SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 0-18265.
COMMUNITY FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Virginia 54-1532044
--------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
38 North Central Avenue, Staunton, Virginia 24401
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (540) 886-0796
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
(Title of Class)
<PAGE>
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES /X/ / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
The registrant had $19,350,419 in revenues for the year ended March 31,
2000
As of May 31, 2000, there were issued and outstanding 2,486,776 shares of
the registrant's common stock. The aggregate market value of the voting stock
held by non-affiliates of the issuer, computed by reference to the average of
the closing bid and asked price of such stock as of May 31, 2000, was
approximately $20,000,000. (The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the
registrant that such person is an affiliate of the issuer.) There were 2,486,776
shares of common stock of the registrant outstanding as of May 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB--Portions of the Annual Report to Stockholders for
the fiscal year ended March 31, 2000.
PART III of Form 10-KSB--Portions of the Proxy Statement for the 2000
Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format: Yes / / No/X/
2
<PAGE>
PART I
Item 1. Description of Business
General
--------------------------------------------------------------------------------
Community Financial Corporation ("Community" or the "Company") is a
Virginia corporation, which owns Community Bank (the "Bank" or "Community
Bank"). The Bank was organized in 1928 as a Virginia-chartered building and loan
association, converted to a federally-chartered 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
shares of our common stock. We effected a two-for-one stock split in the form of
a 100% stock dividend in November 1994 and March 1998. References throughout
this Form 10KSB to the Company generally include the Bank, unless the context
otherwise requires.
Our principal asset is the outstanding stock of Community Bank, our wholly
owned subsidiary. Our common stock trades on The Nasdaq SmallCap Market under
the symbol "CFFC." In November 1997, Community Bank established Community First
Mortgage Corporation ("Community First"), a wholly owned mortgage banking
subsidiary to originate and sell mortgage loans.
Community and Community Bank are subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision, Department of
the Treasury ("OTS") and by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and our
deposits are backed by the full faith and credit of the United States Government
and are insured by the Savings Association Insurance Fund ("SAIF") to the
maximum extent permitted by the FDIC.
At March 31, 2000, Community had $243.1 million in assets, deposits of
$158.6 million and stockholders' equity of $25.4 million. Community's primary
business consists of attracting deposits from the general public and originating
real estate loans and other types of investments through our offices located in
Staunton, Waynesboro, Stuart Drafts and Virginia Beach, Virginia.
Like all financial institutions, Community's operations are materially
affected by general economic conditions, the monetary and fiscal policies of the
federal government and the policies of the various regulatory authorities,
including the OTS and the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). Our results of operations are largely dependent upon
our net interest income, which is the difference between the interest we receive
on our loan portfolio and our investment securities portfolio, and the interest
we pay on our deposit accounts and borrowings.
Our main office is located at 38 North Central Avenue, Staunton, Virginia
24401. Our telephone number is (540) 886-0796.
3
<PAGE>
Forward-Looking Statements
--------------------------------------------------------------------------------
This Annual Report on Form 10-KSB contains certain forward-looking
statements with respect to the financial condition and results of operations of
our business. These forward-looking statements involve certain risks and
uncertainties. When used in this Annual Report on Form 10-KSB or future filings
by us with the Securities and Exchange Commission, in our press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. We wish to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made, and to advise readers that various factors including regional and national
economic conditions, changes in levels of market interest rates, credit risks of
lending activities, and competitive and regulatory factors could affect our
financial performance and could cause our actual results for future periods to
differ materially from those anticipated or projected.
We do not undertake and specifically disclaim any obligation to publicly
release the results of any revisions which may be made to any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
Lending Activities
--------------------------------------------------------------------------------
General. We, like most other thrift institutions, concentrate our lending
activities on first mortgage conventional loans secured by residential and, to a
lesser extent, commercial real estate with an emphasis on multi-family housing.
We make construction loans secured by commercial real estate and one-to
four-family residential properties. Additionally, we make consumer loans in
order to increase the diversification and decrease the interest rate sensitivity
of our loan portfolio and to increase interest income. Substantially all of our
loans are originated within our market area which includes Shenandoah,
Rockingham, Page, Highland, Augusta, Albemarle, Bath, Rockbridge and Nelson
Counties, the city of Richmond and the Hampton Roads area in Virginia.
Residential loan originations come primarily from walk-in customers, real
estate brokers and builders. Commercial real estate loan originations are
obtained through broker referrals, direct solicitation of developers and
continued business from customers. All completed loan applications are reviewed
by our salaried loan officers. As part of the application process, information
is obtained concerning the income, financial condition, employment and credit
history of the applicant. If commercial real estate is involved, information is
also obtained concerning cash flow after debt service. The quality of loans is
analyzed based on our experience and on guidelines with respect to credit
underwriting as well as the guidelines issued by the Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and other
purchasers of loans, depending on the type of loans involved. The one-to
four-family adjustable-rate mortgage loans originated by us, however, are not
readily saleable in the secondary market due to the fact that we do not
4
<PAGE>
typically require surveys, title insurance or written verifications of
employment history and deposit relationships. All real estate is appraised by
independent fee appraisers who have been pre-approved by the Board of Directors.
Our loan commitments are approved at different levels, depending on the
size and type of the loan being sought. One-to four-family and commercial real
estate loans in the amount of $225,000 or less may be approved by the President
of the Company. Loans in excess of $225,000 but less than $750,000 must be
approved by a majority of our Loan Committee. All mortgage loans in excess of
$750,000 must be approved by the Board of Directors. Consumer loans in excess of
$250,000 on a secured basis and $150,000 on an unsecured basis require the
approval of three members of senior management. Regardless of the individual
loan approval authority, the Board of Directors generally approves or ratifies
all loans.
The aggregate amount of loans that the Bank is permitted to make to any one
borrower, including related entities, and the aggregate amount that the Bank may
invest in any one real estate project, with certain exceptions, is limited to
the greater of 15% of unimpaired capital and surplus or $500,000. At March 31,
2000, the maximum amount which the Bank could have loaned to one borrower and
the borrower's related entities and invested in any one project was
approximately $3.7 million. At March 31, 2000, the Bank had no borrower, or
groups of borrowers, with loans outstanding in excess of $2.6 million.
5
<PAGE>
Loan Portfolio Composition. The following table sets forth the composition
of our total loan portfolio in dollars and percentages as of the dates
indicated.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
Residential $ 97,409 48.57% $ 91,396 51.56% $ 94,962 56.92% $ 96,968 63.83% $ 91,212 62.92%
Commercial 42,318 21.10 38,545 21.75 40,115 24.04 37,508 24.69 38,433 26.51
Construction 20,687 10.31 13,712 7.74 10,071 6.04 5,204 3.42 6,415 4.43
------ ----- ------ ---- ------ ---- ----- ---- ----- ----
Total real estate 160,414 79.98 143,653 81.05 145,148 87.00 139,680 91.94 136,060 93.86
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
CONSUMER LOANS:
Unsecured personal 2,800 1.40 2,710 1.53 1,935 1.16 4,418 2.91 3,616 2.50
Secured personal 7,794 3.89 4,200 2.37 3,066 1.84 546 .36 --- ---
Automobile 8,945 4.46 6,430 3.63 3,970 2.38 1,646 1.08 1,470 1.01
Home equity 10,590 5.28 12,234 6.90 7,086 4.25 1,630 1.07 380 .26
Deposit account 576 .29 260 .15 277 .16 339 .22 234 .16
Other 48 .02 47 .02 35 .02 76 .05 496 .34
Total consumer 30,753 15.34 25,881 14.60 16,369 9.81 8,655 5.69 6,196 4.27
Commercial business 9,392 4.68 7,713 4.35 5,321 3.19 3,588 2.37 2,709 1.87
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total loans receivable $200,559 100.00% $177,247 100.00% $166,838 100.00% $151,923 100.00% $144,965 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loans in process 9,452 4,249 3,003 1,619 1,830
Derferred fees and unearned 188 268 247 361 396
Allowance for losses 1,218 1,316 1,117 1,038 1,000
----- ----- ----- ----- -----
Total net items 10,858 5,833 4,367 3,018 3,226
------ ----- ----- ----- -----
Total loans receivable, net $189,701 $171,414 $162,471 $148,905 $141,739
======== ======== ======== ======== ========
</TABLE>
6
<PAGE>
The following table shows the composition of our loan portfolio by fixed
and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
March 31
---------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate:
Residential 18,343 9.15% $ 16,587 9.36% $ 13,539 8.12% $ 11,161 7.34% $ 12,863 8.87%
Commercial 13,019 6.49 11,294 6.37 6,442 3.86 6,223 4.10 5,548 3.83
------ ---- ------ ---- ----- ---- ----- ---- ----- ----
Total real estate 31,362 15.64 27,881 15.73 19,981 11.98 17,384 11.44 18,411 12.70
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Consumer 27,911 13.91 22,353 12.61 14,716 8.82 8,114 5.33 5,902 4.07
Commercial business 4,327 2.16 5,656 3.19 4,767 2.86 3,588 2.37 2,709 1.87
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total fixed-rate loans 63,600 31.71 55,890 31.53 39,464 23.66 29,086 19.14 27,022 18.64
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Adjustable-Rate loans:
Real Estate:
Residential 78,908 39.34 84,877 47.89 86,074 51.59 87,336 57.49 80,773 55.72
Commercial 50,144 25.00 30,895 17.43 39,093 23.43 34,960 23.01 36,876 25.44
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total real estate 129,052 64.34 115,772 65.32 125,167 75.02 122,296 80.50 117,649 81.16
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Consumer 2,842 1.42 3,528 1.99 1,653 .99 541 .36 294 .20
Commercial Business 5,065 2.53 2,057 1.16 554 .33 --- --- --- ---
----- ---- ----- ---- --- --- ------- ----- ------- -----
Total adjustable-rate 136,959 68.29 121,357 68.47 127,374 76.34 122,837 80.86 117,943 81.36
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans receivable $200,559 100.00% $177,247 100.00% $166,838 100.00% $151,923 100.00% $144,965 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loans in 9,452 4,249 3,003 1,619 1,830
Deferred fees and 188 268 247 361 396
Allowance for losses 1,218 1,316 1,117 1,038 1,000
----- ----- ----- ----- -----
Total net items 10,858 5,833 4,367 3,018 3,226
------ ----- ----- ----- -----
Total loans $189,701 $171,414 $162,471 $148,905 $141,739
======== ======== ======== ======== ========
</TABLE>
(1) Includes residential real estate construction loans of $1.0
million, $2.7 million, $818,000, $1.5 million, and $2.4 million and commercial
real estate construction loans of $1.1 million, $2.6 million, $4.3 million, $3.7
million, and $4.0 million at March 31, 2000, 1999, 1998, 1997 and 1996,
respectively.
(2) Includes residential real estate construction loans of $12.2
million, $7.4 million and $3.8 million and commercial real estate construction
loans of $4.6 million, $1.0 million and $1.1 million at March 31, 2000 , 1999
and 1998 respectively.
7
<PAGE>
Loan Maturity and Repricing
--------------------------------------------------------------------------------
We originate fixed and adjustable rate construction loans both of which
generally mature in one year or less. At March 31, 2000, we had total
construction loans of $20.7 million, all of which mature in the fiscal year
ending March 31, 2001.
One-to Four-Family Residential Real Estate Lending
--------------------------------------------------------------------------------
Our primary lending program is the origination of loans secured by one-to
four-family residences, substantially all of which are located in our market
area. We evaluate both the borrower's ability to make principal and interest
payments and the value of the property that will secure the loan. Although
federal law permits us to make loans in amounts of up to 100% of the appraised
value of the underlying real estate, we generally make one-to four-family
residential real estate loans in amounts of 80% or less of the appraised value.
In certain instances, we will lend up to 90% of the appraised value of the
underlying real estate and require the borrower to purchase private mortgage
insurance in an amount sufficient to reduce our exposure to 80% or less.
In order to reduce our exposure to changes in interest rates, we have
de-emphasized the origination of 30-year fixed-rate one-to four-family
residential mortgage loans for retention in our own portfolio. For the year
ended March 31, 2000, 35.4% of all one-to four-family residential loans we
originated had adjustable interest rates. Although, due to competitive market
pressures, we do originate fixed-rate mortgage loans, we currently underwrite
and document all such loans to permit their sale in the secondary mortgage
market, with a third-party purchase commitment for the loan being required prior
to origination. At March 31, 2000, $17.3 million (excluding $1.0 million of
residential construction loans) or 18.2%, of our one-to four-family residential
mortgage loan portfolio consisted of fixed-rate mortgage loans.
Our current one-to four-family residential adjustable-rate mortgages
("ARMs") have interest rates that adjust primarily every year, generally in
accordance with the rates on one-year U.S. Treasury Bills. Although our primary
one-to four-family residential loan is the one year adjustable, we offer a
residential loan which adjusts every three or five years generally in accordance
with the rates on one or three year U.S. Treasury Bills. Our ARMs generally
limit interest rate increases to 2% each rate adjustment period and have an
established ceiling rate at the time the loans are made of up to 6% over the
original interest rate. To compete with other lenders in our market area, we
make one, three and five-year ARMs at interest rates which, for the initial
period, are below the index rate which would otherwise apply to these loans.
Borrowers are qualified, however, at the fully indexed interest rate. At March
31, 2000, residential ARM loans totaled $78.9 million, or 39.3%, of our total
loans receivable before net items. There are unquantifiable risks resulting from
potential increased costs to the borrower as a result of repricing. It is
possible, therefore, that during periods of rising interest rates, the risk of
defaults on ARMs may increase due to the upward adjustment of interest costs to
borrowers.
All one-to four-family real estate mortgage loans being originated by us
contain a "due-on-sale" clause providing that we may declare the unpaid
8
<PAGE>
principal balance due and payable upon the sale of the mortgaged property. It is
our policy to enforce these due-on-sale clauses concerning fixed-rated loans and
to permit assumptions of ARMs, for a fee, by qualified borrowers.
We require, in connection with the origination of residential real estate
loans, title opinions and fire and casualty insurance coverage, as well as flood
insurance where appropriate, to protect our interests. The cost of this
insurance coverage is paid by the borrower. We generally do not require escrows
for taxes and insurance.
Commercial Real Estate and Construction Lending
--------------------------------------------------------------------------------
We have originated and, in the past have purchased, commercial real estate
loans and loan participations. We also make commercial real estate construction
loans. Our commercial real estate and construction loans are secured by various
types of commercial real estate, including multi-family residential buildings,
hotels and motels, convenience stores, commercial and industrial buildings,
shopping centers and churches. We have in recent years placed more emphasis on
multi-family housing loans for our commercial real estate loan portfolio. At
March 31, 2000, commercial real estate, land and construction loans aggregated
$63.0 million or 31.4% of our total loans receivable before net items. Our
commercial real estate and construction loans are secured primarily by
properties located in our market area.
Our commercial real estate loans are generally made at interest rates that
adjust based on yields for one-year U.S. Treasury securities, with a 2% annual
cap on rate adjustments and a 6% cap on interest rates over the life of the
loan. Typically, we charge fees ranging from 1% to 2% on these loans. At March
31, 2000, we had $13.0 million in fixed-rate commercial real estate and
construction loans. Commercial real estate loans made by us are fully amortizing
with maturities ranging from five to 30 years.
At March 31, 2000, we had $5.8 million or 2.9% of our total loans
receivable before net items invested in commercial construction loans compared
to $3.6 million or 2.1% at March 31, 1999. At March 31, 2000, we had 30
commercial construction loans, the largest one having an outstanding balance of
$716,000. All of these loans are presently performing in accordance with their
terms. Our commercial construction loans are generally made for a one year term
or less, with a requirement that the borrower have a commitment for permanent
financing prior to funding the construction loan. Our construction loans
generally provide for a fixed rate of interest at the prevailing prime rate or
slightly above. Such loans are secured by the personal guarantees of the
borrowers and by first mortgages on the projects.
In our underwriting of commercial real estate and construction loans, we
may lend, under federal regulations, up to 100% of the security property's
appraised value, although the loan to original appraised value ratio on such
properties is generally 80% or less. Our commercial real estate and construction
loan underwriting criteria require an examination of debt service coverage
ratios, the borrower's creditworthiness and prior credit history and reputation,
and we generally require personal guarantees or endorsements of borrowers. We
also carefully consider the location of the security property.
At March 31, 2000, we had 23 commercial real estate loans (or multiple
loans to one borrower) in excess of $1.0 million with an aggregate balance of
9
<PAGE>
$36.8 million. The largest relationship was to a single borrower for $2.6
million secured by a combination of multi-family and single family rental
property, personal residence, improved land and residential construction.
The following table presents information as to Community's commercial real
estate and construction lending portfolio as of March 31, 2000 by type of
project.
NUMBER OF PRINCIPAL
LOANS BALANCE
(Dollars in Thousands)
Permanent financing:
Multi-family residential buildings 44 $16,177
Hotel and motel 3 2,099
Commercial and industrial buildings 62 19,422
Raw land 90 5,441
Church 4 981
--- ------
203 44,010
Acquisition and construction financing:
Commercial and industrial buildings 30 5,765
--- ------
Total 233 $49,775
=== =======
Commercial real estate and construction lending is generally considered to
involve a higher level of credit risk than one-to four-family residential
lending due to the concentration of principal in a limited number of loans and
borrowers and the effects of general economic conditions on real estate
developers and managers. Our risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's sale value
upon completion of the project and the estimated cost of the project. If the
estimated cost of construction or development proves to be inaccurate, we may be
required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value proves to be inaccurate, we
may be confronted, at or prior to the maturity of the loan, with a project with
value which is insufficient to assure full repayment. Because we usually provide
loans to a developer for the entire estimated cost and interest of the project,
defaults in repayment generally do not occur during the construction period and
it is therefore difficult to identify problem loans at an early stage. When loan
payments become due, borrowers may experience cash flow from the project which
is not adequate to service total debt. This cash flow shortage can result in the
failure to make loan payments. In such cases, we may be compelled to modify the
terms of the loan. In addition, the nature of these loans is such that they are
generally less predictable and more difficult to evaluate and monitor.
Consumer Lending
--------------------------------------------------------------------------------
We offer various secured and unsecured consumer loans, including unsecured
personal loans, automobile loans, deposit account loans, installment and demand
loans, and home equity and credit card loans. At March 31, 2000, we had $30.7
million or 15.3% of our total loans receivable before net items invested in
consumer loans. With the exception of $10.6 million of home equity loans at
March 31, 2000, our consumer loans have fixed interest rates and generally have
10
<PAGE>
terms ranging from 90 days to five years. The largest component of consumer
loans are home equity loans. We originate all of our consumer loans in our
market area and intend to continue our consumer lending in this geographic area.
We offer VISA credit card accounts. At March 31, 2000, 1,440 credit card
accounts had been issued, with an aggregate outstanding balance of $430,000 and
unused credit available of $3.5 million. We presently charge no annual
membership fee and an annual rate of interest of 15.98%.
Consumer loans do not include unused lines of credit on credit card
accounts opened by us and lines of credit on home equity loans. The total unused
credit available under our home equity and credit card programs was $8.3 million
at March 31, 2000.
The underwriting standards employed by us for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes a comparison
of the value of the security in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, such as credit
card receivables, or secured by rapidly depreciable assets such as automobiles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loan such as us, and a
borrower may be able to assert against such assignee claims and defenses which
it has against the seller of the underlying collateral. We add general
provisions to our loan loss allowance, in amounts determined in accordance with
industry standards, at the time the loans are originated. Consumer loan
delinquencies often increase over time as the loans age. Accordingly, although
the level of non-performing assets in our consumer loan portfolio has generally
been low ($161,000 at March 31, 2000), there can be no assurance that
delinquencies will not increase in the future.
Commercial Business Lending
--------------------------------------------------------------------------------
We also originate commercial business loans. At March 31, 2000 we had $9.4
million in commercial business loans outstanding, representing 4.7% of our gross
loan portfolio. We offer commercial business loans to service existing
customers, to consolidate our banking relationships with these customers, and to
further our asset/liability management goals.
11
<PAGE>
Unlike residential mortgage loans which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be dependent upon the success of the
business itself. Our commercial business loans almost always include personal
guarantees and are usually, but not always, secured by business assets. However,
the collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. At
March 31, 2000, we had $7.8 million of secured commercial business loans and
$1.6 million of unsecured commercial business loans.
We recognize the generally increased credit risk associated with commercial
business lending. Our commercial business lending practice emphasizes credit
file documentation and analysis of the borrower's character, management
capabilities, capacity to repay the loan, the adequacy of the borrower's capital
and collateral. Analysis of the borrower's past, present and future cash flows
is also an important aspect of our credit analysis.
Loan Originations, Purchases and Sales
--------------------------------------------------------------------------------
Federal regulations authorize us to make real estate loans anywhere in the
United States. However, at March 31, 2000, substantially all of our real estate
loans were secured by real estate located in our market area.
Management believes that purchases of loans and loan participations are
generally desirable only when local mortgage demand is less than the supply of
funds available for local mortgage origination. We did not purchase any loans in
fiscal 2000.
Generally, we originate fixed-rate residential mortgage loans for sale in
the secondary market and retain adjustable-rate mortgage loans for our
portfolio. Prior to fiscal 1997 we retained the servicing for mortgage loans
sold. During fiscal 1997 we began to sell loans with servicing released to be
more competitive in that market.
12
<PAGE>
The following table shows our loan origination, purchase, sale and
repayment activities for the periods indicated.
Year Ended March 31,
---------------------------------
2000 1999 1998
---------------------------------
(In Thousands)
ORIGINATION BY TYPE:
Adjustable Rate:
Real estate - one - to four - family
- residential $35,426 $22,300 $20,724
- commercial 2,912 13,916 9,693
- home equity 1,420 8,214 390
----- ----- ---
Total adjustable rate 39,758 44,430 30,807
------ ------ ------
FIXED RATE:
Real estate - one - to four - family
- residential 64,560 28,614 5,345
- commercial 9,533 4,514 ---
Non-real estate - consumer (1) 19,391 22,134 22,009
-- ------ ------ ------
Total fixed rate 93,484 55,262 27,354
------ ------ ------
SALES AND REPAYMENTS
Real estate loans 77,850 28,606 4,001
Principal repayments 24,278 41,034 23,552
------ ------ ------
Total reductions 102,128 69,640 27,553
------- ------ ------
Increase (decrease) in other items, net (12,827) (21,109) (17,041)
------- ------- -------
Net increase $18,287 $ 8,943 $13,567
======= ======= =======
-------------------
(1) Consumer loans include the amounts outstanding on credit card accounts
opened by us and unused lines of credit on home equity loans. The total credit
available was $8.3 million, $5.9 million, and $4.6 million at March 31, 2000,
1999 and 1998, respectively, which would have increased fixed-rate consumer
loans to $36.2 million, $28.0 million and $26.6 million at such dates,
respectively.
Delinquent and Problem Loans
--------------------------------------------------------------------------------
When a borrower fails to make a required payment on a loan, we attempt to
cause the deficiency to be cured by contacting the borrower. A notice is mailed
to the borrower after a payment is 16 days past due and again when the loan is
28 days past due. For most loans, if the delinquency is not cured within 30 days
we issue a notice of intent to foreclose on the property and if the delinquency
13
<PAGE>
is not cured within 60 days, we may institute foreclosure action. If foreclosed
on, real property is sold at a public sale and may be purchased by us.
Historically, deficiencies have been cured promptly.
The following table sets forth information concerning delinquent mortgage
and other loans at March 31, 2000. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Residential Real Commercial Real
Estate Estate Consumer
----------------------------------------------------------
Number Amount Number Amount Number Amount
----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
LOANS DELINQUENT FOR:
30-59 days 7 $361 4 $346 74 $1,705
60-89 days - - - - 2 16
90 days and over 2 159 1 131 2 158
- --- - --- - ---
Total delinquent loans 9 $520 5 $477 78 $1,879
= ==== = ==== == ======
</TABLE>
Federal regulations provide for the classification of loans, debt, equity
securities and other assets considered to be of lesser quality as "substandard,"
"doubtful" or "loss" assets. The regulations require insured institutions to
classify their own assets and to establish prudent general allowances for losses
for assets classified "substandard" or "doubtful." For the portion of assets
classified as "loss," an institution is required to either establish specific
allowances of 100% of the amount classified or charge such amount off its books.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
potential weaknesses are required to be designated "special mention" by
management. In addition, the OTS may require the establishment of a general
allowance for losses based on assets classified as "substandard" and "doubtful"
or based on the general quality of the asset portfolio of an institution. In
connection with the filing of our periodic reports with the OTS and in
accordance with our classification of assets policy, we regularly review the
loans in our portfolio to determine whether any loans require classification in
accordance with applicable regulations.
On the basis of management's review of our assets, at March 31, 2000, we
had classified $1,221,000 of our assets as substandard, $13,000 as doubtful and
none as loss. All assets that have been classified are included below in either
the table of non-performing assets or under "Other Loans of Concern."
14
<PAGE>
Non-Performing Assets
--------------------------------------------------------------------------------
The table below sets forth the amounts and categories of non-performing
assets in our loan portfolio. Non-performing assets include non-accruing loans,
accruing loans delinquent 90 days or more as to principal or interest payments
and real estate acquired through foreclosure, which include assets acquired in
settlement of loans. Typically, a loan becomes nonaccruing when it is 90 days
delinquent. All consumer loans more than 120 days delinquent are charged against
the consumer loan allowance for loan losses. Accruing mortgage loans delinquent
more than 90 days are loans that we consider to be well secured and in the
process of collection. For the years presented, we have had no troubled debt
restructurings (which involve forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates).
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Consumer $ 281 $ 92 $ 590 $ 400 $ ---
Real Estate 159 1,074 45 103 ---
Accruing loans delinquent more than 90 Days:
Residential --- --- --- --- 52
Commercial --- --- --- --- ---
Consumer --- --- --- --- 541
Real estate acquired through foreclosure 831 352 303 173 148
------ ------ ------ ----- -----
Total $1,271 $1,518 $ 938 $ 676 $ 741
====== ====== ===== ===== =====
Total as a percentage of total assets .52% .76% .51% .40% .46%
=== === === === ===
Unallocated allowance for loan losses $1,200 $1,195 $1,080 $ 783 $ 791
====== ====== ====== ===== =====
</TABLE>
Non-performing assets at March 31, 2000 were comprised primarily of
residential real estate acquired through foreclosure. At March 31, 2000 the
largest property in non-performing assets was a multi-family unit with an
approximate value of $457,000. Based on current market values of the properties
securing these loans, management anticipates no significant losses in excess of
the reserves for losses previously recorded.
15
<PAGE>
Other Loans Of Concern
--------------------------------------------------------------------------------
As of March 31, 2000, there were $3,458,000 in loans with respect to which
known information about the possible credit problems of the borrowers or the
cash flows of the security properties have caused management to have doubts as
to the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the non-performing
asset categories.
The $3,458,000 in other loans of concern is comprised primarily of
commercial and residential real estate loans. Included in the commercial real
estate loans of concern are two loans in the amount of $1.3 million and
$900,000, both of which are current as to interest and principal payments. We
are closely monitoring the status of these loans.
Although management believes that these loans are adequately secured and no
material loss is expected, certain circumstances may cause the borrower to be
unable to comply with the present loan repayment terms at some future date.
Allowance for Losses on Loans and Real Estate
--------------------------------------------------------------------------------
We provide valuation reserves for anticipated losses on loans and real
estate when management determines that a significant decline in the value of the
collateral has occurred, as a result of which the value of the collateral is
less than the amount of the unpaid principal of the related loan plus estimated
costs of acquisition and sale. In addition, we also provide reserves based on
the dollar amount and type of collateral securing our loans, in order to protect
against unanticipated losses. Although management believes that it uses the best
information available to make such determinations, future adjustments to
reserves may be necessary, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial determinations. During 1999, we decreased our allowance for losses on
loans by $98,000 due primarily to the charge-off of specific reserves. At March
31, 2000, we had an allowance for loan losses of $1,218,000 which is
predominantly a general allowance of $1,200,000.
16
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,316 $1,117 $1,039 $1,000 $ 743
------ ------ ------ ------ -----
Provision charged to operations 283 360 499 181 307
--- --- --- --- ---
CHARGE-OFFS:
Residential real estate 288 100 116 59 ---
Consumer 159 74 376 110 71
Recoveries:
Real Estate 59 6 --- --- ---
Consumer 7 7 73 27 1
- - -- -- -
Net charge-offs 381 161 420 142 70
--- --- --- --- --
Balance at end of period $1,218 $1,316 $1,117 $1,039 $1,000
------ ------ ------ ------ ------
Ratio of net charge-offs during the period to .20% .10% .27% .01% .01%
</TABLE>
17
<PAGE>
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
Consumer and
Commercial Commercial
Residential Real Estate Construction Business Total
-----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
MARCH 31,2000
Amount of loan loss allowance $ 238 $ 246 $ 136 $ 598 $ 1,218
Loan amounts by category 97,409 42,318 20,687 40,145 200,559
Percent of loans in each
category to total loans 48.57% 21.10% 10.31% 20.02% 100.00%
MARCH 31,1999
Amount of loan loss allowance $ 375 $ 306 $ 123 $ 512 $ 1,316
Loan amounts by category 91,396 38,545 13,712 33,594 177,247
Percent of loans in each
category to total loans 51.56% 21.75% 7.74% 18.95% 100.00%
MARCH 31, 1998
Amount of loan loss allowance $ 376 $ 161 $ 116 $ 464 $ 1,117
Loan amounts by category 94,962 40,115 10,071 21,690 166,838
Percent of loans in each
category to total loans 56.92% 24.04% 6.04% 13.00% 100.00%
MARCH 31, 1997
Amount of loan loss allowance $ 385 $ 140 $ 78 $ 436 $ 1,039
Loan amounts by category 96,968 37,508 5,204 12,243 151,923
Percent of loans in each
category to total loans 63.83% 24.69% 3.42% 8.06% 100.00%
MARCH 31, 1996
Amount of loan loss allowance $ 381 $ 242 $ 83 $ 294 $ 1,000
Loan amounts by category 91,212 38,433 6,415 8,905 144,965
Percent of loans in each
category to total loans 61.92% 26.51% 4.43% 6.14% 100.00%
</TABLE>
18
<PAGE>
Subsidiary Activities
--------------------------------------------------------------------------------
We established Community First Mortgage Corporation, a mortgage banking
subsidiary, in November 1997 and began operations in June 1998. The primary
business of Community First is to originate fixed rate mortgage loans to sell to
third party investors to generate fee income and gains on the sale of mortgage
loans. The success of a mortgage banking operation such as Community First is
generally dependent on increasing the volume of mortgage loans originated and
sold to investors. Community First, during the year ended March 31, 2000
experienced a loss before income taxes of approximately $608,000.
Investment Activities
--------------------------------------------------------------------------------
As a member of the FHLB System, Community Bank must maintain minimum levels
of investments that are liquid assets as specified by the OTS. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. See "Regulation -
Liquidity."
Historically, we have maintained our liquid assets above the minimum
requirements imposed by federal regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is provided. As of March 31, 2000, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings and current borrowings) was 6.8%.
The contractual maturities and weighted average yields of the investment
securities portfolio, excluding FHLB of Atlanta stock and FHLMC stock, are
indicated in the following table.
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------------------------------------
Within 1 year 1 to 5 Years Total Investment Securities
Book Value Book Value Book Value MarketValue
--------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Federal agency obligations $ --- $23,065 $23,065 $22,610
State agency obligations and commercial paper 1,195 3,053 4,248 4,194
----- ----- ----- -----
Total investment securities $1,195 $26,118 $27,313 $26,804
====== ======= ======= =======
Weighted average yield 5.11% 6.66% 6.59% 6.71%
</TABLE>
19
<PAGE>
The following table sets forth the composition of our investment portfolio
at the dates indicated.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------------
2000 1999 1998
Book Value % of Total Book Value % of Total Book Value % of Total
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks $1,908 100.0% $6,407 100.0% $2,866 100.0%
Total $1,908 100.0% $6,407 100.0% $2,866 100.0%
------ ------ ------ ------ ------ ------
Investment securities:
Federal agency obligations 23,065 63.8 2,315 21.8 1,861 55.2
State agencies and commercial paper 4,248 11.8 3,246 30.6 1,323 3.6
FHLMC common stock 6,864 19.0 3,543 33.4 3,905 25.4
----- ---- ----- ---- ----- ----
Subtotal 34,177 94.6 9,104 85.8 7,089 84.2
FHLB stock 1,950 5.4 1,508 14.2 1,600 15.8
----- ---- ----- ---- ----- ----
Total investment securities and FHLB stock $36,127 100.0% $10,612 100.00% $8,689 100.0%
======= ====== ======= ======= ====== ======
Average remaining life or term to repricing, 3 Years 3 Years 3 Years
</TABLE>
During fiscal 2000 the market rates paid on investment securities
increased. During fiscal 2000 we invested primarily in federal and state agency
securities with maturities of one to five years, some of which are callable
within one to three years from date of purchase.
20
<PAGE>
Sources of Funds
--------------------------------------------------------------------------------
General. Deposits have traditionally been the principal source of our funds
for use in lending and for other general business purposes. In addition to
deposits, we derive funds from loan repayments, cash flows generated from
operations, which includes interest credited to deposit accounts, repurchase
agreements entered into with commercial banks and FHLB of Atlanta advances.
Contractual loan payments are a relatively stable source of funds, while
deposit inflows and outflows and the related cost of such funds have varied
widely. Borrowings may be used on a short-term basis to compensate for
reductions in deposits or deposit inflows at less than projected levels and may
be used on a longer-term basis to support expanded lending activities.
Deposits. We attract both short-term and long-term deposits from the
general public by offering a wide assortment of accounts and rates. We have been
required by market conditions to rely on short-term accounts and other deposit
alternatives that are more responsive to market interest rates than the passbook
accounts and fixed interest rate, fixed-term certificates that were our primary
source of deposits in the past. We offer regular passbook accounts, checking
accounts, various money market accounts, fixed-rate long-term certificates with
varying maturities, $100,000 or above jumbo certificates of deposit and
individual retirement accounts. Certain of our jumbo certificates which have
matured revert to a passbook rate and are reflected in the tables as passbook
accounts. We do not solicit brokered deposits due to our ability historically to
attract funds from our local markets or borrow from the FHLB at lower rates.
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by us at the periods indicated.
At March 31,
-------------------------------------
2000 1999 1998
-------------------------------------
(In Thousands)
Passbook and statement accounts $14,574 $14,307 $12,443
NOW and Super NOW accounts 26,763 25,914 21,080
Money market accounts 11,257 11,613 8,349
One-to five-year fixed-rate certificates 103,029 97,508 91,996
Six-month and 91 day certificates 2,445 3,373 3,246
Jumbo certificates 500 300 1,050
--- --- -----
Total $158,568 $153,015 $138,164
======== ======== ========
21
<PAGE>
The following table sets forth the change in the dollar amount of savings
deposits in the various types of deposit programs offered by us for the periods
indicated.
Year Ended March 31,
-----------------------------------
2000 1999 1998
-----------------------------------
(In Thousands)
Passbook and statement accounts $ 267 $1,864 $ (135)
NOW and Super NOW accounts 849 4,834 5,504
Money market accounts (356) 3,264 (1,586)
One-to five-year fixed-rate certificates 5,521 5,512 18,179
Six-month and 91 day certificates (928) 127 (829)
Jumbo certificates 200 (750) 436
--- ---- ---
Total increase $5,553 $14,851 $21,569
====== ======= =======
The following table contains information pertaining to the average amount
of and the average rate paid on each of the following deposit categories for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Paid Paid Paid
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Deposit Category
Non-interest bearing demand deposits $ 6,601 ---% $4,909 ---% $2,944 ---%
Interest bearing demand deposits 29,146 2.73 26,027 2.96 23,715 2.96
Savings deposits 14,297 3.04 13,378 3.00 12,358 2.99
Time deposits 101,377 5.08 97,475 5.35 87,672 5.45
------- ------ ------
Total deposits $151,421 4.22% 141,789 4.50% $126,689 4.54%
======== ======= ========
</TABLE>
22
<PAGE>
The variety of deposit accounts we offer has allowed us to be competitive
in obtaining funds and has allowed us to respond with flexibility (by paying
rates of interest more closely approximating market rates of interest) to,
although not eliminate the threat of, disintermediation (the flow of funds away
from depository institutions such as thrift institutions into direct investment
vehicles such as government and corporate securities). In addition, we have
become much more subject to short-term fluctuations in deposit flows, as
customers have become more interest rate conscious. Our ability to attract and
maintain deposits, and our cost of funds, has been, and will continue to be,
significantly affected by money market conditions.
The following table sets forth our deposit flows during the periods
indicated.
Year Ended March 31,
--------------------------------------------
2000 1999 1998
--------------------------------------------
(Dollars in Thousands)
Opening balance $153,015 $138,164 $116,595
Net deposits (withdrawals) (827) 8,464 16,718
Interest credited 6,380 6,387 4,851
----- ----- -----
Ending balance 158,568 $153,015 $138,164
======= ======== ========
Net increase 5,553 $14,851 $21,569
Percent increase 3.63% 10.75% 18.50%
During the fiscal years ended March 31, 2000, 1999 and 1998 we emphasized
free checking accounts, increased our marketing efforts and remained competitive
in regard to the rates offered by competitors. Due to these efforts and the
opening of an additional branch location in Staunton in October of 1999, we
experienced an increase in both demand and time deposits during fiscal 2000. To
the extent that we may rely on sources of funds other than deposits, our
earnings may be adversely affected. We may use borrowings as an alternative
source of funds. See "- Borrowings."
23
<PAGE>
The following table shows rate information for our certificates of deposit
as indicated.
2.00- 3.01- 5.01- 6.01-
3.00% 5.00% 6.00% 7.00% Total
--------------------------------------------------------------------------------
(In Thousands)
March 31, 2000 $21 $37,443 $49,368 $19,142 $105,974
March 31, 1999 --- $29,790 $67,199 $4,192 $101,181
March 31, 1998 $49 $5,729 $74,112 $16,402 $96,292
The following table indicates the amount of the certificates of deposit by
time remaining until maturity as of March 31, 2000.
<TABLE>
<CAPTION>
Maturity
3 Months Over 3 to Over 12 Total
or less 12 Months Months
----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $13,193 $40,103 $37,377 $90,673
Certificates of deposit of $100,000 or more 1,523 7,038 6,740 15,301
Total certificates of deposit $14,716 $47,141 $44,117 $105,974
</TABLE>
24
<PAGE>
Borrowings
--------------------------------------------------------------------------------
As a member of the FHLB of Atlanta, we are required to own capital stock in
the FHLB of Atlanta and are authorized to apply for advances from the FHLB of
Atlanta. Each FHLB credit program has its own interest rate, which may be fixed
or variable, and range of maturities. The FHLB of Atlanta may prescribe the
acceptable uses to which these advances may be put, as well as limitations on
the size of the advances and repayment provisions. Our borrowings, from time to
time, also include securities sold under agreements to repurchase, with
mortgage-backed securities or other securities pledged as collateral. The
proceeds are utilized by us for general corporate purposes. At March 31, 2000,
we had $20,000,000 of securities sold under agreements to repurchase.
We generally utilize borrowings to supplement deposits when they are
available at a lower overall cost to us or they can be invested at a positive
rate of return.
The following table sets forth the maximum month-end balance, and average
balance and weighted average rate, of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances $42,000 $20,000 $32,000
</TABLE>
<TABLE>
<CAPTION>
Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Balance:
FHLB advances $32,583 5.7% $14,167 5.7% $25,917 5.7%
</TABLE>
25
<PAGE>
The following table sets forth information as to the our borrowings and the
weighted average interest rate paid on such borrowings at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------
2000 1999 1998
----------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase $20,000 --- ---
FHLB advances 37,000 19,000 18,000
Total Borrowings $57,000 $19,000 $18,000
Weighted average interest rate of borrowings 6.49% 5.60% 5.77%
</TABLE>
26
<PAGE>
Competition
--------------------------------------------------------------------------------
Community faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other thrift institutions, commercial banks and mortgage bankers
who also make loans secured by real estate located in our market area. We
compete for real estate loans principally on the basis of our interest rates and
loan fees, the types of loans and the quality of services provided to borrowers.
We face substantial competition in attracting deposits from other thrift
institutions, commercial banks, money market and mutual funds, credit unions and
other investment vehicles. Our ability to attract and retain deposits depends on
our ability to provide an investment opportunity that satisfies the requirements
of investors as to rate of return, liquidity, risk and other factors. We compete
for these deposits by offering a variety of deposit accounts at competitive
rates and convenient business hours.
We consider our primary market for deposits to be Augusta County and for
mortgage loans to be Augusta and Rockingham Counties and the Hampton Roads area.
We estimate that our market share of savings deposits in Augusta County is
approximately 10% and our share of mortgage loans in Augusta and Rockingham
Counties is less than 10%. The opening of an office by the Bank in April, 1997
in Virginia Beach, Virginia expanded the Bank's market area to the Hampton Roads
area of Virginia.
Regulation
--------------------------------------------------------------------------------
General. Community Bank is a federally chartered financial institution, the
deposits of which are federally insured. Accordingly, Community Bank is subject
to broad federal regulation and oversight extending to all its operations. The
Bank is a member of the FHLB of Atlanta and is subject to certain limited
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). As the savings and loan holding company of Community Bank,
Community Financial also is subject to federal regulation and oversight.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive authority
over the operations of savings associations. As part of this authority, we are
required to file periodic reports with the OTS and we are subject to periodic
examinations by the OTS. When an examination is conducted by the OTS, the
examiners may require us to provide for higher general or specific loan loss
reserves. Our last regular OTS examination was in October, 1999 and the
examiners did not require us to provide for higher general or specific loan loss
reserves.
27
<PAGE>
All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets, to fund the operations of the OTS.
Our OTS assessment for the fiscal year ended March 31, 2000, was $49,806.
Insurance of Accounts and Regulation by the FDIC. Community Bank is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions.
The FDIC's deposit insurance premiums are assessed through a risk-based
system, under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under this system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier
1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy,
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
Regulatory Capital Requirements. Federally insured savings associations,
such as Community Bank, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis. See Note 10 of the Notes to Consolidated Financial
Statements contained in Part II, Item 7 of this report for information on our
regulatory capital levels and applicable OTS requirements.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements.
Limitations on Dividends and Other Capital Distributions. OTS regulations
impose various restrictions on savings associations with respect to their
ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as Community Bank that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to net income for the
current year plus the previous two years net income, less capital distributions
paid over that same period. However, an association deemed to be in need of more
than normal supervision by the OTS may have its dividend authority restricted by
28
<PAGE>
the OTS. Community Bank may pay dividends in accordance with this general
authority.
Liquidity. All savings associations, including Community Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what we
include in liquid assets, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources" contained
in Part II, Item 6 of this report.
Qualified Thrift Lender Test. All savings associations, including Community
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At March 31, 2000,
Community Bank met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of Community Bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by Community Bank. An unsatisfactory rating may be used as the basis for
the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, Community Bank may be required to devote additional funds for
investment and lending in our local community. We were examined for CRA
compliance in October, 1999 and received a rating of "Satisfactory".
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of Community
Bank include Community Financial and any company which is under common control
with Community Bank. In addition, a savings association may not lend to any
affiliate engaged in activities not permissible for a bank holding company or
29
<PAGE>
acquire the securities of most affiliates. Community Bank's subsidiaries are not
deemed affiliates, however; the OTS has the discretion to treat subsidiaries of
savings associations as affiliates on a case by case basis.
Holding Company Regulation. Community Financial is a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such, we are
required to register and file reports with the OTS and are subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
us and our non-savings association subsidiaries which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association.
As a unitary savings and loan holding company, we generally are not subject
to activity restrictions. If we acquire control of another savings association
as a separate subsidiary, we or the Company would become a multiple savings and
loan holding company, and our activities and any of our subsidiaries (other than
Community Bank or any other SAIF-insured savings association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
Federal Securities Law. Our stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We are subject
to the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Community stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of Community may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
we meet specified current public information requirements, each affiliate of
ours is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
30
<PAGE>
Federal and State Taxation
--------------------------------------------------------------------------------
Federal Taxation. Savings associations such as Community Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which could, within specified formula limits, be taken
as a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" was computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) could be computed under either the experience method or the percentage
of taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repealed the above-described
reserve method of accounting (including the percentage of taxable income method)
used by many thrift institutions to calculate their bad debt reserve for federal
income tax purposes. Thrift institutions with $500 million or less in assets
may, however, continue to use the experience method. As a result, the Bank must
recapture as taxable income that portion of the reserve that exceeds the amount
that could have been taken under the experience method for post- 1987 tax years.
At March 31, 2000, Community Bank's post-1987 excess reserves still to be
recaptured amounted to approximately $845,000. This amount will be recaptured
into taxable income ratably over the next four years. The legislation also
requires thrift institutions to account for bad debts for federal income tax
purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995.
In addition to the regular income tax, corporations, including savings
associations such as Community Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
31
<PAGE>
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 2000, Community Bank's Excess for tax purposes totaled
approximately $2.3 million.
Community Financial and Community Bank file consolidated federal income tax
returns on a fiscal year basis. Savings associations, such as the Community
Bank, that file federal income tax returns as part of a consolidated group are
required by applicable Treasury regulations to reduce their taxable income for
purposes of computing the percentage bad debt deduction for losses attributable
to activities of the non-savings association members of the consolidated group
that are functionally related to the activities of the savings association
member.
Our federal income tax returns and our consolidated subsidiary for the last
three years are open to possible audit by the Internal Revenue Service (the
"IRS"). No returns are being audited by the IRS at the current time. In the
opinion of management, any examination of still open returns (including returns
of subsidiaries and predecessors of, or entities merged into, Community Bank)
would not result in a deficiency which could have a material adverse effect on
the financial condition of Community Financial and our consolidated
subsidiaries.
Virginia Taxation. We conduct our business in Virginia and consequently are
subject to the Virginia corporate income tax. The Commonwealth of Virginia
imposes a corporate income tax on a basis similar to federal income tax at a
rate of 6% on Virginia taxable income.
Executive Officers
--------------------------------------------------------------------------------
The following sets forth the name, age and information as to the business
experience during the past five years of each of the executive officers of
Community Financial. Except as otherwise indicated, the persons named have
served as officers of Community Financial since it became the holding company of
Community Bank, and all offices and positions described below are also with
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 Vice President of Community Bank. From
December 1993 to January 1996, he was President and Chief Executive Officer of
Seaboard Bancorp.
32
<PAGE>
R. Jerry Giles. Mr. Giles, age 51, is our Chief Financial Officer. He was
appointed to his current position in April 1994. Prior to joining the Company,
Mr. Giles was a Certified Public Accountant in public accounting and the Chief
Financial Officer with a savings bank for eleven years.
Patsy Clem. Ms. Clem, age 60, is our Controller, a position she has held
since July, 1986. Ms. Clem has been employed by us since 1983 in the Accounting
Department.
Chris P. Kyriakides. Mr. Kyriakides, age 37, is our Vice President and
Regional President, a position he has held since January, 1997. Prior to joining
the Company Mr. Kyriakides was Chief Operations Officer of Seaboard Savings Bank
in Virginia Beach, Virginia.
Benny N. Werner. Mr. Werner, age 51, is our Senior Vice President of Retail
Banking, a position he has held since May 1998. Prior to joining the Company Mr.
Werner was employed by Crestar for three years as President-Warrenton area and
employed by Jefferson Savings and Loan, Warrenton, Virginia as Senior Vice
President of Retail Banking for seventeen years.
There is no family relationship between any of the executive officers of
the Company or its subsidiaries. None was selected as an officer pursuant to any
arrangement or understanding between him or her and any other person. The term
of office for each executive officer of Community expires at the first meeting
of the Board of Directors after the next annual meeting of stockholders
following his or her election or appointment and until his or her successor in
chosen and qualified, or until their earlier resignation or removal.
Employees
--------------------------------------------------------------------------------
At March 31, 2000, we had a total of 138 employees, including 22 hourly
employees. None of our employees are represented by any collective bargaining
group. Management considers our employee relations to be good.
33
<PAGE>
Item 2. Description of Property
--------------------------------------------------------------------------------
The following table sets forth information at March 31, 2000, with respect
to our offices and equipment.
<TABLE>
<CAPTION>
Net Book
Owned or Value at
Leased Gross Square March 31,
Location Opened Expiration Footage 2000
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
38 North Central Avenue
Staunton, Virginia 1965 Owned 17,000 $2,901,000
Rte 250 West
Waynesboro, Virginia 1989 Owned 5,300 960,000
Route 340 and 608
Stuarts Draft, Virginia 1993 Owned 2,074 358,000
5300 Kemps River Drive
Virginia Beach, Virginia 1997 2002 2,400 64,000
621 Nevan Road
Virginia Beach, Virginia 1998 2038 13,000 986,000
101 Community Way
Staunton, Virginia 1999 2039 4,500 879,000
Community First Mortgage
9011 Arboretum Parkway
Richmond, Virginia 1997 2003 1,800 10,000
</TABLE>
Our accounting and record-keeping activities are maintained on an in-house
computer system. The net book value of our computer equipment at March 31, 2000
was $965,518.
For additional information regarding our property and equipment and
operating leases, see notes 3 and 14 of Notes to Consolidated Financial
Statements in Item 7, "Financial Statements" of this Annual Report, which is
incorporated herein by reference.
34
<PAGE>
Item 3. Legal Proceedings
--------------------------------------------------------------------------------
There are no material pending legal proceedings to which we or our direct
or indirect subsidiaries is a party or to which any of our property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
--------------------------------------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 2000.
PART II
Item 5. Market for Common Equity and Related Security Holder Matters
--------------------------------------------------------------------------------
The information contained under the caption "Common Stock" on page 40 of
the Registrant's Annual Report to Stockholders attached hereto as Exhibit 13 is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
--------------------------------------------------------------------------------
The information under the caption "Management's Discussion and Analysis of
Operations" on pages 9 through 16 of the Registrant's Annual Report to
Stockholders attached hereto as Exhibit 13 is incorporated herein by reference.
Item 7. Financial Statements
--------------------------------------------------------------------------------
The Financial Statements on pages 17 through 38 in the Registrant's Annual
Report to Stockholders attached hereto as Exhibit 13 is incorporated herein by
reference.
Financial Statement schedules have been omitted because they are not
applicable or because the information is otherwise furnished.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
--------------------------------------------------------------------------------
None.
35
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
--------------------------------------------------------------------------------
Information concerning directors of the Registrant contained under the
caption "Proposal I - Election of Directors" in our definitive Proxy Statement
is incorporated herein by reference from our definitive Proxy Statement for the
2000 Annual Meeting of Stockholders a copy of which will be filed not later than
120 days after the close of the fiscal year.
Information concerning executive officers is set forth in Part I of this
report under the caption "Executive Officers," and is incorporated herein by
reference.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the last fiscal year ended March 31, 2000, all Section 16(a) filing
requirements applicable to our officers, directors and greater than 10 percent
beneficial owners were complied with.
Item 10. Executive Compensation
--------------------------------------------------------------------------------
Information concerning executive compensation contained under the caption
"Executive Compensation" in our definitive Proxy Statement is incorporated
herein by reference from our definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management contained under the caption "Stock Ownership of Community Financial
Corporation Common Stock - Stock Ownership of Directors and Executive Officers"
in our Proxy Statement is incorporated herein by reference from our definitive
Proxy Statement for the 2000 Annual Meeting of Stockholders, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
36
<PAGE>
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------------------------------
Information concerning certain relationships and transactions contained
under the caption "Certain Transactions" in our definitive Proxy Statement is
incorporated herein by reference from our definitive Proxy Statement for the
2000 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Item 13. Exhibits and Reports on 8-K
--------------------------------------------------------------------------------
(a) Exhibits:
<TABLE>
<CAPTION>
Regulation S-K Document Reference to Prior
Exhibit Number Filing or Exhibit
Number Attached
Hereto
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquid, or None
3 Amended and Restated Articles of Incorporation and Bylaws ***
4 Instruments defining the rights of security holders, including ****
9 Voting trust agreement None
10 Material contracts:
Stock Option and Incentive Plan *
Employment Agreement for P. Douglas Richard 10.1
Employee Stock Ownership Plan **
1996 Incentive Plan ***
Supplemental Executive Retirement Plan ****
11 Statement re computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter on change in certifying accountant None
18 Letter on change in accounting principles None
21 Subsidiaries of Registrant ****
37
<PAGE>
22 Published report regarding matters submitted to vote of security None
23 Consent of Experts 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
</TABLE>
*Filed on May 19, 1989 as exhibits to the Registrant's Registration
Statement No. 33-28817 on Form S-4. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
**Filed on June 28, 1993, as Exhibit 10 to the Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1993. Such previously filed document is
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
***Filed on July 5, 1996 as exhibits to the Registrant's Definitive Proxy
Statement, File Number 000-18265 on Schedule 14A. Such previously filed document
is hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
****Filed on June 29, 1999 as Exhibit 10 to the Annual Report on Form
10-KSB for the fiscal year ended March 31, 1999. Such previously filed document
is hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
(b) Reports on Form 8-K:
On February 2, 2000, the Registrant filed its press release dated January
24, 2000 under a current report on Form 8-K, announcing the resignation of
Thomas W. Winfree as the Registrant's President and Chief Executive Officer and
the appointment of P. Douglas Richard as his replacement.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNITY FINANCIAL CORPORATION
Date: June 28, 2000 By: /s/ P. Douglas Richard
------------------------------------
P. Douglas Richard
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ P. Douglas Richard By: /s/ James R. Cooke, Jr.
----------------------------- ------------------------------
P. Douglas Richard James R. Cooke, Jr.
President and Chief Chairman of the Board
Executive Officer and Director
(Principal Executive Officer)
Date: June 28, 2000 Date: June 28, 2000
By: /s/ Jane C. Hickok By: /s/ Charles F. Andersen
----------------------------- ------------------------------
Jane C. Hickok Charles F. Andersen
Vice Chairman of the Board Director
and Director
Date: June 28, 2000 Date: June 28, 2000
By: /s/ Dale C. Smith By: /s/ Kenneth L. Elmore
----------------------------- ------------------------------
Dale C. Smith Kenneth L. Elmore
Director Director
Date: June 28, 2000 Date: June 28, 2000
By: /s/ R. Jerry Giles By: /s/ Charles W. Fairchilds
----------------------------- ------------------------------
R. Jerry Giles Charles W. Fairchilds
Chief Financial Officer Director
(Principal Financial and
Accounting Officer)
Date: June 28, 2000 Date: June 28, 2000
39
<PAGE>
