1) Based on month-end balances.
16
<PAGE>
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, 1999, the Company and its subsidiaries had 113 full-time
and 23 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
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.
17
<PAGE>
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.
Recently Enacted Legislative and Regulatory Changes. On November 12, 1999,
President Clinton signed legislation which could have a far-reaching impact on
the financial services industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes
affiliations between banking, securities and insurance firms and authorizes bank
holding companies and national banks to engage in a variety of new financial
activities. Among the new activities that will be permitted to bank holding
companies are securities and insurance brokerage, securities underwriting,
insurance underwriting and merchant banking. The Federal Reserve Board, in
consultation with the Department of Treasury, may approve additional financial
activities. National bank subsidiaries will be permitted to engage in similar
financial
18
<PAGE>
activities but only on an agency basis unless they are one of the 50 largest
banks in the country. National bank subsidiaries will be prohibited from
insurance underwriting, real estate development and merchant banking. The G-L-B
Act prohibits future acquisitions of existing unitary savings and loan holding
companies by firms that are engaged in commercial activities and prohibits the
formation of new unitary holding companies.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the G-L-
B Act. The G-L-B Act directs the federal banking agencies, the National Credit
Union Administration, the Secretary of the Treasury, the Securities and Exchange
Commission and the Federal Trade Commission, after consultation with the
National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.
The G-L-B Act contains significant revisions to the Federal Home Loan Bank
System. The G-L-B Act imposes new capital requirements on the Federal Home Loan
Banks and authorizes them to issue two classes of stock with differing dividend
rates and redemption requirements. The G-L-B Act expands the permissible uses
of Federal Home Loan Bank advances by community financial institutions (under
$500 million in assets) to include funding loans to small businesses, small
farms and small agri-businesses. The G-L-B Act makes membership in the Federal
Home Loan Bank System voluntary for federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which the Company may affiliate, it may facilitate affiliations with
companies in the financial services industry.
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.
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.
19
<PAGE>
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 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.
20
<PAGE>
Until December 31, 1999, all SAIF-insured institutions paid 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 were 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"
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
21
<PAGE>
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 4.0%. 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; subordinated debt and intermediate-term preferred stock; and up to
45.0% of unrealized gains of equity securities.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total risk-
weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total risk-
weighted assets.
Federal banking regulations classify banks by capital levels and which
provide for the federal banking agencies to take various prompt corrective
actions to resolve the problems of any bank that fails to satisfy the capital
standards. Under such regulations, a well-capitalized bank is one that is not
subject to any regulatory order or directive to meet any specific capital level
and that has or exceeds the following capital levels: a total risk-based capital
ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of
5%. An adequately capitalized bank is one that does not qualify as well-
capitalized but meets or exceeds the following capital requirements: a total
risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a
leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest
22
<PAGE>
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, 1999 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
six years. For additional information regarding taxation, see Note 11 of Notes
to Consolidated Financial Statements.
23
<PAGE>
Item 2. Properties
- -------------------
The following table sets forth the location and certain additional
information regarding the Company's offices at December 31, 1999. 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, 1999 Square Footage
------ ---------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Community Financial Corp.
240 E. Chestnut
P.O. Box 700
Olney, IL 62450 1994 $1,084 $ 796 --
Community Bank & Trust, N.A.
- ----------------------------
Main Office:
240 E. Chestnut
P.O. Box 700
Olney, IL 62450 1883 (1) 2,293 988 9,200
Branch Offices:
Olney Branch
1110 S. West St.
Olney, IL 62450 1998 150 121 2,700
Lawrenceville Branch
1601 State
P.O. Box 477
Lawrenceville, IL 62439 1983 (1) 648 251 2,800
Fairfield Branch
303 W. Delaware
Fairfield, IL 62837 1983 (1) 543 229 2,400
Newton Branch
601 W. Jourdan
P.O. Box 361
Newton, IL 62448 1990 (1) 647 382 3,114
Charleston Branch
820 W. Lincoln
Charleston, IL 61920 1989 (1) 1,253 1,020 4,912
American Bank of Illinois in Highland
- -------------------------------------
Main Office:
12616 Route 143
Highland, IL 62249 1,715 1,571 8,000
Branch Office:
P.O. Box 158
Pocahontas, IL 62275 452 193 2,200
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
Year Total at December Approximate
Opened Investment 31, 1999 Square Footage
------ ---------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
The Egyptian State Bank
- -----------------------
2 South Main Street
Carrier Mills, IL 62917 1951 $ 564 $ 220 3,500
Saline County State Bank
- ------------------------
Main Office:
1115 Wilson Street
P.O. Box 99
Stonefort, IL 62987 1904 108 4 4,000
Branch Office:
Route 166 & Blue Avenue
Creal Springs, IL 62922 1984 608 438 3,200
MidAmerica Bank of St. Clair County
- -----------------------------------
350 Hartman Lane
P.O. Box 850
O'Fallon, IL 62269 1996 1,888 1,488 7,200
</TABLE>
- ---------------
(1) Date of acquisition.
The net book value of the Company's investment in premises and equipment
totaled approximately $7.7 million at December 31, 1999. 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 then President and Chief Executive Officer and CB&T itself as
defendants. The complaint seeks total damages of $200,000 (including $50,000
against the former 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.
On March 8, 2000, Mr. Barrett Rochman, a holder of in excess of 5% of the
Company's outstanding common stock, filed a Complaint for Mandamus Judgment
against the Company in the Circuit Court of the Second Judicial Circuit of
Illinois, Richland County, seeking to examine and make extracts from the minutes
of the meetings of the Company's Board of Directors and of the meetings of the
management recognition plan and compensation committees of the Board of
Directors from and after January 1, 1999. By order dated March 27, 2000, the
court ordered the Company to turn over to Mr. Rochman the material he requested,
with all such material to be under a protective order with application to lift
such order to be sought for specific information after review. The court further
found that the Company did not act in bad faith and denied Mr. Rochman's motion
for fees.
Item 4. Submission of Matters to Vote of Security Holders.
- ---------------------------------------------------------
Not applicable.
25
<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, 1999 (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 3 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 5
through 14 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 5
through 14 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 15 through 51 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 2000 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
26
<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, 1999 and 1998
Consolidated Statements of Income - Years ended December 31,
1999 and 1998
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended December 31,
1999 and 1998
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
27
<PAGE>
they are required or because the required information is included in the
consolidated financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-K and is also the Exhibit Index.
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).
*** Incorporated herein by reference from the Company's current report on Form
8-K filed March 6, 2000.
(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, 1999.
(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.
28
<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 20, 2000
By: /s/ Wayne H. Benson
-------------------
Wayne H. Benson
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Wayne H. Benson March 20, 2000
- ------------------------------
Wayne H. Benson
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Douglas W. Tompson March 20, 2000
- ------------------------------
Douglas W. Tompson
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Roger A. Charleston March 20, 2000
- -----------------------------
Roger A. Charleston
Chairman of the Board
/s/ Shirley B. Kessler March 20, 2000
- -----------------------------
Shirley B. Kessler
Director
/s/ Michael F. Bauman March 20, 2000
- -----------------------------
Michael F. Bauman
Director
/s/ Roger L. Haberer March 20, 2000
- -----------------------------
Roger L. Haberer
Director
/s/ Gary L. Graham March 20, 2000
- -----------------------------
Gary L. Graham
Director
/s/ Brad A. Jones March 20, 2000
- -----------------------------
Brad A. Jones
Director
/s/ Clyde R. King March 20, 2000
- -----------------------------
Clyde R. King
Director
29
<PAGE>
COMMUNITY FINANCIAL CORP.
[LOGO]
1999 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Community Financial Corp. .................................................. (i)
Market Information.......................................................... (i)
Letter to Stockholders...................................................... 1
Selected Consolidated Financial and Other Data.............................. 3
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 5
Consolidated Financial Statements........................................... 15
Corporate Information......................................... Inside Back COver
</TABLE>
<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
six offices serving Richland, Coles, Jasper, Lawrence and Wayne Counties and
contiguous counties in Southeastern Illinois. At December 31, 1999, CB&T had
total assets of $207.7 million and total deposits of $141.5 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, 1999,
ABI had total assets of $31.1 million and total deposits of $26.3 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, 1999, Egyptian had total
assets of $24.1 million and total deposits of $20.7 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,
1999, Saline had total assets of $16.5 million and total deposits of $14.3
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, 1999,
MidAmerica had total assets of $28.0 million and total deposits of $22.7
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 2,213,645
shares of the common stock outstanding and approximately 559 holders of record
of the common stock. Following are the high and low closing sale prices as
reported by Nasdaq and dividends declared, by fiscal quarter, during the past
two fiscal years.
<TABLE>
<CAPTION>
Dividends Dividends
High Low Declared High Low Declared
------- ------- --------- ------- ------- ---------
1998 1999
- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter $21.000 $18.750 $ -- First Quarter $11.625 $9.625 $ --
Second Quarter 23.500 16.250 -- Second Quarter 10.375 8.625 --
Third Quarter 17.250 11.750 -- Third Quarter 10.125 8.875 --
Fourth Quarter 13.125 11.000 0.25 Fourth Quarter 9.625 7.750 0.25
</TABLE>
(i)
<PAGE>
[LETTERHEAD OF COMMUNITY FINANCIAL CORP.]
Dear Fellow Stockholder:
As your Company's recently appointed President and Chief Executive Officer,
I am pleased to be writing my first letter to stockholders as part of Community
Financial Corp.'s 1999 Annual Report. I consider it an important part of my job
to communicate to you and I look forward to keeping you informed on a regular
basis.
With all candor, 1999 was a disappointing year. While our financial
condition remains strong, operating results were stagnant and I am not pleased
with the year's financial results. Like you, I am a stockholder of Community
Financial and I want to see improved financial performance and meaningful growth
in the value of our collective investment. To accomplish these goals, and with
the close participation and assistance of your Board of Directors, we are taking
significant steps to improve your Company's financial performance and, most
importantly, to enhance value for all of our stockholders. Before we talk about
the future, let's look at what happened in 1999.
1999 Financial Results
----------------------
For the year ended December 31, 1999, Community Financial Corp. earned
$1,130,000, or $0.53 per share (on a fully diluted basis) as compared to
earnings of $1,237,000, or $0.55 per share in 1998. On a year-to-year basis, our
earnings decreased $107,000, or $0.2 per share primarily as a result of
increased non-interest expense and provisions for loan losses. During the year,
cash dividends of $0.25 per share were paid.
Loan growth during 1999 was impressive, increasing $22.3 million or 14.2%,
and I remain encouraged that demand for our loan products remains strong. At
year end, your Company's net loans receivable reached $179.5 million. As a
result of 1999's robust loan growth, Community Financial's provision for loan
losses increased $266,000 to $707,000. Your Company's asset quality remains
strong and we closed the year with assets of $309.9 million, a slight increase
over the prior year's closing total.
As we sharpen our focus on improving financial performance and building
stockholder value, it is important to remember our origins. Prior to assuming
public company status and converting to a commercial bank in 1995, your Company
operated as a traditional thrift, primarily engaged in residential mortgage and
consumer lending. To this day, our balance sheet still resembles that of a
thrift which has held back our performance compared to other commercial banks.
Commercial banks offer a wider array of more profitable products, are
operationally more efficient and possess asset liability mixes which are less
interest rate sensitive. Quite obviously, we need to make changes to become a
true commercial bank and improve your Company's performance.
Strategic Plan Adopted
----------------------
Your Board of Directors and I have dedicated ourselves to improving
Community Financial's performance and stockholder returns. To that end, we have
now completed an extensive and wide ranging analysis of your Company and have
adopted a strategic plan to address Community Financial's future and enable us
to achieve levels of performance similar to that of commercial banks. To assist
us in completing our strategic plan, we retained a nationally recognized bank
consulting group, Professional Bank Services.
As indicated, our analysis addressed every important aspect of your
Company's operations and our strategic plan is comprehensive in scope.
Highlights of the plan, which we expect to implement over the next two years,
include:
. BANK CONSOLIDATION to control costs and increase operating efficiencies;
. BALANCE SHEET RESTRUCTURING to maximize loan volume and lower our cost of
funds; and,
. COMMON STOCK REPURCHASE PROGRAM which will enable us to repurchase a
significant amount of Community Financial's outstanding common stock.
Your entire Board of Directors is excited about our strategic plan and your
Company's future prospects. We will, of course, provide you with substantially
more information regarding your Company's strategic plan as we proceed.
1
<PAGE>
We look to the future with a renewed sense of optimism as we begin to
tackle the challenges facing us. While much hard work remains, I am confident in
the abilities of our valued, dedicated and talented employees to successfully
implement our strategic plan and to achieve our goals. And, our number one
priority in the future will be to enhance the value of your investment in
Community Financial Corp.
In closing, I would like to thank all of our employees for their many
contributions. And to our customers, thank you for your business. We will be
more dedicated than ever to meeting your banking needs and exceeding your
expectations.
On behalf of your Board of Directors, thank you for your interest and
continued support.
Sincerely,
/s/ Wayne H. Benson
Wayne H. Benson
President & Chief
Executive Officer
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Selected Financial Condition Data
<TABLE>
<CAPTION>
At December 31,
---------------------------
1999 1998
------------ -----------
(In thousands)
<S> <C> <C>
Assets....................................... $309,919 $309,840
Loans receivable, net........................ 179,467 157,207
Investment securities:
Available for sale........................ 43,771 52,102
Held to maturity............................. 18,407 16,921
Cash and cash equivalents and time deposits.. 15,655 22,902
Mortgage-backed and related securities
available for sale......................... 34,341 42,797
Mortgage-backed and related securities
held-to-maturity........................... 338 442
Deposits..................................... 225,170 223,933
FHLB advances................................ 42,000 44,100
Other borrowings............................. 6,891 4,296
Stockholders' equity......................... 33,826 35,266
- --------------------------------------------------------------------------------
Selected Operations Data
At December 31,
-------------------
1999 1998
-------- --------
(In thousands, except per share data)
Interest income.............................. $ 21,689 $ 22,231
Interest expense............................. (12,296) (12,815)
-------- --------
Net interest income......................... 9,393 9,416
Provision for loan losses.................... (707) (441)
-------- --------
Net interest income after
provision for loan losses.................. 8,686 8,975
Noninterest income........................... 2,297 1,681
Noninterest expense.......................... (9,322) (8,880)
Gain (loss) on sale of assets............... ( 8) (18)
-------- --------
Income before provision for income tax...... 1,653 1,758
Provision for income tax..................... (523) (521)
-------- --------
Net income................................... $ 1,130 $ 1,237
======== ========
Basic earnings per share..................... $ .53 $ .57
======== ========
Diluted earnings per share................... $ .53 $ .55
======== ========
Cash dividends declared per share............ $ .25 $ .25
======== ========
</TABLE>
3
<PAGE>
Key Operating Ratios:
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets)...................... .36% .40%
Return on average equity (net income
divided by average stockholders' equity) (1).......... 3.26 3.43
Interest rate spread (combined weighted
average interest rate earned less
combined weighted average interest
rate cost)............................................ 2.88 2.79
Net yield on interest-earning assets.................... 3.19 3.18
Ratio of average interest-earning assets
to average interest-bearing liabilities............... 107.38 109.02
Ratio of noninterest expense to average
total assets.......................................... 2.98 2.84
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period...................................... .34 .53
Nonperforming loans to total loans..................... .44 .75
Allowance for loan losses to total
loans at end of period................................ .87 1.24
Allowance for loan losses to nonperforming
loans at end of period............................... 198.49 164.78
Provision for loan losses to total loans
at end of period..................................... .39 .28
Net charge-offs to average loans....................... .65 .25
Capital Ratios:
Stockholders' equity to total assets at end of period.. 10.91 11.38
Average stockholders' equity to average assets......... 11.09 11.54
</TABLE>
- -----------------------
(1) Average stockholders' equity reflects average unrealized losses on
securities available for sale for the year ended December 31, 1999 and
average unrealized gains on securities available for sale for the year
ended December 31, 1998.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan and mortgage-
backed and related securities portfolio and interest paid on interest-bearing
liabilities. Net interest income is determined by (i) the difference between
yields earned on interest-earning assets and rates paid on interest-bearing
liabilities ("interest rate spread") and (ii) the relative amounts of interest-
earning assets and interest-bearing liabilities. The Company's interest rate
spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. To a lesser extent, the
Company's net income also is affected by the level of general and administrative
expenses and the level of other income, which primarily consists of service
charges and other fees.
The operations of the Company are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Company's market area.
Forward-Looking Statements
When used in this Annual Report, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the potential
global computer crash that might have occurred in the year 2000. Many computer
programs had been programmed to only distinguish the final two digits of the
year entered (a common programming practice in earlier years) and, therefore,
without correction, could have read entries for the year 2000 as the year 1900
and computed payment, interest or delinquency based on the wrong date.
The Company conducted a comprehensive review of its computer system to
identify applications that could have been affected by the "Year 2000" issue,
and developed an implementation plan to address the issue. The Company is happy
to report that it did not have any problems, computer or otherwise, resulting
from the year 2000. The Company estimates that the expenses resulting from its
year 2000 preparations did not exceed $153,000 and are reflected in its results
of operation for the year ended December 31, 1999.
5
<PAGE>
Comparison of Financial Condition at December 31, 1999 and 1998
The Company's financial condition remained fairly constant for the 1999
period as reflected by a slight increase in total assets of $79,000 from $309.8
million at December 31, 1998 to $309.9 million at December 31, 1999. The
Company's net loans receivable increased $22.3 million, or 14.2% from $157.2
million at December 31, 1998 to $179.5 million at December 31, 1999. The
increase was due to agriculture related loans increasing $2.8 million, or 15.9%
from $17.6 million at December 31, 1998 to $20.4 million at December 31, 1999,
commercial related loans increasing $3.5 million, or 10.2% from $34.2 million at
December 31, 1998 to $37.6 million at December 31, 1999. The growth in
agriculture and commercial related lending was the Company's decision to
reposition the loan portfolio to more closely reflect that of a commercial banks
portfolio. In addition, automobile loans increased by $10.2 million, or 42.0%
from $24.2 million at December 31, 1998 to $34.4 million at December 31, 1999 as
a result of an automobile promotion during the first half of 1999. Single family
residential loans increased $6.2 million or 9.1%, from $68.1 million at December
31, 1998 to $74.3 million at December 31, 1999 as secondary market rates
increased and the Company promoting balloon rate loans. The weighted average
interest rate on loans increased by 15 basis points from 8.68% at December 31,
1998 to 8.83% at December 31, 1999. The allowance for loan and lease losses
decreased $400,000, or 20.0%, from $2.0 million at December 31, 1998 to $1.6
million at December 31, 1999 due to net loan charge offs exceeding the provision
for loan losses.
The Company's investment securities decreased by $6.8 million, or 9.9%,
from $69.0 million at December 31, 1998 to $62.2 million at December 31, 1999.
The decrease was used primarily to fund the increased loan growth. The Company's
mortgage-backed and related securities decreased by $8.5 million, or 19.8%, from
$43.2 million at December 31, 1998 to $34.7 million at December 31, 1999. The
decrease is the result of principal payback, sales and maturities. The proceeds
were primarily used to fund the increased loan growth.
Deposits increased by $1.2 million, or 0.6% from $223.9 million at December
31, 1998 to $225.2 million at December 31, 1999. The increase was due primarily
to non-interest demand deposits increasing $1.9 million, or 14.7% from $12.5
million at December 31, 1998 to $14.4 million at December 31, 1999, money market
deposits decreasing $2.0 million, or 8.9% from $22.5 million at December 31,
1998 to $20.5 million at December 31, 1999 and time deposits increasing by $1.5
million, or 1.1% from $134.9 million at December 31, 1998 to $136.3 million at
December 31, 1999. The weighted average cost of deposits decreased by 4 basis
points from 4.31% for the year ended December 31, 1998 to 4.27% for the year
ended December 31, 1999.
The Company's repurchase agreements increased by $2.6 million, or 60.4%,
from $4.3 million at December 31, 1998 to $6.9 million at December 31, 1999. 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
decreased $2.1 million, or 4.8%, from $44.1 million at December 31, 1998 to
$42.0 million at December 31, 1999.
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, 1999 and 1998
Net Income. Net income was $1.1 million for the year ended December 31,
1999, as compared to $1.2 million for the year ended December 31, 1998. This
represents a decrease of $107,000, or 8.6%. The decrease in net income reflects
(on a pre-tax basis) the combined effects of a $23,000, or 0.2%, decrease in net
interest income, a $626,000, or 37.6%, increase in non-interest income, a
$442,000, or 5.0%, increase in non-interest expense and a $266,000, or 60.3%,
increase in the provision for loan losses from $441,000 for the year ended
December 31, 1998 to $707,000 for the year ended December 31, 1999. The increase
in the provision for loan losses was to bring the allowance for loan and lease
losses into compliance with the Company's policies partly as the result of the
growth in the loan portfolio and partly as the results of net loan charge offs.
6
<PAGE>
Net Interest Income. Net interest income decreased by $23,000, or 0.2%,
from $9.4 million for the year ended December 31, 1998 to $9.4 million for the
year ended December 31, 1999. The decrease in net interest income reflects a
decrease in interest income of $542,000, or 2.4%, from $22.2 million for the
year ended December 31, 1998 to $21.7 million for the year ended December 31,
1999. The decrease was primarily due to average interest earning assets
decreasing by $1.9 million, or 0.6% from $296.5 million for the year ended
December 31, 1998 to $294.6 million for the year ended December 31, 1999. In
addition, the average yield on interest earning assets declined 14 basis points
from 7.50% for the year ended December 31, 1998 to 7.36% for the year ended
December 31, 1999. The cost of interest-bearing liabilities decreased by
$519,000, or 4.0%, from $12.8 million for the year ended December 31, 1998 to
$12.3 million for the year ended December 31, 1999. The decrease was due to a
decrease in the average cost of liabilities of 23 basis points, from 4.71% for
the year ended December 31, 1998 to 4.48% for the year ended December 31, 1999.
Interest Income. Interest income was $21.7 million for the year ended
December 31, 1999, as compared to $22.2 million for the year ended December 31,
1998, representing a decrease of $542,000, or 2.4%. The decrease was primarily
due to a decrease of 14 basis points in rates on average earning assets from
7.50% for the year ended December 31, 1998 to 7.36% for the year ended December
31, 1999 in connection with a volume decrease of $1.9 million or 0.6%, from
$296.5 million for the year ended December 31, 1998 to $294.6 million for the
year ended December 31, 1999. Interest on loans increased by $656,000, or 4.7%,
from $14.0 million for the year ended December 31, 1998 to $14.6 million for the
year ended December 31, 1999. This is due primarily to a volume increase of
$12.3 million, or 7.7%, in the average balance of (net) loans receivable from
$158.7 million at December 31, 1998 to $171.0 million at December 31, 1999.
Interest income on mortgage-backed and related securities increased $712,000,
or 37.6% from $1.9 million for the year ended December 31,1998 to $2.6 million
for the year ended December 31, 1999, primarily due to a volume increase in the
average balance of $11.7 million or 40.3%, from $29.0 million for the year ended
December 31, 1998 to $40.7 million for the year ended December 31, 1999.
Interest on investments and interest-bearing deposits decreased by $1.9 million,
or 30.1%, from $6.3 million for the year ended December 31, 1998 to $4.4 million
for the year ended December 31, 1999. The decrease was primarily the result of a
volume decrease in the average balance of investment securities decreasing $17.4
million, or 20.7%, from $84.2 million for the year ended December 31, 1998 to
$66.8 million for the year ended December 31, 1999. In addition, the average
balance of cash and cash equivalents experienced a volume decrease of $8.4
million, or 34.2%, from $24.6 million for the year ended December 31, 1998 to
$16.2 million for the year ended December 31, 1999.
Interest Expense. Interest expense, which consists primarily of interest
on deposits, decreased by $519,000, or 4.0%, from $12.8 million for the year
ended December 31, 1998 to $12.3 million for the year ended December 31, 1999.
Interest on deposits decreased by $442,000 or 4.5%, from $9.9 million for the
year ended December 31, 1998 to $9.4 million for the year ended December 31,
1999. The decrease is primarily due to a rate decrease of 21 basis points, from
4.42% for the year ended December 31, 1998 to 4.21% for the year ended December
31, 1999 as the average balance of interest-bearing deposits remained fairly
constant. In addition, interest on other borrowed funds decreased $77,000 or
2.6%, from $3.0 million for the year ended December 31, 1998 to $2.9 million for
the year ended December 31, 1999.
Provision for Loan Losses. The Company established provisions for loan
losses of $707,000 and $441,000 for the years ended December 31, 1999 and 1998,
respectively. The Company's provisions for loan losses have been increased to
reflect the net charge offs for the period and to recognize the 14.2% growth in
the loan portfolio. Net charge offs to average loans was .65% and .25% for the
periods ending December 31, 1999 and 1998 respectively. Provisions for loan
losses to total loans was .39% and .28% for the periods ending December 31, 1999
and 1998 respectively.
Non-Interest Income. Non-interest income increased by $626,000, or 37.6%,
from $1.7 million for the year ended December 31, 1998 to $2.3 million for the
year ended December 31, 1999. The increase is primarily due to an increase in
service fees which amounted to $407,000 or 29.7%, from $1.4 million for the year
ended December 31, 1998 to $1.8 million for the year ended December 31, 1999. Of
this increase, $316,000 was due to increased fee income on loans as the loan
portfolio increased 14.2%.
Non-Interest Expense. Non-interest expense increased by $442,000 or 5.0%,
from $8.9 million for the year ended December 31, 1998 to $9.3 million for the
year ended December 31, 1999. Of the increase, salaries and employee
7
<PAGE>
benefits increased $92,000 or 2.1%, from $4.3 million for the year ended
December 31, 1998 to $4.4 million for the year end December 31, 1999 as a result
of pay rate increases. Depreciation on new computer equipment placed in service
in late 1998 increased $174,000 or 48.1%, from $362,000 for the year end
December 31, 1998 to $536,000 for the year end December 31, 1999. Occupancy
expense increased $139,000 or 27.6%, from $503,000 for the year ended December
31, 1998 to $642,000 for the year ended December 31, 1999. This increase was due
primarily to lease expense increasing $32,000 or 246.2%, from $13,000 for the
year ended December 31, 1998 to $45,000 for the year ended December 31, 1999 as
the result of a full year of operations for the Rt. 130 location of Community
Bank & Trust. In addition, real estate taxes increased $63,000 or 58.3%, from
$108,000 for the year ended December 31, 1998 to $171,000 for the year ended
December 31, 1999 as a result of increased valuations on 1998 taxes payable in
1999.
Income Taxes. The Company's income tax was $523,000 and $521,000 for the
years ended December 31, 1999 and 1998, respectively, which resulted in an
effective income tax rate of 31.6% and 29.6%, 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.
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- -------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)................ $170,950 $ 14,649 8.57% $158,716 $13,993 8.82%
Investment securities:
Securities available for sale......... 48,384 3,007 6.21 64,934 4,006 6.17
Securities held to maturity................ 18,416 989 5.37 19,288 1,020 5.29
Mortgage-backed and related securities:
Securities available for sale......... 40,309 2,586 6.41 28,388 1,862 6.56
Securities held-to-maturity........... 396 21 5.30 61 33 5.36
Cash and cash equivalents................ 16,168 437 2.70 24,578 1,317 5.36
-------- -------- -------- -------
Total interest-earning assets......... 294,623 21,689 7.36 296,520 22,231 7.50
Noninterest-earning assets................. 17,817 16,198
-------- --------
Total assets.......................... $312,440 $312,718
======== ========
Interest-bearing liabilities:
Deposits................................. $223,784 9,423 4.21 $223,086 9,865 4.42
Borrowings............................... 50,588 2,873 5.68 48,891 2,950 6.03
-------- -------- -------- -------
Total interest-bearing liabilities.... 274,372 12,296 4.48 271,977 12,815 4.71
-------- -------
Noninterest-bearing liabilities............ 3,430 4,647
-------- --------
Total liabilities.......................... 277,802 276,624
Stockholders' equity....................... 35,726 6,068
Accumulated gain (loss)
other comprehensive income............... (1,088) 26
-------- --------
Total liabilities and retained earnings.... $312,440 $312,718
======== ========
Net interest income........................ $ 9,393 $ 9,416
======== =======
Interest rate spread....................... 2.88% 2.79%
====== ======
Net yield on interest-earning assets....... 3.19% 3.18%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities.. 107.38% 109.02%
====== ======
</TABLE>
___________________
(1) Includes nonaccrual loans.
9
<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,
------------------------------------
1999 vs. 1998
------------------------------------
Increase (Decrease)
Due to
------------------------------------
Rate/
Volume Rate Volume Total
-------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable, net $ 1,079 $ (392) $ (30) $ 657
Investment securities:
Securities available for sale (1,021) 30 (8) (999)
Securities held to maturity (46) 16 (1) (31)
Mortgage-backed and related
securities:
Securities available for sale 782 (50) (21) 711
Securities held-to-maturity (12) 20 (7) 1
Cash and cash equivalents (451) (653) 223 (881)
------- ------- ----- -----
Total interest-earning assets 331 (1,029) 156 (542)
------- ------- ----- -----
Interest expense:
Deposits 31 (472) (1) (442)
Borrowings 102 (173) (6) (77)
------- ------- ----- -----
Total interest-bearing liabilities 133 (645) (7) (519)
------- ------- ----- -----
Change in net interest income $ 198 $ (384) $ 163 $ (23)
======= ======= ===== =====
</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
10
<PAGE>
certain strategies designed to decrease the vulnerability of its earnings to
material and prolonged changes in interest rates.
The Company has established an Asset and Liability Management Committee
which currently is comprised of two non-employee directors and four senior
management employees 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, 1999, the Company had a negative one-year
interest rate sensitivity gap of 11.9%, 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.
11
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999 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)................... $ 56,209 $ 6,447 $ 1,149 $ 0 $ 0 $ 63,805
Interest-earning deposits................... 6,714 0 0 0 0 6,714
Fixed-rate single-family mortgage loans..... 21,747 25,712 21,764 0 0 69,223
Mortgage-backed and related securities (1).. 327 236 35,942 0 0 36,505
Other loans................................. 26,302 39,722 45,800 0 0 111,824
-------- -------- -------- ------------ --------
Total..................................... 111,299 72,117 104,655 0 0 288,071
-------- -------- -------- ------------ --------
Interest-bearing liabilities:
Deposits.................................... 103,955 106,817 0 0 0 210,772
Borrowings.................................. 43,891 5,000 0 0 0 48,891
-------- -------- -------- ------------ --------
Total..................................... 147,846 111,817 0 0 0 259,663
-------- -------- -------- ------------ --------
Interest sensitivity gap..................... $(36,547) $(39,700) $104,655 $ 0 $ 0 $ 28,408
======== ======== ======== ============ ======== ========
Cumulative interest sensitivity gap.......... $(36,547) $(76,247) $ 28,408 28,408 $ 28,408 $ 28,408
======== ======== ======== ============ ======== ========
Ratio of interest-earning assets
to interest-bearing liabilities............ 75.3 % 64.5 % 100.0% N/A% N/A% 110.9%
======== ======== ======== ============ ======== ========
Ratio of cumulative gap to total assets...... (11.9)% (24.3)% 9.2% 9.2% 9.2% 9.2%
======== ======== ======== ============ ======== ========
</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.
Borrowings are presented at their fixed maturity date unless the borrowing
has a call feature, at which the call date will be used.
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.
12
<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 $39.3 million at
December 31, 1999 classified as available for sale. Another source of liquidity
is the ability to obtain advances from the FHLB of Chicago, Federal Reserve Bank
and Independent Bankers Bank. 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, 1999, the Company had commitments
to originate loans of $15.9 million. Certificates of deposit which are
scheduled to mature in less than one year at December 31, 1999 totaled $94.7
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.
13
<PAGE>
Impact of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
SFAS No. 133, " Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and hedging activities and requires recognition of all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation, SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," amended Statement No. 133 to
be effective for all fiscal years beginning after June 15, 2000. Although
the Company has not formally completed its evaluation of SFAS No. 133, as
amended, the adoption of the statement is not expected to have a material
effect on the consolidated financial statements.
14
<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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 1999 and 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, 1999 and 1998, and the results of
their operations and their cash flows for the years ended December 31, 1999 and
1998, in conformity with generally accepted accounting principles.
/s/ LARSSON, WOODYARD & HENSON, LLP
February 10, 2000
Paris, Illinois
15
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
-------------------
1999 1998
-------- -------
(1,000's)
-------------------
<S> <C> <C>
Cash $ 8,941 $ 8,134
Interest bearing deposits 6,714 14,768
-------- --------
Total Cash and Cash Equivalents 15,655 22,902
Securities available for sale (amortized cost of $45,398
and $52,168 in 1999 and 1998, respectively) 43,771 52,102
Securities held to maturity (estimated market value of
$18,249 and $17,133 in 1999 and 1998, respectively) 18,407 16,921
Mortgage-backed and related securities available for sale (amortized
cost of $36,167 and $42,727 at 1999 and 1998, respectively) 34,341 42,797
Mortgage-backed and related securities held to maturity
(estimated market value of $352 and $463 at 1999 and 1998, respectively) 338 442
Loans receivable, net 179,467 157,207
Foreclosed real estate, net 257 436
Accrued interest receivable 2,865 3,094
Premises and equipment, net 7,701 7,635
Deferred income taxes 1,518 275
Goodwill and other intangibles 4,158 4,456
Core deposit intangibles 416 517
Other assets 1,025 1,056
-------- --------
Total Assets $309,919 $309,840
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $225,170 $223,933
Federal Home Loan Bank advances 42,000 44,100
Repurchase agreements 6,891 4,296
Advances from borrowers for taxes and insurance 25 32
Accrued interest payable 484 493
Accrued income taxes 163 58
Other liabilities 1,360 1,662
-------- --------
Total Liabilities 276,093 274,574
-------- --------
Commitments and contingencies
Stockholders' Equity:
Preferred stock $0.01 par value; 1,000,000 shares authorized;
0 shares issued at December 31,1999 and 1998
Common stock $.01 par value; 7,000,000 shares authorized;
2,213,645 and 2,242,612 shares issued at December 31, 1999
and 1998, respectively 26 26
Additional paid-in capital 25,641 25,649
Treasury stock (5,600) (5,273)
Shares held for management recognition plan (230) (569)
Unallocated employee stock ownership plan (ESOP) shares (902) (1,164)
Accumulated other comprehensive income (2,279) 4
Retained earnings 17,170 16,593
-------- --------
Total Stockholders' Equity 33,826 35,266
-------- --------
Total Liabilities and Stockholders' Equity $309,919 $309,840
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
-------- -------
(1,000's)
-------------------
<S> <C> <C>
Interest income:
Interest on loans $14,649 $13,993
Interest on mortgage-backed and related securities 2,607 1,895
Interest on securities and interest-bearing deposits 4,433 6,343
------- -------
Total interest income 21,689 22,231
------- -------
Interest expense:
Interest on deposits 9,423 9,865
Interest on other borrowed funds 2,873 2,950
------- -------
Total interest expense 12,296 12,815
------- -------
Net interest income 9,393 9,416
Provision for loan losses 707 441
------- -------
Net interest income after provision for loan losses 8,686 8,975
------- -------
Non-interest income
Service fees 1,777 1,370
Insurance and annuity commissions 328 203
Net loss on sale of investments (19) 0
Net gain (loss) on sale of assets 11 (18)
Other 192 108
------- -------
2,289 1,663
------- -------
Non-interest expense
Salaries and employee benefits 4,414 4,322
Occupancy expense 642 503
Equipment and furnishing expense 724 563
Data processing expense 609 659
Professional fees 332 363
Federal insurance premium 171 97
Amortization of intangibles 399 366
Other 2,031 2,007
------- -------
9,322 8,880
------- -------
Income before income taxes 1,653 1,758
Provision for income taxes 523 521
------- -------
Net income $ 1,130 $ 1,237
======= =======
Basic earnings per share $ .53 $ .57
Diluted earnings per share $ .53 $ .55
</TABLE>
See accompanying notes to consolidated financial statements.
17
<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, 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
Comprehensive Income
Net income 1,130 1,130 $ 1,130
----------
Other comprehensive income
Unrealized gain
(loss) on securities (3,471)
Related tax effects 1,175
Realized loss
(gain) on securities 19
Related tax effects (6)
----------
Total other
comprehensive income (2,283) (2,283) (2,283)
----------
Total comprehensive income ($1,153)
==========
ESOP shares allocated (8) 262 254
Amortization of
Management Recognition Plan (35) 339 304
Treasury stock (292) (292)
Stock options exercised
Dividends ($.25 per share) (553) (553)
------ ------- --------- ---------- ------- ----------- ------------- --------
Balance, December 31, 1999 $ 26 $25,641 ($ 5,600) ($ 902) ($ 230) $ 17,170 ($ 2,279) $33,826
====== ======= ======== ========= ======= =========== ============ ========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
(1,000's)
------------------------
<S> <C> <C>
Operating activities:
Net income $ 1,130 $ 1,237
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 735 552
Provision for loan losses 707 441
Accretion of discounts on securities (47) (160)
Amortization of premiums on securities 156 125
Amortization of intangibles 399 366
Increase in accrued interest receivable 229 (419)
Decrease (increase) in deferred income taxes (69) 14
Decrease (increase) in other assets 29 (502)
Increase (decrease) in accrued income taxes 105 12
Increase (decrease) in accrued interest payable (9) 36
(Decrease) increase in other liabilities (301) 506
MRP stock plans 304 70
ESOP stock plan 254 330
Gain on sale of securities and mortgage-backed
and related securities 19 0
Loss on sale of premises and equipment (11) 18
---------- ---------
Net cash provided by operating activities 3,630 2,626
---------- ---------
Investing activities:
Proceeds from sales of securities available for sale 1,457 0
Proceeds from maturities of securities held to maturity 6,068 9,442
Proceeds from maturities of securities available for sale 26,295 50,226
Proceeds from maturities of mortgage-backed and related
securities available for sale 127 0
Proceeds from sales of mortgage-backed and related
securities available for sale 2,770 0
Proceeds from maturing time deposits 317 0
Purchase of securities available for sale (20,439) (44,886)
Purchase of securities held to maturity (8,102) (8,050)
Purchase of mortgage-backed and related
securities available for sale (4,981) (28,363)
Decrease (increase) in loans receivable (22,959) 4,198
Principal collected on mortgage-backed and related
securities available for sale 8,627 9,909
Proceeds from foreclosed real estate 194 162
Purchase of premises and equipment (801) (2,352)
Proceeds from sale of premises and equipment 0 0
Purchase of Federal Home Loan Bank stock (330) (125)
---------- ---------
Net cash used in investing activities (11,757) (9,839)
---------- ---------
</TABLE>
19
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
(1,000's)
------------------------
<S> <C> <C>
Financing activities:
Net increase (decrease) in deposits $ 1,237 $ 5,018
Increase (decrease) in advances from borrowers
for taxes and insurance (8) (9)
Proceeds from long term FHLB advances 0 7,100
Repayments of long term FHLB advances (19,100) 0
Increase (decrease) in other borrowings 17,000 (5,600)
Increase (decrease) in repurchase agreements 2,596 (1,027)
Purchase of treasury stock (292) (1,470)
Stock options 0 (60)
Dividends paid (accrued) (553) (561)
---------- ---------
Net cash provided by financing activities 880 3,391
---------- ---------
(Decrease) increase in cash and cash equivalents (7,247) (3,822)
Cash and cash equivalents at beginning of year 22,902 26,724
---------- ---------
Cash and cash equivalents at end of year $ 15,655 $ 22,902
========== =========
Supplemental Disclosures:
Additional Cash Flows Information:
Cash paid for:
Interest on deposits, advances and other borrowings $ 12,305 $ 12,779
Income taxes:
Federal $ 500 $ 626
State $ 0 $ 40
Securities transferred to available for sale $ 504 $ 0
</TABLE>
See accompanying notes to consolidated financial statements.
20
<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
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.
21
<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, 1999 and 1998.
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.
22
<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.
23
<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. 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, 1999 and
1998 was $569,000 and $327,000, 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, 1999 and 1998 was $269,000 and
$112,000, 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.
24
<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.
Accounting for Derivative Instruments and Hedging Activities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for
derivative instruments and hedging activities and requires recognition
of all derivatives as either assets or liabilities measured at fair
value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting
designation, SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133," amended Statement No. 133 to be effective for all fiscal years
beginning after June 15, 2000. Although the Company has not formally
completed its evaluation of SFAS No. 133, as amended, the adoption of
the statement is not expected to have a material effect on the
consolidated financial statements.
25
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Reclassifications
Certain reclassifications have been made to the balances as of December 31,
1998 with no effect on net income, to be consistent with the classifications
adopted for December 31, 1999.
Note 2. Securities
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------
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 $ 42,302 $ 0 $ 1,627 $ 40,675
State and municipal obligations 105 0 0 105
FRB stock 381 0 0 381
FHLB stock 2,610 0 0 2,610
--------- -------- ---------- ----------
$ 45,398 $ 0 $ 1,627 $ 43,771
========= ======== ========== ==========
<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 $ 48,845 $ 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>
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,
----------------------------------------------
1999 1998
----------------------------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
--------- ----------- --------- -----------
(1,000's)
----------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,746 $ 3,744 $ 3,325 $ 3,328
Due after one year through five years 15,245 14,823 22,646 22,615
Due after five years through ten years 23,416 22,213 23,534 23,496
Due after ten years 2,991 2,991 2,663 2,663
------- ------- ------- -------
$45,398 $43,771 $52,168 $52,102
======= ======= ======= =======
</TABLE>
26
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
Securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------
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 $ 14,198 $ 1 $ 185 $14,014
State and municipal obligations 4,209 35 9 4,235
--------- --------- ---------- -----------
$ $18,407 $ 36 $ 194 $ 18,249
======= ========= ========== ===========
<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>
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,
----------------------------------------------------
1999 1998
-----------------------------------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
--------- ----------- ----------- -----------
(1,000's)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,039 $ 4,017 $ 3,249 $ 3,271
Due after one year through five years 13,296 13,156 12,269 12,412
Due after five years through ten years 1,072 1,076 1,403 1,450
Due after ten years 0 0 0 0
--------- ----------- ---------- --------
$ 18,407 $ 18,249 $ 16,921 $ 17,133
========= =========== ========== ========
</TABLE>
Securities with a carrying amount of $26,895,000 and $41,011,000 at December
31, 1999 and 1998 were pledged to secure public deposits, repurchase
agreements, and for other purposes as required or permitted by law.
27
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
Proceeds from sales of securities, gross gains and gross losses from such sales
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
---------- ----------
(1,000's)
-----------------------
<S> <C> <C>
Proceeds from sales $ 953 $ 0
========== ==========
Gross gains $ 1 $ 0
Gross losses 9 0
---------- ----------
Net gain (loss) ($ 8) $ 0
========== ==========
</TABLE>
Note 3. Mortgage-Backed and Related Securities
Mortgage-backed and related securities available for sale are summarized
as follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 22,241 $ 28 $ 1,209 $ 21,060
GNMA collateralized
mortgage obligations 135 2 0 137
FNMA certificates 442 0 9 433
FNMA collateralized mortgage obligations 2,696 0 80 2,616
FHLMC certificates 2,720 12 105 2,627
FHLMC collateralized
mortgage obligations 7,933 0 465 7,468
--------- ---------- ---------- -----------
$ 36,167 $ 42 $ 1,868 $ 34,341
========= ========== ========== ===========
<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
========= ========== ========== ===========
</TABLE>
28
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Mortgage-Backed and Related Securities
Mortgage-backed and related securities held to maturity are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 275 $ 13 $ 0 $ 288
FHLMC certificates 63 1 0 64
--------- ---------- ---------- -----------
$ 338 $ 14 $ 0 $ 352
========= ========== ========== ===========
<CAPTION>
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>
Mortgage-backed and related securities with a carrying amount of $27,277,000 and
$17,369,000 at December 31, 1999 and 1998, 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
6.48% and 6.62% at December 31, 1999 and 1998, 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 18 years and 20 years at December 31, 1999 and 1998, respectively.
Proceeds from sales of mortgage-backed and related securities, gross gains and
gross losses from such sales were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
---------- ----------
(1,000's)
-----------------------
<S> <C> <C>
Proceeds from sales $ 2,770 $ 0
========== ==========
Gross gains $ 12 $ 0
Gross losses 23 0
---------- ----------
Net gain (loss) ($ 11) $ 0
========== ==========
</TABLE>
29
<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,
------------------
1999 1998
-------- --------
(1,000's)
------------------
<S> <C> <C>
Real estate loans:
Single-family residential $ 74,299 $ 68,057
Construction 5,752 4,470
Multi-family residential and commercial 16,526 9,451
Agricultural 11,441 6,988
Commercial 15,376 12,954
Other loans:
Agricultural 8,965 10,636
Commercial 5,740 11,752
Automobile 34,355 24,199
Credit card 1,831 2,015
Mobile home 1,207 997
Educational 5 13
Deposit accounts 1,231 1,697
Home improvement 254 852
Other 4,065 5,486
-------- --------
181,047 159,567
Less:
Loans in process 0 381
Allowance for losses 1,580 1,979
-------- --------
$179,467 $157,207
======== ========
</TABLE>
Certain consumer loans are shown net of add-on interest at December 31, 1999
and 1998. The add-on interest amounted to $136,000 and $397,000, respectively.
Changes in allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
(1,000's)
------------------
<S> <C> <C>
Balance at January 1 $ 1,979 $ 1,934
Provision for loan losses 707 441
Recoveries 372 280
Loans charged off ( 1,478) ( 676)
-------- --------
Balance at December 31 $ 1,580 $ 1,979
======== ========
</TABLE>
30
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans Receivable
Non-accrued loans are considered as impaired loans by the Company. As of
December 31, 1999 and 1998, the amount of interest not recognized on these
loans was $36,000 and $49,000 for the respective years ended.
Impaired loans as of December 31, 1999 and 1998 are summarized as follows
(amounts in thousands):
1999 1998
----- -------
Impaired loans with a valuation reserve $ 796 $1,201
Impaired loans with no valuation reserve 0 0
----- ------
Total impaired loans $ 796 $1,201
===== ======
Valuation reserve on impaired loans $ 150 $ 226
Average impaired loans, net of valuation reserves, were $1,393,000 and $610,000
for the respective years ended December 31, 1999 and 1998. Cash basis income
recognized on these loans during each of the years was immaterial.
Weighted average interest rate on loans consisted of the following:
December 31,
--------------------------
1999 1998
----------- -----------
Mortgage loans 8.68% 8.44%
Other loans 9.10% 8.93%
Total loans 8.83% 8.68%
Note 5. Accrued Interest Receivable
Accrued interest receivable consisted of the following:
December 31,
-----------------------
1999 1998
--------- --------
(1,000's)
-----------------------
Loans $ 1,706 $ 1,679
Mortgage-backed and related securities 222 261
Securities 937 1,154
-------- -------
$ 2,865 $ 3,094
======== =======
Note 6. Premises and Equipment
Premises and equipment are summarized by major classifications as presented
below:.
December 31,
-----------------
1999 1998
------- --------
(1,000's)
------------------
Land $ 1,317 $ 1,317
Building 6,362 5,844
Furniture and equipment 4,274 4,009
------- --------
11,953 11,170
Accumulated depreciation (4,252) (3,535)
------- --------
$ 7,701 $ 7,635
======= ========
Depreciation included in the consolidated statements of income amounted to
$735,000 and $552,000 for the years ended December 31, 1999 and 1998,
respectively.
Improvements to the bank facility at Highland, Illinois was completed at cost
of $873,000 with cost incurred in 1998 of $396,000.
31
<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,
--------------------------------------------------------
1999 1998
--------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Demand deposits, non-interest bearing $ 14,398 0.00% $ 12,548 0.00%
Demand deposits, interest bearing 27,727 2.51% 27,933 2.17%
Passbook 26,229 2.92% 26,111 2.90%
Money market 20,472 3.57% 22,462 3.52%
Certificates 136,344 5.45% 134,879 5.55%
-------- ---------
$225,170 4.27% $ 223,933 4.31%
======== =========
</TABLE>
Certificates had the following remaining maturities (amounts in thousands):
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------
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% $ 109 $ 0 $ 0 $ 5 $ 114
4 - 5.99% 80,412 20,335 4,709 6,894 112,350
6 - 7.99% 12,943 4,299 3,537 1,881 22,660
8 - 9.99% 1,220 0 0 0 1,220
-------- ---------- --------- -------- ---------
$ 94,684 $ 24,634 $ 8,246 $ 8,780 $ 136,344
======== ========== ========= ======== =========
<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
======== ========= ========== ======== =========
</TABLE>
32
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposit Analysis
Interest expense on deposits is summarized as follows:
Year Ended December 31,
------------------------
1999 1998
-------- ---------
(1,000's)
------------------------
Passbook $ 904 $ 837
Demand deposits 712 713
Money market 721 838
Certificates 7,108 7,504
Penalties on early withdrawals 22 27
------- -------
$ 9,423 $ 9,865
======= =======
At December 31, 1999 and 1998, the Bank had $36,294,000 and $43,713,000,
respectively, of deposit accounts with balances in excess of $100,000. The Bank
did not have brokered deposits at December 31, 1999 and 1998. 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 $15,603,000 and $27,032,000 at December 31, 1999 and 1998,
respectively.
Note 8. Other Borrowed Funds
Long term advances from the FHLB consisted of fixed rate callable notes with
the initial call at one year and generally quarterly thereafter. Short term
advances included $13,000,000 of fixed rate and $900,000 variable rate. The
open line of credit interest rate can adjust daily. The FHLB advances were
secured by certain mortgage loans and securities. FHLB advances require monthly
interest payments. Interest expense for FHLB advances amounted to $2,506,000
and $2,384,000 for the respective years ended December 31, 1999 and 1998,
respectively.
The advances at December 31, 1999 consisted of the following (amounts in
thousands):
Issue Maturity
Date Date Amount Rate
---- -------- --------- ------
Long Term
June 17, 1997 June 18, 2002 $ 5,000 5.710%
August 6, 1997 August 8, 2002 15,000 5.400%
January 16, 1998 January 16, 2008 5,000 5.300%
---------
25,000
---------
Short Term
December 12, 1999 June 13, 2000 12,000 5.970%
October 6, 1999 October 6, 2000 900 5.615%
November 22, 1999 May 22, 2000 1,000 5.830%
---------
13,900
---------
Open Line of Credit 3,100 4.740%
---------
$ 42,000
=========
33
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Other Borrowed Funds
Scheduled principal reduction of long term advances at December 31, 1999 is as
follows: 2000 - $0; 2001 - $0; 2002 - $20,000,000; 2003 - $0; and 2004 - $0;
and $5,000,000 thereafter.
The advances at December 31, 1998 consisted of the following (amounts in
thousands):
Issue Maturity Interest
Date Date Amount Rate
---------- ----------------- -------- --------
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
=======
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.
The Company entered into a loan agreement with UMB Bank of St. Louis during
1997 which provided available credit of $10,000,000 at prime interest rate. The
Company borrowed $5,600,000 during 1997 which was paid off during 1998.
Interest expense amounted to $0 and $302,000 for the respective years ended
December 31, 1999 and 1998.
The subsidiary banks have established lines of credit at other financial
institutions. As of December 31, 1999 and 1998 there were no outstanding
balances. Interest expense amounted to $68,000 and $0 for the respective years
ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
FHLB Advances
--------------------
Open Line Term Lines Short Term
1999 of Credit Notes of Credits Notes
- -------------------------------------------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31 $3,100 $38,900 $ 0 $ 0
Average amount outstanding during the year 2,335 43,223 1,432 0
Maximum amount outstanding at any month end 8,415 44,100 7,700 0
Weighted average interest rate:
During the year 5.67% 5.49% 4.76% 0.00%
End of year 4.74% 5.61% 0.00% 0.00%
</TABLE>
34
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Other Borrowed Funds
<TABLE>
<CAPTION>
FHLB Advances
-------------------
Open Line Term Lines of Short Term
1998 of Credit Notes Credit Notes
- ------------------------------------------------ ---------- ------- --------- -----------
<S> <C> <C> <C> <C>
Balance at December 31 $ 0 44,100 0 0
Average amount outstanding during the year 0 43,742 0 3,554
Maximum amount outstanding at any month end 0 44,100 0 5,600
Weighted average interest rate:
During the year 0.00% 5.45% 0.00% 8.50%
End of year 0.00% 5.37% 0.00% 0.00%
</TABLE>
Note 9. Repurchase Agreements
The subsidiary banks have entered into repurchase agreements with customers at
various interest rates with maturities of six months or less. Interest expense
amounted to $299,000 and $264,000 for years ended December 31, 1999 and 1998,
respectively. These agreements are not insured by FDIC.
Summary of repurchase agreements and rates at December 31:
<TABLE>
<CAPTION>
1999 1998
--------- -------
(1,000's)
------------------
<S> <C> <C>
Balance at December 31 $6,891 $4,296
Average amount outstanding during the year 6,248 4,963
Maximum amount outstanding at any month end 8,635 5,874
Weighted average interest rate:
During the year 4.75% 5.26%
End of year 5.54% 4.92%
</TABLE>
35
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Stockholders' Equity
Regulatory Restrictions and Capital Requirements
The principal source of income and funds for the Company are dividends from
its subsidiaries. During 2000, the amount of dividends the subsidiaries can
pay to the Company without prior approval of regulatory agencies is limited to
their 2000 eligible net profits, as defined, and the adjusted retained 1999 and
1998 net income of the subsidiaries. As a practical matter, the banks may
restrict dividends to a lesser amount because of the need to maintain adequate
capital structures. The Company received $3,500,000 in dividends from the bank
subsidiaries in 1998 to repay debt incurred with the 1997 bank acquisitions
with prior regulatory approval.
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. As of the most recent notification from the
regulators, the Company and subsidiary banks were considered to be well
capitalized.
The subsidiary banks' actual and minimum required capital amounts and ratios
as mandated by the Federal Reserve Board at December 31, 1999, 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. $33,111 18.99% $13,950 8.00% $17,437 10.00%
Community Bank and Trust, N.A. 21,370 17.14% 9,973 8.00% 12,467 10.00%
American Bank of Illinois 2,218 10.82% 1,641 8.00% 2,051 10.00%
Egyptian State Bank 2,027 13.45% 1,206 8.00% 1,507 10.00%
Saline County State Bank 1,398 10.77% 1,039 8.00% 1,299 10.00%
MidAmerica Bank of St. Clair County 3,299 18.63% 1,417 8.00% 1,771 10.00%
</TABLE>
36
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Stockholders' Equity
<TABLE>
<CAPTION>
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>
Tier 1 Capital to risk weighted assets
Community Financial Corp. $31,531 18.08% $ 6,975 4.00% $10,462 6.00%
Community Bank and Trust, N.A. 20,270 16.26% 4,987 4.00% 7,480 6.00%
American Bank of Illinois 2,104 10.26% 820 4.00% 1,230 6.00%
Egyptian State Bank 1,945 12.90% 603 4.00% 904 6.00%
Saline County State Bank 1,308 10.07% 519 4.00% 779 6.00%
MidAmerica Bank of St. Clair County 3,105 17.53% 708 4.00% 1,062 6.00%
Tier 1 Capital to average assets
Community Financial Corp. 31,531 10.06% 12,542 4.00% 15,677 5.00%
Community Bank and Trust, N.A. 20,270 9.60% 8,444 4.00% 10,555 5.00%
American Bank of Illinois 2,104 6.90% 1,220 4.00% 1,525 5.00%
Egyptian State Bank 1,945 8.34% 933 4.00% 1,166 5.00%
Saline County State Bank 1,308 8.15% 642 4.00% 802 5.00%
MidAmerica Bank of St. Clair County 3,105 13.18% 943 4.00% 1,178 5.00%
</TABLE>
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>
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>
37
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Stockholders' Equity
At the time of the conversion of Community Bank & Trust, N.A. to a stock
organization, a special liquidation account was established for the benefit
of eligible account holders and the supplemental eligible account holders in
an amount equal to the net worth of the Bank. The special liquidation
account, $13,950,000, will be maintained for the benefit of eligible account
holders and the supplemental eligible account 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.
Treasury Stock
During 1999, the Company authorized purchasing up to 50,000 shares of the
outstanding shares of stock. The Company purchased 28,967 shares of $292,000
with an average cost per share of $10.09. The Company transferred 2,116
shares of unallocated stock held by the MRP trust to 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.
Note 11. Income Tax
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
-------- --------
(1,000's)
-----------------------
<S> <C> <C>
Currently payable: Federal $ 592 $ 514
State 0 0
Deferred: Federal (69) 7
State 0 0
-------- --------
$ 523 $ 521
======== ========
</TABLE>
Income tax expense for the years ended December 31, 1999 and 1998 has been
provided at an effective rate of approximately 31.64% and 29.64%, 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,
-----------------------
1999 1998
-------- --------
(1,000's)
-----------------------
<S> <C> <C>
Computed tax at statutory rates $ 562 $ 598
Increase (decrease) in tax expense resulting from:
Other 19 (8)
Tax exempt income - net (58) (69)
-------- --------
Income tax expense $ 523 $ 521
======== ========
</TABLE>
38
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Income Tax
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,
----------------------
1999 1998
---------- ----------
(1,000's)
----------------------
<S> <C> <C>
Deferred tax assets:
Allowance for unrealized losses on securities available for sale $ 1,180 $ 1
Allowance for loan losses 537 606
Acquisition adjustments 150 135
Other 6 4
---------- ----------
1,873 746
---------- ----------
Deferred tax liabilities:
Recapture of bad debt reserves 90 180
Federal Home Loan Bank stock 29 29
Premises and equipment 108 86
Core deposit intangible 96 120
Other 32 56
---------- ----------
355 471
---------- ----------
Net deferred tax asset $ 1,518 $ 275
========== ==========
</TABLE>
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, 1999 and 1998, management believes it is
more likely than not that the Bank will realize the benefits of these
deductible differences.
The Company has a capital loss carryover, as of December 31, 1999, amounts to
$329,000 and will start to expire in 2006. No deferred taxes have been
recorded for this carryover.
Note 12. 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.
39
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Commitments and Contingencies
The subsidiary banks had outstanding firm commitments to originate loans as
follows:
December 31,
-----------------
1999 1998
------- -------
(1,000's)
-----------------
Real estate $ 605 $1,316
Credit card loans 7,332 6,807
------ ------
Commitments to originate loans $7,937 $8,123
====== ======
Unused lines of credit $7,947 $8,655
====== ======
Interest rates on the above commitments ranged from 6.75% to 16.90% and 6.66%
to 16.90% at December 31, 1999 and 1998, respectively.
There were no outstanding commitments to purchase or sell securities at
December 31, 1999 and 1998, 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.
40
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Related Parties
The Banks have entered into transactions with its directors, key management and
their affiliates (Related Parties). Such transactions were made in the ordinary
course of business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features. A summary of loans to such related parties is as follows:
December 31,
------------------------
1999 1998
--------- ----------
(1,000's)
------------------------
Balance December 31 $ 1,712 $ 967
New loans 503 823
Repayments (806) (78)
-------- --------
Balance December 31 $ 1,409 $ 1,712
======== ========
Note 14. Carrying Amounts and Fair Value of Financial Instruments
Carrying amounts and estimated fair values for financial instruments at
December 31:
<TABLE>
<CAPTION>
1999 1998
----------------------- ---------------------
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 $ 15,655 $ 15,655 $ 22,902 $ 22,902
Securities 63,647 62,178 69,023 69,235
Mortgage-backed and related securities 34,679 36,519 43,239 43,260
Loans receivable 179,467 179,307 157,207 157,632
Accrued interest receivable 2,865 2,865 3,094 3,094
Financial Liabilities
Deposits 225,170 216,403 223,933 222,240
FHLB advances 42,000 40,599 44,100 41,864
Repurchase agreements 6,891 6,714 4,296 4,296
Accrued interest payable 484 484 493 493
Advances for taxes and insurance 25 25 32 32
Off-Balance-Sheet Financial Instruments
Commitments to extend credit 0 7,937 0 8,123
Unused lines of credit 0 7,947 0 8,655
</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.
41
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. 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, 1999 and
1998. 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.
42
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. 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 15. 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 $208,000 and $403,000 for December 31,
1999 and 1998. The ESOP shares were as follows:
1999 1998
-------- ----------
Allocated shares 100,435 74,033
Shares ratably released for allocation 21,160 21,160
Unallocated shares 90,005 116,407
-------- ----------
Total ESOP shares 211,600 211,600
======== ==========
Fair value of unreleased shares at December 31 $844,000 $1,310,000
======== ==========
43
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. 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.
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:
December 31,
-------------------
1999 1998
------- --------
(1,000's)
-------------------
MRP vesting $ 253 $ 253
MRP tax bonus 82 94
Retirement MRP vesting 51 31
Retirement MRP tax bonus 14 11
------- --------
$ 400 $ 389
======= ========
Note 17. 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 18. 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 1998 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.
44
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 18. Stock Option and Incentive Plan
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:
1999 1998
--------- ----------
(1,000's)
----------------------
Net income
----------
As reported $ 1,130 $ 1,237
========= ========
Pro forma $ 1,013 $ 1,049
========= ========
Basis earnings per share
------------------------
As reported $ .53 $ .57
========= ========
Pro forma $ .48 $ .48
========= ========
Diluted earnings per share
--------------------------
As reported $ .53 $ .55
========= ========
Pro forma $ .48 $ .47
========= ========
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%. 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>
1999 1998
------------------------------ ----------------------------
Number of Exercise Number of Exercise
Shares Price Shares Price
---------- ------------------ --------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 241,362 13.125 to 18.375 240,701 $13.125
Granted 0 10,580 18.375
Exercised 0 (9,919) 13.125
Forfeited 3,968 13.125 0
------- -------
Outstanding at end of year 237,394 241,362 13.125 to 18.375
======= =======
Options exercisable at end of year 237,394 13.125 to 18.375 241,362 13.125 to 18.375
======= =======
</TABLE>
The following is a summary of the status of fixed options outstanding at
December 31, 1999:
<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 $18.375 237,394 7 years $13.36 237,394 $13.36
</TABLE>
45
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. 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>
1999 1998
----------- ----------
(1,000's)
-----------------------
<S> <C> <C>
Income available to common stockholders used in basic EPS $ 1,130 $ 1,237
========== ==========
Income available to common stockholders after assumed
conversions of dilutive securities $ 1,130 $ 1,237
========== ==========
Weighted average number of common shares used in basic EPS 2,120,399 2,189,020
Effect of dilutive securities:
Stock options 0 61,882
---------- ----------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS 2,120,399 2,250,902
========== ==========
</TABLE>
Note 20. 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.
Note 21. 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, 1999
and 1998 and its condensed statements of income and cash flows for the years
ended December 31, 1999 and 1998.
46
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Community Financial Corp. Condensed Financial Information
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
At December 31,
---------------------
1999 1998
-------- ---------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 1,446 $ 2,223
Securities held to maturity 580 896
Investment in subsidiaries 30,376 29,496
Premise and equipment, net 796 1,003
Receivable from subsidiaries 938 1,203
Other assets 342 1,419
-------- ---------
$34,478 $36,240
======== =========
Liabilities and Stockholders' Equity:
Accrued expenses and other liabilities $ 585 $ 862
Payable to subsidiaries 67 112
-------- ---------
Total liabilities 652 974
-------- ---------
Stockholders' equity:
Common stock 26 26
Additional paid-in capital 25,641 25,649
Unearned MRP shares (230) (569)
Treasury stock (5,600) (5,273)
Unearned ESOP shares (902) (1,164)
Accumulated other comprehensive income (2,279) 4
Retained earnings, subject to certain restrictions 17,170 16,593
-------- ---------
Total stockholders' equity 33,826 35,266
-------- ---------
$34,478 $36,240
======== =========
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------
1999 1998
---------- -----------
Dividends from subsidiary banks $ 0 $ 3,500
Interest income from subsidiary banks 84 117
Interest income 76 187
Non-interest income 122 7
Interest expense 0 (302)
Non-interest expense (1,244) (1,183)
---------- ---------
Income before income taxes (962) 2,326
Benefit from income taxes 383 419
---------- ---------
Income before undistributed earnings of subsidiaries (579) 2,745
Undistributed (distributions in excess of) earnings of
subsidiaries 1,709 (1,508)
---------- ---------
Net income $1,130 $ 1,237
========== =========
</TABLE>
47
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Community Financial Corp. Condensed Financial Information
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,130 $ 1,237
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in earnings of subsidiaries (1,709) (1,992)
Dividends received from subsidiaries 0 3,500
Stock employee benefit plans 558 456
Other, net 236 (378)
------ -------
Net cash provided by operating activities 215 2,823
------ -------
Cash flows from investing activities:
Purchase investment in subsidiaries 0 0
Purchases of investment securities 0 0
Maturities of investment securities 308 1,990
Receivable from subsidiaries (418) 225
Purchase of premise and equipment (37) (1,041)
Proceeds from redemption of subsidiaries stock 0 3,030
------ -------
Net cash provided by (used in)
investing activities (147) 4,204
------ -------
Cash flows from financing activities:
Common stock repurchased (292) (1,470)
Proceeds from other borrowings 0 0
Repayment of other borrowings 0 (5,600)
Dividends paid on common stock (553) (561)
------ -------
Net cash (used in) provided by
financing activities (845) (7,631)
------ -------
Net increase in cash and cash equivalents (777) (604)
Cash and cash equivalents at beginning of year 2,223 2,827
------ -------
Cash and cash equivalents at end of year $1,446 $ 2,223
====== =======
</TABLE>
48
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22. 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, 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
======= ====== ====== ====== ======= ==== ====== =======
Year Ended December 31, 1999
Interest Income:
Loans $10,486 $1,546 $1,331 $1,286 $ 84 $ 0 ($84) $14,649
Other 5,081 337 1,113 433 76 0 0 7,040
------- ------ ------ ------ ------- ---- ------ -------
15,567 1,883 2,444 1,719 160 0 (84) 21,689
------- ------ ------ ------ ------- ---- ------ -------
Interest Expense:
Deposits 6,312 778 1,286 1,047 0 0 0 9,423
Other 2,766 107 0 0 0 0 0 2,873
------- ------ ------ ------ ------- ---- ------ -------
9,078 885 1,286 1,047 0 0 0 12,296
------- ------ ------ ------ ------- ---- ------ -------
Net interest income 6,489 998 1,158 672 160 0 (84) 9,393
Provision for loan losses 537 18 52 100 0 0 0 707
------- ------ ------ ------ ------- ---- ------ -------
Net interest income
after provision 5,952 980 1,106 572 160 0 (84) 8,686
Non-interest income 1,214 360 221 186 122 308 (122) 2,289
Non-interest expense 5,025 1,168 1,118 973 1,244 0 (206) 9,322
------- ------ ------ ------ ------- ---- ------ -------
Income before taxes 2,141 172 209 (215) (962) 308 0 1,653
Provision for (benefit from) taxes 904 49 18 (65) (383) 0 0 523
------- ------ ------ ------ ------- ---- ------ -------
Net Income $ 1,237 $ 123 $ 191 ($150) ($579) $308 $ 0 $ 1,130
======= ====== ====== ====== ======= ==== ====== =======
</TABLE>
49
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22. Segment information
Other significant items:
<TABLE>
<CAPTION>
Financial Institutions
--------------------------------------------
East West
Central Central Southern Central
Illinois Illinois Illinois Illinois Company Other Adjustments Total
-------- -------- -------- -------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Year Ended December 31, 1999
Depreciation $ 307 $ 50 $ 39 $ 96 243 0 0 735
Amortization 0 93 153 153 0 0 0 399
Expenditures for premise
and equipment 116 554 75 19 37 0 0 801
Dividends paid 0 0 0 0 553 0 0 553
Undistributed earnings 1,237 123 191 (150) 0 308 (1,709) 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.
50
<PAGE>
COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23. Condensed Quarterly Results of Operations
<TABLE>
<CAPTION>
1999
--------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $5,496 $ 5,542 $ 5,432 $ 5,219
Interest expense (3,088) (3,113) (3,051) (3,044)
------- ------- ------- -------
Net interest income 2,408 2,429 2,381 2,175
Provision for loan losses (230) (211) (188) (78)
Non-interest income 751 493 580 465
Non-interest expense (2,494) (2,122) (2,425) (2,281)
------- ------- ------- -------
Income before income tax expense 435 589 348 281
Income tax expense (133) (222) (87) (81)
------- ------- ------- -------
Net income $ 302 $ 367 $ 261 $ 200
======= ======= ======= =======
Earnings per share: Basic $ 0.14 $ 0.18 $ 0.12 $ 0.10
Diluted $ 0.14 $ 0.18 $ 0.12 $ 0.10
<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
</TABLE>
51
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
<S> <C> <C>
Roger A. Charleston Shirley B. Kessler Brad A. Jones
Chairman of the Board Retired President and Co-Owner of Rural King Supply
Civil Engineer; Owner, Charleston Chief Executive Officer
Engineering
Michael F. Bauman C. Richard King Roger L. Haberer
Real Estate Investor Retired Information Services Manager of
Westaff
Wayne H. Benson Gary L. Graham
President and Mayor, City of O'Fallon, IL
Chief Executive Officer Owner of LUCO, Inc. (River Barge Business)
EXECUTIVE OFFICERS
Wayne H. Benson Douglas W. Tompson
President and Chief Financial Officer
Chief Executive Officer
SUBSIDIARY BANKS
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
Independent Certified Accountants Special Counsel Annual Report on Form 10-K
Larsson, Woodyard & Henson, CPAS Stradley Ronon Housley Kantarian &
702 E. Court Street Bronstein, LLP A copy of the Company's Annual
Paris, Illinois 61944 1220 19th Street, N.W., Suite 700 Report on Form 10-K for the fiscal
Washington, D.C. 20036 year ended December 31, 1999 as
General Counsel filed with the Securities and
Ray W. Vaughn, Attorney Annual Meeting Exchange Commission will be
308 S. Kitchell The 2000 Annual Meeting of Stockholders furnished without charge to
Olney, Illinois 62450 will be held on April 27, 2000 at 11:00 stockholders as of the record date
a.m. at the Holiday Motel at 1300 S. for the 2000 Annual Meeting upon
Transfer Agent and Registrar West Street, Olney, Illinois. written request to Corporate
Registrar and Transfer Co., Secretary, Community Financial
Cranford, New Jersey Corp., 240 E. Chestnut Street,
Olney, Illinois 62450-2295
</TABLE>
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
State or Other
Jurisdiction of Percentage
Incorporation Ownership
------------- ---------
Parent
- ------
Community Financial Corp. Illinois
Subsidiary (1)
- ----------
Community Bank & Trust, N.A. United States 100%
American Bank of Illinois in Highland Illinois 100%
The Egyptian State Bank Illinois 100%
Saline County State Bank Illinois 100%
MidAmerica Bank of St. Clair County 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>
EXHIBIT 23
[LETTERHEAD OF LARSSON, WOODYARD & HENSON, LLP]
The Board of Directors
Community Financial Corp.
240 East Chestnut
Olney, Illinois 62450
We consent to incorporation by reference in the registration statements (No.
33-92534 and 333-322) on Form S-8 of Community Financial Corp. of our report
dated February 10, 2000, relating to the consolidated statements of financial
condition of Community Financial Corp. and Subsidiary as of December 31, 1999
and 1998 and the related consolidated statements of income, stockholders' equity
and cash flows for the years ended December 31, 1999 and 1998, which report
appears in the December 31, 1999 annual report on Form 10-K of Community
Financial Corp.
/s/ Larsson, Woodyard & Henson, LLP
March 23, 2000
Paris, Illinois
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,941
<INT-BEARING-DEPOSITS> 6,714
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,112
<INVESTMENTS-CARRYING> 18,745
<INVESTMENTS-MARKET> 18,601
<LOANS> 181,047
<ALLOWANCE> 1,580
<TOTAL-ASSETS> 309,919
<DEPOSITS> 225,170
<SHORT-TERM> 6,891
<LIABILITIES-OTHER> 2,032
<LONG-TERM> 42,000
0
0
<COMMON> 26
<OTHER-SE> 33,800
<TOTAL-LIABILITIES-AND-EQUITY> 309,919
<INTEREST-LOAN> 14,649
<INTEREST-INVEST> 7,040
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,689
<INTEREST-DEPOSIT> 9,423
<INTEREST-EXPENSE> 12,296
<INTEREST-INCOME-NET> 9,393
<LOAN-LOSSES> 707
<SECURITIES-GAINS> (19)
<EXPENSE-OTHER> 9,322
<INCOME-PRETAX> 1,653
<INCOME-PRE-EXTRAORDINARY> 1,653
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,130
<EPS-BASIC> .53
<EPS-DILUTED> .53
<YIELD-ACTUAL> 3.19
<LOANS-NON> 796
<LOANS-PAST> 831
<LOANS-TROUBLED> 28
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,979
<CHARGE-OFFS> 1,478
<RECOVERIES> 372
<ALLOWANCE-CLOSE> 1,580
<ALLOWANCE-DOMESTIC> 1,580
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
