TABLE OF CONTENTS
| President's Message . . . . . . . . . . . . . . . . . . . . . . . .1 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . .3 Board of Directors/Executive Management . . . . . . .4 Management's Discussion ∓ Analysis . . . . . . . .5 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . .13 Consolidated Balance Sheets . . . . . . . . . . . . . . . .14 Consolidated Statement of Incomes . . . . . . . . . . .15 | Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . .16 Consolidated Statements of Cash Flows . . . . . . .17 Summary of Accounting Policies . . . . . . . . . . . . .18 Notes to Consolidated Financial Statements . . . . .21 Stockholder Information . . . . . . . . . . . . . . . . . . . .36 Corporate Profile . . . . . . . . . . . . . . . . . . . . . . . . .37 Bank Locations . . . . . . . . . . . . . .Inside Back Cover |
| President's Letter |
Dear Stockholder: |
| We are pleased to present in this 2005 Annual Report another record year of operating results for Community Financial Corporation. Your Corporation has continued its steady growth ending the fiscal year with assets totaling $399.6 million, up $63 million or 18.6% from the prior year. Fueling this growth was continued strong loan demand, both in the Valley and Hampton Roads regions, resulting in loans outstanding at fiscal year end of $336.8 million, an increase of $57.5 million or 20.6% from $279.3 million for the prior year. Total loan production reached an unprecedented level for the year exceeding $205 million. Deposits totaled $275.4 million at fiscal year end, up 5.8% from $260.2 million the previous year. While experiencing this growth, Community has also maintained its high level of asset quality. Real estate owned and repossessed assets were $138,000 or .03% of assets at March 31, 2005, compared to $621,000 or 18% of assets at March 31, 2004. More importantly, our positive earnings trend has continued with net income at fiscal year end totaling $3.8 million or $1.76 per diluted share compared to $3.5 million or $1.63 per diluted share for the previous fiscal year, an 8% increase. The prior year's earnings included a gain on the sale of our former mortgage banking subsidiary and a tax credit received as a result of the rehabilitation of the Bank's operations center in Staunton. These nonrecurring items increased diluted earnings per share by $.25 in fiscal 2004. Absent these nonrecurring items, after tax earnings per share were up approximately 27.5%. A major factor in our growth in earnings during fiscal 2005 was a $1.8 million or 15.0% increase in net interest income, from $12.0 million in the prior fiscal year to $13.8 million this fiscal year. The Bank's Hampton Roads Region continues to play an important role in the overall success of the Corporation ending the year with loans outstanding of $127.6 million, an increase of $22.0 million or 21%.Deposit growth for the region was $7.5 million or 12.6%, totaling $67.5 million at fiscal year end. Consistent with our goal of providing the best possible service to our customers,we are pleased to announce that we will be relocating our Kemps River Branch in Virginia Beach to a free standing building at the corner of Indian River Road and Lake | James Drive. This location is approximately one-half mile from our existing location and will afford our customers much better access and parking, and provide us with much higher public visibility. We anticipate moving into this new space in late summer. We have also made improvements to two of our Valley offices. The major renovations we announced last year for the Stuarts Draft office were completed in January and have resulted in a larger and more modern facility. The Waynesboro office has also received a well-deserved upgrade. We would like to thank our customers and staff for enduring some inconvenience during the course of these projects. Last year we announced that Community had entered into an affiliation with BI Investments to provide uninsured investment alternatives to our customers who desire such products. Gene Straley, our investment consultant with many years of experience, welcomes the opportunity to meet with you should you have an interest in these types of investments.  Your Corporation's assets have grown, our infrastructure has been improved, we have broadened and improved our products and services, and enjoyed record earnings. However, our most valuable assets are our employees, who have made all of this possible. Your Corporation is fortunate to have a dedicated, experienced and talented staff committed to enhancing stockholder value and providing our customers with quality products and services.  The performance of our stock continued to improve, opening in April 2004 at $21.79 per share and reaching a high during the year of $24.55. The closing price at March 31, 2005 was $22.44, an increase of 3% | New Kemps River Location Waynesboro Renovation |
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NEXT PAGEPresident's Letter |
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| Renovation of Stuarts Draft Branch |  from the prior year. More significantly, over the past five years, not including payment of dividends, the price of our stock has appreciated over 133% or an average of 26.6% per year. In addition to the stock appreciation, our stockholders also benefited from a 10% increase in our quarterly dividend from $.10 per share to $.11 per share effective for | the quarter ended December 31, 2004. We are pleased to report that during the course of the year, your Corporation paid over $870,000 in dividends to you as stockholders and over the past five years that amount has been in excess of $3.9 million. As always, your Board of Directors, Management and Staff are prepared to meet the challenges that come with each new year and will endeavor to convert these challenges into opportunities. We continue to have high goals and expectations and are confident that through our efforts and your continued support we will achieve the level of success to which we have become accustomed. | |
 James R. Cooke, Jr. Chairman of the Board |  P. Douglas Richard President & CEO |
 |
 |
Selected Consolidated |
| At March 31, | |||||
| 2005 | 2004 | 2003 | 2002 | 2001 | |
| (In thousands) | |||||
| Selected Financial Condition Data: | |||||
| Total assets | $399,604 | $336,947 | $297,991 | $263,374 | $270,176 |
| Loans receivable, net | 336,809 | 279,301 | 245,638 | 219,434 | 210,550 |
| Investment securities and other earning assets(1) | 45,911 | 39,620 | 35,550 | 29,704 | 44,421 |
| Real estate owned, net | 138 | 621 | 720 | 794 | 451 |
| Deposits | 275,430 | 260,231 | 247,212 | 204,535 | 174,307 |
| Advances and other borrowed money | 81,650 | 46,429 | 22,774 | 28,951 | 67,422 |
| Stockholders' equity | 31,325 | 29,269 | 26,342 | 26,695 | 25,805 |
| Year Ended March 31, | |||||
| 2005 | 2004 | 2003 | 2002 | 2001 | |
| (In thousands) | |||||
| Selected Operations Data: | |||||
| Total interest income | $ 20,038 | $ 17,524 | $ 17,661 | $ 18,941 | $ 20,047 |
| Total interest expense | 6,281 | 5,542 | 6,746 | 9,057 | 11,914 |
| Net interest income | 13,757 | 11,982 | 10,915 | 9,884 | 8,133 |
| Provision for loan losses | 870 | 846 | 451 | 373 | 320 |
| Net interest income after provision for loan losses | 12,887 | 11,136 | 10,464 | 9,511 | 7,813 |
| Service charges and fees | 2,293 | 2,683 | 3,490 | 3,287 | 2,821 |
| Gain on sale of subsidiary | - | 241 | - | - | - |
| Other noninterest income(2) | 415 | 301 | 159 | 95 | 78 |
| Noninterest expenses | 10,060 | 9,684 | 9,954 | 9,163 | 8,241 |
| Income before income taxes | 5,535 | 4,677 | 4,159 | 3,730 | 2,471 |
| Income taxes | 1,729 | 1,195 | 1,253 | 1,123 | 728 |
| Net income | $ 3,806 | $ 3,482 | $ 2,906 | $ 2,607 | $ 1,743 |
| At or For the Year Ended March 31, | |||||
| 2005 | 2004 | 2003 | 2002 | 2001 | |
| Other Data: | |||||
| Average interest-earning assets to average interest bearing liabilities | 104.81% | 106.57% | 107.41% | 108.18% | 107.04% |
| Average interest rate spread during year | 3.84 | 3.86 | 3.86 | 3.66 | 2.96 |
| Non-performing assets to total assets | .14 | .51 | .63 | .36 | .43 |
| Return on assets (ratio of net income to average total assets) | 1.04 | 1.12 | 1.03 | 1.03 | .68 |
| Return on equity (ratio of net income to average total equity) | 12.56 | 12.45 | 10.96 | 10.01 | 6.81 |
| Equity-to-assets ratio (ratio of average equity to average assets) | 8.28 | 9.31 | 9.94 | 10.27 | 9.97 |
| | |||||
| Per Share Data: | |||||
| Net income-diluted | $1.76 | $1.63 | $1.33 | $1.14 | $.72 |
| Book value | 15.02 | 14.08 | 12.78 | 11.84 | 10.99 |
| Dividends | .42 | .39 | .35 | .32 | .32 |
| Dividend payout ratio | 22.97% | 23.22% | 25.95% | 28.08% | 44.75% |
| Number of full-service offices | 8 | 8 | 8 | 7 | 6 |
| | |||||
| (1) Includes federal funds sold, securities purchased under resale agreements and overnight deposits. | |||||
| (2) Other income includes customer service fees and commissions, gain or loss on disposal of property and other items. | |||||
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NEXT PAGE| Community Financial Corporation and Subsidiary |
 Pictured front row, left to right: James R. Cooke, Jr., D.D.S., P. Douglas Richard, ____________ Back row, left to right: Morgan N. Trimyer, Jr., Jane C. Hickok, Charles F. Andersen, M.D., Dale C. Smith, Charles W. Fairchilds |
Board of Directors Charles F. Andersen, M.D. Dr. Andersen was an orthopedic surgeon in private practice in Waynesboro, Virginia for thirty years until his retirement in August, 2004. James R. Cooke, Jr., D.D.S. Dr. Cooke has been a practicing dentist in Staunton,Virginia since 1965. Charles W. Fairchilds. Mr. Fairchilds has been the President of Allied Ready Mix in Waynesboro, Virginia since 1987. Jane C. Hickok. Mrs. Hickok was elected Vice Chairman of the Board in October 1994.She retired as President and Chief Executive Officer of Community Bank in October 1994 after serving since 1984. Mrs. Hickok also retired as President and Chief Executive Officer of Community Financial Corporation in January 1995, but continues to serve as a director of Community Financial and |
Management  P. Douglas Richard President & CEO  R. Jerry Giles Senior Vice President Chief Financial Officer |
| Community Bank. Mrs. Hickok was elected as a director of Community Bank in 1983 and as a director of Community Financial in 1990 when it became the holding company of Community Bank. P. Douglas Richard. Mr. Richard was appointed the Acting President and Chief Executive Officer of Community Financial and Community Bank on January 12, 2000, and became the President and Chief Executive Officer of Community Financial and Community Bank on April 26, 2000. He was appointed to the Board of Directors of Community Financial on April 26, 2000. From January 1, 1997, to January 12, 2000, Mr. Richard was a Senior Vice President of Community Bank. From December 1993 to January 1996 he was President and Chief Executive Officer of Seaboard Bancorp. Dale C. Smith. Mr. Smith was the General Manager and Chief Executive Officer of Augusta Cooperative-Farm Bureau, Inc., a farm supply and retail store, for thirty-nine years until his retirement September 1, 2002. Morgan N. Trimyer, Jr. In January 2001, Mr.Trimyer joined Bankers Insurance, LLC., an insurance company located in Richmond,Virginia, as a Vice President and the Director of Marketing. Mr.Trimyer served as Vice President and Partner of Welton, Duke ∓ Hawks, Inc., an insurance company headquartered in Portsmouth,Virginia from 1984 until January 2001.He was also Vice President of Valley Insurance Agency, Inc. located in Lexington,Virginia. |
 Chris P. Kyriakides Senior Vice President Regional President  Norman C. (Butch) Smiley, III Senior Vice President Chief Lending Officer |
| Hampton Roads Board of Directors | |
| Pictured front row, left to right: Chris P.Kyriakides P.Douglas Richard Back row, left to right: Morgan N.Trimyer, Jr. Leslie Watson William R.Waddell Robert M.Thornton Berard Harrison Not pictured: James R.Cooke, Jr. |  |
 Benny N. Werner Senior Vice President Retail Banking |
| Management's Discussion & Analysis |
| Executive Overview Community Financial Corporation is a Virginia corporation. Certain of the information presented herein relates to Community Bank, a wholly owned subsidiary of Community Financial, and Community First Mortgage Corporation, a former wholly owned subsidiary of Community Bank. References in this Annual Report to we, us, our, the Corporation and the Bank refer to Community Financial and/or Community Bank as the context requires. Community Financial and Community Bank, like all thrift institutions and their holding companies, are subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The following information is intended to provide investors a better understanding of our financial position and the operating results of Community Financial Corporation and its subsidiary, Community Bank. This discussion is primarily from management's perspective and may not contain all information that is of importance to the reader. Accordingly, the information should be considered in the context of the consolidated financial statements and other related information contained herein. Our net income is primarily dependent on the difference or spread between the average yield earned on loans and investments and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Like other financial institutions, we are subject to interest rate risk to the degree that our interest bearing liabilities, primarily deposits and borrowings with short and medium term maturities, mature or reprice more rapidly, or on a different basis, than interest earning assets, primarily loans with longer term maturities than deposits and borrowings. While having liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, such an asset/liability structure may result in lower net income or net losses during periods of rising interest rates, unless o ffset by other noninterest income. Our net income is also affected by, among other things, fee income, provision for loan and real estate losses, operating expenses and income taxes. The primary factor contributing to the increase in net interest income for the fiscal year ended March 31, 2005 was the growth in interest-earning assets, primarily loans, while maintaining a relatively stable interest rate spread. While the growth in loans has exceeded management's expectations, we continue to monitor the impact rising interest rates may have on both the growth in | interest-earning assets and our interest rate spread. Management anticipates slower loan growth in 2006 fiscal year due to rising interest rates, increased competitive loan pricing and regulatory capital considerations. Although we maintained a stable interest rate spread in a rising interest rate environment due in part to increased rate adjustments on loans during fiscal 2005, the pace and extent of future interest rate changes will impact our interest rate spread as well as limitations on interest rate adjustments on certain adjustable rate loans. Management anticipates an increase in net interest income during fiscal 2006 due primarily to an increase in loans receivable during both the fourth quarter of fiscal 2005 and expected increases during fiscal 2006. Management also anticipates that our interest rate spread will be impacted by rising short-term interest rates and the related movement of long-term interest rates. Funding for the growth in interest-earning assets combined with a rising interest rate environment has impacted the composition of our interest-bearing liabilities. While both borrowings from the Federal Home Bank of Atlanta and deposits increased during the fiscal year ended March 31, 2005 the primary source of funding was borrowings. Competitors in our market areas have competed with time deposit rates above what is generally considered by management to be prudent. The utilization of borrowings permitted us to acquire funds at a market rate of interest rather than time deposits at interest rates above the market. Also, as interest rates have increased deposit balances in savings and money market accounts have decreased as customers have transferred funds to time deposits or equities markets. As the level of borrowings increases, management recognizes the need to increase deposits and has instituted strategies to attract time deposits and non-interest bearing transactions accounts. While we have, the c apacity to continue to utilize borrowings to meet funding needs, management recognizes the practical long-term limitations of such a funding strategy. Management is also cognizant of the potential for compression in our net interest margin related to the need to acquire funds and the pace of interest rate changes. Management will continue to monitor the level of deposits and borrowings in relation to the current interest rate environment. Critical Accounting Policies General | already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standard ("SFAS") No.5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the loan balance. The allowance for loan losses is maintained at a level considered by management to be adequate to absorb future loan losses currently inherent in the loan portfolio. Management's assessment of the adequacy of the allowance is based upon type and volume of the loan portfolio, past loan loss experience, existing and anticipated economic conditions, and other factors which deserve current recognition in estimating future loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Additions to the allowance are charged in operations. Subsequent recoveries, if any, are credited to the allowance. Loans are charged-off partially or wholly at the time management determines collectibility is not probable. Management's assessment of the adequacy of the allowance is subject to evaluation and adjustment by the Bank's regulators. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could |
| Our Name Really Does Say It All. 5 |
| Community Financial Corporation |
| March 31, 2005 | March 31, 2004 | ||||
| Change in Interest Rate (Basis Points) | Board Limit NPV as % of Assets | $ Change in NPV | % Change in NPV | $ Change in NPV | % Change in NPV |
| (Dollars in Thousands) | |||||
| +200 | 7 | -4,460 | -11 | -943 | -2 |
| +100 | 8 | -2,275 | -5 | -92 | 0 |
| -0- | 9 | --- | --- | --- | --- |
| -100 | 8 | 426 | 1 | -381 | -1 |
| -200 | 7 | -567 | -1 | --- | --- |
| affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or inherent when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effe ctive interest rate, the loan's obtainable market price, or the fair market value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement. Asset/Liability Management Management believes it is important to manage the relationship between interest rates and the effect on our net portfolio value. This approach calculates the difference between the present value of expected | cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off balance sheet contracts. Management of our assets and liabilities is done within the context of the marketplace, but also within limits established by the board of directors on the amount of change in net portfolio value which is acceptable given certain interest rate changes. Presented in the following table, as of March 31, 2005 and 2004, is an analysis of our interest rate risk as measured by changes in net portfolio value for instantaneous and sustained parallel shifts in the yield curve and compared to our board policy limits. Information is presented in accordance withOffice of Thrift Supervision regulations and based on its assumptions. The Board limits have been established with consideration of the dollar impact of various rate changes and our strong capital position. As illustrated in the table, net portfolio value is not significantly impacted by rising or falling rates as of the date indicated. Management generally works to maintain a neutral position regarding interest rate risk. In the current interest rate environment, our customers are interested in obtaining long-term credit products and short-term savings products. Management has taken action to counter this trend. A significant effort has been made to reduce the duration and average life of our interest-earning assets. As of March 31, 2005, approximately 68% of our gross loan portfolio consisted of loans which reprice during the life of the loan. We emphasize adjustable-rate mortgage loans and have increased our portfolio of short-term consumer loans. On the deposit side, management has worked to reduce the impact of interest rate changes by emphasizing noninterest bearing or low interest deposit products and maintaining competitive pricing on | longer term certificates of deposit. We have also used Federal Home Loan Bank advances to provide funding for loan originations and to provide liquidity as needed. In managing our asset/liability mix depending on the relationship between long- and short-term interest rates, market conditions, and consumer preference, we may place somewhat greater emphasis on maximizing our net interest income than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe the increased net income that may result from an acceptable mismatch in the actual maturity or repricing of our asset and liability portfolio can provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. We have established limits, which may change from time to time, on the level of acceptable interest rate risk. There can be no assurance, however, that in the event o f an adverse change in interest rates, our efforts to limit interest rate risk will be successful. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, 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 may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. |
| 6 |
| Management's Discussion & Analysis |
| Average Balances, Interest Rates and Yields The following table sets forth certain information relating to categories of our interest-earning assets and interest-bearing liabilities for the periods indicated. All average balances are computed on a monthly basis. Non-accruing loans have been included in the table as loans carrying a zero yield. |
| Year Ended March 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
| Average Balance | Interest | Yield/ Cost | Average Balance | Interest | Yield/ Cost | Average Balance | Interest | Yield/ Cost | |
| (Dollars in Thousands) | |||||||||
| Interest-Earning Assets | |||||||||
| Loans | $304,010 | $18,009 | 5.92% | $259,567 | $15,666 | 6.04% | $235,125 | $16,051 | 6.83% |
| Investment securities and other investments | 46,175 | 2,029 | 4.39 | 40,932 | 1,858 | 4.54 | 34,451 | 1,610 | 4.67 |
| Total interest-earning assets | 350,185 | 20,038 | 5.72 | 300,499 | 17,524 | 5.83 | 269,576 | 17,661 | 6.55 |
| Non-interest earning assets | 15,874 | 10,378 | 10,814 | ||||||
| Total assets | $366,059 | $310,877 | $280,390 | ||||||
| Interest-Bearing Liabilities | |||||||||
| Deposits | $265,903 | 4,846 | 1.82 | $253,056 | 5,184 | 2.05 | $225,576 | 6,296 | 2.79 |
| FHLB advances and other borrowings | 68,223 | 1,435 | 2.10 | 28,925 | 358 | 1.24 | 25,391 | 450 | 1.77 |
| Total interest-bearing liabilities | 334,126 | 6,281 | 1.88 | 281,981 | 5,542 | 1.97 | 250,967 | 6,746 | 2.69 |
| Other Liabilities | 1,636 | 920 | 2,096 | ||||||
| Total Liabilities | 335,762 | 282,901 | 253,063 | ||||||
| Stockholders' equity | 30,297 | 27,976 | 27,327 | ||||||
| Total liabilities and stockholders' equity | $366,059 | $310,877 | $280,390 | ||||||
| Net interest income/interest rate spread | $13,757 | 3.84 | $11,982 | 3.86 | $10,915 | 3.86 | |||
| Net interest-earning assets/net yield on interest-earning assets | $16,059 | 3.93 | $18,518 | 3.99 | $18,609 | 4.05 | |||
| Percentage of interest- earning assets to interest- bearing liabilities | 104.81% | 106.57% | 107.41% | ||||||
| Our Name Really Does Say It All. 7 |
| Community Financial Corporation |
| Rate/Volume Analysis The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total changes in rate and volume. The combined effect of changes in both volume and rate, which cannot be separately identified, has been allocated proportionately to the change due to volume and the change due to rate. |
| Year Ended March 31, | ||||||
| 2005 v. 2004 | 2004 v. 2003 | |||||
| Increase (Decrease) Due to | Total Increase | Increase (Decrease) Due to | Total Increase | |||
| Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | |
| (Dollars in Thousands) | ||||||
| Interest-Earning Assets | ||||||
| Loans | $ 2,633 | $ (290) | $ 2,343 | $ 1,475 | $ (1,860) | $ (385) |
| Investment securities and other investments | 230 | (59) | 171 | 294 | (46) | 248 |
| Total interest-earning assets | $ 2,863 | $ (349) | $ 2,514 | $ 1,769 | $ (1,906) | $ (137) |
| Interest-Bearing Liabilities | ||||||
| Deposits | $ 234 | $ (572) | $ (338) | $ 563 | $ (1,675) | $ (1,112) |
| FHLB advances and other borrowings | 827 | 250 | 1,077 | 44 | (136) | (92) |
| Total interest-bearing liabilities | $ 1,061 | $ (322) | $ 739 | $ 607 | $ (1,811) | $ (1.204) |
| Net interest income | $ 1,775 | $ 1,067 | ||||
| 8 |
| Management's Discussion & Analysis |
| Asset Quality Asset quality is an important factor in the successful operation of a financial institution. The loss of interest income and principal that may result from nonperforming assets has an adverse effect on earnings, while the resolution of those assets requires the use of capital and managerial resources. At March 31, 2005, total non-performing assets, consisting of non-performing loans and repossessed automobiles, were $548,000 or .14% of total assets compared to $1,734,000 or .51% at March 31, 2004. Non-performing assets at March 31, 2005 were comprised primarily of single family residential properties delinquent 90 days or more. At March 31, 2005, the largest property in non-performing assets was a residential construction loan with an approximate value of $141,000. Based on current market values of the collateral securing these loans, management anticipates no significant losses in excess of the reserves for losses previously recorded. Due to an uncertain real estate market and the economy in general, no assurances can be given that our level of non-performing assets may not increase in the future. We maintain an allowance for loan lossesto provide for estimated potential losses in our loan portfolio. We determine the level of reserves based on loan performance, the value of the collateral, economic and market conditions, and previous experience. We review the adequacy of the allowance at least quarterly, utilizing our internal loan classifications system. During fiscal 2005, we increased our allowance for loan losses $376,000, to $3,021,000. Management believes that the loan loss allowance is adequate. We had net charge-offs of $494,000, $140,000, and $186,000, for the years ended March 31, 2005, 2004 and 2003, respectively. The increase in net chargeoffs from 2004 to 2005 is related primarily to the charge-off of one loan in the amount of $230,000. While consumer loans provide a greater yield they generally have a higher rate of charge-offs than mortgage loans. Although management believes it uses the best information available, future adjustments to the allowance may be necessary. Financial Condition | $57.5 million. These increases were funded by both a $15.2 million increase indeposits and a $45.2 million increase in borrowings. Management elected to fund asset growth in fiscal 2005 primarily with borrowings due to the lower relative interest rate cost. The average balance of borrowings increased from $28.2 million and an average interest rate of 1.27% for fiscal 2004 to $68.2 million and 2.10% for fiscal 2005. The increase in deposits is reflected primarily in increased demand deposits of $4.5 million and time deposits of $27.8 million offset by a $17.1 million decrease in savings and money market accounts. The change in deposits is related primarily to rising interest rates and customers preference for higher rate timedeposits. Management believes the increase in time and demand deposits is primarily attributable to maintaining competitive pricing. The increase in loans receivable was due to both a lower rate environment and competitive pric ing on both mortgage and consumer loans. The Hampton Roads region of the Bank experienced growth of $22 million in primarily real estate loans for the fiscal year ended 2005. The Shenandoah Valley region of the Bank had loan growth of approximately $35.5 million in primarily non-mortgage loans including an increase of $17.0 million in automobile dealer loans. Management anticipates slower loan growth in both regions for the 2006 fiscal year due to rising interest rates, increased competitive loan pricing and regulatory capital considerations. Management anticipates the primary source of funding for loan growth during fiscal 2006 to be from time deposits due to customers' preference for these higher rate products as interest rates increase and the increase in borrowing costs. Management also anticpates a continuing decrease in savings and money market accounts as interest rates are expected to increase during fiscal 2006. Stockholders' equity increased $2.1 million to $31.3 million at March 31, 2005 compared to March 31, 2004. The increase was the result of $3.8 million of net income and proceeds from option exercises offset by dividends paid to stockholders of $874,000 and a decrease in the unrealized gain on equity securities of $937,000. Results of Operations | level of our operating expenses. Net interest income depends upon the value of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. Comparison of Years ended General. Net income for the year ended March 31, 2005 was $3,806,000 or $1.76 diluted earnings per share compared to $3,482,000 or $1.63 diluted earnings per share for the year ended March 31, 2004. Net income increased due primarily to an increase in net interest income of $1.8 million. Interest Income. Interest Expense. Provision for Loan Losses. |
| Our Name Really Does Say It All. 9 |
| Community Financial Corporation |
| March 31, 2005, our allowance as a percentage of total loans receivable was .89% and as a percentage of total nonperforming assets was 548%. Noninterest Income. Noninterest Expense. | Taxes. Total taxes increased to $1,730,000 during the year ended March 31, 2005 from $1,195,000 during fiscal 2004. The increase in taxes can be attributed primarily to a one-time rehabilitation tax credit of approximately $391,000 received during fiscal 2004. The effective tax rate for the year ended March 31, 2005 was 31.2% compared to 25.6% for fiscal 2004. Comparison of Years ended General. Net income for the year endedMarch 31, 2004 was $3,482,000 or $1.63 diluted earnings per share compared to $2,906,000 or $1.33 diluted earnings per share for the year ended March 31, 2003. Net income increased due primarily to an increase in net interest income of $1.1 million. Interest Income. | fiscal 2003 to 5.83% for the current fiscal year 2004 due primarily to a lower interest rate environment. Interest Expense. Provision for Loan Losses. |
| Table 1 |
| Fiscal 2005 | Fiscal 2004 | Change | |
| Gain on sale of loans | $ - | $ 86,633 | $ (86,633) |
| Gain on sale of subsidiary | - | 241,066 | (241,066) |
| Fees from sold loans | 5,891 | 504,648 | (498,757) |
| Other loan fee income | 355,574 | 311,873 | 43,701 |
| Deposit fee income | 1,932,150 | 1,779,663 | 152,487 |
| Other | 414,654 | 301,260 | 113,394 |
| Total noninterest income | $ 2,708,269 | $ 3,225,143 | $ (516,874) |
| Table 2 |
| Compensation | |||
| Fiscal 2005 | Fiscal 2004 | Change | |
| Community Bank | $ 5,669,838 | $ 4,805,307 | $ 864,531 |
| Community First Mortgage | - | 450,627 | (450,627) |
| Total | $ 5,669,838 | $ 5,255,934 | $ 413,904 |
| 10 |
| Management's Discussion & Analysis |
| Noninterest Income. Noninterest income decreased to $3,225,000 in fiscal 2004 as compared to $3,650,000 for the year ended March 31, 2003, primarily due to decreased fees and gain on sale of loans offset by the gain on the sale of the Bank's mortgage subsidiary in June 2003. (See Table 3). Noninterest Expense. Taxes. Liquidity and Capital Resources Our principal sources of funds are customer deposits, advances from the Federal Home Loan Bank of Atlanta, amortization and prepayment of loans, proceeds from the sale of loans and funds provided from operations. Management maintains | investments in liquid assets based upon its assessment of (i) our need for funds, (ii) expected deposit flows, (iii) the yields available on short-term liquid assets, (iv) the liquidity of our loan portfolio and (v) the objectives of our asset/liability management program. Liquidity represents our ability to meet our on-going funding requirements for contractual obligations, the credit needs of customers, withdrawal of customers' deposits and operating expenses. Our dominant source of funds during the year ended March 31, 2005 was from Federal Home Loan Bank advances which increased by $30.0 million. Our cash decreased $2.2 million from $4.5 million at March 31, 2004 to $2.3 million at March 31, 2005. The decrease in cash was related to the increase in loans and investment securities. At March 31, 2005, we had commitments to purchase or originate $17.0 million of loans. Certificates of deposit scheduled to mature in one year or less at March 31, 2005 totaled $53.8 million. Based on our historical experience, management believes that a significant portion of such deposits will remain with us. Management further believes that loan repayments and other sources of funds will be adequate to meet our foreseeable short- and long-term liquidity needs. | At March 31, 2005, we had tangible and core capital of 7.10% of adjusted total assets, which was in excess of their respective requirements of 1.5% and 4.0%. We also had risk-based capital of 10.25% of risk weighted assets, which also exceeded its requirement of 8.0%. The Bank was considered "well capitalized" as of March 31, 2005. Impact of Inflation and The consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time because of inflation. Unlike most industrial companies, virtually all ofthe assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or the same magnitude as the price of goods and services. In the current interest-rate environment, equity, maturity structure and quality of our assets and liabilities are critical to the maintenance of acceptable performance levels. |
| Table 3 |
| Fiscal 2004 | Fiscal 2003 | Change | |
| Gain on sale of loans | $ 86,633 | $297,965 | $ (211,332) |
| Gain on sale of subsidiary | 241,066 | - | 241,066 |
| Fees from sold loans | 504,648 | 1,568,340 | (1,063,692) |
| Other loan fee income | 311,873 | 272,055 | 39,818 |
| Deposit fee income | 1,779,663 | 1,352,029 | 427,634 |
| Other | 301,260 | 159,172 | 142,088 |
| Total noninterest income | $ 3,225,143 | $ 3,649,561 | $ (424,418) |
| Table 4 |
| Compensation | |||
| Fiscal 2004 | Fiscal 2003 | Change | |
| Community Bank | $ 4,805,307 | $ 4,245,343 | $ 559,964 |
| Community First Mortgage | 450,627 | 1,560,952 | (1,110,325) |
| Total | $ 5,255,934 | $ 5,806,295 | $ (550,361) |
| Our Name Really Does Say It All. 11 |
| Community Financial Corporation |
| Off-Balance Sheet Arrangements As of March 31, 2005, we have not participated in any material unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special entities. The Corporation does have significant commitments to fund loans in the ordinary course of business. Such commitments and resulting off-balance sheet risk are further discussed in Note 15 to the consolidated financial statements. Contractual Obligations | charge-offs and loan loss provisions, growth opportunities, interest rates, acquisition and divestiture opportunities, and synergies, efficiencies, cost savings and funding advantages. These forwardlooking statements are based on currently available competitive, financial and economic data and management's views and assumptions regarding future events. These forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Accordingly, Community Financial Corporation cautions readers not to place undue reliance on any forward-looking statements. Many of these forward-looking statements |
|
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||
| Operating Leasees | $ 1,393,591 | $ 127,535 | $ 293,285 | $ 273,790 | $ 698,981 | ||||||
| Long-Term Debt | 5,000,000 | - | - | 5,000,000 | - | ||||||
| Total | $ 6,393,591 | $ 127,535 | $ 293,285 | $ 5,273,790 | $ 698,981 |
Accounting Pronouncements For a discussion of certain accounting pronouncements implemented by us during fiscal 2005 and new pronouncements which will be implemented in the future, see Summary of Accounting Policies accompanying the Consolidated Financial Statements. FORWARDING LOOKING | appear in this document in the President's letter and Management's Discussion and Analysis. Words such as may, could, should, would, believe, anticipate, estimate, expect, intend, plan and similar expressions are intended to identify these forward-looking statements. The important factors discussed below, as well as other factors discussed elsewhere in this document and factors identified in our filings with the Securities and Exchange Commission and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document. Among the factors that could cause our actual results to differ from these forward-looking statements are:
|
|
| 12 |
| Report of Independent Registered Public Accounting Firm |
 Certified Public Accountants and Consultants |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders Community Financial Corporation Staunton, Virginia We have audited the accompanying consolidated balance sheets of Community Financial Corporation and Subsidiary as of March 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended March 31, 2005, 2004 and 2003. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting. Accordingly,we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 Corporation and Subsidiary as of March 31, 2005 and 2004, and the results of their operations and their cash flows for the years ended March 31, 2005, 2004 and 2003, in conformity with U.S. generally accepted accounting principles. |
 |
| 50 S. Cameron St. P.O. Box 2560 Winchester, VA 22604 (540) 662-3417 | Offices located in: Winchester, Middleburg, Leesburg, and Culpeper, Virginia Member: American Institute of Certified Public Accountants / Virginia Society of Certified Public Accountants |
| Our Name Really Does Say It All. 13 |
| Community Financial Corporation and Subsidiary |
| Consolidated Balance Sheets | ||||
| March 31, | 2005 | 2004 | ||
| Assets | ||||
| Cash (including interest bearing deposits of $1,554,563 and $1,658,488) | $ 2,345,769 | $ 4,493,661 | ||
| Securities | ||||
| Held to maturity (fair value approximates $26,366,018 and $20,998,373) | 26,630,865 | 20,648,291 | ||
| Available for sale, at fair value | 13,496,728 | 15,012,833 | ||
| Restricted investment in Federal Home Loan Bank stock, at cost | 4,228,700 | 2,300,000 | ||
| Loans receivable, net of allowance for loan losses of $3,021,493 and $2,645,765 | 336,808,373 | 279,301,167 | ||
| Real estate owned, net | 138,114 | 621,363 | ||
| Property and equipment, net | 7,845,945 | 7,280,604 | ||
| Accrued interest receivable | 1,860,982 | 1,317,129 | ||
| Prepaid expenses and other assets | 6,248,506 | 5,972,367 | ||
| Total assets | $ 399,603,982 | $ 336,947,415 | ||
| Liabilities and Stockholders' Equity | ||||
| Liabilities | ||||
| Deposits | $ 275,430,388 | $ 260,230,949 | ||
| Advances from Federal Home Loan Bank | 76,000,000 | 46,000,000 | ||
| Securities sold under agreements to repurchase | 15,650,497 | 428,920 | ||
| Advance payments by borrowers for taxes and insurance | 167,437 | 136,316 | ||
| Other liabilities | 1,030,576 | 882,695 | ||
| Total liabilities | 368,278,898 | 307,678,880 | ||
| Commitments and Contingencies | - | - | ||
| Stockholders' Equity | ||||
| Preferred stock, $.01 par value, authorized 3,000,000 shares, none outstanding | - | - | ||
| Common stock, $.01 par value, 10,000,000 authorized shares, 2,085,106 and 2,078,906 shares outstanding | 20,851 | 20,789 | ||
| Additional paid-in capital | 4,292,815 | 4,230,512 | ||
| Retained earnings | 25,948,758 | 23,017,148 | ||
| Accumulated other comprehensive income, net | 1,062,660 | 2,000,086 | ||
| Total stockholders' equity | 31,325,084 | 29,268,535 | ||
| Total liabilities and stockholders' equity | $ 399,603,982 | $ 336,947,415 | ||
| See accompanying summary of accounting policies and notes to consolidated financial statements. | ||||
| 14 |
| Community Financial Corporation and Subsidiary |
| Consolidated Statements of Income | |||
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Interest and dividend income | |||
| Loans | $ 18,008,965 | $ 15,665,992 | $ 16,050,771 |
| Investment securities | 1,115,248 | 1,054,701 | 1,019,061 |
| Other investments | 913,950 | 802,937 | 591,166 |
| Total interest and dividend income | 20,038,163 | 17,523,630 | 17,660,998 |
| Interest expense | |||
| Deposits | 4,845,625 | 5,183,608 | 6,295,618 |
| Borrowed money | 1,435,178 | 358,309 | 450,606 |
| Total interest expense | 6,280,803 | 5,541,917 | 6,746,224 |
| Net interest income | 13,757,360 | 11,981,713 | 10,914,774 |
| Provision for loan losses | 870,064 | 845,577 | 450,836 |
| Net interest income after provision for loan losses | 12,887,296 | 11,136,136 | 10,463,938 |
| Noninterest income | |||
| Service charges, fees and commissions | 2,293,615 | 2,596,184 | 3,192,424 |
| Gain on sale of loans | - | 86,633 | 297,965 |
| Gain on sale of subsidiary | - | 241,066 | - |
| Other | 414,654 | 301,260 | 159,172 |
| Total noninterest income | 2,708,269 | 3,225,143 | 3,649,561 |
| Noninterest expense | |||
| Compensation and employee benefits | 5,669,838 | 5,255,934 | 5,806,295 |
| Occupancy | 1,247,458 | 1,367,910 | 1,358,019 |
| Data processing | 1,340,989 | 1,296,186 | 1,056,982 |
| Advertising | 391,502 | 369,103 | 375,993 |
| Professional fees | 242,862 | 227,977 | 175,566 |
| Deposit insurance | 38,430 | 38,352 | 35,726 |
| Other | 1,129,411 | 1,128,861 | 1,145,563 |
| Total noninterest expense | 10,060,490 | 9,684,323 | 9,954,144 |
| Income before income taxes | 5,535,075 | 4,676,956 | 4,159,355 |
| Income taxes | 1,729,543 | 1,195,072 | 1,253,563 |
| Net income | $ 3,805,532 | $ 3,481,884 | $ 2,905,792 |
| Earnings per share | |||
| Basic | $ 1.83 | $ 1.68 | $ 1.34 |
| Diluted | $ 1.76 | $ 1.63 | $ 1.33 |
| See accompanying summary of accounting policies and notes to consolidated financial statements. | |||
| Our Name Really Does Say It All. 15 |
| Community Financial Corporation and Subsidiary |
| Consolidated Statements of Stockholders' Equity Accumulated | |||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income, Net | Total Stockholders' Equity | |
| Balance, March 31, 2002 | $ 22,531 | $ 4,326,489 | $ 20,223,498 | $ 2,122,592 | $ 26,695,110 |
| Comprehensive income: | |||||
| Net income | - | - | 2,905,792 | - | 2,905,792 |
| Change in unrealized gain on available for sale securities, net of tax | - | - | - | (210,441) | (210,441) |
| Total comprehensive income | - | - | - | - | 2,695,351 |
| Cash dividends, $.35 per share | - | - | (754,197) | - | (754,197) |
| Exercise of stock options | 115 | 119,775 | - | - | 119,890 |
| Repurchase of stock (200,300 shares) | (2,003) | (380,570) | (2,031,433) | - | (2,414,006) |
| Balance, March 31, 2003 | 20,643 | 4,065,694 | 20,343,660 | 1,912,151 | 26,342,148 |
| Comprehensive income: | |||||
| Net income | - | - | 3,481,884 | - | 3,481,884 |
| Change in unrealized gain on available for sale securities, net of tax | - | - | - | 87,935 | 87,935 |
| Total comprehensive income | - | - | - | - | 3,569,819 |
| Cash dividends, $.39 per share | - | - | (808,396) | - | (808,396) |
| Exercise of stock options | 170 | 217,276 | - | - | 217,446 |
| Repurchase of stock (2,441 shares) | (24) | (52,458) | - | - | (52,482) |
| Balance, March 31, 2004 | 20,789 | 4,230,512 | 23,017,148 | 2,000,086 | 29,268,535 |
| Comprehensive income: | |||||
| Net income | - | - | 3,805,532 | - | 3,805,532 |
| Change in unrealized gain on available for sale securities, net of tax | - | - | - | (937,426) | (937,426) |
| Total comprehensive income | - | - | - | - | 2,868,106 |
| Cash dividends, $.42 per share | - | - | (873,922) | - | (873,922) |
| Exercise of stock options | 62 | 62,303 | - | - | 62,365 |
| Balance, March 31, 2005 | $ 20,851 | $ 4,292,815 | $ 25,948,758 | $ 1,062,660 | $ 31,325,084 |
| See accompanying summary of accounting policies and notes to consolidated financial statements. | |||||
| Consolidated Statements of Cash Flows | |||||
| Year Ended March 31, | 2005 | 2004 | 2003 | ||
| Operating activities | |||||
| Net income | $ 3,805,532 | $ 3,481,884 | $ 2,905,792 | ||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||
| Provision for loan losses | 870,064 | 845,577 | 450,836 | ||
| Depreciation | 544,856 | 779,401 | 737,630 | ||
| Gain on sale of loans | - | (86,633) | (297,965) | ||
| Gain on sale of subsidiary | - | (241,066) | - | ||
| Amortization of premium and accretion of discount on securities, net | 13,442 | 13,687 | 42,302 | ||
| Increase (decrease) in net deferred loan origination costs | (544,929) | 349,931 | (23,850) | ||
| Loans originated for sale | - | (24,745,863) | (72,357,946) | ||
| Proceeds from loan sales | - | 27,228,266 | 73,395,119 | ||
| Deferred income tax (benefit) expense | (328,621) | (301,847) | 60,260 | ||
| (Increase) decrease in other assets | 87,308 | 121,448 | (74,780) | ||
| Increase (decrease) in other liabilities | 179,002 | (396,280) | (1,534,480) | ||
| Net cash provided by operating activities | $ 4,626,654 | $ 7,048,505 | $ 3,302,918 | ||
| 16 |
| Community Financial Corporation and Subsidiary |
| Consolidated Statements of Cash Flows | |||||
| Year Ended March 31, | 2005 | 2004 | 2003 | ||
| Investing activities | |||||
| Proceeds from maturities of held to maturity securities | $ 10,950,000 | $ 21,674,216 | $ 9,520,000 | ||
| Purchase of held to maturity securities | (16,946,016) | (21,253,437) | (13,817,361) | ||
| Purchase of available for sale securities | - | (4,402,332) | (2,462,500) | ||
| Net increase in loans | (58,049,420) | (35,972,568) | (27,399,577) | ||
| Proceeds from sale of subsidiary | - | 1,515,210 | - | ||
| Purchase of property and equipment | (1,110,197) | (595,116) | (2,781,336) | ||
| Proceeds from sale of real estate owned | 700,328 | 1,212,535 | 915,715 | ||
| Purchase of bank-owned life insurance | - | (5,000,000) | - | ||
| Redemption of FHLB stock | - | - | 900,000 | ||
| Purchase of FHLB stock | (1,928,700) | (600,000) | - | ||
| Net cash provided (absorbed) by investing activities | (66,384,005) | (43,421,492) | (35,125,059) | ||
| Financing activities | |||||
| Net increase in certificates of deposit | $ 27,767,643 | $ 7,018,418 | $ 4,461,065 | ||
| Net (decrease) increase in savings and checking deposits | (12,568,204) | 6,000,338 | 38,215,672 | ||
| Proceeds from issuance of common stock | 62,365 | 217,446 | 119,890 | ||
| Repurchase of stock | - | (52,482) | (2,414,006) | ||
| Increase (decrease) in securities sold under agreements to repurchase | 15,221,577 | (344,805) | (177,080) | ||
| Dividends paid | (873,922) | (808,396) | (754,197) | ||
| Proceeds from (repayments of) advances | 30,000,000 | 24,000,000 | (6,000,000) | ||
| Net cash provided by financing activities | 59,609,459 | 36,030,519 | 33,451,344 | ||
| Increase (decrease) in cash and cash equivalents | (2,147,892) | (342,468) | 1,629,203 | ||
| Cash and cash equivalents - beginning of year | 4,493,661 | 4,836,129 | 3,206,926 | ||
| Cash and cash equivalents - end of year | $ 2,345,769 | $ 4,493,661 | $ 4,836,129 | ||
| Supplemental Disclosure of Cash Flow Information | |||||
| Cash payments of interest expense | $ 6,049,364 | $ 5,545,253 | $ 7,903,965 | ||
| Cash payments of income taxes | $ 1,515,009 | $ 1,818,789 | $ 1,547,515 | ||
| Supplemental Schedule of Non-Cash Investing and Financing Activities | |||||
| Net change in unrealized gain on ecurities available for sale | $ (1,511,980) | $ 141,830 | $ (339,421) | ||
| Transfers from loans to real estate acquired through foreclosure | $ 217,079 | $ 1,113,963 | $ 768,205 | ||
| See accompanying summary of accounting policies and notes to consolidated financial statements. | |||||
| Our Name Really Does Say It All. 17 |
| Summary of Accounting Policies |
| Principles of Consolidation The accompanying consolidated financial statements include the accounts of Community Financial Corporation (the "Corporation") and its wholly-owned subsidiary, Community Bank (the "Bank") and Community First Mortgage Corporation ("Community First Mortgage"), a wholly-owned subsidiary of the Bank. Community First Mortgage was sold on June 30, 2003. All material intercompany accounts and transactions have been eliminated in consolidation. Nature of Business and The Office of Thrift Supervision ("OTS") is the primary regulator for federally chartered savings associations, as well as well as savings and loan holding companies. The Bank's deposits are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). The FDIC has specific authority to prescribe and enforce such regulations and issue such orders as it deems necessary to prevent actions or practices by savings associations that pose a serious threat to the SAIF. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was effective January 1, 1993. FDICIA contained provisions which allow regulators to impose prompt corrective action on undercapitalized institutions in accordance with a categorized capital-based system. Estimates | and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. Cash and Cash Equivalents Securities Investments in debt and equity securities classified as available for sale are stated at market value with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of tax effect, until realized. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the | Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Loans Receivable The Corporation defers loan origination and commitment fees, net of certain direct loan origination costs, and the net deferred fees are amortized into interest income over the lives of the related loans as yield adjustments. Any unamortized net fees on loans fully repaid or sold are recognized as income in the year of repayment or sale. The Corporation places loans on nonaccrual status after being delinquent greater than 90 days or earlier if the Corporation becomes aware that the borrower has entered bankruptcy proceedings, or in situations in which the loans have developed inherent problems prior to being 90 days delinquent that indicate payments of principal or interest will not be made in full. Whenever the accrual of interest is stopped, previously accrued but uncollected interest income is reversed. Thereafter, interest is recognized only as cash is received until the loan is reinstated to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. |
| 18 |
| Community Financial Corporation and Subsidiary |
| Allowance for Loan Losses The allowance for loan losses is maintained at a level considered by management to be adequate to absorb future loan losses currently inherent in the loan portfolio. Management's assessment of the adequacy of the allowance is based upon type and volume of the loan portfolio, past loan loss experience, existing and anticipated economic conditions, and other factors which deserve current recognition in estimating future loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Additions to the allowance are charged to operations. Subsequent recoveries, if any, are credited to the allowance. Loans are charged-off partially or wholly at the time management determines collectibility is not probable. Management's assessment of the adequacy of the allowance is also subject to evaluation and adjustment by the Bank 's regulators. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management | in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement. Real Estate Owned Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated net realizable value. Property and Equipment Property and equipment is stated at cost less accumulated depreciation. Provisions for depreciation are computed using the straight-line method over the | estimated useful lives of the individual assets. Expenditures for betterments and major renewals are capitalized and ordinary maintenance and repairs are charged to operations as incurred. Estimated useful lives are three to ten years for furniture and equipment and five to fifty years for buildings and improvements. Income Taxes Earnings Per Share Advertising Costs Comprehensive Income |
| Our Name Really Does Say It All. 19 |
| Community Financial Corporation and Subsidiary |
| Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This Interpretation provides guidance with respect to the identification of variable interest entities when the assets, liabilities, non-controlling interests, and results of operations of a variable interest entity need to be included in an entity's consolidated financial statements. An entity is deemed a variable interest entity, subject to the interpretation, if the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or in cases in which the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability to make decisions about the entity's activities through voting rights, the ob ligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. Due to significant implementation issues, the FASB modified the wording of FIN 46 and issued FIN 46R in December of 2003. FIN 46R deferred the effective date for the provisions of FIN 46 to entities other than Special Purpose Entities (SPEs) until financial statements issued for periods ending after March 15, 2004. SPEs were subject to the provisions of either FIN 46 or FIN 46R as of December 15, 2003.Management has evaluated the Corporation's investments in variable interest entities and potential variable interest entities or transactions. The adoption of FIN 46 and FIN 46R did not have a material effect on the Corporation's consolidated financial position or consolidated results of operations. In December 2003, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The scope of the SOP applies to unhealthy "problem" loans that have been acquired, either individually in a portfolio, or in a business acquisition. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. The SOP does not apply to loans originated by the Corporation. The Corporation adopted the provisions of SOP 03-3 effective January 1, 2005. The initial implementation did not have a significant effect on the Corporation's consolidated financial position or consolidated results of operations. Emerging Issues Task Force Issue No. (EITF) 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain | Investments", was issued and is effectiveMarch 31, 2004. EITF 03-1 provides guidance for determining the meaning of "other-than- temporarily impaired" and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115) and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Corporation can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. This issue also requires disclosures assessing the ability and intent to hold investments in instances in which an investor determine s that an investment with a fair value less than cost is not other-than-temporarily impaired. On September 30, 2004, the Financial Accounting Standards Board delayed the effective date for the measurement and recognition guidance contained in Issue 03-1. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The disclosure guidance in Issue 03-1 was not delayed. EITF No. 03-16, "Accounting for Investments in Limited Liability Companies", was ratified by the FASB and is effective for reporting periods beginning after June 15, 2004. APB Opinion No. 18, "The Equity Method of Accounting Investments in Common Stock," prescribes the accounting for investments in common stock of corporations that are not consolidated. AICPA Accounting Interpretation 2, "Investments in Partnerships Ventures," of Opinion 18, indicates that "many of the provisions of the Opinion would be appropriate in accounting" for partnerships. In EITF Abstracts, Topic No. D-46, "Accounting for Limited Partnership Investments," the SEC staff clarified its view that investments of more than 3 to 5 percent are considered to be more than minor and, therefore, should be accounted for using the equity method. Limited liability companies (LLCs) have characteristics of both corporations and partnerships, but are dissimilar from both in certain respects. Due to th ose similarities and differences, diversity in practice exists with respect to accounting for noncontrolling investments in LLCs. The consensus reached was that an LLC should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a non-controlling investment should be accounted for using the cost method or the equity method of accounting. The adoption of EITF No. 03-16 did not have an impact on the consolidated financial statements of the Corporation. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment." This Statement establishes standards for the | accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in sharebased payment transactions. The Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). The entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. This Statement is effective for public entities as of the beginning of the first annual reporting period that begins after June 15, 2005 (as amended by the SEC). Under the transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under Statement 123 for either recognition or pro forma disclosures. For periods before the required effective date, entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by Statement 123. The provisions for SFAS No. 123R do not impact the Corporation's results of operations at the present time. In March 2005, the SEC issued SAB 107. SAB 107 expresses the views of the SEC staff regarding the interaction of SFAS No. 123R and certain SEC rules and regulations and the valuation of share-based payment arrangements for public companies. SAB 107 does not impact the Corporation's results of operations at the present time. |
| 20 |
| Notes to Consolidated Financial Statements |
| 1. Stock-Based Employee Compensation Plan At March 31, 2005, the Corporation had a stock-based employee compensation plan which is described more fully in Note 14. The Corporation accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. In determining the pro forma amounts below, the value of each grant is estimated at the grant date using the Black-Scholes option-pricing model, with the following weighted-average assumptions for grants in 2005, 2004 and 2003: dividend rate of 2.53%, 2.71% and 2.78%: risk-free interest rate of 5.00%, 4.54% and 4.25%; expected lives of 10 years; and expected price volatility of 18.54%, 18.02% and 18.46%. |
| Year Ended March 31, | 2005 | 2004 | 2003 | |||
| Net income, as reported | $ 3,805,532 | $ 3,481,884 | $ 2,905,792 | |||
| Additional expense had the Corporation Adopted SFAS No. 123 | 243,636 | 271,314 | 22,083 | |||
| Pro forma net income | $ 3,561,896 | $ 3,210,570 | $ 2,883,709 | |||
| Earnings per share: | ||||||
| Basic - as reported | $ 1.83 | $ 1.68 | $ 1.34 | |||
| Basic - pro forma | 1.71 | 1.55 | 1.33 | |||
| Diluted - as reported | 1.76 | 1.63 | 1.33 | |||
| Diluted - pro forma | 1.64 | 1.50 | 1.32 | |||
| 2. Securities A summary of the amortized cost and estimated market values of securities is as follows: |
| March 31, 2005 | ||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Gross Market Value | |
| Held to Maturity | ||||
| United States government and agency obligations | $ 23,834,062 | $ 15,575 | $ 298,996 | $ 23,550,641 |
| State and municipal obligations | 2,796,803 | 30,787 | 12,213 | 2,815,377 |
| 26,630,865 | 46,362 | 311,209 | 26,366,018 | |
| Available for Sale | ||||
| Equity securities | 11,782,765 | 3,162,020 | 1,448,057 | 13,496,728 |
| $ 38,413,630 | $ 3,208,382 | $ 1,759,266 | $ 39,862,746 | |
| March 31, 2004 | ||||
| Held to Maturity | ||||
| United States government and agency obligations | $ 17,335,421 | $ 174,931 | $ - | $ 17,510,352 |
| State and municipal obligations | 3,312,870 | 175,151 | - | 3,488,021 |
| 20,648,291 | 350,082 | - | 20,998,373 | |
| Available for Sale | ||||
| Equity securities | 11,786,890 | 3,451,600 | 225,657 | 15,012,833 |
| $ 32,435,181 | $ 3,801,682 | $ 225,657 | $ 36,011,206 | |
| Our Name Really Does Say It All. 21 |
| Community Financial Corporation and Subsidiary |
| 2. Securities (continued) The amortized cost and estimated market value of securities at March 31, 2005, by contractual maturity, are as follows: |
| Amortized Cost | Estimated Market Value | |
| Held to Maturity | ||
| Within one year or less | $ 590,367 | $ 591,412 |
| After one through five years | 23,540,498 | 23,303,856 |
| Due in more than five years | 2,500,000 | 2,470,750 |
| 26,630,865 | 26,366,018 | |
| Available for Sale | ||
| Equity securities | 11,782,765 | 13,496,728 |
| $ 38,413,630 | $ 39,862,746 | |
| Securities having a market value of $15,792,818 and $1,824,418 at March 31, 2005 and 2004, respectively, were pledged by the Corporation for purposes required by law. Information pertaining to securities with gross unrealized losses at March 31, 2005 and 2004, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows: |
| March 31, 2005 | ||||
| Less Than Twelve Months | Twelve Months and over | |||
| Gross Unrealized Losses | Estimated Market Value | Gross Unrealized Losses | Estimated Market Value | |
| Held to Maturity | ||||
| United States government and agency obligations | $ 298,996 | $ 21,790,016 | $ - | $ - |
| State and municipal obligations | 12,213 | 394,789 | - | - |
| 311,209 | 22,184,805 | - | - | |
| Available for Sale | ||||
| Equity securities | 579,275 | 6,784,350 | 868,782 | 3,478,031 |
| $ 890,484 | $ 28,969,155 | $ 868,782 | $ 3,478,031 | |
| March 31, 2004 | ||||
| Less Than Twelve Months | Twelve Months and over | |||
| Gross Unrealized Losses | Estimated Market Value | Gross Unrealized Losses | Estimated Market Value | |
| Available for Sale Equity securities | $ 225,657 | $ 4,125,281 | $ - | $ - |
| At March 31, 2004, no securities held to maturity were in an unrealized loss position. At March 31, 2005, 46 debt securities had unrealized losses with aggregate depreciation of 1.3% from the Corporation's amortized cost basis. These unrealized losses related principally to government agencies. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies and whether downgrades by bond debt rating agencies have occurred. As management has the ability and intent to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary. At March 31, 2005, four marketable equity securities had unrealized losses with aggregate depreciation of 12% from the Corporation's cost basis. The securities have an investment grade rating of AA or better. These unrealized losses relate primarily to government agencies and have existed for less than twelve months for three of the issues and less than twenty-four months for one issue. The movement in the market value of the securities is closely related to changes in interest rates. In analyzing the issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies and whether downgrades by bond debt rating agencies have occurred. As management has the ability and intent to hold these equity securities for the foreseeable future, no declines are deemed to be other than temporary. Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. |
| 22 |
| Notes to Consolidated Financial Statements |
| 3. Loans Receivable, Net Loans receivable are summarized as follows: |
| March 31, | 2005 | 2004 | ||||
| Residential real estate | $123,256,206 | $121,142,826 | ||||
| Commercial real estate | 95,700,285 | 73,107,189 | ||||
| Construction | 35,018,563 | 25,320,639 | ||||
| Commercial business | 30,174,159 | 16,360,783 | ||||
| Consumer | 68,713,300 | 55,939,434 | ||||
| 352,862,513 | 291,870,871 | |||||
| Less: | ||||||
| Loans in process | 14,133,160 | 10,479,523 | ||||
| Deferred loan (costs), net | (1,100,513) | (555,584) | ||||
| Allowance for loan losses | 3,021,493 | 2,645,765 | ||||
| 16,054,140 | 12,569,704 | |||||
| $336,808,373 | $279,301,167 | |||||
| Loans serviced for others amounted to approximately $1,117,301 and $1,374,876 at March 31, 2005 and 2004, respectively. The loans are not included in the accompanying consolidated balance sheets. A summary of the allowance for loan losses is as follows: |
| Year Ended March 31, | 2005 | 2004 | 2003 | ||
| Balance at beginning of year | $2,645,765 | $1,940,425 | $1,675,679 | ||
| Provision for loan loss | 870,064 | 845,577 | 450,836 | ||
| Loans charged-off | (679,865) | (289,225) | (243,179) | ||
| Recoveries of loans previously charged-off | 185,529 | 148,988 | 57,089 | ||
| Balance at end of year | $3,021,493 | $2,645,765 | $1,940,425 | ||
| Impaired loans with a valuation allowance totaled $25,965 and $410,284 as of March 31, 2005 and 2004, respectively. The average investment in impaired loans for the years ended March 31, 2005 and 2004 totaled $160,307 and $165,203, respectively. No interest income was recognized on these loans. There were no impaired loans during the year ended March 31, 2003. No additional funds are committed to be advanced in connection with impaired loans. There were no loans past due 90 days and still accruing interest. Nonaccrual loans excluded from impaired loan disclosure amounted to $386,763, $702,506 and $1,165,198 at March 31, 2005, 2004 and 2003, respectively. If interest on these loans had been accrued, such income would have approximated $9,082, $29,094 and $80,098 for the years ended March 31, 2005, 2004 and 2003, respectively. 4. Property and Equipment Property and equipment are summarized as follows: |
| March 31, | 2005 | 2004 | |
| Buildings | $ 7,253,919 | $ 6,505,452 | |
| Land and improvements | 2,189,516 | 2,182,566 | |
| Furniture and equipment | 3,936,413 | 3,550,209 | |
| Construction in progress | 8,971 | 40,395 | |
| 13,388,819 | 12,278,622 | ||
| Less accumulated depreciation and amortization | 5,542,874 | 4,998,018 | |
| Property and equipment, net | $ 7,845,945 | $ 7,280,604 | |
| Depreciation expense for the years ended March 31, 2005, 2004 and 2003 amounted to $544,856, $779,401 and $737,630, respectively. 5. Deposits Deposits are summarized as follows: |
| March 31, | 2005 | 2004 | |
| Demand deposits | |||
| Noninterest bearing | $ 25,885,375 | $ 25,491,504 | |
| Savings accounts | 41,908,251 | 52,266,951 | |
| NOW accounts | 28,338,186 | 24,249,937 | |
| Money market deposit accounts | 16,042,721 | 22,734,345 | |
| Total demand deposits | 112,174,533 | 124,742,737 | |
| Time deposits | 163,255,855 | 135,488,212 | |
| $ 275,430,388 | $ 260,230,949 | ||
| Our Name Really Does Say It All. 23 |
| Community Financial Corporation and Subsidiary |
| 5. Deposits (continued) The aggregate amount of time deposit accounts with a minimum denomination of $100,000 was $42,157,813 and $29,319,664 at March 31, 2005 and 2004, respectively. Time deposits mature as follows: |
| Years Ended March 31, | ||
| 2006 | $ 53,769,046 | |
| 2007 | 48,862,646 | |
| 2008 | 47,188,236 | |
| 2009 | 5,317,178 | |
| 2010 | 8,118,749 | |
| $ 163,255,855 | ||
| At March 31, 2005 and 2004, overdraft demand deposits reclassified to loans totaled $61,998 and $54,074, respectively. Interest expense on deposits is summarized as follows: |
| Years Ended March 31, | 2005 | 2004 | 2003 |
| Time deposits | $ 4,238,489 | $ 4,189,441 | $ 4,543,999 |
| Money market deposit and NOW accounts | 249,336 | 390,878 | 559,868 |
| Savings | 357,800 | 603,289 | 1,191,751 |
| $ 4,845,625 | $ 5,183,608 | $ 6,295,618 | |
| 6. Fair Value of Financial Instruments The estimated fair values of the Corporation's financial instruments are as follows: |
| March 31, | 2005 | 2004 | ||
| (In Thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value |
| Financial assets | ||||
| Cash and cash equivalents | $ 2,346 | $ 2,346 | $ 4,494 | $ 4,494 |
| Securities | 40,128 | 39,863 | 35,661 | 36,011 |
| Federal Home Loan Bank stock, restricted | 4,229 | 4,229 | 2,300 | 2,300 |
| Loans, net | 336,808 | 336,071 | 279,301 | 283,141 |
| Accrued interest receivable | 1,861 | 1,861 | 1,317 | 1,317 |
| March 31, | 2005 | 2004 | ||
| (In Thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value |
| Financial liabilities | ||||
| Deposits | $ 275,430 | $ 279,122 | $ 260,231 | $ 263,010 |
| Advances from Federal Home Loan Bank | 76,000 | 75,707 | 46,000 | 46,000 |
| Securities sold under agreements to repurchase | 15,650 | 15,650 | 429 | 429 |
| Accrued interest payable | 319 | 319 | 87 | 87 |
| The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and cash equivalents For those short-term investments, the carrying amount is a reasonable estimate of fair value. |
| 24 |
| Notes to Consolidated Financial Statements |
| 6. Fair Value of Financial Instruments (continued) Securities Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank. Loans receivable For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposit liabilities The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Advances from Federal Home Loan Bank For advances that mature within one year of the balance sheet date, carrying value is considered a reasonable estimate of fair value. The fair values of all other advances are estimated using discounted cash flow analysis based on the Corporation's current incremental borrowing rate for similar types of advances. Securities sold under agreements to repurchase Securities sold under agreements to repurchase are treated as short-term borrowings and the carrying value approximates fair value. Accrued interest The carrying amounts of accrued interest approximate fair value. Off-balance sheet instruments The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At March 31, 2005 and 2004, the carrying amounts of loan commitments and standby letters of credit were deemed immaterial. 7. Advances from Federal Home Loan Bank Advances from the Federal Home Loan Bank are summarized as follows: |
| Due in year ending March 31, | |
| 2006 | $ 71,000,000 |
| 2010 | 5,000,000 |
| $ 76,000,000 | |
| The weighted average interest rate on advances was 3.13% and 1.25% at March 31, 2005 and 2004, respectively. These advances are collateralized by the investment in FHLB stock and the Corporation's portfolio of first mortgage loans, multi-family, commercial real estate, second mortgage and home equity lines of credit under a Blanket Floating Lien Agreement. Value of this collateral as of March 31, 2005 was $146,192,926. Information related to borrowing activity from the Federal Home Loan Bank is as follows: |
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Maximum amount outstanding during the year | $78,000,000 | $46,000,000 | $30,000,000 |
| Average amount outstanding during the year | $64,183,562 | $27,721,163 | $23,428,100 |
| Average interest rate during the year | 2.09% | 1.27% | 1.78% |
| Our Name Really Does Say It All. 25 |
| Community Financial Corporation and Subsidiary |
| 8. Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase are secured borrowings that generally mature within one to four days from the transaction date. These amounts are recorded at the amount of cash received in connection with the transaction. The Corporation may be required to provide additional collateral based on the fair value of the underlying securities. The following is a summary of certain information regarding the Corporation's repurchase agreements: |
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Balance at end of year | $ 15,650,497 | $ 428,920 | $ 773,725 |
| Weighted average interest rate during the yea | 2.39% | 1.28% | 2.09% |
| Average amount outstanding during the year | $ 4,039,633 | $ 479,448 | $ 1,564,676 |
| Maximum amount outstanding at any month end during the year | $ 15,650,497 | $ 1,008,658 | $ 3,057,918 |
| 9. Income Taxes Deferred tax assets (liabilities), included in the consolidated balance sheets are as follows: |
| March 31, | 2005 | 2004 | |
| Deferred tax assets | |||
| Allowance for losses | $ 1,148,167 | $ 1,005,391 | |
| Deferred compensation | 102,739 | 11,811 | |
| Other | 21,467 | 36,900 | |
| 1,272,373 | 1,054,102 | ||
| Deferred tax liabilities | |||
| Depreciable assets | (236,465) | (360,394) | |
| Unrealized gain on securities available for sale | (651,305) | (1,225,858) | |
| FHLB stock | - | (15,521) | |
| Pension | (40,605) | (11,505) | |
| (928,375) | (1,613,270) | ||
| Net deferred tax asset (liability) | $ 343,998 | $ (559,176) | |
| The provision for income taxes charged to operations for the years ended March 31, 2005, 2004 and 2003, consists of the following: |
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Current | $ 2,058,164 | $ 1,496,919 | $ 1,193,303 |
| Deferred | (328,621) | (301,847) | 60,260 |
| $ 1,729,543 | $ 1,195,072 | $ 1,253,563 | |
| Differences between the statutory and effective tax rates are summarized as follows: |
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Tax at statutory rate | 34.0% | 34.0% | 34.0% |
| Increases (decreases) in taxes resulting from: | |||
| State income taxes, net of federal benefit (expense) | 2.6 | (0.2) | 2.8 |
| Non-taxable interest and dividend received deduction | (3.1) | (3.5) | (2.9) |
| Rehabilitation tax credit | - | (3.7) | - |
| Bank-owned life insurance | (1.4) | (0.1) | - |
| Other | (0.9) | (0.9) | (3.8) |
| 31.2% | 25.6% | 30.1% | |
| 26 |
| Notes to Consolidated Financial Statements |
| 10. Comprehensive Income The components of other comprehensive income (loss) are summarized as follows: |
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Unrealized gains (losses) on securities: | |||
| Unrealized holding gain (loss) arising during the period | $ (1,511,980) | $ 141,830 | $ (339,421) |
| Income tax (expense) benefit related to items of other comprehensive income | 574,554 | (53,895) | 128,980 |
| Other comprehensive income (loss), net of tax | $ (937,426) | $ 87,935 | $ (210,441) |
| 11. Stockholders' Equity and Regulatory Capital Requirements Savings institutions must maintain specific capital standards that are no less stringent than the capital standards applicable to national banks. The OTS regulations currently have three capital standards including (i) a tangible capital requirement, (ii) a core capital requirement, and (iii) a risk-based capital requirement. The tangible capital standard requires savings institutions to maintain tangible capital of not less than 1.5% of adjusted total assets. The core capital standard requires a savings institution to maintain core capital of not less than 4.0% of adjusted total assets. The risk-based capital standard requires risk-based capital of not less than 8.0% of risk-weighted assets. The following table represents the Bank's regulatory capital levels, relative to the OTS requirements applicable at that date: |
| March 31, 2005 | Amount Required | Percent Required | Actual Amount | Actual Percent | Excess Amount |
| (In Thousands) | |||||
| Tangible Capital | $ 6,036 | 1.50% | $ 28,551 | 7.10% | $ 22,515 |
| Core Capital | 16,095 | 4.00 | 28,551 | 7.10 | 12,456 |
| Risk-based Capital | 25,202 | 8.00 | 32,289 | 10.25 | 7,087 |
| March 31, 2005 | Amount Required | Percent Required | Actual Amount | Actual Percent | Excess Amount |
| Tangible Capital | $ 5,053 | 1.50% | $ 25,761 | 7.65% | $ 20,708 |
| Core Capital | 13,477 | 4.00 | 25,761 | 7.65 | 12,284 |
| Risk-based Capital | 20,707 | 8.00 | 29,523 | 11.41 | 8,816 |
| The Bank may not declare or pay a cash dividend, or repurchase any of its capital stock if the effect thereof would cause the net worth of the Bank to be reduced below certain requirements imposed by federal regulations. Capital distributions by OTS-regulated savings banks are limited by regulation ("Capital Distribution Regulation"). Capital distributions are defined to include, in part, dividends, stock repurchases and cash-out mergers. The Capital Distribution Regulation permits a "Tier 1" savings bank to make capital distributions during a calendar year equal to net income for the current year plus the previous two years net income, less capital distributions paid over that same time period. Any distributions in excess of that amount require prior OTS notice, with the opportunity for OTS to object to the distribution. A Tier 1 savings bank is defined as a savings bank that has, on a pro forma basis after the proposed distribution, capital equal to or greater than the OTS fully phased-in capital requirement and has not been deemed by the OTS to be "in need of more than normal supervision". The Bank is currently classified as a Tier 1 institution for these purposes. The Capital Distribution Regulation requires that savings banks provide the applicable OTS District Director with a 30-day advance written notice of all proposed capital distributions whether or not advance approval is required by the regulation. |
| Our Name Really Does Say It All. 27 |
| Community Financial Corporation and Subsidiary |
| 12. Earnings Per Share During the year ended March 31, 2003, the Board of Directors authorized a stock repurchase program of 184,353 shares of the Corporation's stock. During the years ended March 31, 2004 and 2003, 2,441 and 200,300 shares, respectively, were repurchased for an aggregate amount of approximately $52,482 and $2,414,006, respectively. No shares were repurchased during the fiscal year ended March 31, 2005. Earnings per share is calculated as follows: |
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Basic earnings per share | |||
| Income available to common shareholders | $ 3,805,532 | $ 3,481,884 | $ 2,905,792 |
| Weighted average shares outstanding | 2,080,302 | 2,073,597 | 2,168,306 |
| Basic earnings per share | $ 1.83 | $ 1.68 | $ 1.34 |
| Diluted earnings per share | |||
| Income available to common shareholders | $ 3,805,532 | $ 3,481,884 | $ 2,905,792 |
| Weighted average shares outstanding | 2,080,302 | 2,073,597 | 2,168,306 |
| Dilutive effect of stock options | 85,518 | 65,498 | 23,912 |
| Total weighted average shares outstanding | 2,165,820 | 2,139,095 | 2,192,218 |
| Diluted earnings per share | $ 1.76 | $ 1.63 | $ 1.33 |
| During the years ended March 31, 2004 and 2003, stock options representing 18,700 and 62,150 shares on average were not included in the calculation of earnings per share because they would have been antidilutive. No stock options were excluded for the year ended March 31, 2005. For the years presented, there was no adjustment to income for potential common shares. 13. Employee Benefit Plans Pension Plan The Corporation has a noncontributory defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and final average compensation. The Corporation's funding policy is to contribute amounts to the pension trust at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA), but not in excess of the maximum tax deductible amount. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following is a summary of information with respect to the plan: |
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Change in benefit obligation: | |||
| Benefit obligation at beginning of year | $ 1,576,290 | $ 1,405,489 | $ 1,078,895 |
| Service cost | 187,751 | 185,765 | 134,360 |
| Interest cost | 101,710 | 87,246 | 73,074 |
| Actuarial (gain) loss | 351,778 | (49,477) | 140,433 |
| Benefits paid | (21,273) | (52,733) | (21,273) |
| Benefit obligation at end of year | $ 2,196,256 | $ 1,576,290 | $ 1,405,489 |
| Change in plan assets: | |||
| Fair value of plan assets at beginning of year | $ 1,362,096 | $ 1,156,714 | $ 956,857 |
| Actual return on plan assets | 73,297 | 64,933 | 59,189 |
| Employer contribution | 251,761 | 193,182 | 161,941 |
| Benefits paid | (21,273) | (52,733) | (21,273) |
| Fair value of plan assets at end of year | $ 1,665,881 | $ 1,362,096 | $ 1,156,714 |
| Funded status | (530,375) | (214,194) | (248,775) |
| Unrecognized net actuarial loss | 637,992 | 267,133 | 310,474 |
| Unrecognized net asset at transition | - | - | (8,262) |
| Prepaid pension cost | $ 107,617 | $ 52,939 | $ 53,437 |
| 28 |
| Notes to Consolidated Financial Statements |
| 13. Employee Benefit Plans (continued) The accumulated benefit obligation for the defined benefit pension plan was $1,404,341, $1,109,601 and $933,506 as of March 31, 2005, 2004 and 2003, respectively. |
| Year Ended March 31, | 2005 | 2004 | 2003 |
| The components of net periodic pension cost are as follows: | |||
| Service cost | $ 187,751 | $ 185,765 | $ 134,360 |
| Interest cost | 101,710 | 87,246 | 73,074 |
| Expected return on plan assets | (101,293) | (84,612) | (70,933) |
| Amortization of net asset at transition | - | (8,262) | (8,267) |
| Amortization of prior service cost | - | - | 3,104 |
| Recognized net actuarial loss | 8,915 | 13,543 | 4,268 |
| $ 197,083 | $ 193,680 | $ 135,606 | |
| The following assumed rates were used in determining the benefit obligations: | |||
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Weighted average discount rate | 6.00% | 6.50% | 6.25% |
| Increase in future compensation levels | 5.00% | 5.00% | 5.00% |
| The following assumed rates were used in determining the net periodic pension costs: | |||
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Weighted average discount rate | 6.50% | 6.50% | 6.25% |
| Expected long-term rate of return on plan assets | 7.50% | 7.50% | 7.50% |
| Increase in future compensation levels | 5.00% | 5.00% | 5.00% |
| The measurement dates used to value the plan assets were December 31, 2004, 2003 and 2002. Long-Term Rate of Return The plan sponsor selects the expected long-term rate of return on assets assumption in consultation with their investment advisors. The rate is intended to reflect the average rate of earnings expected to be earned on the funds invested to provide plan benefits. Historical performance is reviewed with respect to real rates of return (net of inflation) for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions. Asset Allocation The pension plan's weighted-average asset allocations at December 31, 2004 and 2003, by asset category are as follows: |
| December 31, | 2004 | 2003 |
| Fixed income securities | 69% | 67% |
| Equity securities | 9% | 9% |
| Cash | 22% | 24% |
| 100% | 100% | |
| Funds are invested in a participation guarantee contract of the selected insurance company. The funds are in the general assets of the guaranteeing company which are primarily long-term bonds and long-term mortgages. Funds are guaranteed by the insurance company against failed investments. Interest is credited annually to the funds. The Corporation expects to contribute $263,000 to its pension plan during the year ending March 31, 2005. |
| Our Name Really Does Say It All. 29 |
| Community Financial Corporation and Subsidiary |
| 13. Employee Benefit Plans (continued) Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows: |
| 2006 | $ 31,754 | |
| 2007 | 30,336 | |
| 2008 | 30,763 | |
| 2009 | 46,143 | |
| 2010 | 87,550 | |
| 2011-2015 | 670,296 |
| Employee Stock Ownership Plan The Employee Stock Ownership and 401(k) Profit Sharing Plan (the "Plan") is a combination of a profit sharing plan with 401(k) and a stock bonus plan. The Plan provides for retirement, death, and disability benefits for all eligible employees. An employee becomes eligible for participation after completion of one year of service. After meeting the eligibility requirements, an employee becomes a member of the Plan on the earliest January 1, April 1, July 1, or October 1 occurring on or after his or her qualification. The contributions to the Plan are discretionary and are determined by the Board of Directors. The contributions are limited annually to the maximum amount permitted as a tax deduction under the applicable Internal Revenue Code provisions. Profit-sharing expenses were approximately $138,100, $123,900 and $94,300 for the years ended March 31, 2005, 2004 and 2003, respectively. Deferred Compensation Plans During the year ended March 31, 2004, the Corporation adopted deferred compensation plans for the Board of Directors, President and four Executive Officers. Benefits are to be paid in monthly installments commencing at retirement and ending upon the death of the director or officer. The agreement provides that if board membership or employment is terminated for reasons other than death or disability prior to retirement age, the amount of benefits would be reduced. The deferred compensation expense for the years ended March 31, 2005 and 2004, based on the present value of the retirement benefits, was $239,000 and $31,000, respectively. The plans are unfunded; however, life insurance has been acquired on the life of the employees in amounts sufficient to discharge the obligation. 14. Stock Option Plan The Corporation has a noncompensatory stock option plan (the "Plan") designed to provide long-term incentives to employees. All options are exercisable upon grant date. The following table summarizes options outstanding: |
| Year Ended March 31, | 2005 | 2004 | 2003 | |||
| Shares | Weighted - Average Exercise Price | Shares | Weighted - Average Exercise Price | Shares | Weighted - Average Exercise Price | |
| Options outstanding at beginning of year | 257,850 | $ 13.77 | 200,150 | $ 11.73 | 204,750 | $ 11.56 |
| Granted | 50,000 | 22.44 | 74,800 | 18.68 | 7,000 | 14.52 |
| Forfeited | - | - | (100) | 12.00 | (100) | 12.00 |
| Exercised | (6,200) | 9.01 | (17,000) | 11.28 | (11,500) | 10.43 |
| Options outstanding at end of year | 301,650 | $ 15.32 | 257,850 | $ 13.77 | 200,150 | $ 11.73 |
| Weighted-average fair value of options granted during the year | $ 5.75 | $ 4.24 | $ 3.15 | |||
| 30 |
| Notes to Consolidated Financial Statements |
| 14. Stock Option Plan (continued) The following table summarizes information about stock options outstanding and exercisable at March 31, 2005: |
| Options Outstanding and Exercisable | |||
| Range of Exercise Price | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price |
| $ 8.25 - $ 9.90 | 47,500 | 5.53 | 9.69 |
| $10.00 - $15.63 | 129,350 | 3.29 | 12.68 |
| $17.50 - $22.44 | 124,800 | 9.20 | 20.18 |
| 15. Commitments and Contingencies The Corporation is a party to credit related 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, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Corporation's exposure to credit loss is represented by the contractual amount of these commitments. The Corporation follows the same credit policies in making commitments as it does for on-balance-sheet instruments. At March 31, 2005 and 2004, the following financial instruments were outstanding whose contract amounts represent credit risk: Contract Amount |
| March 31, | 2005 | 2004 |
| (In Thousands) | ||
| Commitments to grant loans | $ 17,027 | $ 16,948 |
| Unfunded commitments under lines of credit | 27,646 | 21,133 |
| Standby letters of credit | 1,178 | 941 |
| 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. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Corporation, is based on management's credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Corporation is committed. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. |
| Our Name Really Does Say It All. 31 |
| Community Financial Corporation and Subsidiary |
| 15. Commitments and Contingencies (continued) Leases The Corporation is obligated under several noncancellable operating leases. Future minimum annual rental commitments under the leases are as follows: |
| Year Ending March 31, | Amount |
| 2006 | $ 127,535 |
| 2007 | 164,556 |
| 2008 | 128,729 |
| 2009 | 134,976 |
| 2010 | 138,814 |
| Thereafter | 698,981 |
| $ 1,393,591 | |
| Total lease expense was approximately $129,000, $133,000 and $271,000 for the years ended March 31, 2005, 2004 and 2003, respectively. In the normal course of business, the Corporation has entered into employment or severance agreements with certain officers of the Bank. The Corporation maintains its cash accounts in several correspondent banks. As of March 31, 2005, deposits in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) were approximately $1,602,000. 16. Related Party Transactions The Corporation has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal shareholders, executive officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. At March 31, 2005 and 2004, these loans totaled $405,521 and $362,222, respectively. During the year ended March 31, 2005, total principal additions were $110,000 and total principal payments were $66,701. 17. Sale of Subsidiary On June 30, 2003, the Corporation sold Community First Mortgage. Community First Mortgage was a wholly-owned mortgage banking subsidiary of the Bank established in November 1997 for the purpose of originating and selling mortgage loans. The proceeds on the sale of this subsidiary were $1,515,210 resulting in a gain of $241,066. The results of the Community First Mortgage's operations are included in the consolidated statements of income through the date of disposition. |
| 32 |
| Notes to Consolidated Financial Statements |
| 18. Selected Quarterly Financial Data (Unaudited) Condensed quarterly consolidated financial data is shown as follows: |
| Year Ended March 31, 2005 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter |
| Total interest income | $ 4,567 | $ 4,922 | $ 5,137 | $ 5,412 |
| Total interest expense | 1,349 | 1,447 | 1,626 | 1,859 |
| Net interest income | 3,218 | 3,475 | 3,511 | 3,553 |
| Provision for loan losses | 164 | 127 | 208 | 371 |
| Net interest income after provision for loan losses | 3,054 | 3,348 | 3,303 | 3,182 |
| Other income | 677 | 674 | 658 | 699 |
| Other expenses | 2,420 | 2,492 | 2,577 | 2,571 |
| Income before income taxes | 1,311 | 1,530 | 1,384 | 1,310 |
| Income tax expense | 419 | 499 | 444 | 367 |
| Net income | $ 892 | $ 1,031 | $ 940 | $ 943 |
| Earnings per share | ||||
| Basic | $ 0.43 | $ 0.49 | $ 0.45 | $ 0.46 |
| Diluted | $ 0.41 | $ 0.48 | $ 0.43 | $ 0.44 |
| Year Ended March 31, 2004 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter |
| Total interest income | $ 4,425 | $ 4,322 | $ 4,377 | $ 4,400 |
| Total interest expense | 1,458 | 1,375 | 1,358 | 1,351 |
| Net interest income | 2,967 | 2,947 | 3,019 | 3,049 |
| Provision for loan losses | 147 | 98 | 152 | 449 |
| Net interest income after provision for loan losses | 2,820 | 2,849 | 2,867 | 2,600 |
| Other income | 1,407 | 592 | 608 | 618 |
| Other expenses | 2,755 | 2,249 | 2,294 | 2,386 |
| Income before income taxes | 1,472 | 1,192 | 1,181 | 832 |
| Income tax expense | 475 | 356 | 353 | 11 |
| Net income | $ 997 | $ 836 | $ 828 | $ 821 |
| Earnings per share | ||||
| Basic | $ 0.48 | $ 0.41 | $ 0.40 | $ 0.39 |
| Diluted | $ 0.47 | $ 0.39 | $ 0.39 | $ 0.38 |
| Our Name Really Does Say It All. 33 |
| Community Financial Corporation and Subsidiary |
| 19. Condensed Financial Information of the Corporation (Parent Company Only) |
| Condensed Balance Sheets | ||
| March 31, | 2005 | 2004 |
| Assets | ||
| Investment in the Bank, at equity | $ 29,614,495 | $ 27,761,119 |
| Cash | 1,071,418 | 959,198 |
| Prepaid expenses and other assets | 639,304 | 548,227 |
| Total assets | $ 31,325,217 | $ 29,268,544 |
| Liabilities and Stockholders' Equity | ||
| Liabilities, other liabilities | $ 133 | $ 9 |
| Stockholders' Equity | ||
| Preferred stock | - | - |
| Common stock | 20,851 | 20,789 |
| Additional paid-in capital | 4,292,815 | 4,230,512 |
| Retained earnings | 25,948,758 | 23,017,148 |
| Accumulated other comprehensive income | 1,062,660 | 2,000,086 |
| Total stockholders' equity | 31,325,084 | 29,268,535 |
| Total liabilities and stockholders' equity | $ 31,325,217 | $ 29,268,544 |
| Condensed Statements of Income | ||||
| Year Ended March 31, | 2005 | 2004 | 2003 | |
| Income | ||||
| Dividend from Bank | $ 1,000,000 | $ 1,500,000 | $ 3,000,000 | |
| Interest income | 85,061 | 96,109 | 47,571 | |
| Total income | 1,085,061 | 1,596,109 | 3,047,571 | |
| Noninterest expenses | 85,544 | 96,792 | 75,585 | |
| Income before equity in undistributed net income of the Bank | 999,517 | 1,499,317 | 2,971,986 | |
| Equity in earnings of Bank, net of distributions | 2,790,803 | 1,955,972 | (76,828) | |
| Income before income taxes | 3,790,320 | 3,455,289 | 2,895,158 | |
| Income tax (benefit) | (15,212) | (26,595) | (10,634) | |
| Net income | $ 3,805,532 | $ 3,481,884 | $ 2,905,792 | |
| 34 |
| Notes to Consolidated Financial Statements |
| 19. Condensed Financial Information of the Corporation (Parent Company Only) (continued) |
| Condensed Statements of Cash Flows | |||
| Year Ended March 31, | 2005 | 2004 | 2003 |
| Operating activities | |||
| Net income | $ 3,805,532 | $ 3,481,884 | $ 2,905,792 |
| Adjustments | |||
| Equity in earnings of Bank, net of distributions | (2,790,803) | (1,955,972) | 76,828 |
| (Increase) in prepaid and other assets | (91,077) | (53,544) | (138,882) |
| Increase in other liabilities | 125 | 9 | - |
| Net cash provided by operating activities | 923,777 | 1,472,377 | 2,843,738 |
| Investing activities | |||
| Net cash provided by investing activities | - | - | - |
| Financing activities | |||
| Cash dividends paid on common stock | (873,922) | (808,396) | (754,197) |
| Repurchase of common stock | - | (52,482) | (2,414,006) |
| Proceeds from issuance of common stock | 62,365 | 217,446 | 119,890 |
| Net cash (absorbed by) financing activities | (811,557) | (643,432) | (3,048,313) |
| Increase (decrease) in cash | 112,220 | 828,945 | (204,575) |
| Cash, beginning of year | 959,198 | 130,253 | 334,828 |
| Cash, end of year | $ 1,071,418 | $ 959,198 | $ 130,253 |
| Our Name Really Does Say It All. 35 |
Stockholder Information |
| Form 10-K Report A copy of the our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, including financial statements, as filed with the SEC, will be furnished without charge to our stockholders of record upon written request to the Secretary, Community Financial Corporation, 38 North Central Avenue, Staunton, Virginia 24401. The annual report on Form 10-K is also available on Community Financial's website at www.cbnk.com and on the Security and Exchange Commission's website at www.sec.gov. |
| Independent Auditors Yount, Hyde & Barbour, P.C. 50 South Cameron Street Winchester, Virginia 22601 Market Makers Scott & Stringfellow, Inc Knight Securities L.P. | Legal Counsel Nelson, McPherson, Summers & Santos 12 North New Street Staunton, Virginia 24401 Silver, Freedman & Taff, L.L.P. 1700 Wisconsin Avenue, N.W. Washington, D.C. 20007 Transfer Agent Community Bank acts as Transfer Agent for Community Financial Corporation |
| Common Stock As of May 31, 2005, there were approximately 479 holders of record of Community Financial common stock. Community Financial common stock is traded on The Nasdaq Small Cap Market under the symbol "CFFC." The shareholders of record number does not reflect persons or entities who hold their stock in nominee or "street" name. The following tables present the Corporation's high, low and closing sales prices as reported by the Nasdaq Stock Market during the last two fiscal years and the dividends declared by us for the stated periods. |
| Fiscal 2005 | High | Low | Close | Dividend Declared | |
| March 2005 | $24.55 | $21.90 | $22.44 | $ 11 | |
| December 2004 | 22.19 | 18.91 | 22.19 | .11 | |
| September 2004 | 20.24 | 18.20 | 20.00 | .10 | |
| June 2004 | 24.00 | 18.90 | 20.24 | .10 | |
| Fiscal 2004 | High | Low | Close | Dividend Declared | |
| March 2004 | $24.70 | $19.10 | $21.79 | $ 10 | |
| December 2003 | 19.75 | 17.50 | 19.75 | .10 | |
| September 2003 | 18.04 | 15.50 | 17.90 | .10 | |
| June 2003 | 16.99 | 14.10 | 15.50 | .09 |
| The Board of Directors of Community Financial makes dividend payment decisions with consideration of a variety of factors, including earnings, financial condition, market considerations and regulatory restrictions. Our ability to pay dividends is limited by restrictions imposed by the Virginia Stock Corporation Act, and indirectly, by the Office of Thrift Supervision. Restrictions on dividend payments from Community Bank to Community Financial (Community Financial's primary source of funds for the payment of dividends to its stockholders) are described in Note 11 of the Notes to Consolidated Financial Statements contained in this Annual Report. |
| 36 |
 Community Bank was organized in 1928 as a Virginia-chartered building and loan association, converted to a federallychartered savings and loan association in 1955 and to a federally-chartered savings bank in 1983. In 1988, Community Bank converted to the stock form of organization through the sale and issuance of 656,134 shares of its common stock. Community Financial was organized in 1989 for the purpose of becoming a thrift institution holding company. Effective January 31, 1990, Community Bank completed the holding company reorganization of the bank and Community Financial acquired all of the issued and outstanding shares of common stock of Community Bank. In 1996, Community Financial changed its place of incorporation to the Commonwealth of Virginia from the State of Delaware. The principal asset of Community Financial is the outstanding stock of Community Bank, its wholly owned subsidiary. Community Financial presently has no separate operations and its business consists only of the business of Community Bank. Community Bank's primary business is to meet the financial needs of individuals, businesses and community organizations. Community Bank offers real estate, business and personal loans with complementary deposit services such as checking, savings, certificates of deposit, money market, retirement accounts, cash management and internet banking services. Community Bank also offers insurance and investment products. Flexible, local and prompt decisions on loans and other financial service needs are a primary advantage of banking with Community Bank. Both Community Financial and Community Bank conduct business through a main office located at 38 North Central Avenue, Staunton,Virginia 24401, a second Staunton office at 101 Community Way, Staunton,Virginia 24401,a Waynesboro office at 2934 West Main Street, Waynesboro, Virginia 22980, a Stuarts Draft office at Routes 340 and 608, Stuarts Draft, Virginia 24477, a Raphine office at 2134 Raphine Road, Raphine, Virginia 24472, a Verona office at 21 Dick Huff Lane,Verona,Virginia and two Virginia Beach offices at 5300 Kemps River Drive, Suite 100, Virginia Beach, Virginia 23467 and 621 Nevan Road,Virginia Beach,Virginia 23451. |
Corporate Profile | ||
| Corporate Officers | ||
| P. Douglas Richard R. Jerry Giles Benny N. Werner Norman C. (Butch) Smiley III Chris P. Kyriakides Kathy H. Bryan M. Paul Coleman Gary L. Davenport Kay T. Dean Danny R. Fields Darlene A. Hall Robert M. (Bobby) Hoffman Richard J. Mayer Hugh J. McMenamin Lyle A. Moffett Jane P. Orem Robert W. Pennington Ramona W. Savidge Jeff S. Wagner Thomas R. Wagner Joseph P. Zakaib Michele T. Bartley Gregory T. Berkshire F. Marie Biser Johnnie T. (J.T.) Bishop Dianne F. Campbell Ken K. Donner Virginia M. McCormack Lovetta L. Moore Shelly K. Parker Liza H. Piszker Alfred M. Randolph Connie R. Savage Brenda L. Sayre Liinda B. Wood Gretchen T. Abshire Deborah M. Burnett Martha B. Chandler Michelle R. Coffey Charlott C. Dean Teresa L. Cox Renee A. Fangman Rosalie J. Moster Janet R. Redifer Barbara W. Wood | President & CEO Chief Financial Officer Senior Vice President Senior Vice President Senior Vice President Vice President Vice President Vice President Vice President Vice President Vice President Vice President Vice President/Controller Vice President Vice President Vice President Vice President Vice President/Secretary Vice President Vice President Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Secretary Assistant Secretary Assistant Secretary Assistant Secretary Assistant Secretary Assistant Secretary Assistant Secretary Assistant Secretary Assistant Secretary Assistant Secretary | 37 |
Community Bank Offices | ||
| Valley Region | ||
 Richmond Road | ||
  Stuarts Draft Raphine | ||
 |
 Corporate Headquarters, Staunton |
 Verona |
Hampton Roads Region
 | Regional Headquarters, Hilltop,Virginia Beach |  Kemps River,Virginia Beach |
38
NEXT PAGECOMMUNITY BANK'S MOST VALUABLE ASSETS
Our Employees
| Gretchen Abshire Pam Addington Michele Bartley Amy Beech Greg Berkshire Rhonda Beyeler Marie Biser J.T. Bishop Tysha Blackburn Dianne Booth Joe Bowman Jenny Boxler Janet Braithwaite Linda Brown Kathy Bryan Danelle Bryant Jennifer Bryant Deborah Burnett Garner Byram Amanda Campbell Bill Campbell Dianne Campbell Jennifer Campbell Lona Cannon Martha Chandler Stacy Clemmer Michelle Coffey Tess Cole Paul Coleman Teresa Cox Ellen Cruce Gary Davenport Charlott Dean Kay Dean Stephanie Deaver | Grace Dick Maria Dimapelis Ken Donner Renee Fangman Rebecca Fielding Danny Fields Sharon Fisher Ariel Fix Tom Fleisher Julie Fletcher Sara Fox Brenda Frazier Wanda Garrison Betsy Gatewood Jerry Giles Bill Haessly Darlene Hall Pam Harris Norman Hart Chris Henderson Nancy Hill Kay Hiner Angela Hinton Bobby Hoffman Anne Hottel Carolyn Howell Heather Humphrey Sabrina Johnson Arbutis Jones Denia Jove Kerri Kincaid Terri Knapton Debbie Knott Julie Krumpter Chris Kyriakides | Mary Laughbaum Rose Lilly Tonna Lotts Don Luttrell Rich Mayer Matt McChesney Ginny McCormack Shanda McCray Pam McGovern Hugh McMenamin Sally Medeiros Emilie Mehrtens Heather Miller Peggy Miller Lyle Moffett Lovetta Moore Rosalie Moster Cameron Napier Claire O'Conner Dinah Ordewald Jane Orem Jessie Palmieri Janice Pappas Shelly Parker Catherine Pauly Bob Pennington Liza Piszker Debra Poole Tami Ragland Lee Ralston-Shaner Ranny Randolph Janet Redifer Doug Richard Teresa Ridgeway Theresa Riggs | Pam Ritchie Connie Savage Ramona Savidge Brenda Sayre Sarah Sayre Marie Schmitt Rachel Sellers Karen Sheehan Stephanie Shiflett Heather Shiley Butch Smiley Melessa Smiley April Smith Bethany Smith Jacelyn Spears Brittany Stansberry Fran Stauffer Amie Stephenson Gene Straley Randy Sumey Linda Turner Glenn VanLear Wendi Vess Laura Voss Jeff Wagner Tom Wagner Benny Werner Stacy Whaley Megan Wheeler Dee Wimer Barbara Wood Linda Wood Connie Yauilla Joe Zakaib |
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NEXT PAGE Community Financial Investments Helping our Customers Reach Their Financial Goals. Gene Straley, the investment consultant at Community Financial Services brings a wealth of experience to Community Bank customers. By listening carefully to their goals and concerns, Gene can tailor an investment strategy to fit comfortably with each customer's objectives. At Community Bank, we want to be sure that our customers receive the same level of care they expect when banking with us. That's why we now offer all the financial capabilities found at other brokerage firms through our association with BI Investments, LLC. Every available investment solution. We want to offer our customers a complete range of investment choices. So we offer both standard brokerage and specialized solutions in every branch. |
Mutual Funds
| Stocks Government Bonds Corporate Bonds Municipal Bonds Options Unit Investment Trusts (UITs) Self-directed IRAs Roth IRAs 529 College Savings Plans Investment Advisory Accounts | Asset Allocation Accounts Fixed Annuities Variable Annuities Life Insurance* Long Term Care Insurance* *Through various third parties |
| Securities and Insurance Products: |
| Not Insured by FDIC or any Federal Government Agency | May Lose Value | Not a Deposit of or Guaranteed by the Bank or any Bank Affiliate |
| Securities and insurance offered through BI Investments, LLC, member NASD and SIPC. BI Investments is associated with Community Bank. Community Financial Investments is a trade name of Community Bank. |
| Community Mortgage Services |  Dianne F. Campbell, our mortgage specialist, is leading our team's effort to expand our mortgage products and services.Community Bank has helped thousands of people since 1928 obtain the best mortgage to suit their needs.We can provide our customers with solid advice based on our solid experience.We now offer:
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| Bank Locations | ||
| Valley Offices | ||
| Waynesboro 2934 West Main Street Waynesboro, VA 22980 (540) 943-5000 FAX (540) 943-2097 Stuarts Draft 2658 Stuarts Draft Highway Stuarts Draft, VA 24477 (540) 337-1514 FAX (540) 337-0665 | Staunton Downtown and Administrative 38 North Central Avenue Staunton, VA 24401 (540) 886-0796 FAX (540) 885-0643 Richmond Road 101 Community Way Staunton, VA 24401 (540) 213-3888 FAX (540) 213-0638 | Verona 21 Dick Huff Lane Verona, VA 24482 (540) 248-0700 FAX (540) 248-1117 Raphine 2134 Raphine Road Raphine, VA 24472 (540) 377-5300 FAX (540) 377-5304 |
| Virginia Beach Offices | ||
| E-MAIL: cbnk@cbnk.com | Hilltop- Regional Headquarters 621 Nevan Road Virginia Beach, VA 23451 (757) 491-8810 FAX (757) 491-8102 Kemps River 5300 Kemps River Drive Virginia Beach, VA 23464 (757) 424-5600 FAX (757) 424-5645 Moving Soon to 1201 Lake James Drive Virginia Beach, Virginia 23464 | WEB ADDRESS: www.cbnk.com |
For Our Customers' Convenience,
We Also Provide Access to Community Bank Services Thru:
| ATM LOCATIONS | 24 HOUR ACCESS |
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Executive & Administrative Offices |
