SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File No. 000-16461
COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0868361
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
68149 Main Street
Blountsville, Alabama 35031
(Address of principal executive offices)
(205) 429-1000
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 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| no |_|
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy of information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2):
yes |_| no |X|
As of March 31, 2003, the aggregate market value of the registrant's voting
stock held by non-affiliates was $27,000,000 based upon a sale price of $10.00
per share on March 31, 2003.
As of March 31, 2003, there were 4,637,314 shares of the registrant's
common stock, $.10 par value shares, outstanding.
PART 1
Item 1 - Business
General
Community Bancshares, Inc. (the "Company") is a Delaware corporation and a bank
holding company registered with the Board of Governors of the Federal Reserve
System (the "Federal Reserve") under the Bank Holding Act of 1956, as amended
(the "Bank Holding Company Act"). The Company was organized in 1983 and
commenced business in 1985. The Company has one bank subsidiary, Community Bank
("Community Bank" or "the Bank"), an Alabama banking corporation which conducts
a general commercial banking business in north and west-central Alabama. At
December 31, 2002, the Company and its subsidiaries had total assets of
approximately $567,596,000, deposits of approximately $459,464,000, and
shareholders' equity of approximately $40,311,000. The Company maintains its
principal executive offices at 68149 Main Street, Blountsville, Alabama 35031,
and its telephone number is (205) 429-1000.
Subsidiary Bank
At December 31, 2002, Community Bank conducted business through 20 locations in
seven counties in north Alabama, and two counties in west-central Alabama. It
offers a wide range of commercial and retail banking services, including savings
and time deposit accounts, personal and commercial loans and personal and
commercial checking accounts. The majority of loans by Community Bank are to
individuals and small to mid-sized businesses in Alabama. Community Bank seeks
to provide superior service to its customers and to become a vital component of
each of the communities it serves.
Community Bank operates in small non-urban communities. At December 31, 2002 the
Bank had locations in Blountsville, Cleveland, Oneonta, Snead and West Blount in
Blount County, Alabama; Rogersville in Lauderdale County, Alabama; Elkmont in
Limestone County, Alabama; Gurley, Meridianville and New Hope in Madison County,
Alabama; Demopolis in Marengo County, Alabama; Hamilton in Marion County,
Alabama; Falkville and Hartselle in Morgan County, Alabama; Uniontown in Perry
County, Alabama; and Double Springs and Haleyville in Winston County, Alabama.
At December 31, 2002, Community Bank operated 18 full service offices as well as
two paying and receiving offices located within Wal-Mart stores, which primarily
open deposit accounts, cash checks and receive deposits and loan payments.
In the first half of 2002, Community Bank sold its two Pulaski, Tennessee
offices, its Rainsville and Ft. Payne, Alabama offices and its Marshall County,
Alabama locations. The Marshall County locations included one banking office in
Boaz, Alabama, one in Albertville, Alabama, two in Arab, Alabama and two in
Guntersville, Alabama. Two of the total ten offices sold were paying and
receiving offices located in Wal-Mart stores, one in Ft. Payne, Alabama and one
in Guntersville, Alabama.
Subsidiaries of Community Bank
1st Community Credit Corporation currently operates 12 finance company offices
in 12 Alabama communities, including Albertville, Arab, Athens, Boaz, Cullman,
Decatur, Gadsden, Hartselle, Huntsville, Fort Payne, Jasper and Oneonta,
Alabama. 1st Community Credit Corporation provides loans to a market segment
traditionally not pursued by Community Bank. These loans have typically
generated higher yields and involved greater risk than standard commercial bank
loans. At December 31, 2002, 1st Community Credit Corporation's loan portfolio
totaled approximately $27,937,000.
Community Insurance Corp. serves as an agent in the sale of title, property,
casualty and life insurance products to individuals and businesses through an
office in Huntsville, Alabama. Community Insurance Corp. owns 100% of the
outstanding shares of capital stock of Southern Select Insurance, Inc., a
managing general agency which brokers agricultural, commercial and personal
insurance products. Both Community Insurance Corp. and Southern Select
Insurance, Inc. are located in Huntsville, Alabama.
1
Community Appraisals, Inc., a subsidiary of Community Bank, operates a real
estate appraisal business through its office located at the Company's
headquarters complex in Blountsville, Alabama. This subsidiary provides
appraisal services in connection with the lending activities of Community Bank
and 1st Community Credit Corporation.
Market Areas
At December 31, 2002, the Company's principal market areas were located in north
Alabama (Blount, Cullman, DeKalb, Etowah, Lauderdale, Limestone, Madison,
Marshall and Morgan Counties), northwest Alabama (Marion and Winston Counties),
and west-central Alabama (Marengo and Perry Counties). All of the Company's
banking and finance company offices are located in relatively rural areas and
place an emphasis on personal service.
With the exception of Blount, Marengo, Marion, Perry and Winston Counties in
Alabama, the markets in which the Company operates share one common
characteristic: each is close enough to Huntsville, Alabama, to share in the
economic and employment benefits of that city. Huntsville is located in Madison
County. Unemployment for Madison County was 3.8% for December 2002 as compared
to 5.8% for Alabama during that period, as reported by the Alabama Department of
Industrial Relations. The Huntsville Metropolitan Statistical Area ("MSA")
possesses a diverse economic base with employers that include the military and
aerospace industries, manufacturers of durable goods, machinery, transportation,
as well as retailers and service industries. Agriculture, in the form of
soybeans, hay, corn, cotton, tobacco, dairy and poultry farming, also makes up a
significant portion of the Huntsville MSA's economy.
Similarly, Blount County is close enough to Birmingham, Alabama, to share in the
economic and employment benefits of that city. Jefferson County, in which
Birmingham is located, had a 4.5% unemployment rate for December 2002, according
to the Alabama Department of Industrial Relations. The Birmingham area still
retains some of the steel and related manufacturers that built the city, but the
economy is now more diverse with the University of Alabama in Birmingham and the
healthcare industry providing many jobs.
Marion and Winston Counties lie in northwest Alabama, near the Mississippi
border. In both counties the manufacturing sector provides more jobs and higher
sales or receipts than the wholesale, retail and service sectors. Manufactured
housing and furniture production are two prominent industries in these counties,
and both industries have experienced recent economic slowdowns. Marion County
was reported to have an unemployment rate of 10.6% for December 2002, according
to the Alabama Department of Industrial Relations. Winston County was reported
to have an unemployment rate of 9.4% for December 2002, according to the Alabama
Department of Industrial Relations.
Marengo and Perry Counties are located in west-central Alabama. Manufacturing
provides more jobs in these counties than the wholesale, retail and service
sectors. In addition, catfish farming and the timber industry are important
components in the economy of these counties. Marengo County's unemployment rate
reported by the Alabama Department of Industrial Relations for December 2002 was
4.4%. Perry County was reported to have an unemployment rate of 10.0% for
December 2002, as reported by the Alabama Department of Industrial Relations.
While certain markets have experienced an economic downturn, overall, the
Company remains optimistic about current economic prospects in its market areas,
and the Company attempts to assist those local economies by returning the
deposits of its customers to the communities from which they come in the form of
loans.
Lending Activities
Community Bank's lending activities include commercial, real estate and consumer
loans. Community Bank's commercial loan services include term-loans, lines of
credit and agricultural loans. A broad range of short to medium term commercial
loans, both secured and unsecured, are made available to businesses for working
capital, business expansion and the purchase of equipment and machinery.
Community Bank's real estate lending activities include fixed and adjustable
rate residential mortgage loans, construction loans, second mortgages, home
improvement loans and home equity lines of credit. Community Bank's consumer
lending services include loans for automobiles, recreation vehicles and boats,
as well as personal (secured and unsecured) and deposit account secured loans.
2
Competition
The banking business in Alabama is highly competitive with respect to loans,
deposits and other financial services and is dominated by a number of major
banks and bank holding companies which have numerous offices and affiliates
operating over wide geographic areas. Community Bank competes for deposits,
loans and other business with these banks as well as with savings and loan
associations, credit unions, mortgage companies, insurance companies and other
local financial institutions. Many of the major commercial banks operating in
Community Bank's service areas offer services such as international banking and
investment and trust services, which are not offered by Community Bank.
Additionally, the competitive environment for both the Company and Community
Bank may be materially affected by the enactment of the Gramm-Leach-Bliley
Financial Services Modernization Act (the "GLBA"). This law modified or
eliminated many barriers between investment banking, commercial banking and
insurance underwriting and sales. See "Supervision and Regulation". These
changes in the law have created and may continue to create greater competition
for the Company and Community Bank by increasing the number and types of
competitors and by encouraging increased consolidation within the financial
services industry.
Employees
At December 31, 2002, the Company and its subsidiaries had approximately 307
full-time equivalent employees. The Company and its subsidiaries provide a
variety of group life, health and accident insurance, retirement and stock
ownership plans and other benefit programs for their employees. The Company
maintains continuing education and training programs for its employees, designed
to prepare the employees for positions of increasing responsibility in
management or operations. Membership and participation by employees in
professional and industry organizations is encouraged and supported by the
Company.
Supervision and Regulation
The following is a brief summary of the regulatory environment in which the
Company and its subsidiaries operate and is not designed to be a complete
discussion of all statutes and regulations affecting such operations, including
those federal and state statutes and regulations specifically mentioned herein.
Changes in the laws and regulations applicable to the Company and its
subsidiaries can affect the operating environment of the Company and its
subsidiaries in substantial and unpredictable ways. The Company cannot
accurately predict whether legislation will ultimately be enacted, and, if
enacted, the ultimate effect that it or implementing regulations would have on
its or its subsidiaries financial condition or results of operations.
The Company is a bank holding company and is registered as such with the Federal
Reserve. The Company is subject to regulation and supervision by the Federal
Reserve and is required to file with the Federal Reserve annual reports and such
other information as the Federal Reserve may require. The Federal Reserve also
conducts examinations of the Company.
The Federal Reserve takes the position that a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary bank
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the Federal Reserve's position that, in serving as a source of strength to
its subsidiary bank, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary bank during
periods of financial stress or adversity and should maintain the financial
flexibility and capital raising capacity to obtain additional resources for
assisting its subsidiary bank.
Community Bank is incorporated under the laws of the State of Alabama and is
subject to the applicable provisions of Alabama banking laws and to regulation
and examination by the Alabama State Banking Department. Examinations include a
review of Community Bank's condition and resources, its mode of conducting and
managing its affairs, the actions of its directors, the investment of its funds,
the safety and prudence of its management, compliance with its charter and law
in the administration of its affairs and other aspects of Community Bank's
operations. State statutes in Alabama relate to such matters as loans,
mortgages, consolidations, required reserves, allowable investments, issuance of
securities, payment of dividends, establishment of branches, filing of periodic
reports and other matters affecting the business of Community Bank.
3
Deposits in Community Bank are insured, up to applicable limits, by the Federal
Deposit Insurance Corporation (the "FDIC") and, therefore, Community Bank is
subject to provisions of the Federal Deposit Insurance Act ("FDIA"). Community
Bank's primary federal regulator is the FDIC, and as a result, Community Bank is
subject to examination and regulation by the FDIC. The FDIC is authorized to
terminate the deposit insurance of any depository institution, such as Community
Bank, whose deposits are insured by the FDIC if the FDIC determines, after a
hearing, that the institution or its directors have engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations as an insured institution, or has violated any applicable law,
regulation, order, condition imposed in writing by the FDIC in connection with
the granting of any application or other request by the depository institution
or any written agreement entered into with the FDIC.
Each federal banking regulatory agency is authorized to issue a cease and desist
order to any financial institution or institution-affiliated party for which the
agency is the primary federal banking regulator (which in the case of Community
Bank, is the FDIC and, in the case of the Company, is the Federal Reserve) if
the agency determines, after a hearing, that the institution or
institution-affiliated party has engaged, is engaging or is reasonably believed
to be about to engage, in unsafe or unsound practices, or has violated, is
violating or is reasonably believed to be about to violate a law, rule or
regulation, or any condition imposed in writing by the agency in connection with
the granting of any application or other request by the institution or any
written agreement entered into with the agency. The cease and desist order may
require the institution or institution-affiliated party to cease and desist from
the violation or practice, including requiring the institution or
institution-affiliated party to make restitution or reimbursement against loss,
restrict the institution's growth, dispose of loans or assets, rescind
agreements or contracts, employ qualified officers or employees and take other
actions determined to be appropriate by the agency. The order may also limit the
activities of the institution.
The Company and Community Bank are subject to the provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA
expanded the regulatory powers of federal banking agencies to permit prompt
corrective actions to resolve problems of insured depository institutions
through the regulation of banks and their affiliates, including bank holding
companies. The provisions are designed to minimize the potential loss to
depositors and to FDIC insurance funds if financial institutions default on
their obligations to depositors or become in danger of default. Among other
things, FDICIA provides a framework for a system of supervisory actions based
primarily on the capital levels of financial institutions.
FDICIA also provides for a risk-based deposit insurance premium structure. The
FDIC is an independent federal agency established originally to insure the
deposits, up to prescribed statutory limits, of federally insured banks and to
preserve the safety and soundness of the banking industry. The FDIC maintains
two separate insurance funds: the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"). Community Bank's deposit accounts are
insured by the FDIC under the BIF to the maximum extent permitted by law.
Community Bank pays deposit insurance premiums to the FDIC based on a risk-based
assessment system established by the FDIC for all BIF-member institutions.
Under FDIC regulations, institutions are assigned to one of three capital groups
for insurance premium purposes (well capitalized, adequately capitalized and
undercapitalized). These three groups are then divided into subgroups which are
based on supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Assessment rates vary depending
upon the assessment classification. In addition, regardless of the potential
risk to the insurance fund, federal law requires the FDIC to establish
assessment rates that will maintain each insurance fund's ratio of reserves to
insured deposits at 1.25%. During 2001 and for the first semiannual assessment
period of 2002, assessment rates for BIF-insured institutions ranged from 0% of
insured deposits for well-capitalized institutions with minor supervisory
concerns to .27% of insured deposits for undercapitalized institutions with
substantial supervisory concerns. The assessment rate schedule is subject to
change by the FDIC and, accordingly, the assessment rate could increase or
decrease in the future.
In addition to deposit insurance assessments, the FDIC is authorized to collect
assessments against insured deposits to be paid to the Finance Corporation
("FICO") to service FICO debt incurred in the 1980s. The FICO assessment rate is
adjusted quarterly. The average annual assessment rate in 2002 was 1.75 cents
per $100 of assessable deposits. For the first quarter of 2003, the FICO
assessment rate for such deposits will be 1.65 cents per $100. Community Bank's
assessment expense for the year ended December 31, 2002 equaled approximately
$631,000.
4
The federal banking regulatory agencies have adopted a set of guidelines
prescribing safety and soundness standards pursuant to FDICIA. The guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal stockholder. In addition, the agencies
adopted regulations that authorize an agency to order an institution that has
been given notice by an agency that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If the institution fails to
submit an acceptable compliance plan or fails to implement an accepted plan, the
agency must issue an order directing action to correct the deficiency and may
issue an order directing other actions be taken, including restricting asset
growth, restricting interest rates paid on deposits, and requiring an increase
in the bank's ratio of tangible equity to assets. If an institution fails to
comply with such an order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties.
FDICIA establishes a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, the federal banking
regulatory agencies are required to rate supervised institutions on the basis of
five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three under-capitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Under certain
circumstances, an institution may be downgraded to a category lower than that
warranted by its capital levels, and subjected to the supervisory restrictions
applicable to institutions in the lower capital category. Generally, subject to
a narrow exception, FDICIA requires a federal banking regulatory agency to
appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking regulatory agencies have specified by
regulation the relevant capital level for each category.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's total assets at the time it becomes
undercapitalized or the amount necessary to bring the institution into
compliance with all applicable capital standards. If a depository institution
fails to submit an acceptable plan, it is treated as if it is significantly
undercapitalized. Significantly undercapitalized depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator. At December 31, 2002, Community Bank was well
capitalized for prompt corrective action purposes.
The Company is required to comply with the risk-based capital guidelines
established by the Federal Reserve, and other tests relating to capital adequacy
which the Federal Reserve adopts from time to time. Under the risk-based capital
assessment system, assets are weighted by a risk factor and a ratio is
calculated by dividing the qualifying capital by the risk-weighted assets. Tier
I capital generally includes common stock and retained earnings. Total capital
is comprised of Tier I capital and Tier II capital, which includes certain
allowances for loan losses and certain subordinated debt. The Company's Tier I
and total capital ratios exceeded the required minimum levels as of December 31,
2002.
The Company is a legal entity which is separate and distinct from its
subsidiaries. There are various legal limitations on the extent to which
Community Bank may extend credit, pay dividends or otherwise supply funds to the
Company or its affiliates. In particular, Community Bank is subject to certain
restrictions imposed by federal law on any extensions of credit to the Company
or, with certain exceptions, other affiliates.
5
The primary source of funds for dividends paid to the Company's shareholders is
dividends paid to the Company by Community Bank. Various federal and state laws
limit the amount of dividends that Community Bank may pay to the Company without
regulatory approval. Under Alabama law, an Alabama state bank, such as Community
Bank, may not pay a dividend in excess of 90% of its net earnings until the
bank's surplus is equal to at least 20% of its capital. Community Bank is also
required by Alabama law to obtain the prior approval of the Superintendent of
the Alabama State Banking Department in order to pay a dividend if the total of
all the dividends declared by Community Bank in any calendar year will exceed
the total of Community Bank's net earnings (as defined by statute) for that year
and its retained net earnings for the preceding two years, less any required
transfers to surplus. At December 31, 2002, Community Bank could not have
declared or paid any dividend without such approval. In addition, no dividends
may be paid from Community Bank's surplus without the prior written approval of
the Superintendent of the Alabama State Banking Department. Under FDICIA,
Community Bank may not pay any dividends, if after paying the dividend it would
be undercapitalized under applicable capital requirements. The FDIC also has the
authority to prohibit Community Bank from engaging in business practices which
the FDIC considers to be unsafe or unsound, which, depending on the financial
condition of Community Bank, could include the payment of dividends.
In addition, the Federal Reserve has the authority to prohibit the payment of
dividends by a bank holding company, such as the Company, if its actions
constitute unsafe or unsound practices. In 1985, the Federal Reserve issued a
policy statement on the payment of cash dividends by bank holding companies,
which outlined the Federal Reserve's view that a bank holding company that is
experiencing earnings weaknesses or other financial pressures should not pay
cash dividends that exceed its net income, that are inconsistent with its
capital position or that could only be funded in ways that weaken its financial
health, such as by borrowing or selling assets. The Federal Reserve indicated
that, in some instances, it may be appropriate for a bank holding company to
eliminate its dividends.
The federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") permits adequately capitalized and managed bank holding companies to
acquire control of banks in states other than their home states, subject to
federal regulatory approval, without regard to whether such a transaction is
prohibited by the laws of any state. IBBEA permits states to continue to require
that an acquired bank have been in existence for a certain minimum time period,
which may not exceed five years. A bank holding company may not, following an
interstate acquisition, control more than 10% of the nation's total amount of
bank deposits or 30% of bank deposits in the relevant state (unless the state
enacts legislation to raise the 30% limit). States retain the ability to adopt
legislation to effectively lower the 30% limit. Federal banking regulators may
approve merger transactions involving banks located in different states, without
regard to laws of any state prohibiting such transactions; except that, mergers
may not be approved with respect to banks located in states that, prior to June
1, 1997, enacted legislation prohibiting mergers by banks located in such state
with out-of-state institutions. Also, states may continue to require that an
acquired bank have been in existence for a certain minimum period of time, which
may not exceed five years. Federal banking regulators may permit an out-of-state
bank to open new branches in another state if such state has enacted legislation
permitting interstate branching. Affiliated institutions are authorized to
accept deposits for existing accounts, renew time deposits and close and service
loans for affiliated institutions without being deemed an impermissible branch
of the affiliate.
The federal Community Reinvestment Act of 1977 ("CRA") and its implementing
regulations are intended to encourage regulated financial institutions to meet
the credit needs of their local community or communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
such financial institutions. The regulations provide that the appropriate
regulatory authority will assess CRA reports in connection with applications for
establishment of domestic branches, acquisitions of banks or mergers involving
bank holding companies. An unsatisfactory CRA rating may serve as a basis to
deny an application to acquire or establish a new bank, to establish a new
branch or to expand banking services. At December 31, 2002, the Company had a
"satisfactory" CRA rating.
The federal Gramm-Leach-Bliley Act of 1999 (the "GLBA") eliminated prohibitions
in the Glass-Steagall Act against a bank associating with a company engaged
principally in securities activities. The GLBA also permits a bank holding
company to elect to become a "financial holding company," which would expand the
powers of the bank holding company. The repeal of the Glass-Steagall Act
provisions and the availability of financial holding company powers became
effective on March 11, 2000. Financial holding company powers relate to
financial activities that are determined by the Federal Reserve to be financial
in nature, incidental to an activity that is financial in nature, or
complementary to
6
a financial activity (provided that the complementary activity does not pose a
safety and soundness risk). The GLBA itself defines certain activities as
financial in nature, including lending activities, underwriting and selling
insurance, providing financial or investment advice, underwriting, dealing and
making markets in securities and merchant banking. In order to qualify as a
financial holding company, a bank holding company's depository subsidiaries must
be both well capitalized and well managed, and must have at least a satisfactory
rating under the CRA. The bank holding company must also declare its intention
to become a financial holding company to the Federal Reserve and certify that
its depository subsidiaries meet the capitalization and management requirements.
The GLBA establishes the Federal Reserve as the umbrella regulator of financial
holding companies, with subsidiaries of the financial holding company being more
specifically regulated by other regulatory authorities, such as the Securities
and Exchange Commission, the Commodity Futures Trading Commission and state
securities and insurance regulators, based upon the subsidiaries' particular
activities. The GLBA also provides for minimum federal standards of privacy to
protect the confidentiality of personal financial information of customers and
to regulate use of such information by financial institutions. A bank holding
company that does not elect to become a financial holding company remains
subject to the Bank Holding Company Act. The Company has not determined whether
it will elect to become a financial holding company.
The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act (the "USA Patriot Act") which was signed
into law by President Bush on October 26, 2001, is designed to deny terrorists
and others the ability to obtain access to the United States financial system.
Title III of the USA Patriot Act is the International Money Laundering Abatement
and Anti-Terrorist Financing Act of 2001. Among its provisions, the USA Patriot
Act mandates or will require financial institutions to implement additional
policies and procedures with respect to, or additional measures, including
additional due diligence and recordkeeping, designed to address any or all of
the following matters, among others: money laundering; suspicious activities and
currency transaction reporting; and currency crimes. The U.S. Department of the
Treasury in consultation with the Federal Reserve Board and other federal
financial institution regulators has promulgated rules and regulations
implementing the USA Patriot Act which (i) prohibit U.S. correspondent accounts
with foreign banks that have no physical presence in any jurisdiction; (ii)
require financial institutions to maintain certain records for correspondent
accounts of foreign banks; (iii) require financial institutions to produce
certain records relating to anti-money laundering compliance upon request of the
appropriate federal banking agency; (iv) require due diligence with respect to
private banking and correspondent banking accounts; (v) facilitate information
sharing between the government and financial institutions; and (vi) require
financial institutions to have in place a money laundering program. In addition,
an implementing regulation under the USA Patriot Act regarding verification of
customer identification by financial institutions has been proposed, although
such regulation has not yet been finalized. The Company has implemented and will
continue to implement the provisions of the USA Patriot Act, as such provisions
become effective. The Company currently maintains and will continue to maintain
policies and procedures to comply with the USA Patriot Act requirements. At this
time, the Company does not expect that the USA Patriot Act will have a
significant impact on the financial position of the Company.
On July 30,2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act"), which is intended to address systemic and structural
weaknesses of the capital markets in the United States that were perceived to
have contributed to the recent corporate scandals. The Sarbanes-Oxley Act
creates the Public Company Accounting Oversight Board (the "Board") to oversee
the conduct of audits of public companies. The duties of the Board include (i)
registering public accounting firms that prepare audit reports, (ii)
establishing auditing, quality control, ethics, independence and other standards
for the preparation of audit reports, (iii) conducting inspections of registered
public accounting firms and (iv) otherwise promoting high professional standards
among, and improving the quality of audit services offered by auditors of public
companies. The Board will be funded from assessments on public companies and
will be subject to the oversight of the Securities and Exchange Commission. In
addition, the Sarbanes-Oxley Act attempts to strengthen the independence of
public company auditors by, among other things, (i) prohibiting public company
auditors from providing certain non-audit services to their audit clients, (ii)
requiring a company's audit committee to preapprove all audit and non-audit
services being provided by its independent auditor, (iii) requiring the rotation
of audit partners and (iv) prohibiting an auditor from auditing a client that
has as its chief executive officer, chief financial officer, chief accounting
officer or controller a person that was employed by the auditor during the
previous year.
7
The Sarbanes-Oxley Act also attempts to enhance the responsibility of corporate
management by, among other things, (i) requiring the chief executive officer and
chief financial officer of public companies to provide certain certifications in
their periodic reports regarding the accuracy of the periodic reports filed with
the Securities and Exchange Commission, (ii) prohibiting officers and directors
of public companies from fraudulently influencing an accountant engaged in the
audit of the company's financial statements, (iii) requiring chief executive
officers and chief financial officers to forfeit certain bonuses in the event of
a misstatement of financial results, (iv) prohibiting officers and directors
found to be unfit from serving in a similar capacity with other public
companies, (v) prohibiting officers and directors from trading in the company's
equity securities during pension blackout periods and (vi) requiring the
Securities and Exchange Commission to issue standards of professional conduct
for attorneys representing public companies. In addition, public companies whose
securities are listed on a national securities exchange or association must
satisfy the following additional requirements: (i) the company's audit committee
must appoint and oversee the company's auditors, (ii) each member of the
company's audit committee must be independent, (iii) the company's audit
committee must establish procedures for receiving complaints regarding
accounting, internal accounting controls and audit-related matters, (iv) the
company's audit committee must have the authority to engage independent advisors
and (v) the company must provide appropriate funding to its audit committee, as
determined by the audit committee.
The Sarbanes-Oxley Act contains several provisions intended to enhance the
quality of financial disclosures of public companies, including provisions that
(i) require that financial disclosures reflect all material correcting
adjustments identified by the company's auditors, (ii) require the disclosure of
all material off-balance sheet transactions, (iii) require the Securities and
Exchange Commission to issue rules regarding the use by public companies of pro
forma financial information, (iv) with certain limited exceptions, including an
exception for financial institutions making loans in compliance with federal
banking regulations, prohibit public companies from making personal loans to its
officers and directors, (v) with certain limited exceptions, require directors,
officers and principal shareholders of public companies to report changes in
their ownership in the company's securities within two business days of the
change, (vi) require a company's management to provide a report of its
assessment of internal controls of the company in its annual report, (vii)
require public companies to adopt codes of conduct for senior financial officers
and (viii) require companies to disclose whether the company's audit committee
has a financial expert as a member.
Under the Sarbanes-Oxley Act, the Securities and Exchange Commission is directed
to adopt rules designed to protect the independence of research analysts and to
require research analysts to disclose conflicts of interest and potential
conflicts of interest. The Sarbanes-Oxley Act also directs that certain studies
be conducted by the Comptroller General and the Securities and Exchange
Commission, including studies regarding the function of credit rating agencies
and the role of investment banks and financial advisors in the manipulation of
earnings. The Sarbanes-Oxley Act imposes criminal liability for certain acts,
including altering documents involving federal investigations, bankruptcy
proceedings and corporate audits and increases the penalties for certain
offenses, including mail and wire fraud. In addition, the Sarbanes-Oxley Act
gives added protection to corporate whistle-blowers. Although the Company
anticipates that it will incur additional expense in complying with the
provisions of the Sarbanes-Oxley Act and the regulations promulgated by the
Securities and Exchange Commission thereunder, the Company does not expect that
such compliance will have a material impact on the Company's financial condition
or results of operations.
Community Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity and fair credit reporting.
Community Insurance Corp. is a licensed insurance agent and broker for various
insurance companies, and is subject to regulation by the Alabama Insurance
Commission.
The Federal Reserve regulates money, credit and interest rate conditions in
order to influence general economic conditions, primarily through open market
operations in U.S. Government securities, changes in the discount rate, reserve
requirements on member banks' deposits and funds availability regulations. The
earnings and growth of the Company and its subsidiaries are subject to the
influence of economic conditions generally and to the monetary and
8
fiscal policies of the United States and its agencies, particularly the Federal
Reserve. The nature and timing of any changes in such conditions and policies
and their impact on the Company cannot be predicted.
On April 9, 2001, the Company's Board of Directors entered into a Memorandum of
Understanding (the "Memorandum") with the Federal Reserve Bank of Atlanta (the
"Reserve Bank"), which outlines actions to be taken by the Company to address
concerns identified by the Reserve Bank. In the Memorandum, the Company agreed
that, without the prior written approval of the Reserve Bank, it would not
declare or pay any dividends, repurchase shares of its common stock, incur any
additional indebtedness, alter the terms of existing indebtedness or increase
the amount of management fees paid to the Company by Community Bank. In
addition, the Company agreed to maintain a quarterly Tier I leverage ratio (the
ratio of Tier I capital to average assets, less goodwill) of at least 6.5%
during the period in which the Memorandum is in effect, and to periodically
update the Company's plan for maintaining capital and earnings at adequate
levels. The Company also agreed to establish a policy that provides for target
levels of capital and guidelines for payment of dividends and a plan to
strengthen the Company's internal audit program. The Company further agreed that
a committee of non-employee directors of the Company would review and report on
the appropriateness of the compensation provided under the employment agreement
of Kennon R. Patterson, Sr., who was then the Chairman of the Board, Chief
Executive Officer and President of the Company. In addition, the Company agreed
to provide the Reserve Bank with a contingency plan for conserving or raising
cash and information about loans extended by Community Bank to facilitate
purchases of the Company's common stock, and to periodically provide the Reserve
Bank with certain financial and other information and a report of actions taken
by the Company to ensure compliance with the Memorandum. On March 8, 2002, the
Reserve Bank requested that the Company agree to an amendment of the Memorandum
that would disallow the Company from making any distributions of interest,
principal or other sums on subordinated debentures or trust preferred securities
without the prior written approval of the Reserve Bank. The Company agreed to
the amendment. The Company elected to defer the March and September 2002
interest payments on its junior subordinated deferrable interest debentures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations, Borrowed Funds - Maturities of Long-term Debt". Management of the
Company cannot currently estimate the period during which the Company will
remain subject to the terms of the Memorandum, or the effect of the Memorandum
on the Company's financial condition, liquidity and results of operations.
On April 18, 2001, the Board of Directors of Community Bank entered into a
Memorandum of Understanding (the "Bank Memorandum") with the Regional Director
of the FDIC's Atlanta Regional Office and the Alabama State Banking Department.
Major provisions of the Bank Memorandum include requirements to reduce
classified assets, restrict expansion, adopt revised policies in the areas of
lending, liquidity, interest rate risk, loan documentation, asset/liability
management and ethics, review duties and responsibilities of key officers,
review compliance with investment, liquidity and funds management policies,
reconstitute membership of its Board of Directors, develop internal loan review
and internal audit functions, maintain capital ratio requirements, restrict
dividend payments, provide to the regulators updates on the status of
litigation, other financial and managerial information and quarterly progress
reports detailing efforts to comply with the requirements of the Bank
Memorandum.
Based on an examination as of June 30, 2001, the FDIC and the Alabama State
Banking Department requested the Community Bank Board of Directors to adopt a
Safety and Soundness Compliance Plan ("Plan"). The Board adopted the Plan on
March 5, 2002. The Plan (initiated by the FDIC) replaced the Bank Memorandum
(initiated by the Alabama State Banking Department).
Pursuant to the terms of the Plan, the Board must review the Bank's
organizational structure and staffing requirements and hire and train any
additional personnel needed to comply with the Plan. Also the Board must review
and revise the bank's loan policy and underwriting standards, loan collection
plan, allowance for loan losses methodology, interest rate risk policy and asset
liability management policy. The Plan also provides that the Board must adopt an
internal audit program, an internal controls program, a plan to reduce
classified assets and internal and external loan documentation review
procedures. Also, pursuant to the Plan, the Board must engage an outside firm to
perform the loan review function and must adopt an internal loan review program.
The Plan also places restrictions on extending credit to borrowers who have
classified loans with the bank. Under the Plan, prior to submission of Reports
of Condition and Income, the Board must review the adequacy of the allowance for
loan losses and provide for an adequate balance. Under the Plan, the Board
committed to maintaining a Tier I capital ratio of at least 7% and to obtain the
prior approval of the regulators before paying dividends. In addition, the Plan
requires the submission of a budget and profit plan and the engagement of an
outside accounting firm to perform the bank's internal audit function and the
formation of a bank administration department to strengthen internal controls.
Finally, the Plan requires management to make monthly reports to the Board of
Directors regarding the status in meeting the requirements of the Plan, and to
submit quarterly progress reports to the regulators.
9
On December 10, 2002, the Board of Directors of Community Bank entered into an
agreement with the Alabama State Banking Department. The agreement provided that
the Board of Directors would take certain actions regarding (i) an investigation
into payments made in connection with several construction projects of the Bank,
(ii) approval and management of payments and loans involving directors, officers
and employees and (iii) expense controls and review of financial statements.
With respect to the investigation of construction payments, the Bank's Audit
Committee, with the assistance of independent accountants and counsel, must
determine whether any directors, officers or employees improperly benefited from
payments made by the Bank for construction projects. If improper benefits were
received, the Audit Committee must determine the amount of such benefits, fix an
appropriate rate of interest due to the Bank on the principal amount of any
benefit, require restitution of the amount of the benefit, plus accrued interest
and investigate any apparent negligence on the part of Bank employees with
regard to improper payments. The Bank has reported the Audit Committee's
progress and findings to the Alabama State Banking Department for its review.
The Board has agreed, among other things, to require Board approval of all
extensions of credit to insiders, as defined in Regulation O of the Board of
Governors of the Federal Reserve System. The Board has also agreed to implement
certain procedures for managing existing loans to insiders, including
limitations on renewals, methods of collection of adversely classified loans to
certain insiders and obtaining current appraisals on collateral securing such
adversely classified loans. In addition, the Board has agreed to limit future
extensions of credit and any payments other than ordinary compensation to any
director, officer or employee who, after investigation, is deemed to owe
restitution to the Bank or whose loans have been adversely classified, to
consult with the Alabama State Banking Department regarding settlement of
litigation and to obtain prior approval for sales or transfers of the Bank's
assets benefiting any director, officer or employee deemed to owe restitution.
As a part of an effort to control the Bank's expenses, the Board has directed
the Audit Committee to review for adequacy and appropriateness bills paid by the
Bank for professional services from 1998 to the present, to recover fees
improperly paid, if any, for the benefit of third parties and to establish
additional internal controls for the payment of future bills.
On March 4, 2003, the Board of Directors of Community Bank and the FDIC entered
into a Stipulation and Consent to the Issuance of an Order to Cease and Desist
(the "Consent Agreement"). The Order was effective 10 days after March 12, 2003,
the date of its issuance. The FDIC alleged in the Order to Cease and Desist (the
"Order") deficiencies relating to the Board's supervision over active management
of Community Bank, supervision and control of lending to insiders and accurate
maintenance of Community Bank's books and records. The FDIC characterizes these
deficiencies as unsafe and unsound banking practices. The Board consented to the
Order without admitting or denying those allegations. Pursuant to the Order, the
Board of Community Bank agreed to cease and desist from conduct giving rise to
the noted deficiencies and to:
(i) develop within 30 days of the effective date of the Order a written
plan specifying the responsibilities and lines of authority for
Community Bank's executive officers and outlining internal controls to
ensure compliance with the plan;
(ii) refrain from making, renewing or modifying any loans to current or
former executive officers or directors without prior approval of the
FDIC and the Alabama State Banking Department;
(iii)amend Community Bank's books and records to reflect the actual value
of bank premises and fixed assets; and
(iv) supply a copy of the Order to the Company and provide the Company with
a summary of the Order for inclusion in the Company's next shareholder
communication.
10
Statistical Disclosure
Statistical and other information regarding the following items are set forth in
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" on the pages indicated below.
Page(s)
Loan Portfolio and Selected Loan Maturity........................................................ 21
Investment Portfolio............................................................................. 22
Investment Portfolio Maturity Schedule........................................................... 23
Average Deposit Balances and Rates Paid.......................................................... 24
Maturities of Large Time Deposits................................................................ 24
Short-term Borrowings............................................................................ 25
Maturities of Long-term Debt..................................................................... 26
Interest Sensitivity............................................................................. 28
Capital Adequacy Ratios and Capital Growth "Reduction Ratios".................................... 29
Yields, Rates, Interest Rate Spread and Net Interest Margin...................................... 31
Consolidated Average Balances, Interest Income/Expense and Yields/Rates.......................... 32
Rate/Volume Variance Analysis.................................................................... 33
Summary of Loan Loss Experience.................................................................. 35
Allocation of the Allowance for Loan Losses...................................................... 36
Nonperforming Assets............................................................................. 37
Noninterest Income............................................................................... 38
Noninterest Expense.............................................................................. 39
Item 2 - Properties
The corporate headquarters of the Company is owned by Community Bank and located
at 68149 Main Street (U.S. Highway 231) in Blountsville, Alabama. Community
Bank's administrative, operational, accounting and legal functions are housed in
three buildings constructed in 1997, all of which are located on the same
property as the corporate headquarters.
The main banking office of Community Bank is located at 69156 Main Street,
Blountsville, Alabama. The premises are owned by Community Bank.
At December 31, 2002, Community Bank owned or leased buildings that were used in
the normal course of business in nine counties in Alabama, including Blount,
Lauderdale, Limestone, Madison, Marengo, Marion, Morgan, Perry and Winston
Counties. 1st Community Credit Corporation owned or leased buildings that were
used in the normal course of business in ten counties in Alabama, including
Blount, Cullman, Marshall, Morgan, Limestone, Lawrence, Etowah, Madison, DeKalb
and Walker Counties. Community Insurance Corp. and its subsidiary, Southern
Select Insurance, Inc., owned a building that is used in the normal course of
business in Madison County, Alabama.
For information about the amounts at which bank premises, equipment and other
real estate are recorded in the Company's financial statements and information
relating to commitments under leases, see the Company's Consolidated Financial
Statements and the accompanying notes to Consolidated Financial Statements
included elsewhere in this Report.
Item 3 - Legal Proceedings
Background
At a meeting of Community Bank's Board of Directors on June 20, 2000, a director
brought to the attention of the Board the total amount of money Community Bank
had paid subcontractors in connection with the construction of a new
11
Community Bank office in Guntersville, Alabama. Management of the Company
commenced an investigation of the expenditures. At the request of management,
the architects and subcontractors involved in the construction project made
presentations to the Boards of Directors of the Company and Community Bank on
July 15 and July 18, 2000, respectively. At the July 18, 2000 meeting of the
Board of Directors of Community Bank, another director alleged that Community
Bank had been overcharged by subcontractors on that construction project and
another current construction project. On July 18, 2000, the Boards of Directors
of the Company and Community Bank appointed a joint committee comprised of
independent directors of the Company and of Community Bank to investigate the
alleged overcharges. The joint committee retained independent legal counsel and
an independent accounting firm to assist the committee in its investigation and
has made its report to the Boards of Directors. The directors of Community Bank
who alleged the construction overcharges have made similar charges to bank
regulatory agencies and law enforcement authorities. Management believes that
these agencies and authorities are currently conducting investigations regarding
this matter.
Benson Litigation
On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E.
Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company, Community Bank, certain directors
and officers of the Company and Community Bank, an employee of Community Bank
and two construction subcontractors. The plaintiffs purported to file the
lawsuit as a shareholder derivative action, which relates to the alleged
construction overcharges being investigated by the joint committee of the Boards
of Directors of the Company and Community Bank. The complaint alleges that the
directors, officers and employee named as defendants in the complaint breached
their fiduciary duties, failed to properly supervise officers and agents of the
Company and Community Bank, and permitted waste of corporate assets by allegedly
permitting the subcontractor defendants to overcharge Community Bank in
connection with the construction of two new Community Bank offices, and to
perform the construction work without written contracts, budgets, performance
guarantees and assurances of indemnification. In addition, the complaint alleges
that Kennon R. Patterson, Sr., the Chairman, President and Chief Executive
Officer of the Company, breached his fiduciary duties by allegedly permitting
the two named subcontractors to overcharge for work performed on the two
construction projects in exchange for allegedly discounted charges for work
these subcontractors performed in connection with the construction of Mr.
Patterson's residence. The complaint further alleges that the director
defendants knew or should have known of this alleged arrangement between Mr.
Patterson and the subcontractors. The complaint also alleges that Mr. Patterson,
the Community Bank employee and the two subcontractor defendants made false
representations and suppressed information about the alleged overcharges and
arrangement between Mr. Patterson and the subcontractors.
On August 15, 2000, the plaintiffs filed an amended complaint adding Andy C.
Mann, a shareholder of the Company, as a plaintiff and adding a former director
of the Company and Community Bank as a defendant. The amended complaint
generally reiterates the allegations of the original complaint. In addition, the
amended complaint alleges that Community Bank was overcharged on all
construction projects from January 1997 to the present. The amended complaint
also alleges that the defendants breached their fiduciary duties and are guilty
of gross financial mismanagement, including allegations concerning the making or
approval of certain loans and taking allegedly improper actions to conceal the
fact that certain loans were uncollectible. On September 18, 2000 the plaintiffs
filed a second amended complaint. The second amended complaint generally
reiterates the allegations of the original and first amended complaints. In
addition, the second amended complaint alleges that the plaintiffs were
improperly denied their rights to inspect and copy certain records of the
Company and Community Bank. The second amended complaint also alleges that the
directors of the Company abdicated their roles as directors either by express
agreement or as a result of wantonness and gross negligence. The second amended
complaint asserts that the counts involving inspection of corporate records and
director abdication are individual, non-derivative claims. The second amended
complaint seeks, on behalf of the Company, an unspecified amount of compensatory
damages in excess of $1 million, punitive damages, disgorgement of allegedly
improperly paid profits and appropriate equitable relief. Upon motion of the
defendants, the case was transferred to the state Circuit Court in Blount
County, Alabama by order dated September 21, 2000, as amended on October 12,
2000.
On August 24, 2000, the Board of Directors of the Company designated the
directors of the Company who serve on the joint investigative committee as a
special litigation committee to investigate and evaluate the allegations and
issues raised in this lawsuit and to arrive at such decisions and take such
action as the special litigation committee deems appropriate. On June 8, 2001,
the special litigation committee filed its report under seal with the court. On
June 18, 2001, the court entered an order affirming the confidentiality of the
special committee's report. On June 28, 2001, the Company, Community Bank and
various other defendants filed a motion with the court to adopt the report of
the special committee, for partial summary judgment and to realign the Company
and Community Bank as plaintiffs in the lawsuit.
12
Following a hearing on August 29, 2001, the court denied these motions on
November 8, 2001. The court also ruled that the plaintiffs were entitled to
conduct discovery except as it related to one of the subcontractor defendants
and granted the plaintiffs' motion to unseal the report of the special
litigation committee. On November 14, 2001, the directors of the Company filed a
motion for the court to alter, amend, or vacate its November 8, 2001 rulings. On
February 7, 2002, the Company and Community Bank filed a motion to disqualify
Maynard, Cooper & Gale, P.C., the law firm representing the plaintiffs, due to
conflicts of interest. The court held a hearing on these motions on February 22,
2002 and the parties are awaiting a ruling. A tentative settlement of the
lawsuit was announced in December, 2002, but was not carried through and is
unlikely to be under present circumstances. One of the subcontractors named as a
defendant in this action, Morgan City Construction, Inc., and its principals,
Mr. and Mrs. Dewey Hamaker, have been tried and convicted in the United States
District Court for the Northern District of Alabama and are awaiting sentencing.
Because of the inherent uncertainties of the litigation process, the Company is
unable at this time to predict the outcome of this lawsuit and its effect on the
Company's financial condition and results of operations.
Packard Derivative Litigation
On April 4, 2003, a group composed of the same plaintiffs as in the Benson case
filed another derivative action against Sheffield Electrical Contractors, Inc.,
Steve Sheffield, Jay Bolden, Dudley, Hopton-Jones, Sims & Freeman, PLLP, Glynn
Debter, Kennon R. Patterson, Jr., Robert O. Summerford, Jimmie Trotter, John
Lewis, Jr., Merritt Robbins, Stacey Mann, B. K. Walker, Jr., Denny Kelly, Roy B.
Jackson, Loy McGruder, and Hodge Patterson. The complaint in this new derivative
lawsuit, besides adding defendants known during but not named in the Benson
lawsuit, is based upon the same allegations as in the Benson case but bases its
claims against the director-defendants not "for what they did (and did not do)
before learning of the over billing [sic.] allegations against Patterson [Kennon
R. Patterson, Sr., the Company's former Chairman and CEO] in July 2000" but,
instead "only for what they have done (and failed to do) after the filing of the
Benson lawsuit-- that is, after they learned of the allegations against
Patterson in July 2000." [Emphasis in the original.]
The time for answering the complaint in this case has not yet expired. Because
of the inherent uncertainties of the litigation process, the Company is unable
at this time to predict the outcome of this lawsuit and its effect on the
Company's financial condition and results of operations.
Towns Derivative Litigation
The lawsuit filed by Mr. William Towns, a shareholder of the Company, on
November 19, 1998, as a shareholder derivative action against the directors of
the Company in the Circuit Court of Blount County, Alabama, was settled and
dismissed during 2002. The settlement did not have a material effect on the
financial condition of the company.
Corr Family Litigation
On September 14, 2000, Bryan A. Corr and six other shareholders of the Company
related to Mr. Corr filed an action in the Circuit Court of Blount County,
Alabama, against the Company, Community Bank, and certain directors and officers
of the Company and Community Bank. The plaintiffs have alleged that the
directors of the Company actively participated in or ratified the
misappropriation of corporate income. The action was not styled as a shareholder
derivative action. On January 3, 2001, the defendants filed a motion for summary
judgment on the basis that these claims are derivative in nature and cannot be
brought on behalf of individual shareholders. The court has not ruled on the
motion. Although management currently believes that this action will not have a
material adverse effect on the Company's financial condition or results of
operations, regardless of the outcome, the action could be costly, time
consuming, and a diversion of management's attention.
13
Auto Loan Litigation
The action filed by the Company in the United States District Court for the
Northern District of Alabama against Carl Gregory Ford L-M, Inc., an automobile
dealership located in Ft. Payne, Alabama, Carl Gregory and Doug Broaddus, the
owners of the dealership, several employees and former employees of the
dealership and Gerald Scot Parrish, a former employee of Community Bank, with
respect to certain loans originated during 1998 in Community Bank's Wal-Mart
office in Ft. Payne, Alabama, has been settled as to all defendants other than
G. S. Parrish, the former employee of the Bank. The Bank has one year within
which to re-file its claims against Mr. Parrish.
Employee Litigation
The lawsuit filed by Messrs. Michael W. Alred and Michael A. Bean, two former
directors and executive officers of Community Bank, against Community Bank in
the United States District Court for the Northern District of Alabama alleging
that their employment was wrongfully terminated for allegedly providing
information to bank regulatory and law enforcement authorities concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority by Community Bank, its directors, officers and
employees was settled and dismissed during 2002. The terms of the settlement of
this litigation were deemed confidential and are included in the statement of
income as an increase to litigation expense.
Lending Acts Litigation
On October 11, 2002, William Alston, Murphy Howard, and Jason Tittle filed an
action against Community Bank, Community Bancshares, Inc., Holsombeck Motors,
Inc., Lee Brown d/b/a Alabama Bond & Investigation a/k/a ABI Recovery, Chris
Holmes d/b/a Alabama Bond & Investigation a/k/a ABI Recovery, Regina Holsombeck,
Kennon "Ken" Patterson, Sr., Hodge Patterson, James Timothy "Tim" Hodge, Ernie
Stephens, and the State of Alabama Department of Revenue. The plaintiffs in this
class action allege that Community Bank and others conspired or used
extortionate methods to effect a lending scheme of "churning phantom loans", and
that profits from the scheme were used to secure an interest in and/or to invest
in an enterprise that affects interstate commerce. The allegations state that
Community Bank used various methods to get uneducated customers with fair to
poor credit to sign numerous "phantom loans" when the customers only intended to
sign for one loan. Claims include racketeering activity within the meaning of
the Racketeer Influnced and Corrupt Organization act of 1970, conspiracy,
spoliation, conversion, negligence, wantonness, outrage, and civil conspiracy.
The Company and Community Bank intend to defend the action vigorously and
currently are conducting discovery to ascertain what substance, if any, there is
to the claims. Although management currently believes that this action will not
have a material adverse effect on the Company's financial condition or results
of operations, regardless of the outcome, the action could be costly, time
consuming, and a diversion of management's attention.
Conspiracy Litigation
On November 6, 2001 the Company and Community Bank filed a lawsuit in the United
States District Court for the Northern District of Alabama against Bryan A.
Corr, Doris J. Corr, individually and as executrix of the Estate of R. C. Corr,
Jr., Tina M. Corr, Corr, Inc., George M. Barnett, Michael A. Bean, Michael W.
Alred, R. Wayne Washam, M. Lewis Benson, Doris E. Benson, John M. Packard and
Andy Mann seeking damages in excess of $50 million. The complaint alleges that,
by knowingly making false statements and unsupported allegations to regulatory
and law enforcement authorities and in certain lawsuits discussed above, the
defendants abused the civil legal process to further their plan to discredit and
dislodge the directors and management of the Company and Community Bank and gain
control of those companies. The complaint further alleges that certain of the
defendants who are former directors and/or executive officers of Community Bank
breached their fiduciary duties to Community Bank by participating in, and
taking action in the furtherance of, the conspiracy. Finally, the complaint
alleges that the defendants failed to make filings that are required by the
Federal securities laws to disclose that the group is acting in concert to
acquire control of the Company. The complaint seeks compensatory and punitive
damages as well as an order barring the defendants from voting their shares of
Company stock, purchasing additional Company stock, soliciting proxies and
submitting shareholder proposals for at least three years.
14
On December 5, 2001, the Company, Community Bank and R. Wayne Washam entered
into a stipulation pursuant to which Mr. Washam would be dismissed as a
defendant. The court granted the stipulation on December 6, 2001. During the
time between December 3 and December 7, 2001 the other defendants filed various
motions to dismiss, abate or stay the lawsuit. On January 29, 2002 the Company
and Community Bank filed an amended complaint to reflect the dismissal of Wayne
Washam as a defendant and to add a claim for defamation against two of the
defendants. The lawsuit presently is in the discovery phase. As a result of the
inherent uncertainties of the litigation process, the Company is unable at this
time to predict the outcome of this lawsuit and its effect on the Company's
financial condition and results of operations. Regardless of the outcome,
however, this lawsuit could be costly, time-consuming and a diversion of
management's attention.
Patterson Litigation
On April 9, 2003 Kennon R. Patterson, Sr., former Chairman, President and Chief
Executive Officer of the Company, filed an adversary proceeding in the United
States Bankruptcy Court for the Northern District of Alabama in connection with
his petition for protection under Chapter 11 of the United States Bankruptcy
Code. Defendants of the adversary proceeding are the Company, Community Bank,
five directors of the Company and Community Bank and the law firm of Powell,
Goldstein, Frazer and Murphy, LLP which represents Community Bank's Audit
Committee. The complaint alleges that the Company breached its employment
agreement with Mr. Patterson by terminating his employment on January 27, 2003
and failed to pay him for compensation and benefits which had allegedly accrued
prior to his termination. The complaint also alleges that Community Bank,
members of Community Bank's Audit Committee, the Audit Committee's independent
counsel and the Company's current Chairman, President and Chief Executive
Officer conspired to interfere with Mr. Patterson's contract and business
relationship with the Company. The suit seeks damages in excess of $150 million
for, among other things, lost compensation and benefits, mental anguish, and
damage to Mr. Patterson's reputation. The Company believes that this lawsuit is
without merit and intends to defend the action vigorously. Although management
currently believes that this action will not have a material adverse effect on
the Company's financial condition or results of operations, regardless of the
outcome, the action could be costly, time consuming and a diversion of
management's attention.
Indemnification and Routine Proceedings
The Company's Certificate of Incorporation provides that, in certain
circumstances, the Company will indemnify and advance expenses to its directors
and officers for judgments, settlements, and legal expenses incurred as a result
of their service as officers and directors of the Company. Community Bank's
Bylaws contain a similar provision for indemnification of directors and officers
of Community Bank.
The Company and its subsidiaries are from time to time parties to other legal
proceedings arising from the ordinary course of business. Management believes,
after consultation with legal counsel, that no such proceedings, if resulting in
an outcome unfavorable to the Company, will, individually or in the aggregate,
have a material adverse effect on the Company's financial condition or results
of operations.
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders by solicitation of proxies
or otherwise during the fourth quarter of 2002.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages, the positions held by them
with the Company and certain of its subsidiaries and their principal occupations
for the last five years are as follows:
Name, Age and Position Currently Held with the
Company and its Subsidiaries Principal Experience During Past Five Years
Patrick M. Frawley (51) Chairman, President, and Chief Executive Officer of the
Chairman, President and Chief Executive Officer of the Company (2003 - Present); Chairman and Chief Executive
Company; Chairman and Chief Executive Officer of Officer of Community Bank (2003 - Present); Senior Vice
Community Bank; Chairman of 1st Community Credit Corporation, President of Community Bank (2002 - 2003); Director
Community Appraisals, Inc., Community Insurance Corporation, and of Regulatory Relations for Bank of America
Southern Select Insurance, Inc. (1991 - 2002)
Kerri C. Kinney (33) * Chief Financial Officer of the Company and Community
Chief Financial Officer of the Company and Community Bank Bank (2001-Present); Senior Risk Consultant for Compass
Bank, Birmingham, Alabama (2001); Chief Accounting
Officer of Frontier National Corporation, Sylacauga,
Alabama (1998-2000); Chief Financial Officer of Frontier
National Bank, Lanett, Alabama (1997-2000); Vice President
and Controller of The County Bank, Greenwood, South
Carolina (1993-1997)
Kennon R. Patterson, Sr. (60) ** Chairman, President and Chief Executive Officer of the
Chairman, President and Chief Executive Officer of the Company (1985-2003); Chairman and Chief Executive
Company; Chairman and Chief Executive Officer of Officer of Community Bank (1993-2003)
Community Bank; Chairman of 1st Community Credit Corporation;
Vice Chairman of Community Appraisals, Inc.;
Director of Community Insurance Corp., and Southern
Select Insurance, Inc.
Loy McGruder (61) *** President of Community Bank (2002-Present);
Director of the Company; Director and President of Community Bank Executive Vice President of Community Bank (1994-2002);
City President of Community Bank-Blountsville (1994-1997);
Senior Vice President of Community Bank (1993-1994)
* On April 14, 2003, Jim Kinney, Ms. Kinney's husband, will become an
employee of Community Bank at an annual salary of $75,000. Mr. Kinney will
be the project manager of a specific project for the operations division.
It is anticipated that Mr. Kinney's employment will terminate upon
completion of the project in approximately 12 months.
** In January 2003, the Board of Directors terminated Mr. Patterson's
employment with the Company and Community Bank, and appointed Mr. Frawley
to replace him. On February 8, 2003, the Board of Directors announced that
Mr. Patterson would no longer serve on the Board of Directors of Community
Bank. The Board of Directors of the Company does not have the legal
authority to remove a director of the Company, although a director may
resign. Mr. Patterson has not resigned as a director of the Company and is
currently a director of the Company.
*** Mr. McGruder began a medical leave of absence on February 3, 2003 and will
retire on June 6, 2003. Stacey W. Mann (50), Executive Vice President of
Community Bank since 1997 and Chief Operating Officer since 2001, has been
appointed by the Board of Directors as Interim President pending regulatory
approval.
The Company's Bylaws provide that the term of office of an executive officer of
the Company is as provided in the officer's employment agreement with the
Company or, if the officer is not a party to an employment agreement or if the
officer's employment agreement does not specify a term of office, as determined
by the Company's Board of Directors and until the officer's successor is elected
and qualified or until the officer's earlier resignation or removal.
16
PART II
Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters
Shares of the common stock (the "Common Stock") of the Company were held by
approximately 2,325 shareholders of record as of March 10, 2003. There is no
established trading market for the Common Stock, which has been purchased and
sold infrequently in private transactions. Therefore, no reliable information is
available as to trades of the Common Stock, or as to the prices at which such
Common Stock has traded. Management has reviewed the limited information
available to the Company as to the ranges at which shares of the Common Stock
has been sold. The following data regarding the Common Stock are provided for
information purposes only, and should not be viewed as indicative of the actual
or market value of the Common Stock.
Estimated Price Range
Per Share
High Low
2002:
First Quarter.......................................................... $ 15.00 $ 15.00
Second Quarter......................................................... 20.00 15.00
Third Quarter ......................................................... 15.00 15.00
Fourth Quarter......................................................... 15.00 15.00
2001:
First Quarter.......................................................... $ 22.00 $ 15.00
Second Quarter......................................................... 22.00 15.00
Third Quarter.......................................................... 15.00 15.00
Fourth Quarter......................................................... 18.00 12.00
2000:
First Quarter.......................................................... $ 25.00 $ 24.00
Second Quarter......................................................... 25.00 19.00
Third Quarter.......................................................... 25.00 20.00
Fourth Quarter......................................................... 26.00 20.00
Annual dividends were neither declared nor paid in 2002. Generally, the payment
of dividends on the Common Stock is subject to the prior payment of principal
and interest on the Company's long-term debt, the retention of sufficient
earnings and capital in the Company's operating subsidiaries and regulatory
restrictions. Currently, the Company is under a memorandum of understanding with
the Federal Reserve that, among other restrictions, disallows the declaration or
payment of any dividends without the prior written approval of the Federal
Reserve. The Board of Directors does not currently anticipate declaring or
paying a dividend in 2003. There can be no assurance that the Company will pay
any dividends in the foreseeable future. See "Item 1 - Business - Supervision
and Regulation," "Item 7 - Management's Discussion of Financial Condition and
Results of Operations - Liquidity Management" and Note 12 in the Notes to
Consolidated Financial Statements included elsewhere in this Report.
17
Item 6 - Selected Financial Data
The following table sets forth selected financial data for the last five years.
All averages are daily averages.
Years ended December 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(Dollars in thousands except per share data)
Net interest income........................ $ 23,504 $ 22,853 $ 22,418 $ 26,672 $ 21,672
Provision for loan losses.................. 10,033 6,096 7,573 4,459 885
Net income (loss) from continuing operations (5,023) (2,381) (2,853) ** **
Net income (loss) from discontinued operations. 5,927 958 (167) ** **
Net income (loss).......................... 904 (1,423) (3,019) 1,658 3,579
Per Share Data:
Earnings (loss) per share from
continuing operations - basic......... $ (1.08) $ (0.52) $ (0.64) $ ** $ **
Earnings (loss) per share from
continuing operations - diluted....... (1.08) (0.52) (0.61) ** **
Earnings per share - basic.............. 0.19 (0.31) (0.68) 0.37 0.90
Earnings per share - diluted............ 0.19 (0.31) (0.65) 0.36 0.88
Cash dividends.......................... - - 0.75 0.60 0.50
Balance Sheet:
Loans, net of unearned income........... $ 359,184 $ 501,520 $ 528,316 $ 498,726 $ 433,853
Deposits................................ 459,464 617,706 600,901 573,261 538,586
FHLB long-term debt..................... 38,000 38,000 38,000 40,000 -
Other long-term debt.................... 3,578 4,667 5,675 6,637 7,569
Trust preferred securities.............. 10,000 10,000 10,000 - -
Average equity.......................... 42,848 42,938 41,776 44,203 37,318
Average assets.......................... 629,481 725,461 710,915 632,713 538,470
Ratios:
Return on average assets................ 0.14% (0.20)% (0.42)% 0.26% 0.67%
Return on average equity................ 2.11 (3.31) (7.23) 3.75 9.59
Average equity to average assets........ 6.81 5.92 5.88 6.99 6.93
** 1999 and 1998 data do not reflect separate net income components for
discontinued operations of certain branches divested in 2002.
18
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7a - Quantitative and Qualitative Disclosures about Market Risk
The purpose of this discussion is to focus on the significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during 2000, 2001 and 2002. This discussion and analysis is
intended to supplement and highlight information contained in the Company's
consolidated financial statements and related notes and the selected financial
data presented elsewhere in this Report.
Forward-Looking Statements
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, and documents incorporated herein by
reference, may contain certain statements relating to the future results of the
Company based upon information currently available. These "forward-looking
statements" (as defined in Section 21E of The Securities and Exchange Act of
1934) are typically identified by words such as "believes", "expects",
"anticipates", "intends", "estimates", "projects", and similar expressions.
These forward-looking statements are based upon assumptions the Company believes
are reasonable and may relate to, among other things, the allowance for loan
loss adequacy, simulation of changes in interest rates and litigation results.
Such forward-looking statements are subject to risks and uncertainties, which
could cause the Company's actual results to differ materially from those
included in these statements. These risks and uncertainties include, but are not
limited to, the following: (1) changes in political and economic conditions; (2)
interest rate fluctuations; (3) competitive product and pricing pressures within
the Company's markets; (4) equity and fixed income market fluctuations; (5)
personal and corporate customers' bankruptcies; (6) inflation; (7) acquisitions
and integration of acquired businesses; (8) technological changes; (9) changes
in law; (10) changes in fiscal, monetary, regulatory and tax policies; (11)
monetary fluctuations; (12) success in gaining regulatory approvals when
required; and (13) other risks and uncertainties listed from time to time in the
Company's SEC reports and announcements.
Critical Accounting Policies
The Company's significant accounting policies are presented in Note 1 to the
consolidated financial statements. These policies, along with the disclosures
presented in the other footnotes, provide information on how significant assets
and liabilities are valued in the financial statements and how those values are
determined. Those accounting policies involving significant estimates and
assumptions by management, which have, or could have, a material impact on the
carrying value of certain assets and impact comprehensive income, are considered
critical accounting policies. The Company recognizes the following as critical
accounting policies: Accounting for Allowance for Loan Losses and Accounting for
Income Taxes.
Accounting for Allowance for Loan Losses. Management's ongoing evaluation of the
adequacy and allocation of the allowance considers both impaired and unimpaired
loans and takes into consideration the Bank's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrowers' ability to repay, estimated value of any underlying collateral, the
reviews of regulators and an analysis of current economic conditions. While
management believes that it has exercised prudent judgment and applied
reasonable assumptions which have resulted in an allowance presented in
accordance with generally accepted accounting principles, there can be no
assurance that in the future, adverse economic conditions, increased
nonperforming loans, regulatory concerns, or other factors will not require
further increases in, or reallocation of the allowance. Further discussion
regarding the Company's accounting for allowance for loan losses is included in
Notes 1 and 4 to the consolidated financial statements.
Accounting for Income Taxes. The Company uses the asset and liability method of
accounting for income taxes. Determination of the deferred and current provision
requires analysis by management of certain transactions and the related tax laws
and regulations. Management exercises significant judgment in evaluating the
amount and timing of recognition of the resulting tax liabilities and assets.
Those judgments and estimates are re-evaluated on a continual basis as
regulatory and business factors change. Further discussion regarding the
Company's accounting for income taxes is included in Notes 1 and 20 to the
consolidated financial statements.
19
Net Income and Earnings per share
The Company's net income of approximately $904,000 for 2002 represented a
$2,327,000 increase from its net loss of approximately $1,423,000 for 2001 which
represented a $1,596,000 increase from 2000's net loss of approximately
$3,019,000. When stated as changes in basic earnings per share, the 2002 basic
earnings per share of $0.19 represented a $0.50 increase from the 2001 basic
loss per share of $0.31, which represented a $0.37 increase from the 2000 basic
loss per share of $0.68.
Both 2000 and 2001 Consolidated Statements of Income have been restated to
appropriately reflect earnings and losses from both continuing and discontinued
operations as a result of branch divestitures that occurred in 2002. These
statements have also been restated to reflect results of an investigation that
commenced in the fourth quarter of 2002 into allegations that the Company had
been overcharged on various construction projects. The Company has appropriately
recorded impairment losses on premises and equipment and charged them to the
period in which the overcharge occurred. Any overcharge which occurred prior to
the year ended December 31, 2000 has been appropriately reflected as a prior
period adjustment in Retained Earnings. See Note 22 - Prior Period Adjustments
in the Notes to Consolidated Financial Statements.
Loss from continuing operations increased approximately $2,642,000 to
approximately $5,023,000 at December 31, 2002 from approximately $2,381,000 at
December 31, 2001 which was a decrease in loss from continuing operations of
approximately $472,000 from approximately $2,853,000 at December 31, 2000.
Although net interest income increased approximately $652,000 to approximately
$23,505,000 at December 31, 2002 from approximately $22,853,000 at December 31,
2001, an increase in provision for loan losses of approximately $3,937,000 more
than offset that positive and was the primary cause for increased losses from
continuing operations for 2002. Basic loss from continuing operations per common
share was $1.08 for the year ended December 31, 2002 as compared to a basic loss
from continuing operations per common share for the year ended December 31, 2001
of $0.52. Discontinued operations, net of tax, provided approximately $5,927,000
of net income for the year ended December 31, 2002 or $1.27 basic earnings per
share. This includes a pretax gain of approximately $8,072,000 on the divested
branches. Discontinued operations, net of tax, provided approximately $958,000
of income for the year ended December 31, 2001, but lost approximately $167,000
during the year ended December 31, 2000.
Earning Assets
The Company's average total assets in 2002 decreased 13.2% below that for 2001,
primarily as a result of branch divestitures. Earning assets accounted for
approximately 83.6% of the Company's average total assets for 2002.
Average loans, excluding those associated with discontinued operations, net of
unearned income, represented 72.6%, 75.1% and 78.6% of average earning assets
during 2002, 2001 and 2000, respectively. Average investment securities
represented 22.2% of average earning assets in 2002, compared to 21.5% in 2001
and 20.5% in 2000. The change in the mix of loans and securities has been
attributable to a decrease in loans. Average federal funds sold as a percent of
average earning assets was 4.6%, 3.4% and 0.7% for 2002, 2001 and 2000,
respectively. The other earning asset categories accounted for less than 3.0% of
average earning assets for all three periods.
Loans
Total loans, net of unearned income, decreased approximately $142,335,000, or
28.4%, to approximately $359,184,000 at December 31, 2002, from $501,519,000 at
December 31, 2001, which represented an increase of $26,796,000, or 5.1%, from
$528,316,000 at December 31, 2000. Commercial, financial and agricultural loans
decreased by approximately $44,369,000, or 30.3%, to approximately $101,841,000
at December 31, 2002, from approximately $146,210,000 at December 31, 2001,
which represented a decrease of approximately $5,437,000, or 3.9%, from
approximately $140,773,000 at December 31, 2000. Commercial, financial and
agricultural loans represented 28.3% of total loans at December 31, 2002,
compared to 29.1% at December 31, 2001 and 26.6% at December 31, 2000. Real
estate - mortgage loans decreased by approximately $58,441,000, or 25.1%, to
approximately $174,775,000 at December 31, 2002, from $233,216,000 at December
31, 2001, which represented a decrease of approximately $3,376,000, or 1.4%,
from approximately $236,592,000 at December 31, 2000. As a percentage of total
loans, real
20
estate - mortgage loans increased to 48.7% at December 31, 2002, from 46.5% at
December 31, 2001 and 44.8% at December 31, 2000. Consumer loans decreased by
approximately $38,435,000, or 32.3%, to approximately $80,596,000 at December
31, 2002, from approximately $119,031,000 at December 31, 2001, which
represented a decrease of approximately $26,642,000, or 18.3%, from
approximately $145,673,000 at December 31, 2000. As a percentage of total loans,
consumer loans decreased to 22.4% at December 31, 2002, from 23.8% at December
31, 2001 and 27.6% at December 31, 2000. Real estate - construction loans
decreased by approximately $1,109,000, or 35.5%, to approximately $2,017,000 at
December 31, 2002, from approximately $3,126,000 at December 31, 2001, which
represented a decrease of approximately $2,302,000, or 42.4%, from approximately
$5,429,000 at December 31, 2000. As a percentage of total loans, real estate -
construction loans stayed level at 0.6% at December 31, 2002, from 0.6% at
December 31, 2001 and decreased from 1.0% at December 31, 2000. The Company has
experienced general decreases in loans because of economic downturns, the
tightening of the Company's credit standards and increased charge-offs of loans
originated in previous years, but has specifically experienced a large decline
in loans in 2002 due to the sale of branches earlier in the year.
The following table shows the classification of loans by major category at
December 31, 2002, and at the end of each of the preceding four years.
LOAN PORTFOLIO
December 31,
------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
Commercial, financial and
agricultural....... $ 101,841 28.3% $ 146,210 29.1% $ 140,773 26.6% $ 124,245 24.9% $ 94,057 21.7%
Real estate - construction 2,017 0.6 3,126 0.6 5,429 1.0 6,470 1.3 6,153 1.4
Real estate -mortgage. 174,775 48.7 233,216 46.5 236,592 44.8 224,129 44.9 205,457 47.4
Consumer.............. 80,596 22.4 119,031 23.8 145,673 27.6 144,453 28.9 129,334 29.8
Less: unearned income. 45 - 64 - 151 - 571 - 1,148 .3
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Loans, net of
unearned income 359,184 100.0% 501,519 100.0% 528,316 100.0% 498,726 100.0% 433,853 100.0%
Allowance for loan losses 9,784 7,292 7,107 2,603 2,971
---------- ---------- --------- ---------- ----------
Net loans............. $ 349,400 $ 494,227 $ 521,209 $ 496,123 $ 430,882
========== ========== ========= ========== ==========
The following table provides maturities of certain loan classifications and an
analysis of these loans maturing in over one year as of December 31, 2002.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
Rate Structure for Loans
Maturity Maturing Over One Year
-------------------------------------- -------------------------
Over One
One Year Over Predetermined Floating or
Year or Through Five Interest Adjustable
Less Five Years Years Total Rate Rate
----------- ----------- ----------- ----------- ------------ -----------
(In thousands)
Commercial, financial and
agricultural................ $ 38,891 $ 20,309 $ 42,642 $ 101,842 $ 21,279 $ 41,672
Real estate - construction..... 1,414 119 483 2,016 119 483
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 40,305 $ 20,428 $ 43,125 $ 103,858 $ 21,398 $ 42,155
=========== =========== =========== =========== =========== ===========
Investment Portfolio
The composition of the Company's investment securities portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk and
liquidity considerations. The Company's entire portfolio is classified as
21
available for sale. The primary objectives of the Company's investment strategy
are to maintain an appropriate level of liquidity and provide a tool to assist
in controlling the Company's interest rate position while at the same time
producing adequate levels of interest income. Management of the maturity of the
portfolio is necessary to provide liquidity and to control interest rate risk.
During 2002, gross investment securities sales, calls and pay downs were
approximately $88,623,000 and maturities were approximately $15,000,000,
compared to gross investment securities sales of $86,418,000 in 2001 and
approximately $16,230,000 in 2000 and maturities of approximately $2,500,000 in
2001 and approximately $25,210,000 in 2000. Net gains realized on the sales
totaled approximately $653,000 during 2002, compared to approximately $1,284,000
in 2001 and approximately $5,000 in 2000. At December 31, 2002, gross unrealized
gains in the portfolio were approximately $2,749,000, compared to approximately
$486,000 at December 31, 2001 and approximately $1,419,000 at December 31, 2000,
while gross unrealized losses amounted to approximately $227,000 at December 31,
2002, compared to approximately $893,000 at December 31, 2001 and approximately
$756,000 at December 31, 2000. These fluctuations in the gross unrealized gains
and losses in the Company's investment portfolio resulted primarily from
changing bond prices.
Mortgage-backed securities have varying degrees of risk of impairment of
principal, as opposed to U.S. Treasury and U.S. government agency obligations,
which are considered to contain virtually no default or prepayment risk.
Impairment risk is primarily associated with accelerated prepayments,
particularly with respect to longer maturities purchased at a premium and
interest-only strip securities. The Company's mortgage-backed securities
portfolio as of December 31, 2002 and 2001 contained no interest-only strips and
the amount of unamortized premium on mortgage-backed securities at December 31,
2002, was approximately $1,672,000, compared to approximately $929,000 at
December 31, 2001. The recoverability of the Company's investment in
mortgage-backed securities is reviewed periodically by management, and if
necessary, appropriate adjustments for impaired value are made to income.
The carrying amount of investment securities at the end of each of the last
three years is set forth in the following table:
INVESTMENT PORTFOLIO
December 31,
2002 2001 2000
------------- ------------- -------------
(In thousands)
U. S. Treasury and U.S. Government agencies............... $ 6,523 $ 16,948 $ 46,830
Mortgage-backed securities................................ 107,534 90,647 31,341
State and municipal securities............................ 7,056 11,684 19,499
Federal Home Loan Bank Stock.............................. 2,788 2,400 3,900
------------- ------------- -------------
Total investment securities............................ $ 123,901 $ 121,679 $ 101,570
============= ============= =============
Total investment securities increased approximately $2,222,000, or 1.83%, to
approximately $123,901,000 at December 31, 2002, compared to approximately
$121,679,000 at December 31, 2001 and approximately $101,570,000 at December 31,
2000. During 2002, non-taxable investment securities decreased $4,628,000, or
39.6%, to approximately $7,056,000 from $11,684,000 at December 31, 2001, which
represented an increase of $7,815,000 or 40.1%, from $19,499,000 at December 31,
2000. Taxable investment securities increased approximately $6,850,000, or 6.2%
during 2002 to $116,845,000 from approximately $109,995,000 at December 31,
2001, which represented an increase of $27,924, or 34.0%, from approximately
$82,071,000 at December 31, 2000. The Company saw increases in the investment
portfolio in 2002 as loan volumes continued to decline and excess funds were
invested in securities. The composition of the investment securities portfolio
changed during 2001 primarily as excess funds were invested in mortgage-backed
securities. At December 31, 2002, U.S. government and agency securities
represented 92.1% of the total investment securities portfolio compared to 88.4%
at year-end 2001, while state and municipal securities represented 5.7% and 9.6%
of the investment securities portfolio at year-end 2002 and 2001, respectively.
In 2002 and 2001, as investable funds increased due to diminished loan demand
and bonds redeemed prior to maturity, Community Bank invested more heavily in
mortgage-backed securities to enhance cash flow and maximize yield.
The maturities and weighted average yields of the investments in the year-end
2002 portfolio of investment securities are presented below. The average
maturity of the investment portfolio was 6.21 years at year-end 2002 compared to
5.20 years at year-end 2001 with an average yield of 5.54% and 6.22% at December
31, 2002 and 2001, respectively.
22
Mortgage-backed securities have been included in the maturity table based upon
the guaranteed payoff date of each security.
INVESTMENT PORTFOLIO MATURITY SCHEDULE
Maturing
-------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
----------------- ----------------- ------------------ ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- -------
December 31, 2002: (Dollars in thousands)
SECURITIES - ALL AVAILABLE-FOR-SALE:
U. S. Government agencies..... $ 206 5.05% $ - -% $ 6,317 5.70% $107,535 5.41%
State and municipal securities 239 4.92 180 5.90 369 4.43 6,267 5.07
Equity securities ............ - - - - - - 2,788 -
-------- -------- -------- --------
$ 445 4.98 $ 180 5.90 $ 6,686 5.63 $116,590 5.39
======== ======== ======== ========
With the exception of some securities issued by U.S. Government agencies, the
Company held one municipal bond issued by Hartselle Utilities, whose amortized
cost of $4,680,547 exceeded 10% of the Company's consolidated shareholders'
equity on December 31, 2002.
Federal funds sold decreased 19.9% during 2002, from $30,000,000 at December 31,
2001 to $24,030,000 at December 31, 2002. This decrease resulted mostly from the
branch divestitures.
The balance of interest-bearing deposits with other banks remained at $200,000
at December 31, 2002 and 2001.
Deposits
Community Bank's primary source of funds is its deposits. Dividends from
Community Bank are the Company's primary source of funds. Historically,
continued enhancement of existing products, emphasis upon better customer
service and expansion into new market areas have fueled the growth in Community
Bank's deposit base. The Company does not presently anticipate further
geographic expansion. Rather emphasis has been placed upon attracting consumer
deposits and the Company's intent is to expand its consumer base in its market
areas in order to continue to fund future asset growth.
During 2002, the Company's average total deposits increased approximately
$4,435,000, or 1.0%, to approximately $467,538,000 from approximately
$463,103,000 in 2001, which represented an increase of approximately $1,088,000,
or 0.2%, from approximately $462,015,000 in 2000. At December 31, 2002, the
Company's total deposits were approximately $459,464,000, a decrease of
approximately $158,242,000, or 25.6%, from approximately $617,706,000 at
December 31, 2001.
23
The following table presents the average deposit balances and the average rates
paid for each of the major classifications of deposits for the 12 month periods
ending December 31, 2002, 2001 and 2000 and excludes averages associated with
discontinued operations:
Average Deposit Balances and Rates Paid
-----------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- --------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
---------- -------- --------- -------- --------- --------
(Dollars in thousands)
Noninterest-bearing demand.............. $ 56,994 0.00% $ 57,347 0.00% $ 56,674 0.00%
Interest-bearing demand................. 79,386 2.17 73,301 4.42 81,920 4.82
Savings................................. 56,606 2.04 48,884 4.14 46,586 4.55
Time.................................... 274,552 3.81 283,571 5.37 276,835 5.90
---------- --------- ---------
Total (1)............................ $ 467,538 3.25 $ 463,103 5.05 $ 462,015 5.52
========== ========= =========
------------------
(1) The rate paid on total average deposits represents the rate paid on total
average interest-bearing deposits only.
The Company's average interest-bearing deposits increased by 1.2% and 0.1% in
2002 and 2001, respectively. Average interest-bearing demand deposits increased
8.3% compared to a decrease of 10.5% during 2001 from an average of
approximately $81,920,000 in 2000. Average savings and average time deposits
increased 15.8% and decreased 3.2%, respectively, during 2002 compared to
increases of 4.9% and 2.4%, respectively, during 2001. Average
noninterest-bearing demand deposits decreased 0.6% during 2002 compared to an
increase of 1.2% during 2001 from an average of $56,674,000 during 2000. Total
average deposits increase 1.0% in 2002 and 0.2% in 2001. The two categories of
lowest cost deposits, noninterest-bearing demand deposits and interest-bearing
demand deposits, comprised the following percentages of total average deposits
during 2002, 2001 and 2000, respectively: (i) Average noninterest-bearing demand
deposits - 12.2%, 12.4%, and 12.3%; and (ii) average interest-bearing demand
deposits - 17.0%, 15.8% and 17.7%. Community Bank experienced a slight shift in
its deposit mix during 2002 as interest-bearing demand deposits and savings
increased while certificates of deposits decreased $9,019,000, or 3.2%. Of total
time deposits at December 31, 2002, approximately 31.3% were large denomination
certificates of deposit and other time deposits of $100,000 or more, up from
31.5% at December 31, 2001.
The maturities of the time certificates of deposit and other time deposits of
$100,000 or more issued by the Company at December 31, 2002 are summarized in
the table below.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 2002
----------------------------------------
Time Other
Certificates Time
of Deposit Deposits Total
------------ ------------ ------------
(In thousands)
Maturing in three months or less.................................. $ 7,977 $ 15,290 $ 23,267
Maturing in over three through six months......................... 13,200 - 13,200
Maturing in over six through twelve months........................ 16,972 - 16,972
Maturing in over twelve months.................................... 32,478 - 32,478
------------ ------------ ------------
Total...................................................... $ 70,627 $ 15,290 $ 85,917
============ ============ ============
24
Borrowed Funds
Community Bank also uses borrowed funds as a source of funds for asset growth in
excess of deposit growth and for short-term liquidity needs. The mixture of
borrowed funds and deposits as sources of funds depends on the relative
availability and costs of those funds and Community Bank's need for funding.
Borrowed funds consist primarily of short-term borrowings, borrowings from the
Federal Home Loan Bank of Atlanta, Georgia ("FHLB-Atlanta") and long-term debt.
Short-term borrowings at year-end 2002 and 2001 consisted of the U. S. Treasury
Tax and Loan Note Option account and securities sold under agreements to
repurchase. Community Bank had $5,000,000 at year end 2002 and 2001 in available
lines to purchase Federal Funds on a secured basis from a commercial bank. At
December 31, 2002 and 2001, Community Bank had no funds advanced against these
lines. In May 2001, Community Bank borrowed funds of $8,000,000 under the FHLB
"fixed rate credit" plan. The advance was for six months bearing interest at
4.15% and matured in November 2001.
The following table sets forth, for the periods indicated, certain information
about the Company's short-term borrowings:
SHORT-TERM BORROWINGS
At December 31,
----------------------------
Weighted Maximum
Average Average Average Outstanding At
Balance Rate Balance Rate Any Month End
----------- ---------- ----------- ---------- ---------------
(Dollars in thousands)
2002:
Federal funds purchased.......... $ - 0.00% $ - 0.00% $ -
Short-term FHLB borrowings...... - 0.00 - 0.00 -
Securities sold under
agreement to
repurchase..................... - 0.00 1,369 1.90 2,905
U.S. treasury tax and loan,
note option.................... 1,725 1.10 757 1.39 1,963
----------- ----------- ---------------
Total........................ $ 1,725 1.10 $ 2,126 1.69 $ 4,868
=========== =========== ===============
2001:
Federal funds purchased.......... $ - 0.00% $ 74 6.11% $ 3,000
Short-term FHLB borrowings....... - 0.00 3,967 4.30 8,000
Securities sold under agreement to
repurchase..................... 2,538 2.13 2,272 3.59 391
U.S. treasury tax and loan, note
option......................... 1,822 1.51 1,021 3.21 814
----------- ----------- ---------------
Total........................ $ 4,360 1.87 $ 7,334 3.95 $ 12,205
=========== =========== ===============
Community Bank is a member of the FHLB-Atlanta and was approved to borrow under
various short-term and long-term programs offered by the FHLB-Atlanta. These
borrowings are secured under a blanket lien agreement on certain qualifying
mortgage instruments in Community Bank's loan and investment portfolios. At
December 31, 2002, Community Bank had no available credit through the FHLB -
Atlanta.
Since June 1999, Community Bank has borrowed funds under the FHLB-Atlanta's
"Convertible Advance Program." Community Bank had $38,000,000 outstanding at
both December 31, 2002 and 2001 under the FHLB-Atlanta's "Convertible Advance
Program". This obligation has a final maturity of March 1, 2010 (120 months), a
call feature every quarterly payment date during the life of the obligation, and
a fixed interest rate of 5.93% per annum. The first call date for this advance
was March 1, 2001; the advance was not called on that date nor has been since.
25
Advances obtained by Community Bank under the "Convertible Advance Program" are
subject to the terms of an agreement for Advances and Security Agreement with
Blanket Floating Lien. Among other things, this agreement provides that upon an
event of default, the FHLB may declare all or any part of the indebtedness and
accrued interest thereon, including any prepayment fees, to be immediately due
and payable. Included in the list of "events of default" is where the FHLB
reasonably and in good faith determines that a material adverse change has
occurred in the financial condition of Community Bank from that disclosed at the
time of the making of any advance or from the condition of Community Bank as
most recently disclosed to the FHLB.
Long-term debt consisted of various commitments with scheduled maturities from
one to 20 years. The following table sets forth expected debt service for the
next five years based on interest rates and repayment provisions as of December
31, 2002. A more detailed explanation of long-term debt is included in Note 11
to the Company's Consolidated Financial Statements included elsewhere in this
Report.
MATURITIES OF LONG-TERM DEBT
2003 2004 2005 2006 2007
----------- ----------- ----------- ----------- -----------
(In thousands)
Interest on indebtedness............ $ 184 $ 164 $ 143 $ 121 $ 97
Repayment of principal.............. 408 428 449 472 495
----------- ----------- ----------- ----------- -----------
$ 592 $ 592 $ 592 $ 593 $ 592
=========== =========== =========== =========== ===========
In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). All of the common securities of
the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. Under
the terms of the indenture, the Company may elect to defer payments of interest
for up to ten semiannual payment periods. The Company elected to defer its March
and September 2002 interest payments. The balance of accrued interest payable on
the debentures was $1,541,872 at December 31, 2002. For the duration of such
deferral period, the Company is restricted from paying dividends to shareholders
or paying debt that is junior to the debentures. The debentures represent the
sole asset of the Trust. The debentures and related income statement effects are
eliminated in the Company's consolidated financial statements. The Company is
entitled to treat the aggregate liquidation amount of the debentures as Tier I
capital under Federal Reserve guidelines.
The Capital Securities accrue and pay distributions semiannually at a rate of
10.875% per annum of the stated liquidation value of $1,000 per capital
security. The Company has entered into an agreement which fully and
unconditionally guarantees payment of: (i) accrued and unpaid distributions
required to be paid on the Capital Securities; (ii) the redemption price with
respect to any Capital Securities called for redemption by the Trust; and (iii)
payments due upon a voluntary or involuntary liquidation, winding up or
termination of the Trust.
The Capital Securities are mandatorily redeemable upon the maturity of the
debentures on March 8, 2030, or upon earlier redemption as provided in the
indenture pursuant to which the debentures were issued. The Company has the
right to redeem the debentures purchased by the Trust: (i) in whole or in part,
on or after March 8, 2010; and (ii) in whole (but not in part) at any time
within 90 days following the occurrence and during the continuation of a tax
event, capital treatment event or investment company event (each as defined in
the indenture). As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be a percentage of the principal
amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued
but unpaid interest.
Liquidity Management
Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss. Liquidity management involves
maintaining the Company's ability to meet the day-to-day cash flow requirements
of Community Bank's customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to
26
meet their credit needs. Without proper liquidity management, the Company would
not be able to perform the primary function of a financial intermediary and
would, therefore, not be able to meet the production and growth needs of the
communities it serves.
The primary function of asset and liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can also meet the
investment objectives of its shareholders. Daily monitoring of the sources and
uses of funds is necessary to maintain an acceptable cash position that meets
both its customers' needs and its shareholders' objectives. In a banking
environment, both assets and liabilities are considered sources of liquidity
funding and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales, maturities, calls and pay downs of investment
securities. Real estate-construction and commercial, financial and agricultural
loans that mature in one year or less totaled approximately $40,305,000, or
11.2% of loans, net of unearned income, at December 31, 2002, and investment
securities maturing in one year or less totaled approximately $445,000, or 0.4%
of the investment portfolio, at December 31, 2002. Other sources of liquidity
include cash on deposit with other banks and short-term investments such as
federal funds sold and maturing interest-bearing deposits with other banks.
The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. Funds are
also available through the purchase of federal funds from other commercial banks
and borrowings against Community Bank's credit availability through the
FHLB-Atlanta. Liquidity management involves the daily monitoring of the sources
and uses of funds to maintain an acceptable Company cash position.
Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its shareholders and
other needs. Certain restrictions exist regarding the ability of Community Bank
to transfer funds to the Company in the form of cash dividends, loans or
advances. The approval of the State of Alabama Banking Department is required to
pay dividends in excess of Community Bank's net earnings in the current year
plus retained net earnings for the preceding two years less any required
transfers to surplus. At December 31, 2002, Community Bank could not have
declared any dividends without approval of regulatory authorities. See Note 12
to the Company's Consolidated Financial Statements elsewhere in this Report and
"Item 1 - Business - Supervision and Regulation."
The Company relies on dividends from Community Bank in order to pay expenses,
service debt and pay dividends to shareholders. Although dividends from
Community Bank are the primary source of funding, the Company also receives cash
from Community Bank in the form of management fee income and generally retains
cash for its portion of tax benefit on intercompany income tax settlements.
Without dividends or management fee income from Community Bank, the Company
would not be able to pay expenses or service debt. Management fees for 2002 were
$300,000 and no dividends were paid for 2002. Community Bank is unable to pay a
dividend to the Company without prior approval of the regulatory authorities nor
is the Company able to increase the management fee charged to Community Bank
without the prior written approval of the Federal Reserve. See "Item 1 -
Business - Supervision and Regulation."
Interest Rate Sensitivity
Community Bank's net interest income and the fair value of its financial
instruments are influenced by changes in the level of interest rates. Community
Bank manages its exposure to fluctuations in interest rates through policies
established by its Asset/Liability Committee ("ALCO"). The ALCO meets
periodically to monitor its interest rate risk exposure and implement strategies
that might improve its balance sheet positioning and/or earnings. Management
utilizes an interest rate simulation model to estimate the sensitivity of the
Bank's net interest income and net income to changes in interest rates. Such
estimates are based upon a number of assumptions for each scenario, including
balance sheet growth, deposit repricing characteristics and prepayment rates.
27
The estimated impact on Community Bank's net interest income sensitivity over a
one year time horizon at December 31, 2002 is shown below. Such analysis assumes
an immediate and a parallel shift in interest rates based on correlation
analysis of market prices and the Company's estimates of deposit rate changes in
alternate scenarios.
INTEREST RATE SENSITIVITY
-100 +100
Basis Basis
Points Level Points
----------- ----------- -----------
December 31, 2002: (Dollars in thousands)
Prime rate.................................................... 3.25% 4.25% 5.25%
Interest income............................................... $ 34,342 $ 35,983 $ 37,500
Interest expense.............................................. 13,109 14,131 15,352
----------- ----------- -----------
Net interest income...................................... $ 21,233 $ 21,852 $ 22,148
=========== =========== ===========
Dollar change from level...................................... $ (619) $ 296
Percentage change from level.................................. (2.83)% 1.35%
December 31, 2001:
Prime rate.................................................... 3.75% 4.75% 5.75%
Interest income............................................... $ 47,508 $ 50,612 $ 53,156
Interest expense.............................................. 18,102 20,094 21,679
----------- ----------- -----------
Net interest income...................................... $ 29,406 $ 30,518 $ 31,477
=========== =========== ===========
Dollar change from level...................................... $ (1,112) $ 959
Percentage change from level.................................. (3.64)% 3.14%
As shown above, in a 100 basis point rising rate environment, the net interest
margin should increase 1.35% and in a 100 basis point falling rate environment,
the net interest margin should decrease 2.83%. This is a positive change from
2001 variances of 3.14% and (3.64)%, meaning net interest income is less
sensitive to fluctuations in interest rates when compared to sensitivity for
2001. These percent changes from a level rate scenario fall comfortably within
The Company's ALCO policy limit of +/-7.00%.
Capital Resources
A strong capital position is vital to the continued profitability of the Company
because it promotes depositor and shareholder confidence and provides a solid
foundation for future growth of the organization. In 1993, 1995 and 1998, the
Company raised capital through the sale of shares of its Common Stock. All three
offerings were closed upon being fully subscribed. In the fourth quarter of
1998, the Company sold to the public and the Company's Employee Stock Ownership
Plan (the "ESOP") 500,000 newly issued shares of Common Stock at a price of
$19.00 per share, raising approximately $9,467,000 after reduction for offering
expenses. The net proceeds from all offerings have been available for debt
reduction, capital enhancement, growth and expansion of the Company and general
corporate purposes.
In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). All of the common securities of
the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%.
28
The debentures represent the sole asset of the Trust. The debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines. See "Borrowed
Funds -- Maturities of Long-term Debt."
Bank regulatory authorities have issued risk-based capital guidelines that take
into consideration risk factors associated with various categories of assets,
both on and off the balance sheet. Under the guidelines, capital strength is
measured in two tiers, which are used in conjunction with risk-adjusted assets
to determine the risk-based capital ratios. The Company's Tier I capital, which
includes common stock, retained earnings and Trust preferred securities amounted
to approximately $46,817,000 at December 31, 2002, compared to approximately
$46,359,000 at December 31, 2001. Tier II capital components include
supplemental capital components, such as qualifying allowance for loan losses
and qualifying subordinated debt. Tier I capital plus the Tier II capital
components are referred to as total risk-based capital, which was approximately
$52,885,000, $54,074,000 at year-end 2002 and 2001, respectively. The percentage
ratios, as calculated under the guidelines, for Tier I and total risk-based
capital were 12.98% and 14.66%, respectively, at December 31, 2002, compared to
9.46% and 11.03%, respectively, at year-end 2001.
Another important indicator of capital adequacy in the banking industry is the
leverage ratio. The tier I leverage ratio is defined as the ratio that the
Company's Tier I capital bears to total average assets minus goodwill. The
Company's Tier I leverage ratios were 8.20% and 6.33% at December 31, 2002 and
2001, respectively.
The following table illustrates the Company's regulatory capital ratios at
December 31, 2002, 2001 and 2000:
CAPITAL ADEQUACY RATIOS
December 31,
2002 2001 2000
----------- ----------- -----------
(Dollars in thousands)
Tier I capital................................................ $ 46,817 $ 46,359 $ 44,008
Tier II capital............................................... 6,068 7,715 7,790
----------- ----------- -----------
Total qualifying capital................................. $ 52,885 $ 54,074 $ 51,798
=========== =========== ===========
Risk-weighted total assets (including off-balance-sheet
exposures)............................................... $ 360,709 $ 490,224 $ 510,161
=========== =========== ===========
Tier I risk-based capital ratio............................... 12.98% 9.46% 8.63%
Total risk-based capital ratio................................ 14.66 11.03 10.15
Leverage ratio................................................ 8.20 6.33 6.17
In addition to regulatory requirements, a certain level of capital growth must
be achieved to maintain appropriate ratios of equity to total assets. The
following table summarizes the equity-to assets and dividend payout ratios for
each of the last three years:
CAPITAL GROWTH (REDUCTION) RATIOS
Year Ended December 31,
2002 2001 2000
--------- --------- ---------
Dividend payout ratio......................................... 0% 0% (102.9)%
Average equity to average assets ratio........................ 6.81 5.92 5.88
29
The Company's return on average assets ratio, which is computed by dividing net
income (loss) by average assets was 0.14, (0.20) and (0.42) for 2002, 2001 and
2000, respectively. The increase in 2002 was due to the net income of
approximately $904,000 in 2002, compared to a net loss of approximately
$1,423,000 in 2001 and a net loss of approximately $3,019,100 in 2000, coupled
with a 13.2% decrease in average assets during 2002 to approximately
$629,481,000, compared to average assets of approximately $725,461,000 during
2001 and $710,915,000 during 2000.
The Company's return on average equity ratio, which is computed by dividing net
income (loss) by average shareholders' equity, increased in 2002 to 2.11%, from
(3.31)% in 2001. The increase in 2002 was due to net income of approximately
$904,000 made by the Company in 2002, compared to the net loss of approximately
$1,423,000 in 2001 and a net loss of approximately $3,019,000 in 2000, which was
coupled with a slight decrease in average shareholders' equity to approximately
$42,848,000 during 2002, compared to approximately $42,938,000 during 2001 and
approximately $41,776,000 during 2000.
The Company's dividend payout ratio is determined by dividing the dividends per
share by the basic net earnings or loss per share for the relevant period. The
Company did not pay dividends in 2002 or 2001. During 2000, the Company's
dividend payout ratio was (102.9)% due to an increase in the amount of cash
dividends paid per share coupled with a basic net loss per share reported for
the period. During 2000, the amount of cash dividends paid per share increased
$0.15, or 25%, to $0.75 from $0.60 in 1999. In addition, during 2000, the
Company reported a basic net loss per share of $0.68 compared to basic net
earnings per share of $0.37 for 1999.
The Company's average equity to average assets ratio, which is computed by
dividing average shareholders' equity by average assets, was 6.81% in 2002,
5.92% in 2001, and 5.88% in 2000. The increase in 2002 was due to a 13.2%
decrease in average assets during 2002 to approximately $629,481,000, while
average shareholders' equity decreased by only 0.2%.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is usually the principal source of a financial institution's
earnings stream and represents the difference or spread between interest income
generated from earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in earning assets and interest-bearing liabilities impact net interest income.
Net interest income for 2002 increased approximately $651,000, or 2.8%, to
approximately $23,504,000 from approximately $22,853,000 in 2001, compared to an
increase of approximately $435,000, or 1.9%, in 2001 from approximately
$22,418,000 in 2000. The Company experienced a decline in average earning assets
and growth in average interest-bearing liabilities during 2002; however, a shift
occurred in deposits as a result of decreases in time deposits and increases in
demand and savings. The "Rate/Volume Variance Analysis" table in the section
below provides information about changes in interest income, interest expense
and net interest income due to changes in average balances and rates.
The Company's interest income decreased approximately $6,830,000, or 14.4%, to
$40,657,000 in 2002 from $47,487,000 in 2001, compared to a decrease of
approximately $1,418,000, or 2.9%, in 2001 from approximately $48,905,000 in
2000. The decrease in 2002 was due to a 122 basis points decrease in the yield
on average earning assets during 2002 along with a decrease in the volume of
average earning assets. The 2001 decrease was due to the 76 basis points
decrease in the yield on average earning assets. The interest income on loans
decreased 16.1% during 2002, due to both a decrease of 4.1% in the average loan
balances outstanding and a decrease in the yield on loans of 125 basis points.
During 2001, the interest income on loans decreased 5.2%, primarily due to the
decrease in the yield on loans of 62 basis points. The interest income on
investment securities decreased 2.4% during 2002, compared to 2001, and
increased 6.4% during 2001, compared to 2000, due to changes in the average
investment security balances outstanding.
During 2002, the Company's interest expense decreased approximately $7,481,000,
or 30.4%, to approximately $17,153,000 from approximately $24,634,000 in 2001,
as average interest-bearing liabilities outstanding during 2002
30
decreased 0.5% but the average rate paid on interest-bearing liabilities during
2002 decreased 157 basis points. In 2001, interest expenses decreased
approximately $1,853,000, or 7.0%, to approximately $24,634,000 from
approximately $26,487,000 in 2000, despite a 1.5% increase in average
interest-bearing liabilities in 2001, due to the effect of a 48 basis point
increase in the average rate paid in 2001. Interest-bearing deposits are the
major component of interest bearing liabilities, representing 87.6% in 2002,
86.1% in 2001 and 87.3% in 2000 of average total interest-bearing liabilities
outstanding. While average interest-bearing deposits outstanding increased 1.2%
and 0.1% during 2002 and 2001, respectively, the rate paid on these average
balances reflected a decrease of 180 basis points during 2002 compared to a
decrease of 47 basis points during 2001. The decrease in interest expense on
short-term borrowings during 2002 primarily resulted from a 36.9% decline in the
average balance. The decrease in interest expense on long-term debt during 2002
occurred despite an increase in the average rate paid of 37 basis points due to
a 9.8% decline in the average balance for 2002 . The decrease in interest
expense on FHLB borrowings during 2002 was due to a 9.5% decrease in the average
balance of borrowings outstanding during 2002 even though the average interest
rate paid on these borrowings increased 8 basis points during 2002. The average
capitalized lease obligations outstanding during 2002 were approximately
$4,096,000, which represented 0.9% of the Company's average total
interest-bearing liabilities.
The trend in net interest income is also evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing net interest
income by average earning assets. This ratio represents the difference between
the average yield returned on average earning assets and the average rate paid
for funds used to support those earning assets, including both interest-bearing
and noninterest-bearing sources. The Company's net interest margin for 2002 was
4.47%, compared to 4.31% and 4.45% for 2001 and 2000, respectively.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest-bearing sources of funds.
The interest rate spread eliminates the impact of noninterest-bearing funds and
gives a more direct perspective to the effect of market interest rate movements.
The net interest spread for 2002 increased 35 basis points to 4.07% from the
Company's 2001 spread of 3.72% as the cost of interest-bearing sources of funds
decreased 157 basis points, but the yield on earning assets decreased only 122
basis points. The net interest spread for 2000 was 4.00%. See the tables in this
section below entitled "Consolidated Average Balances, Interest Income/Expenses
and Yields/Rates" and "Rate/Volume Variance Analysis" for more information.
The following tabulation presents certain net interest income data without
modification for assumed tax equivalency:
Years Ended December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Rate earned on earning assets....... 7.73% 8.95% 9.71% 9.40% 9.26%
Rate paid on borrowed funds......... 3.66 5.23 5.71 5.00 5.23
Interest rate spread................ 4.07 3.72 4.00 4.40 4.03
Net interest margin................. 4.47 4.31 4.45 4.86 4.52
During 2002, the banking industry saw the prime interest rate move from 4.75% to
4.25%. This decrease resulted as the prime interest rate fell by 50 basis points
in November 2002. This is in contrast to the 450 basis point increase during
2001.
The "Consolidated Average Balances, Interest Income/Expenses and Yields/Rates"
and the "Rate/Volume Variance Analysis" tables are presented on the following
four pages. The Consolidated Average Balances/Interest Income/Expenses and
Yields/Rates table presents, for the periods shown, the average balance of
certain balance sheet items, the dollar amount of interest income from average
earning assets and resultant yields, the interest expense and rate paid on
average interest-bearing liabilities, and the net-interest margin. The
Rate/Volume Variance Analysis table presents an analysis of changes in interest
income, interest expense and net interest income attributable to changes in
volume and interest rate.
31
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
Years Ended December 31,
2002 2001 2000
---- ---- ----
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- --------- ------- --------- --------- ------- --------- --------- -------
(Dollars in thousands)
Assets (3)
Earning assets:
Loans, net of unearned
income (1)(2)............ $ 382,126 $ 33,506 8.77% $ 398,490 $ 39,938 10.02% $ 395,958 $ 42,121 10.64%
Investment securities:
Taxable.................. 107,566 6,280 5.84 100,599 6,209 6.17 87,745 5,644 6.43
Tax exempt............... 9,028 456 5.05 13,468 693 5.15 15,366 840 5.47
--------- --------- --------- --------- --------- ---------
Total investment securities 116,594 6,736 5.78 114,067 6,902 6.05 103,111 6,484 6.29
Interest bearing deposits
in other banks........... 2,899 29 1.00 344 44 12.79 915 66 7.21
Federal funds sold ......... 24,406 386 1.58 17,816 603 3.38 3,635 234 6.44
--------- --------- --------- --------- --------- ---------
Total earning assets..... 526,025 40,657 7.73 530,717 47,487 8.95 503,619 48,905 9.71
Noninterest-earning assets:
Cash and due from banks.. 20,927 21,160 24,006
Premises and equipment 34,133 31,433 29,549
Accrued interest and
other assets........... 13,315 15,563 18,618
Allowance for loan losses. (7,511) (5,328) (2,691)
Average balances associated with
discontinued operations.. 42,592 131,916 137,814
--------- --------- ---------
Total assets............. $ 629,481 $ 725,461 $ 710,915
========= ========= =========
Liabilities and Shareholders' Equity (3)
Interest-bearing liabilities:
Demand deposits.......... $ 79,386 1,725 2.17 $ 73,301 3,237 4.42 $ 81,920 3,950 4.82
Savings deposits......... 56,606 1,154 2.04 48,884 2,023 4.14 46,586 2,120 4.55
Time deposits............ 274,552 10,474 3.81 283,571 15,227 5.37 276,835 16,322 5.90
--------- --------- --------- --------- --------- ---------
410,544 13,353 3.25 405,756 20,487 5.05 405,341 22,392 5.52
Short-term borrowings....... 2,126 36 1.69 3,367 37 1.10 2,589 112 4.33
FHLB long-term debt......... 38,000 2,266 5.96 41,967 2,468 5.88 38,000 2,248 5.92
Capitalized lease obligations 4,096 225 5.49 4,746 288 6.07 3,579 327 9.14
Other long-term debt........ 13,965 1,273 9.12 15,478 1,354 8.75 14,716 1,408 9.57
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities ........... 468,731 17,153 3.66 471,314 24,634 5.23 464,225 26,487 5.71
--------- ------- --------- ------- --------- -------
Noninterest-bearing liabilities:
Demand deposits.......... 56,994 57,347 56,674
Accrued interest and
other liabilities...... 6,846 4,363 6,170
Shareholders' equity..... 42,848 42,938 41,776
Average balances associated with
discontinued operations.. 54,062 149,499 142,070
--------- --------- ---------
Total liabilities and
shareholders' equity... $ 629,481 $ 725,461 $ 710,915
========= ========= =========
Net interest income/net interest spread 23,504 4.07% 22,853 3.72% 22,418 4.00%
--------- ======= --------- ======= --------- =======
Net interest margin............ 4.47% 4.31% 4.45%
======= ======= =======
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Income on loans, net of unearned income, includes loan fees of $2,980,000.
(3) All yields are computed on income/expense and average balances from
continuing operations.
32
RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS
Average Volume Change in Volume Average Rate
------------------------------- -------------------- ----------------------
2002 2001 2000 2002-2001 2001-2000 2002 2001 2000
--------- --------- --------- --------- --------- ------ ------ ------
(Dollars in thousands)
Earning Assets:
Loans, net of unearned income.... $ 382,126 $ 398,490 $ 395,958 $ (16,364) $ 2,532 8.77% 10.02% 10.64%
Investment securities:
Taxable....................... 107,566 100,599 87,745 6,967 12,854 5.84 6.17 6.43
Tax exempt.................... 9,028 13,468 15,366 (4,440) (1,898) 5.05 5.15 5.47
--------- --------- --------- --------- ---------
Total investment securities 116,594 114,067 103,111 2,527 10,956 5.78 6.05 6.29
Interest-bearing deposits with
other banks.................. 2,899 344 915 2,555 (571) 1.00 12.79 7.21
Federal funds sold............... 24,406 17,816 3,635 6,590 14,181 1.58 3.38 6.44
--------- --------- --------- --------- ---------
Total earning assets....... $ 526,025 $ 530,717 $ 503,619 $ (4,692) $ 27,098 7.73 8.95 9.71
========= ========= ========= ========= =========
Interest-Bearing Liabilities:
Deposits:
Demand........................ $ 79,386 $ 73,301 $ 81,920 $ 6,085 $ (8,619) 2.17 4.42 4.82
Savings ...................... 56,606 48,884 46,586 7,722 2,298 2.04 4.14 4.55
Time.......................... 274,552 283,571 276,835 (9,019) 6,736 3.81 5.37 5.90
--------- --------- --------- ------- ---------
Total interest-bearing deposits 410,544 405,756 405,341 4,788 415 3.25 5.05 5.52
Short-term borrowings............ 2,126 3,367 2,589 (1,241) 778 1.69 1.10 4.33
FHLB long-term debt.............. 38,000 41,967 38,000 (3,967) 3,967 5.96 5.88 5.92
Capitalized lease obligations.... 4,096 4,746 3,579 (650) 1,167 5.49 6.07 9.14
Other long-term debt............. 13,965 15,478 14,716 (1,513) 762 9.12 8.75 9.57
--------- --------- --------- ------- ---------
Total interest-bearing
liabilities............. $ 468,731 $ 471,314 $ 464,225 $(2,583) $ 7,089 3.66 5.23 5.71
========= ========= ========= ======= ========= ------ ------ ------
Net interest income/net interest spread. 4.07% 3.72% 4.00%
====== ====== ======
Net yield on earning assets...... 4.47% 4.31% 4.45%
====== ====== ======
Variance Attributed to (1)
Interest Income/Expense Variance 2002 2001
---------------------------- --------------------- ---------------- ----------------
2002 2001 2000 2002-2001 2001-2000 Volume Rate Volume Rate
-------- -------- -------- --------- --------- ------- ------- ------- -------
(Dollars in thousands)
Earning Assets:
Loans, net of unearned income.... $ 33,506 $ 39,938 $ 42,121 $ (6,432) $ (2,183) $(1,593) $(4,839) $ 270 $(2,453)
Investment securities:
Taxable....................... 6,280 6,209 5,644 71 565 415 (344) 800 (235)
Tax exempt.................... 456 693 840 (237) (147) (224) (13) (100) (47)
-------- -------- -------- --------- --------- ------- ------- ------- -------
Total investment securities 6,736 6,902 6,484 (166) 418 191 (357) 700 (282)
Interest-bearing deposits
with other banks.............. 29 44 66 (15) (22) 59 (74) (55) 33
Federal funds sold .............. 386 603 234 (217) 369 174 (391) 527 (158)
-------- -------- -------- --------- --------- ------- ------- ------- -------
Total earning assets..... $ 40,657 $ 47,487 $ 48,905 $ (6,830) $ (1,418) $(1,169) $(5,661) $ 1,442 $(2,860)
======== ======== ======== ========= ========= ======= ======= ======= =======
Interest-Bearing Liabilities:
Deposits:
Demand........................ $ 1,725 $ 3,237 $ 3,950 $ (1,512) $ (713) $ 250 $(1,762) $ (399) $ (314)
Savings....................... 1,154 2,023 2,120 (869) (97) 281 (1,150) 101 (198)
Time.......................... 10,474 15,227 16,322 (4,753) (1,095) (469) (4,284) 392 (1,487)
-------- -------- -------- --------- --------- ------- ------- ------- -------
Total interest-bearing
deposits.............. 13,353 20,487 22,392 (7,134) (1,905) 62 (7,196) 94 (1,999)
Short-term borrowings............ 36 37 112 (1) (75) (17) 16 26 (101)
FHLB long-term debt.............. 2,266 2,468 2,248 (202) 220 (235) 33 235 (15)
Capitalized lease obligations.... 225 288 327 (63) (39) (7) (56) 135 (174)
Other long-term debt............. 1,273 1,354 1,408 (81) (54) (136) 55 71 (125)
-------- -------- -------- --------- --------- ------- ------- ------- -------
Total interest-bearing
liabilities........... 17,153 24,634 26,487 (7,481) (1,853) (333) (7,148) 561 (2,414)
-------- -------- -------- --------- --------- ------- ------- ------- -------
Net interest income...... $ 23,504 $ 22,853 $ 22,418 $ 651 $ 435 $ (836) $ 1,487 $ 881 $ (446)
======== ======== ======== ========= ========= ======= ======= ======= =======
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
33
Provision for Loan Losses, Net Charge-Offs and Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The allowance is based upon management's estimated range of
those losses. Actual losses for these loans may vary significantly from this
estimate.
At December 31, 2002, the allowance for loan losses was $9,784,000 which
represented an increase of $2,492,000, or 34.2%, over the December 31, 2001
amount of $7,292,000. There was a $185,000, or 2.6%, increase in the allowance
for loan losses at December 31, 2001 as compared to December 31, 2000. This
increase in the overall level of the allowance for loan losses was primarily due
to provisions for loan losses of $10,108,000 and $6,314,000, including amounts
related to discontinued operations, made by the Company in 2002 and 2001,
respectively. As a percentage of total loans, net of unearned income, the
allowance for loan losses increased to 2.72% at December 31, 2002, compared to
1.45% at December 31, 2001. Management believes that the allowance for loan
losses at December 31, 2002 is adequate to absorb known risks in the Company's
loan portfolio based upon the Company's historical experience. No assurance can
be given, however, that increased loan volume, adverse economic conditions or
other circumstances will not result in increased losses in the Company's loan
portfolio or additional provisions to the allowance for loan losses.
A provision for loan losses is charged against current earnings. Actual loan
losses, net of recoveries, are charged directly to the allowance for loan
losses. The amount of the provision for loan losses is based on the growth of
the loan portfolio, the amount of net loan losses incurred and management's
estimation of potential future losses based on an evaluation of the risk in the
loan portfolio. The provision for loan losses was $10,108,000, $6,314,000 and
$9,289,000, including amounts related to discontinued operations, in 2002, 2001
and 2000, respectively. This represented an increase of $3,794,000, or 60.0%, in
2002 and a decrease of $2,975,000 or 32.0% in 2001. The provision for loan loss
in 2002 was significantly higher due to increased loan charge-offs during the
year.
In March 2001, management of Community Bank became aware that an employee in
Community Bank's Double Springs, Alabama location had improperly originated
approximately $1,200,000 in loans primarily during 2000 and the first quarter of
2001 in violation of Community Bank's lending policies, and had manipulated loan
payments to make it falsely appear that payments under the loans were current.
The bank employee has admitted wrongdoing in connection with the loans and his
employment with Community Bank has been terminated. Management notified federal
and state banking regulatory authorities, law enforcement authorities and the
Company's fidelity bond carrier, and is cooperating with law enforcement
authorities in their investigation of the matter. As a result of its
investigation of these loans, the Company has charged off loans deemed to be a
loss and has reserved for its future estimated losses with a provision to its
allowance for loan losses as necessary.
In September 1998, Community Bank determined that $9,360,000 in motor vehicle
loans that were originated in Community Bank's Ft. Payne, Alabama Wal-Mart
location primarily during a four-month period beginning in May 1998 were not in
compliance with Community Bank's lending policy. By December 31, 1999, borrowers
had defaulted on approximately $5,594,000 of these loans. Community Bank took
into possession and resold 362 vehicles that served as collateral for these
loans, which resulted in proceeds of approximately $2,963,000, which was applied
to the outstanding balances of the defaulted loans. In the fourth quarter of
1999, management determined that these unpaid balances were impaired and,
therefore, made a charge of approximately $2,631,000 to the Company's allowance
for loan losses in December 1999. Concurrently, a provision for loan losses, in
the same amount, was made in order to return the allowance for loan losses to
its balance prior to the charge for the impaired loans. During 2000, Community
Bank, including its subsidiary 1st Community Credit Corporation, charged an
additional $567,000 to its allowance for loan losses with respect to these
defaulted Ft. Payne loans. On June 20, 2000, Community Bank filed an action in
the United States District Court for the Northern District of Alabama against an
automobile dealership, several employees and former employees of the dealership
and a former employee of Community Bank. The lawsuit seeks damages of an
unspecified amount to recover losses incurred by Community Bank in connection
with the Ft. Payne loans, along with all costs associated with the legal action.
Community Bank settled this lawsuit in 2002 and treated the amount received as a
recovery of legal expenses. See "Item 3 - Legal Proceedings - Auto Loan
Litigation."
Loan charge-offs exceeded recoveries by $6,864,000 during 2002, which
represented an increase of $735,000, or 12.0%, from $6,129,000 during 2001,
which represented an increase of $1,344,000, or 28.1%, from $4,785,000 during
34
2000. Net loan charge-offs increased in 2002 from 2001 due to continued
deterioration of the Bank's loan portfolio. Net loan charge-offs remained at the
same level in 2000 as compared to 1999.
The following table sets forth certain information with respect to the Company's
loans, net of unearned income, and the allowance for loan losses for the five
years ended December 31, 2002.
SUMMARY OF LOAN LOSS EXPERIENCE
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(Dollars in Thousands)
Allowance for loan losses at beginning
of period............................... $ 7,292 $ 7,107 $ 2,603 $ 2,971 $ 2,131
Loans charged off:
Commercial, financial and agricultural.. 2,033 1,056 620 282 190
Real estate - mortgage.................. 1,106 726 319 92 50
Consumer................................ 4,169 4,785 4,114 4,814 1,223
--------- --------- --------- --------- ---------
Total loans charged off............. 7,308 6,567 5,053 5,188 1,463
--------- --------- --------- --------- ---------
Recoveries on loans previously charged off:
Commercial, financial and agricultural.. 44 7 10 220 11
Real estate - mortgage.................. 57 40 2 4 -
Consumer................................ 343 391 256 138 126
--------- --------- --------- --------- ---------
Total recoveries.................... 444 438 268 362 137
Net loans charged off...................... 6,864 6,129 4,785 4,826 1,326
Reserves (sold) acquired through
(branch divestitures) acquisitions...... (752) - - - 1,281
Provision for loan losses included
in continuing operations................ 10,033 6,096 7,573 4,458 885
Provision for loan losses included
in discontinued operations.............. 75 218 1,716 - -
--------- --------- --------- --------- ---------
Allowance for loan losses at end of period. $ 9,784 $ 7,292 $ 7,107 $ 2,603 $ 2,971
========= ========= ========= ========= =========
Loans, net of unearned income, at
end of period.......................... $ 359,184 $ 501,519 $ 528,316 $ 498,726 $ 433,853
========= ========= ========= ========= =========
Average loans, net of unearned income,
outstanding for the period (*).......... $ 419,337 $ 516,954 $ 522,301 $ 463,298 $ 378,189
========= ========= ========= ========= =========
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Ratios:
Allowance for loan losses to loans, net of
unearned income, at end of period..... 2.72% 1.45% 1.35% 0.52% 0.68%
Allowance for loan losses at end of period to
average loans, net of unearned income (*) 2.33 1.41 1.36 0.56 0.79
Net charge-offs to average loans, net of
unearned income (*)................... 1.64 1.19 0.92 1.04 0.35
Net charge-offs to allowance for loan losses,
at end of period ..................... 70.16 84.05 67.33 185.40 44.63
Recoveries to prior year charge-offs.... 6.76 8.67 5.17 24.74 11.53
(*) Average loans, for this purpose, includes those associated with
discontinued operations.
In assessing the adequacy of the allowance for loan losses, management relies
predominantly on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged off
and to assess the risk characteristics of the portfolio in the aggregate. This
review takes into consideration the judgments of the responsible lending
officers and senior management, internal loan review personnel, external loan
review professionals and also those of bank regulatory agencies that review the
loan portfolio as part of the regular bank examination process. Loans identified
as having increased credit risk are classified in accordance with the Company's
35
loan policy and appropriate reserves are established for each loan
classification category based on pre-determined reserve percentages. Reserves
are established for the remaining unclassified portion of the loan portfolio
based on actual historical loss factors associated with certain loan types.
In evaluating the allowance, management also considers the historical loan loss
experience of Community Bank, the amount of past due and nonperforming loans,
current and anticipated economic conditions, lender requirements and other
appropriate information. Community Bank allocates its allowance for loan losses
to specific loan categories based on an average of net losses for each loan type
during the previous five years.
Management allocated the allowance for loan losses to specific loan classes, as
of the dates indicated, as follows:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31,
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- --------------- -------------- --------------- ----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Domestic loans
Commercial, financial
and agricultural $ 2,678 27% $ 802 11% $ 711 10% $ 234 9% $ 526 18%
Real estate - mortgage 3,696 38% 583 8 497 7 182 7 357 12
Consumer .......... 3,410 35% 5,907 81 5,899 83 2,187 84 2,088 70
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
$ 9,784 100% $ 7,292 100% $ 7,107 100% $ 2,603 100% $ 2,971 100%
======= ======= ======= ======= ======= ======= ======= ====== ======= =======
Nonperforming Assets
Nonperforming assets as of December 31, 2002 increased approximately $9,768,000,
or 78.2%, to approximately $22,260,000 from approximately $12,492,000 at
year-end 2001, which represented an increase of approximately $6,163,000 or
97.4%, from approximately $6,329,000 at December 31, 2000. Nonperforming loans
include loans classified as nonaccrual or renegotiated and those past due 90
days or more for which interest was still being accrued. During 2002,
nonaccruing loans increased 72.4% to $10,099,000 at December 31, 2002, while
loans past due 90 days or more decreased 47.1% to $1,241,000 at December 31,
2002. The Company has recognized its asset quality problems and has in turn,
increased its credit standards. The Company has also implemented steps needed to
recognize problem credits more timely. Loan review processes were implemented
during 2001 which have led to better identification and recognition of problem
credits. These loan reviews continued throughout 2002 and will continue going
forward. The result has been increased recognition of problem credits and
therefore, increases in nonperforming assets. The Company also plans to
implement a more centralized loan processing function in 2003 intended to ensure
loan policies and procedures are properly followed during the beginning stages
of recording a loan rather than identifying problems in loans soley through the
loan review function. Although, the Company believes it has identified
significant problems in its loan portfolio, it cannot assure that continued
deterioration of the loan portfolio will not occur. However, it is the Company's
policy to adequately reserve for losses in the loan portfolio. During 2001,
nonaccruing loans increased 212.2% to $5,859,000 at December 31, 2001, while
loans past due 90 days or more decreased 8.8% to $2,346,000 at December 31,
2001. Other real estate was $7,676,000 and $4,287,000 at December 31, 2002 and
2001, respectively, which represented increases of 79.1% and 127.9%,
respectively, from the prior year-end. There were no commitments to lend any
additional funds on nonaccrual or renegotiated loans at December 31, 2002. The
following table summarizes the Company's nonperforming assets at December 31
during each of the last five years.
36
NONPERFORMING ASSETS
December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in Thousands)
Nonaccruing loans.......................... $ 10,099 $ 5,859 $ 1,877 $ 2,709 $ 1,600
Loans past due 90 days or more............. 1,241 2,346 2,571 1,332 2,384
Restructured loans......................... 3,244 - - - -
-------- -------- -------- -------- --------
Total nonperforming loans.................. 14,584 8,205 4,448 4,041 3,984
Other real estate.......................... 7,676 4,287 1,881 766 699
-------- -------- -------- -------- --------
Total nonperforming assets.......... $ 22,260 $ 12,492 $ 6,329 $ 4,807 $ 4,683
======== ======== ======== ======== ========
Ratios:
Allowance for loan losses to total nonperforming
assets.................................. 43.95% 58.37% 112.29% 54.15% 63.44%
Total nonperforming loans to total loans (net
of unearned income)..................... 4.06 1.64 0.84 0.81 0.92
Total nonperforming assets to total assets 3.92 1.72 0.89 0.71 0.78
The ratio of allowance for loan losses to total nonperforming assets declined
14.42% during 2002, to 43.95% at December 31, 2002, compared to a decline of
53.92% during 2001, to 58.37% at December 31, 2001 and an increase of 58.14%
during 2000 to 112.29% at December 31, 2000. The significant decline in this
ratio for 2002 and 2001 resulted from the substantial increase in the Company's
nonperforming assets during 2002 and 2001. The ratio of total nonperforming
loans to total loans, net of unearned income, increased 2.42% during 2002, to
4.06% at December 31, 2002, compared to 1.64% and 0.84% at year-end 2001 and
2000, respectively. The ratio of total nonperforming assets to total assets
increased 2.20% during 2002 to 3.92% at year-end 2002, compared to 1.72% at
year-end 2001 and 0.89% at year-end 2000. The ratios have worsened in 2002 and
2001 as nonperforming loans and other real estate have increased substantially.
There were no concentrations of loans exceeding 10% of total loans, which are
not otherwise disclosed as a category of loans at December 31, 2002, 2001 and
2000.
It is the general policy of Community Bank to stop accruing interest income and
place the recognition of interest on a cash basis when any commercial,
industrial or real estate loan is past due as to principal or interest and the
ultimate collection of either is in doubt. Normally, accrual of interest income
on consumer installment loans is suspended when any payment of principal or
interest, or both, is more than 90 days delinquent. When a loan is placed on
nonaccrual status, any uncollected interest accrued in a prior year is charged
against the allowance for loan losses and any uncollected interest accrued in
the current year is reversed against current income unless the collateral for
the loan is sufficient to cover the accrued interest or a guarantor assures
payment of interest.
Noninterest Income
Noninterest income from continuing operations for 2002 decreased approximately
$687,000, or 8.4%, to approximately $7,446,000 from approximately $8,133,000 in
2001, which represented a decrease of approximately $445,000, or 5.2%, from
approximately $8,578,000 in 2000. Noninterest income is derived primarily from
service charges on deposit accounts, insurance commissions, bank club dues (a
deposit account packaged with other financial services) and debt cancellation
fees. Service charges on deposit accounts decreased 6.3%, or $198,000 during
2002 compared to a 3.1% decrease during 2001. Insurance commissions increased
25.0% to approximately $2,237,000 in 2002 after decreasing during 2001. The
level of insurance commissions during the past three years is primarily a result
of the activities of Community Insurance Corp., a subsidiary of Community Bank,
in the areas of property, casualty and life insurance. Bank club dues decreased
11.5% during 2002, to approximately $438,000, compared to a decline of 4.8%
during 2001. Debt cancellation fees decreased 40.4% to approximately $233,000,
during 2002 compared to a 34.6% decrease in 2001. The decline in 2002 was
primarily due to decreased volume in debt cancellation coverage associated with
a decline in Community Bank's loan portfolio. Other operating income decreased
8.9%, to approximately $935,000 from approximately $1,026,000 in 2001, which
represented a decrease of approximately $779,000, or 43.2%, from approximately
$1,805,000 in 2000. Components of other operating income reflecting decreases
during 2002 were fee
37
income associated with wire transfers, safe deposit box rentals and other
miscellaneous service fees. The Company also recognized gains on the sale of
investment securities during 2002, 2001 and 2000 as shown below.
NONINTEREST INCOME
Year Ended December 31, Percent Change
------------------------------------ --------------------
2002 2001 2000 2002/2001 2001/2000
---------- ----------- ----------- --------- ---------
(Dollars in thousands)
Service charges on deposits..................... $ 2,950 $ 3,148 $ 3,250 (6.3)% (3.1)%
Insurance commissions........................... 2,237 1,789 2,400 25.0 (25.5)
Investment securities gains (losses)............ 653 1,284 5 (49.1) -
Bank club dues.................................. 438 495 520 (11.5) (4.8)
Debt cancellation fees.......................... 233 391 598 (40.4) (34.6)
Other........................................... 935 1,026 1,805 (8.9) (43.2)
---------- ---------- -----------
$ 7,446 $ 8,133 $ 8,578 (8.4) (5.2)
========== ========== ===========
Noninterest Expenses
Noninterest expenses from continuing operations totaled approximately
$29,071,000 in 2002, $28,792,000 in 2001 and $28,101,000 in 2000. These levels
represent increases of 1.0% and 2.5% for 2002 and 2001, respectively. The
primary component of noninterest expenses is salaries and employee benefits,
which increased $456,000, or 3.4%, during 2002 to $14,455,000, compared to
$13,977,000 and $16,851,000 for 2001 and 2000, respectively. The increase in
salaries and employee benefits during 2002 resulted primarily from an increase
in required funding of the Company's Employee Stock Ownership Plan as well as
increased expense recognition in the Company's defined benefit pension plan.
Director and committee fees were $444,000 in 2002, $436,000 in 2001 and $617,000
in 2000. This expense remained stable for 2002 while the decrease in 2001
resulted primarily from not paying a retainer fee to non-employee directors as
was done in 2000. This represents a 1.8% increase in 2002 compared to a decrease
of 29.3% in 2001. Since 1999, employee directors have not received board or
committee fees. Occupancy expense increased 3.9% in 2002 to $2,276,000, compared
to $2,191,000 in 2001 and $2,059,000 in 2000, while furniture and equipment
expenses decreased 1.0% in 2002 to approximately $1,651,000, as compared to
$1,667,000 in 2001 and $1,678,000 in 2000. Other operating expenses decreased
11.5% in 2002 to approximately $9,200,000, compared to $10,398,000 in 2001 which
represented a 50.0% increase from $6,931,000 in 2000. Professional and legal
fees incurred as a result of continued litigation against the Company continues
to keep other operating expense high.
The substantial decrease in certain types of noninterest expenses were offset by
a write-down of approximately $2,653,000 of unamortized goodwill related to 1st
Community Credit Corporation and Community Insurance Corp., both subsidiaries of
Community Bank. Management deemed the write-down necessary based on its
assessment of each Company's historical operating income. Management believes
that the decision to recognize this expense was prudent under current
conditions. Moreover, the large size of the write-down is based on conservative
estimates of each subsidiaries future cash flows and may obviate the need for
further adjustments, thus leaving the subsidiaries better positioned for future
performance.
38
NONINTEREST EXPENSES
Year Ended December 31, Percent Change
------------------------------------ ---------------------
2002 2001 2000 2002/2001 2001/2000
---------- ----------- ----------- --------- ---------
(Dollars in thousands)
Salaries and employee benefits.................. $ 14,455 $ 13,977 $ 16,851 3.4% (17.1)%
Occupancy expense............................... 2,276 2,191 2,059 3.9 6.4
Furniture and equipment expense................. 1,651 1,667 1,678 (1.0) (0.7)
Director and committee fees..................... 444 436 617 1.8 (29.3)
Net loss on sale of other real estate owned..... 1,260 57 (11) 2,110.5 618.2
Net loss (gain) on disposal of assets........... (215) 66 (24) (425.8) 375.0
Loss on impairment of premises
and equipment.............................. - - 439 - (100.0)
Amortization of intangibles-goodwill............ - 478 470 (100.0) 1.7
Amortization of intangibles-other............... 77 83 83 (7.2) -
Loss on write-down of goodwill.................. - 2,653 - (100.0) -
Advertising..................................... 45 35 79 28.6 (55.7)
Insurance....................................... 832 279 298 198.2 0.6
Legal Fees...................................... 1,962 1,853 785 5.9 136.1
Professional fees............................... 1,309 1,201 211 9.0 469.2
Supplies........................................ 590 559 418 5.5 33.7
Postage......................................... 289 383 437 (24.5) (12.4)
Telephone....................................... 598 657 787 (9.0) (16.5)
Training and Education.......................... 35 41 47 (14.6) (12.8)
Holding cost on other real estate owned......... 253 61 24 314.8 154.2
Other........................................... 3,210 2,115 2,853 51.8 (25.9)
---------- ---------- -----------
$ 29,071 $ 28,792 $ 28,101 1.0 2.5
========== ========== ===========
Impact of Inflation and Changing Prices
A bank's asset and liability structure is substantially different from that of
an industrial company in that virtually all assets and liabilities of a bank are
monetary in nature. Management believes the impact of inflation on financial
results depends upon the Company's ability to react to changes in interest rates
and by such reaction to reduce the inflationary impact on performance. Interest
rates do not necessarily move in the same direction, or at the same magnitude,
as the prices of other goods and services. As discussed previously, management
seeks to manage the relationship between interest-sensitive assets and
liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
Various information shown elsewhere in this Report should assist in an
understanding of how well the Company is positioned to react to changing
interest rates and inflationary trends. In particular, the summary of net
interest income, the maturity distributions, the composition of the loan and
security portfolios and the data on the interest sensitivity of loans and
deposits should be considered.
39
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL INFORMATION
COMMUNITY BANCSHARES, INC.
The management of Community Bancshares, Inc. is responsible for the preparation,
integrity, and objectivity of the consolidated financial statements, related
financial data, and other information in this annual report. The consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States and include amounts based on
management's best estimates and judgment where appropriate. Financial
information appearing throughout this annual report is consistent with the
consolidated financial statements.
In meeting its responsibility both for the integrity and fairness of these
statements and information, management depends on the accounting systems and
related internal accounting controls that are designed to provide reasonable
assurances that (i) transactions are authorized and recorded in accordance with
established procedures, (ii) assets are safeguarded, and (iii) proper and
reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the cost of
internal control systems should not exceed the related benefits. As an integral
part of internal control systems, the Company maintains a professional staff of
internal auditors who monitor compliance and assess the effectiveness of
internal control systems and coordinate audit coverage with independent
certified public accountants.
The responsibility of the Company's independent certified public accountants is
limited to an expression of their opinion as to the fairness of the consolidated
financial statements presented. Their opinion is based on an audit conducted in
accordance with generally accepted auditing standards as described in their
report.
The Board of Directors is responsible for insuring that both management and the
independent certified public accountants fulfill their respective
responsibilities with regard to the consolidated financial statements. The Audit
Committee meets periodically with both management and the independent certified
public accountants to assure that each is carrying out its responsibilities. The
independent certified public accountants have full and free access to the Audit
Committee and Board of Directors and may meet with them, with and without
management being present, to discuss auditing and financial reporting matters.
40
Item 8 - Financial Statements and Supplementary Data
The financial statements and supplementary data required by Regulation S-X and
by Item 302 of Regulation S-K are set forth in the pages listed below.
Financial Statements Page(s)
Report of Independent Accountants..................................................................... 42
Consolidated Statements of Condition as of December 31, 2002 and 2001................................. 43
Consolidated Statements of Income for the years ended December 31, 2002, 2001
and 2000............................................................................................ 44-45
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000.................................................................... 46
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001
and 2000............................................................................................ 47-48
Notes to Consolidated Financial Statements............................................................ 49-87
41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders Community Bancshares, Inc.
We have audited the accompanying consolidated statement of condition of
Community Bancshares, Inc. and subsidiaries as of December 31, 2002, and the
related consolidated statements of income, shareholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the Company
as of December 31, 2001 and 2000 were audited by other auditors whose reports
dated April 5, 2002 and , respectively, expressed an unqualified opinion on
those financial statements. As discussed in Note 22, the Company has restated
its 2001 and 2000 financial statements during the current year to properly
recognize impairment of premises and equipment, unrecorded liabilities,
valuation of repossessed assets, and accounts receivable in conformity with
generally accepted accounting principles. The other auditors reported on the
2001 and 2000 financial statements before the restatement.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community
Bancshares, Inc. and subsidiaries as of December 31, 2002, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles.
We also audited the adjustments described in Note 22 that were applied to
restate the financial statements for the years ended December 31, 2001 and 2000.
In our opinion, such adjustments are appropriate and have been properly applied.
/s/ Carr, Riggs & Ingram, LLC
Montgomery, Alabama
April 15, 2003
42
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 2002 AND 2001
2002 2001
--------------- ---------------
Assets
Cash and due from banks............................................... $ 15,976,613 $ 23,037,008
Interest-bearing deposits in banks and federal funds sold. ........... 24,230,000 30,200,000
Securities available for sale ........................................ 123,901,469 121,679,303
Loans (net of unearned income) ....................................... 359,183,888 501,519,659
Allowance for possible loan losses ................................ 9,784,269 7,292,370
---------------- ----------------
Net loans ......................................................... 349,399,619 494,227,289
Capitalized lease receivable.......................................... 3,053,542 -
Premises and equipment, net .......................................... 25,435,491 37,717,650
Accrued interest receivable........................................... 4,369,748 7,061,043
Goodwill and other intangible assets, net............................. 2,713,389 2,629,682
Other real estate owned .............................................. 7,676,442 4,287,273
Other assets ......................................................... 10,840,086 6,751,759
---------------- ----------------
Total Assets....................................................... $ 567,596,399 $ 727,591,007
================ ================
Liabilities And Shareholders' Equity
Deposits:
Noninterest-bearing................................................ $ 52,920,683 $ 67,695,615
Interest-bearing................................................... 406,543,121 550,010,415
---------------- ----------------
Total deposits ................................................. 459,463,804 617,706,030
Other short-term borrowings .......................................... 1,725,133 4,359,927
Accrued interest payable.............................................. 3,622,765 4,400,000
FHLB long-term debt................................................... 38,000,000 38,000,000
Capitalized lease obligations ........................................ 4,058,169 5,766,076
Other long-term debt ................................................. 3,577,687 4,666,599
Trust preferred securities ........................................... 10,000,000 10,000,000
Other liabilities .................................................... 6,837,884 4,297,542
---------------- ----------------
Total liabilities ................................................. 527,285,442 689,196,174
Shareholders' equity
Preferred stock (par value $.01 per share, 200,000 shares
authorized, no shares issued)...................................... - -
Common stock (par value $.10 per share, 20,000,000
shares authorized, 4,810,089 and 4,808,331 shares
issued as of December 31, 2002 and 2001, respectively)............. 481,009 480,833
Additional paid in capital............................................ 30,806,862 30,753,008
Retained earnings .................................................... 11,023,962 10,119,764
Treasury stock (23,803 and 20,803 shares, as of
December 31, 2002 and 2001, respectively) ...................... (441,768) (396,768)
Unearned ESOP shares (148,972 and 174,267 shares
as of December 31, 2002 and 2001, respectively) ................... (1,999,858) (2,317,902)
Accumulated other comprehensive income (loss), net of taxes .......... 440,750 (244,102)
---------------- ----------------
Total shareholders' equity ........................................ 40,310,957 38,394,833
---------------- ----------------
Total Liabilities and Shareholders' Equity......................... $ 567,596,399 $ 727,591,007
================ ================
See accompanying notes to consolidated financial statements
43
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------------- --------------- ----------------
Interest Income
Interest and fees on loans........................... $ 33,505,597 $ 39,938,259 $ 42,121,252
Interest on investment securities:
Taxable securities................................... 6,280,795 6,209,240 5,644,293
Non taxable securities.............................. 455,769 693,065 839,587
Interest on federal funds sold....................... 386,050 603,072 234,432
Other interest....................................... 29,148 43,851 65,576
----------------- --------------- ----------------
Total interest income ............................ 40,657,359 47,487,487 48,905,140
----------------- --------------- ----------------
Interest Expense
Interest on deposits ................................ 13,352,690 20,486,605 22,392,416
Interest on short-term borrowings ................... 36,423 37,318 112,317
FHLB long-term debt.................................. 2,265,919 2,467,829 2,248,055
Interest on capitalized lease obligations............ 224,846 288,095 326,812
Interest on trust preferred securities............... 1,189,936 1,121,213 839,791
Interest on other long-term debt..................... 82,918 233,315 567,579
----------------- --------------- ----------------
Total interest expense.................................. 17,152,732 24,634,375 26,486,970
----------------- --------------- ----------------
Net interest income. ................................... 23,504,627 22,853,112 22,418,170
Provision for loan losses ........................... 10,032,545 6,095,629 7,573,160
----------------- --------------- ----------------
Net interest income after provision
for loan losses...................................... 13,472,082 16,757,483 14,845,010
Noninterest Income
Service charges on deposits ......................... 2,949,665 3,148,378 3,250,379
Insurance commissions. .............................. 2,237,051 1,788,551 2,400,203
Bank club dues ...................................... 437,977 495,208 520,216
Debt cancellation fees .............................. 233,142 391,104 597,850
Other operating income .............................. 934,242 1,025,522 1,804,908
Securities gains, net................................ 653,442 1,283,945 4,587
----------------- --------------- ----------------
Total noninterest income.......................... 7,445,519 8,132,708 8,578,143
----------------- --------------- ----------------
Noninterest Expense
Salaries and employee benefits ...................... 14,454,500 13,977,467 16,850,976
Occupancy expense ................................... 2,275,815 2,191,388 2,058,553
Furniture and equipment expense...................... 1,650,657 1,666,517 1,678,048
Director and committee fees ......................... 443,600 436,199 617,139
Net loss (gain) on sale or write-down of other
real estate owned................................. 1,260,312 56,576 (10,794)
Net loss (gain) on disposal of assets................ (214,614) 66,482 (24,070)
Other operating expenses ............................ 9,200,270 10,397,769 6,930,711
----------------- --------------- ----------------
Total noninterest expense......................... 29,070,540 28,792,398 28,100,563
----------------- --------------- ----------------
Loss from continuing operations
BEFORE INCOME TAXES.................................. (8,152,939) (3,902,207) (4,677,410)
Applicable income taxes................................. 3,129,806 1,520,856 1,824,753
----------------- --------------- ----------------
Loss from continuing operations................... (5,023,133) (2,381,351) (2,852,657)
----------------- --------------- ----------------
See accompanying notes to consolidated financial statements
44
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
----------------- ----------------- -----------------
Discontinued Operations:
Income (loss) from operations of divested branches
(includes gain on disposal of $8,071,985)......... 8,504,062 1,489,591 (46,341)
Applicable income taxes.............................. (2,576,731) (531,124) (120,277)
----------------- ----------------- -----------------
Net Income (Loss).................................... $ 904,198 $ (1,422,884) $ (3,019,275)
================= ================= =================
OTHER COMPREHENSIVE INCOME:
Unrealized holding gain arising during period,
net of income taxes of $1,432,798, $85,962
and $1,368,797, respectively................... $ 2,149,197 $ 128,944 $ 2,053,194
Less: Reclassification adjustment, net of income
taxes of $261,377, $513,578
and $1,835, respectively....................... (392,065) (770,367) (2,752)
Minimum pension liability, net of income taxes
of $624,626................................... (1,072,280) - -
----------------- ----------------- -----------------
Other Comprehensive Income (LOSS)....................... 684,852 (641,423) 2,050,442
----------------- ----------------- -----------------
COMPREHENSIVE INCOME (LOSS)............................. $ 1,589,050 $ (2,064,307) $ (968,833)
================= ================= =================
Earnings (loss) per common share - Income from continuing operations:
Basic............................................. $ (1.08) $ (0.52) $ (0.64)
Diluted........................................... $ (1.08) $ (0.52) $ (0.61)
Earnings (loss) per common share - Net Income:
Basic............................................. $ 0.19 $ (0.31) $ (0.68)
Diluted........................................... $ 0.19 $ (0.31) $ (0.65)
Average number of shares outstanding:
Basic............................................. 4,642,182 4,572,301 4,460,295
Diluted........................................... 4,642,182 4,572,301 4,671,430
Dividends per share..................................... $ - $ - $ 0.75
See accompanying notes to consolidated financial statements
45
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
consolidated statements of shareholders' equity
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Accumulated
Unearned Other
Common Capital Retained ESOP Comprehensive Treasury
Stock Surplus Earnings Shares Income Stock Total
--------- ----------- ----------- ------------ ------------- --------- ------------
Balance at
December 31, 1999.......... $ 466,551 $29,411,513 $19,038,875 $ (2,788,442) $ (1,653,121) $ - $ 44,475,376
Prior period adjustment (See Note 22
in the Notes to Consolidated
Financial Statements....... - - (1,143,807) - - - (1,143,807)
Net loss - 2000............... - - (3,019,275) - - - (3,019,275)
Other comprehensive
Income, net of tax and
reclassification adjustments:
Net change in unrealized
gains (losses) on securities - - - - 2,050,442 - 2,050,442
Cash dividends: common ....... - - (3,333,145) - - - (3,333,145)
Stock issued in lieu of cash
paid for directors' fees
at $23.50 ................. 948 221,856 - - - - 222,804
Release of ESOP shares........ - 171,552 - 214,440 - - 385,992
Purchase of treasury stock ... - - - - - (396,768) (396,768)
--------- ----------- ----------- ------------ ------------- --------- ------------
Balance at
December 31, 2000 ......... 467,499 29,804,921 11,542,648 (2,574,002) 397,321 (396,768) 39,241,619
Net loss - 2001 ............. - - (1,422,884) - - - (1,422,884)
Other comprehensive
Income, net of tax and
reclassification adjustments:
Net change in unrealized
gains (losses) on securities - - - - (641,423) - (641,423)
Stock options exercised....... 32,956 3,708,944 - - - - 3,741,900
Stock used by optionees to
purchase options when fair
value was $18 per share.... (20,788) (3,721,112) - - - - (3,741,900)
Tax benefit on stock options.. - 751,556 751,556
Stock issued in lieu of cash
paid for directors'
fees at $18............... 1,166 208,699 - - - - 209,865
Release of ESOP shares ....... - - - 256,100 - - 256,100
--------- ----------- ----------- ------------ ------------- --------- ------------
Balance at
December 31, 2001 ......... 480,833 30,753,008 10,119,764 (2,317,902) (244,102) (396,768) 38,394,833
Net income - 2002 ............ - - 904,198 - - - 904,198
Other comprehensive
income, net of tax and
reclassification
adjustments:
Additional pension liability - - - - (1,072,280) - (1,072,280)
Net change in unrealized
gains (losses) on securities - - - - 1,757,132 - 1,757,132
Treasury stock acquired through
debts previously contracted - - - - - (45,000) (45,000)
Reclassification adjustment for
inventory of unreleased shares - (65,094) - 65,094 - - -
Common stock retired.......... (1,792) - - - - - (1,792)
Stock issued in lieu of cash
paid for directors' fees
at $18 .................... 1,968 194,833 - - - - 196,801
Release of ESOP shares ....... - (75,885) - 252,950 - - 177,065
--------- ----------- ----------- ------------ ------------- --------- ------------
Balance At
December 31, 2002.......... $ 481,009 $30,806,862 $11,023,962 $ (1,999,858) $ 440,750 $(441,768) $ 40,310,957
========= =========== =========== ============ ============= ========== ============
See accompanying notes to consolidated financial statements
46
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---------------- ----------------- -----------------
Cash Flows From Operating Activities
Net income (loss).................................... $ 904,198 $ (1,422,884) $ (3,019,275)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses ........................... 10,107,671 6,313,940 9,289,362
Provision for depreciation and amortization ......... 1,962,459 2,572,472 3,447,883
Amortization of investment security premiums
and accretion of discounts. ...................... 350,461 159,957 149,261
Deferred tax benefit................................. (573,197) (914,941) (2,198,860)
Loss on write-down of goodwill ...................... - 2,652,620 -
Realized investment security gains. ................. (653,442) (1,283,945) (4,587)
Gain on sale of branches............................. (8,071,985)
Loss on sale of premises and equipment .............. (214,614) 66,482 144,398
Loss on impairment of premises and equipment......... - - 823,648
Net loss or write-down on other real estate owned.... 1,260,312
(Increase) Decrease in accrued interest receivable.... 2,038,029 1,371,278 (1,895,207)
Increase (Decrease) in accrued interest payable...... (121,194) (975,725) 1,632,119
Other ............................................... (5,195,659) 1,225,955 (2,157,701)
---------------- ----------------- -----------------
Net cash provided by operating
activities .................................... 1,793,039 9,765,209 6,211,041
---------------- ----------------- -----------------
Cash Flows From Investing Activities
Proceeds from sales, calls and pay downs of securities
available for sale................................ 88,623,292 86,418,413 16,229,953
Proceeds from maturity of securities
available for sale ............................... 15,000,000 2,500,000 25,210,217
Purchase of securities available for sale .......... (102,613,924) (108,972,949) (42,889,985)
Cash disbursed in settlement of branch divestitures.. (32,054,765) - -
Net decrease (increase) in loans to customers ....... 37,327,124 16,968,554 (34,374,869)
Proceeds from sale of premises and equipment. ....... 1,561,134 108,075 162,914
Capital expenditures ................................ (846,654) (2,612,433) (5,986,652)
Net proceeds from sale of other real estate ......... 982,581 1,292,223 853,961
---------------- ----------------- -----------------
Net cash used in investing activities ............ 7,978,788 (4,298,117) (40,794,461)
---------------- ----------------- -----------------
Cash Flows From Financing Activities
Net increase (decrease) in demand deposits,
NOW accounts, savings and time open deposit accounts (2,598,896) 21,905,506 (9,214,288)
Net (decrease) increase in certificates of deposit .. (16,563,095) (5,100,244) 36,854,261
Net increase (decrease) in short-term borrowings .... (2,634,794) 2,094,696 (228,611)
Decrease in FHLB long-term debt...................... - - (2,000,000)
Net (decrease) increase in capitalized lease obligations (93,589) (84,149) 5,850,225
Repayment of long-term debt ......................... (911,848) (752,504) (961,958)
Issuance of trust preferred securities............... - - 10,000,000
Issuance of common stock. ........................... - - 222,804
Purchase of treasury stock .......................... - (396,768)
Cash dividends. ..................................... - - (3,333,145)
---------------- ----------------- -----------------
Net cash provided by (used in) financing activities (22,802,222) 18,063,305 36,792,520
---------------- ----------------- -----------------
Net increase (decrease) in cash and
cash equivalents..................................... (13,030,395) 23,530,397 2,209,100
Cash and cash equivalents, beginning
of year........................................... 53,237,008 29,706,611 27,497,511
---------------- ----------------- -----------------
Cash and cash equivalents, end of year.................. $ 40,206,613 $ 53,237,008 $ 29,706,611
================= ================= =================
47
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---------------- ----------------- -----------------
Supplemental cash flow disclosures:
Cash paid for:
Interest............................................. $ 17,929,967 $ 32,563,802 $ 35,488,410
Income taxes......................................... 2,266,517 (1,082,900) 859,978
Schedule of non-cash investing and financing activities:
Foreclosure of other real estate owned............... $ 4,867,504 $ 4,411,029 $ 1,824,857
Foreclosure of other assets.......................... $ 3,215,025 $ 3,777,599 $ 2,975,936
Loan charge-offs - net of recoveries................. $ 6,863,579 $ 6,129,000 $ 4,785,060
See accompanying notes to consolidated financial statements
[The remainder of this page intentionally left blank]
48
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Community Bancshares, Inc. and its wholly owned subsidiaries (the
"Company"), Community Bank, Community Appraisals, Inc., Community Insurance
Corp. and 1st Community Credit Corporation (collectively, the "Bank."). All
significant intercompany balances and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company considers cash and highly liquid
investments with maturities of three months or less when purchased as cash and
cash equivalents. Cash and cash equivalents consist primarily of cash and due
from banks, interest-bearing deposits in banks and federal funds sold.
Investment Securities and Securities Available for Sale: Securities are
classified as either held to maturity or available for sale. Held to maturity or
investment securities are securities for which management has the ability and
intent to hold on a long-term basis or until maturity. These securities are
carried at amortized cost, adjusted for amortization of premiums, and accretion
of discount to the earlier of the maturity or call date.
Securities available for sale represent those securities intended to be held for
an indefinite period of time, including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital or other similar factors. Securities available for sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.
Loans: Loans are stated at face value, net of unearned income. Interest income
on loans is recognized under the "interest" method except for certain
installment loans where interest income is recognized under the "Rule of 78's"
(sum of the months digits) method, which does not produce results significantly
different from the "interest" method. Nonrefundable fees and costs associated
with originating or acquiring loans are recognized under the interest method as
a yield adjustment over the life of the corresponding loan.
Allowance for Loan Losses: A loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Uncollateralized loans are measured
for impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate, while all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. Smaller balance homogeneous loans that consist of residential
mortgages and consumer loans are evaluated collectively and reserves are
established based on historical loss experience.
Management's ongoing evaluation of the adequacy of the allowance also considers
unimpaired loans and takes into consideration the Bank's past loan loss
experience for pools of homogeneous loans, known and inherent risks in the
portfolio, adverse situations that may affect the borrowers' ability to repay,
and an analysis of current economic conditions. While management believes that
it has established the allowance in accordance with generally accepted
accounting principles and has taken into account the views of its regulators and
the current economic environment, there can be no assurance that in the future
the Bank's regulators or its economic environment will not require further
increases in, or re-allocation of the allowance.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
49
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provision for loan losses. When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the allowance
and subsequent recoveries, if any, are credited to the allowance.
Income Recognition on Impaired and Nonaccrual Loans: Loans, including impaired
loans, are generally classified as nonaccrual if they are past due as to
maturity or payment of principal or interest for a period of more than 90 days,
unless such loans are well collateralized and in the process of collection. If a
loan or a portion of a loan is classified as doubtful or is partially charged
off, the loan is generally classified as nonaccrual. At management's discretion,
loans that are on a current payment status or past due less than 90 days may
also be classified as nonaccrual if repayment in full of principal and/or
interest is in doubt.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered
probable.
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectibility of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan has been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge offs have been fully recovered. Interest income recognized on a
cash basis was immaterial for the years ended December 31, 2002, 2001 and 2000.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed generally
using the straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
Estimated useful lives range from five to forty years for bank buildings and
leasehold improvements and three to ten years for furniture and equipment.
Expenditures for maintenance and repairs are charged against earnings as
incurred. Costs of major additions and improvements are capitalized. Upon
disposition or retirement of property, the asset account is relieved of the cost
of the item and the allowance for depreciation is charged with accumulated
depreciation. Any resulting gain or loss is reflected in current income.
Other Real Estate Owned: Other real estate owned includes real estate acquired
through foreclosure or deed taken in lieu of foreclosure. These amounts are
recorded at the lower of the loan balance prior to foreclosure, plus certain
costs incurred for improvements to the property ("cost") or market value less
estimated costs to sell the property. Any write-down from the cost to market
value required at the time of foreclosure is charged to the allowance for loan
losses. Subsequent write-downs and gains or losses recognized on the sale of
these properties are included in noninterest income or expense.
Goodwill and Other Intangible Assets: Goodwill represents the excess of the
costs of an acquisition over the fair value of the net assets acquired. Other
intangible assets represent purchased assets that also lack physical substance,
but can be distinguished from goodwill because of contractual or other legal
rights or because the asset is capable of being sold or exchanged either on its
own or in combination with a related contract, asset, or liability. On January
1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets". Under the provisions of SFAS No. 142, goodwill and other intangible
assets with indefinite useful lives will no longer be amortized, but instead are
tested for impairment as of the date of adoption and at least annually. The
standard also requires that intangible assets with finite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and be reviewed for impairment if a triggering event occurs, as
described by SFAS No. 144. Intangible assets that have finite lives continue to
be amortized over their estimated useful lives and also continue to be subject
to impairment testing. All of the Company's other intangible assets have finite
lives and are amortized on a straight-line basis over a 25 year period.
50
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the adoption of SFAS No. 142, the Company's goodwill was amortized over
a period up to 25 years using the straight-line method or an accelerated method,
as applicable. Note 8 includes a summary of the Company's goodwill and other
intangible assets as well as further detail about the impact of the adoption of
SFAS No.142.
Earnings Per Common Share: Basic earnings per common share are computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per common
share are computed by dividing net income available to common shareholders by
the weighted average number of shares outstanding during the period and the
assumed conversions of potentially dilutive common stock equivalents, if any.
Long-Lived Assets: The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If the future undiscounted cash flows expected to result from the
use of the asset and its eventual disposition are less than the carrying amounts
of the asset, an impairment loss is recognized. Long-lived assets and certain
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell.
Income Taxes: The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recorded at currently enacted tax rates applicable to the period
in which assets or liabilities are expected to be realized or settled. Deferred
tax assets and liabilities are adjusted to reflect changes in statutory tax
rates resulting in income adjustments in the period such changes are enacted.
Credit Related Financial Instruments: In the ordinary course of business the
Company has entered into off balance sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded.
Debt Cancellation Contracts: The Company began issuing debt cancellation
contracts on certain loans to customers as of October 1, 1995. The contract
represents an agreement by the Company to cancel the debt of the borrower upon
said borrower's death. The Company charges fees equivalent to that authorized by
the state banking authorities and establishes a reserve account, from fees
collected, to cover potential claims. The reserve for debt cancellation
contracts totaled $231,764 and $142,825 at December 31, 2002 and 2001,
respectively.
Stock-Based Compensation: SFAS No. 123, "Accounting for Stock-Based
Compensation," defines a fair value based method of accounting for an employee
stock option or similar equity instrument. However, SFAS No. 123 allows an
entity to continue to measure compensation costs for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock issued to Employees. Entities electing to remain with the
accounting in Opinion No. 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS No. 123 had been applied. Under the fair value based method, compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period. Under
the intrinsic value based method, compensation cost is the excess, if any, of
the quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. The Company has
elected to continue to measure compensation cost for its stock option plans
under the provisions in APB Opinion 25 and has calculated the fair value of
outstanding options for purposes of pro forma disclosure utilizing the
Black-Scholes method.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
51
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's options granted in 2002, 2001 and 2000 vest immediately;
therefore, for purposes of pro forma disclosure, the compensation expense
related to these options has been recognized in the year granted.
The Company's actual pro forma information follows:
Year Ended December 31
2002 2001 2000
----------------- --------------- ----------------
Net Income:
As reported $ 904,198 $ (1,422,884) $ (3,019,275)
Deducts:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax 406,164 382,536 39,138
----------------- --------------- ----------------
Pro forma net income (loss) $ 498,034 $ (1,805,420) $ (3,058,413)
================= =============== ================
Basic earnings (loss) per share:
As reported 0.19 (0.31) (0.68)
Pro forma 0.11 (0.39) (0.69)
Diluted earnings (loss) per share
As reported 0.19 (0.31) (0.65)
Pro forma 0.11 (0.39) (0.65)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yield
0%, 2.50% and 2.78%; expected volatility of .232, .257 and .250 for 2002, 2001
and 2000; risk-free interest rates of 2.63%, 4.40% and 5.08% for 2002, 2001 and
2000, respectively; and expected lives of 5 years. The weighted average fair
values of options granted during 2002, 2001 and 2000 were $1.81, $2.30 and
$4.12, respectively.
Advertising Costs: Advertising costs are expensed as incurred.
Reclassification: Certain amounts in 2001 and 2000 have been reclassified to
conform with the 2002 presentation.
Recently Issued Accounting Standards
On June 29, 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Intangible Assets". This statement is effective for fiscal years beginning
after December 15, 2001. SFAS No. 142 requires that goodwill and indefinite
lived intangible assets no longer be amortized, that goodwill will be tested for
impairment at least annually, that intangible assets deemed to have an
indefinite life will be tested for impairment at least annually, and that
amortization period of intangible assets with finite lives will no longer be
limited to forty years.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This Statement is effective for
fiscal years beginning after June 15, 2002, with early adoption permitted. SFAS
No. 143 addresses the recognition and measurement of obligations associated with
the retirement of tangible long-lived assets resulting from acquisition,
construction, development, or the normal operation of a long-lived asset. SFAS
No. 143 requires that the fair value of an asset retirement obligation be
recognized as a liability in the period in which it is incurred. The asset
retirement obligation is to be capitalized as part of the carrying amount of the
long-lived asset and the expense is to be recognized over the useful life of the
long-lived asset. The Standard is effective for the
52
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company beginning January 1, 2003, and its adoption is not expected to have a
material impact on results of operations, financial position, or liquidity.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The major changes
resulting from this statement relate to the establishment of a single method for
the recognition of impairment losses on long-lived assets to be held and used
whether from discontinuance of a business segment or otherwise. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of this statement did not have a material effect
on the Company's consolidated financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64 amendment of FASB Statement No.
13 and Technical Corrections". In April 2002, the FASB issued SFAS No. 145,
which updates, clarifies, and simplifies certain existing accounting
pronouncements beginning at various dates in 2002 and 2003. The statement
rescinds SFAS No. 4 and SFAS No. 64, which required net gains or losses from the
extinguishment of debt to be classified as an extraordinary item in the income
statement. These gains and losses will now be classified as extraordinary only
if they meet the criteria for such classification as outlined in APB Opinion 30,
which allows for extraordinary treatment if the item is material and both
unusual and infrequent in nature. The statement also rescinds SFAS No. 44
related to the accounting for intangible assets for motor carriers and amends
SFAS No. 13 to require certain lease modifications that have economic effects
similar to sale-leaseback transactions to be accounted for as such. The changes
required by SFAS No. 145 are not expected to have a material impact on results
of operations, financial position, or liquidity.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions, an amendment of SFAS No. 72 and 144 and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, SFAS No. 147
removes acquisitions of financial institutions from the scope of SFAS No. 72 and
Interpretation 9 and requires those transactions be accounted for in accordance
with SFAS No. 141 and 142. SFAS No. 147 also amends SFAS No. 144 to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor and borrower relationship intangible assets and
credit cardholder intangible assets. Consequently, those intangible assets are
subject to the same undiscounted cash flow recoverability test and impairment
loss recognition and measurement provisions that SFAS No. 144 requires for other
long-lived assets that are held and used. The provisions of SFAS No. 72
requiring the intangible recognition and subsequent amortization of any excess
fair value of net liabilities assumed in an acquisition will no longer apply.
SFAS No. 147 is essentially effective as of October 1, 2002. As a result, the
Company adopted SFAS No. 147 on October 1, 2002, with no material impact on the
Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It amends the disclosure provisions of that Statement to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
This Statement also amends APB Opinion No. 28 to require disclosure about those
effects in interim financial information. This Statement is effective for
financial statements for fiscal years ending after December 15, 2002 and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a
material impact on the Company's consolidated financial statements.
53
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
guarantor's accounting and disclosure requirement for guarantees, including
indirect guarantees of indebtedness of others, and interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies,
relating to the guarantors accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure provisions of the Interpretation are
effective for financial statements that end after December 15, 2002. However,
the provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of the guarantor's year end. See Note 6, Financial
Instruments with Off-Balance-Sheet Risks, and Note 21, Fair Value of Financial
Instruments in the Notes to Consolidated Financial Statements, for additional
discussion of the Company's financial guarantees as of December 31, 2002. The
initial adoption of this standard did not have an impact on the financial
condition or results of operations. Management does not believe the provisions
of this standard will have a material impact on future operations of the
Company.
NOTE 2 - INVESTMENT SECURITIES
At December 31, 2002 and 2001, the Company's investment securities are
categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices. Unrealized holding gains and losses,
net of applicable deferred taxes, are included as a component of shareholders'
equity, (accumulated other comprehensive income) until realized.
The amortized cost and market values of securities available for sale are
summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- ----------- ---------------
As of December 31, 2002:
U. S. Government And Agency
securities.................................. $ 6,330,000 $ 192,832 $ - $ 6,522,832
State and municipal securities ................ 7,176,984 44,616 165,962 7,055,638
Mortgage-backed securities. ................... 105,084,669 2,511,395 61,165 107,534,899
Federal Home Loan Bank Stock................... 2,788,100 - - 2,788,100
-------------- ------------- ----------- ---------------
Total ......................................... $ 121,379,753 $ 2,748,843 $ 227,127 $ 123,901,469
============== ============= =========== ===============
As of December 31, 2001:
U. S. Government and Agency securities......... $ 16,854,383 $ 99,368 $ 5,234 $ 16,948,517
State and municipal securities ................ 11,512,284 220,731 49,372 11,683,643
Mortgage-backed securities. ................... 91,319,473 166,360 838,690 90,647,143
Federal Home Loan Bank Stock................... 2,400,000 - - 2,400,000
-------------- ------------- ----------- ---------------
Total ......................................... $ 122,086,140 $ 486,459 $ 893,296 $ 121,679,303
============== ============= =========== ===============
Securities with a carrying of $71,663,190 and $87,514,174 at December 31, 2002
and 2001 respectively, were pledged for various purposes as required or
permitted by law.
54
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and market values of debt securities at December 31, 2002 by
contractual maturity are as follows. Expected maturities differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Amortized Fair
Cost Value
--------------- ---------------
Due in one year or less...................................... $ 439 $ 445
Due after one year through five years........................ 180 180
Due after five years through ten years....................... 6,483 6,686
Due after ten years.......................................... 111,489 113,802
Other securities............................................. 2,788 2,788
--------------- ---------------
Total........................................................ $ 121,379 $ 123,901
=============== ===============
Mortgage-backed securities have been included in the maturity tables based upon
the guaranteed payoff date of each security.
Gross realized gains and losses on available for sale securities for each of the
years ended December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
------------- ------------- ------------
Gross realized gains............................................... $ 670,565 $ 1,283,945 $ 45,362
Gross realized losses.............................................. 17,123 - 40,775
An investment security issued by Hartselle Utilities is carried at a value of
$4,680,547, which exceeds 10% of total stockholder's equity.
NOTE 3 - LOANS
December 31,
2002 2001
------------------ ------------------
Commercial, financial and agricultural................................. $ 101,841,274 $ 146,209,839
Real estate - construction............................................. 2,016,539 3,126,592
Real estate - mortgage................................................. 174,774,616 233,216,469
Consumer............................................................... 80,596,466 119,030,750
Unearned income........................................................ (45,007) (63,991)
------------------ ------------------
Total loans............................................................ 359,183,888 501,519,659
Allowance for loan losses.............................................. (9,784,269) (7,292,370)
Net loans.............................................................. $ 349,399,619 $ 494,227,289
================== ==================
The Company's lending is concentrated in North and West-Central Alabama.
Repayment of these loans is in part dependent upon the economic conditions in
these regions of the state. Management does not believe the loan portfolio
contains concentrations of credits either geographically or by borrower, which
would expose the Company to unacceptable amounts of risk. Management continually
evaluates the potential risk in all segments of the portfolio in determining the
adequacy of the allowance for loan losses. Other than concentrations of credit
risk in commercial, residential and construction real estate loans, management
is not aware of any significant concentrations.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
55
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
counterparty. Collateral held varies but may include accounts receivable,
inventory, premises and equipment, residential houses and income-producing
commercial properties. No additional credit risk exposure, relating to
outstanding loan balances, is believed to exist beyond the amounts shown in the
consolidated statement of condition at December 31, 2002.
In the normal course of business, loans are made to officers, directors and
principal shareholders and to Companies in which they own significant interest.
Loan activity to such parties during the year ended December 31, 2002 are
summarized as follows:
Balance Balance
1/1/02 Additions Reductions 12/31/02
----------- ----------- ------------ -----------
$16,179,032 $ 1,596,182 $(4,327,530) $13,447,684
=========== =========== =========== ===========
At December 31, 2002 and 2001, the recorded investment in impaired loans was
approximately $11,916,157 and $6,186,216, respectively. The average recorded
investment in impaired loans was approximately $9,051,187 and $3,555,108 for the
years ended December 31, 2002 and 2001, respectively. The impaired loans were
measured for impairment based primarily on the value of underlying collateral.
The related allowance allocated to impaired loans for 2002 and 2001 was $969,123
and $726,895, respectively. At December 31, 2002, impaired loans with an
associated allowance totaled $1,782,445, while $10,133,712 of impaired loans had
no specific allowance. At December 31, 2001, impaired loans with an associated
allowance totaled $5,070,769, while $1,115,447 of impaired loans had no specific
allowance. The amount of interest recognized on impaired loans during the
portion of the year that they were impaired was not significant for either 2002
or 2001.
The Company uses several factors in determining if a loan is impaired.
Generally, nonaccrual loans as well as loans classified as substandard by
internal loan review are reviewed for impairment. The internal asset
classification procedures include a thorough review of significant loans and
lending relationships, and include the accumulation of related data. This data
includes loan payment status, borrower's financial data, collateral value and
borrower's operating factors such as cash flows, operating income or loss.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for each of the years ended December
31, 2002, 2001 and 2000, were as follows:
2002 2001 2000
--------------- ---------------- ---------------
Balance, January 1....................................... $ 7,292,370 $ 7,107,430 $ 2,603,128
Discontinued operations.................................. (752,193) - -
Charge-offs.............................................. (7,307,862) (6,567,136) (5,053,052)
Recoveries............................................... 444,283 438,136 267,992
--------------- --------------- ---------------
Net charge-offs.......................................... (6,863,579) (6,129,000) (4,785,060)
Provision for loan losses included in
continuing operations................................. 10,032,545 6,095,629 7,573,160
Provision for loan losses included in
discontinued operations............................... 75,126 218,311 1,716,202
--------------- --------------- ---------------
Balance, December 31..................................... $ 9,784,269 $ 7,292,370 $ 7,107,430
=============== =============== ================
56
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - DISCONTINUED OPERATIONS
During 2002, Community Bank consummated the sale of the following branch
offices: two Pulaski, Tennessee locations on March 31, 2002, two DeKalb County,
Alabama locations on May 3, 2002 and six Marshall County, Alabama locations on
May 31, 2002. The following outlines the total assets sold and total liabilities
released on the transactions.
Loans................................................ $ 95,130,132
Less allowance for loan losses..................... 752,193
---------------
Loans, net........................................ 94,377,939
Premises and equipment, net......................... 8,686,603
Accrued interest receivable.......................... 653,266
Other real estate owned.............................. 451,280
Other assets......................................... 93,547
---------------
Total assets...................................... $ 104,262,635
===============
Deposits............................................. $ 139,080,234
Accrued interest payable............................. 656,041
Capitalized lease obligation......................... 1,614,318
Other liabilities.................................... 19,036
---------------
Total liabilities................................. $ 141,369,629
===============
The Company paid $32,054,765 in cash on the transactions and recorded a
capitalized lease receivable of $3,107,157. The Company recognized total gains
of $8,071,985 representing the premium received on core deposits less discounts
on loans and fixed assets.
NOTE 6 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financial needs of its customers. These
financial instruments include loan commitments, standby letters of credit and
obligations to deliver and sell mortgage loans. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the financial statements.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and obligations to deliver and sell mortgage loans is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. The Company has no significant concentrations of
credit risk with any individual counter-party to originate loans.
The total amounts of financial instruments with off-balance-sheet risk as of
December 31, 2002 and 2001 are as follows:
Contract Amount
----------------------------------------
(In Thousands)
2002 2001
------------------ ------------------
Loan commitments....................................................... $ 15,476 $ 19,788
Standby letters of credit.............................................. 532 1,299
------------------ ------------------
Total unfunded commitments.......................................... $ 16,008 $ 21,087
================== ==================
57
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash requirements.
The credit risk involved in issuing letters of credit and funding loan
commitments is essentially the same as that involved in extending loan
facilities to customers.
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are commitments issued by the Company to guarantee the
performance of a customer to a third party. These guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. At December 31, 2002, these
commitments are not reflected on the consolidated balance sheet. However, as
discussed in Note 1, Summary of Significant Accounting Policies, in the Notes to
Consolidated Financial Statements, FIN 45 requires the fair value of these
commitments be recorded as of January 1, 2003. The fair value of the commitment
typically approximates the fee received from the customer for issuing such
commitments. These fees are deferred and are recognized over the commitment
period. The amount recorded as of January 1, 2003 was not material to the
Company's consolidated balance sheet. The Company holds various assets as
collateral supporting those commitments for which collateral is deemed
necessary.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
----------------------------------
2002 2001
---------------- ---------------
Land....................................................................... $ 2,544,557 $ 4,331,352
Bank premises.............................................................. 21,380,949 27,195,381
Furniture and fixtures..................................................... 10,060,496 11,846,267
Automobiles................................................................ 1,459,002 1,674,691
Leasehold improvements..................................................... 369,402 853,690
--------------- ---------------
35,814,406 45,901,381
Less accumulated depreciation.............................................. 10,378,915 10,872,754
--------------- ---------------
25,435,491 35,028,627
Construction in progress................................................... - 2,689,023
--------------- ---------------
Premises and equipment, net................................................ $ 25,435,491 $ 37,717,650
=============== ===============
Depreciation expense included in the Consolidated Statements of Income caption
"occupancy expense" was $1,823,520, $2,058,787 and $1,998,701 for the years
ended December 31, 2002, 2001 and 2000, respectively. The Company capitalized no
interest costs in 2002 and capitalized $242,020 and $244,971 in interest costs
related to building construction in 2001 and 2000, respectively.
58
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
Upon the adoption of SFAS No. 142 on January 1, 2002, the Company ceased
amortizing its goodwill, which decreased noninterest expense and increased net
income in 2002 as compared to 2001. The following table shows the pro forma
effect of applying SFAS 142 to the 2001 and 2000 periods (in thousands, except
per share amounts).
Year Ended December 31,
2002 2001 2000
------------- ------------- -------------
Reported net income (loss)................................ $ 904,918 $ (1,422,884) $ (3,019,275)
Add back: goodwill amortization........................... - 478,487 470,210
------------- ------------- -------------
Adjusted net income (loss)................................ $ 904,198 $ (944,397) $ (2,549,065)
============= ============= =============
Basic earnings per share:
Reported net income (loss)............................. $ 0.19 $ (0.31) $ (0.68)
Add back: goodwill amortization........................ - 0.10 0.11
------------- ------------ -------------
Adjusted net income (loss)................................ $ 0.19 $ (0.21) $ (0.57)
============= ============ =============
Diluted earnings per share:
Reported net income (loss)............................. $ 0.19 $ (0.31) $ (0.65)
Add back: goodwill amortization........................ - 0.10 0.10
------------- ------------ -------------
Adjusted net income (loss)................................ $ 0.19 $ (0.21) $ (0.55)
============= ============ =============
59
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of goodwill by line of business follows:
January 1, Goodwill Impairment December 31,
2002 acquired Losses 2002
------------- ------------- ----------- -------------
Commercial Banking.......................... $ 1,792,807 $ - $ - $ 1,792,807
Parent and other............................ - - - -
------------- ------------- ----------- --------------
Total....................................... $ 1,792,807 $ - $ - $ 1,792,807
============= ============= =========== =============
The Company has finite-lived intangible assets capitalized on its balance sheet
in the form of core deposits. Amortizable intangible assets at December 31, 2002
and 2001 are as follows:
December 31,
----------------------------------
2002 2001
----------------- ---------------
Core deposits
Gross carrying amount................................................. $ 1,985,413 $ 1,985,413
Less: accumulated amortization...................................... 1,253,281 1,173,863
--------------- ----------------
Net carrying amount................................................... 732,132 811,550
--------------- ----------------
Other intangibles
Gross carrying amount................................................. 188,450 77,898
Less: accumulated amortization........................................ - 52,581
--------------- ----------------
Net carrying amount................................................... 188,450 25,317
--------------- ----------------
Total finite-lived intangibles
Gross carrying amount................................................. 2,173,863 2,063,311
Less: accumulated amortization........................................ 1,253,281 1,226,444
--------------- ----------------
Net carrying amount................................................... $ 920,582 $ 836,867
=============== ================
Acquired goodwill and other intangible assets at December 31, 2002 are detailed
as follows:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------------- --------------- ------------
Identifiable amortizing assets............................... $ 2,173,863 $ 1,253,281 $ 920,582
Nonamortizing goodwill....................................... 2,851,372 1,058,565 1,792,807
------------- --------------- ------------
Total acquired intangible asset.............................. $ 5,025,235 $ 2,311,846 $ 2,713,389
============= =============== ============
Amortization expense on finite-lived intangible assets for the periods ended
December 31, 2002, 2001 and 2000 totaled $76,797, $561,798 and $553,521,
respectively. In 2001, the Company recorded an impairment of goodwill of
$2,652,620, which represented the unamortized goodwill related to the Company's
wholly-owned subsidiaries, 1st Community Credit Corporation and Community
Insurance Corp. Aggregate annual amortization expense of currently recorded core
deposits and other intangibles is expected to be $79,417 for the years ended
December 31, 2003 through 2004.
60
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - DEPOSITS
The major classifications of deposits as of December 31, 2002 and 2001 were as
follows:
December 31,
2002 2001
--------------- ---------------
Noninterest-bearing demand................................................. $ 52,313,987 $ 67,695,615
Interest-bearing demand.................................................... 77,528,677 100,094,906
Savings.................................................................... 57,727,147 70,479,875
Time....................................................................... 185,882,451 259,899,596
Certificates of deposit of $100,000 or more................................ 70,626,542 100,387,582
Other time deposits........................................................ 15,385,000 19,148,456
--------------- ----------------
$ 459,463,804 $ 617,706,030
=============== ================
At December 31, 2002, the scheduled maturities of certificates of time deposits
were as follows:
2003................................................................................. $ 172,551,745
2004................................................................................. 29,961,472
2005................................................................................. 15,500,477
2006................................................................................. 4,932,050
2007................................................................................. 48,736,996
Thereafter........................................................................... 211,253
----------------
Total................................................................................ $ 271,893,993
================
NOTE 10 - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 2002 and 2001 consisted of the U.S.
Treasury Tax and Loan Note Option account of $1,725,133 and $1,822,420,
respectively, and securities sold under agreements to repurchase of $0 and
$2,537,507, respectively. The Company had no federal funds purchased or
overnight funds purchased from FHLB-Atlanta at December 31, 2002 and 2001.
US Treasury Tax and Loan Note Option and securities sold under agreements to
repurchase are generally treated as collateralized financing transactions. It is
the Company's policy to deliver underlying securities to custodian accounts for
customers.
A summary of short-term borrowings follows:
SHORT-TERM BORROWINGS
December 31,
2002 2001
------------------ ------------------
Securities sold under agreements to repurchase $ - $ 2,538,___
U.S Treasury tax and loan, note option 1,725,133 1,822,___
------------------ ------------------
Total $ 1,725,133 $ 4,360,___
================== ==================
NOTE 11 - LONG-TERM DEBT
On December 17, 1992, the Company entered into a loan agreement with a regional
bank for amounts up to $6,500,000. At December 31, 2002, the loan was paid in
full. At December 31, 2001, the amount outstanding was $711,304. The
61
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
loan was due December 17, 2002, bearing interest at a floating prime rate,
collateralized by 100% of the common stock of Community Bank. The note agreement
contained provisions, which limited the Company's right to transfer or issue
shares of Community Bank's stock. Upon receipt of full payment, the lender did
not release the Community Bank stock held as collateral on the note. The Company
is obligated to this lender as a guarantor on the ESOP loan discussed in the
following paragraph. The lender retained the Community Bank stock as security on
the guarantee of the ESOP loan.
On November 3, 1993, the Trustees of the Company's ESOP executed a promissory
note of $1,200,000 in order to purchase common stock in the Company's public
offering of new common stock. The note was originally secured by 80,000 shares
of purchased stock. The promissory note had been refinanced in years subsequent
to 1993 as additional shares were purchased by the ESOP. On December 1, 1998,
this note was refinanced and an additional 56,682 shares of the Company's common
stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments due
monthly through November 16, 2010, with all remaining principal, if any, due
upon that date. The initial principal and interest payment on this debt was
$31,677. As changes occur in the interest rate on the loan, appropriate
adjustments are made to the monthly principal and interest payments. At December
31, 2002, the monthly payment was $33,852. The Company has guaranteed this debt
and in accordance with the applicable accounting and reporting guidelines the
debt has been recognized on the Company's statement of condition, with an
offsetting charge against equity. As principal payments are made by the ESOP,
the debt and offsetting charge against equity are reduced. The shares securing
the note are released on a pro-rata basis by the lender as monthly payments of
principal and interest are made. The outstanding balance of this note was
$2,083,342 at December 31, 2002, secured by 148,972 of unreleased shares of
Company stock. (See Note 15)
On October 4, 1994, the Company entered into a twenty-year, subordinated
installment capital note due October 1, 2014 for the purchase of treasury stock.
Monthly principal and interest payments of $15,506 are made on the note, which
bears interest at the fixed annual rate of 7%. The Company maintains the right
to prepay the note at its sole discretion. The balance of the note was
$1,494,345 and $1,572,805 at December 31, 2002 and 2001, respectively.
Since June 1999, Community Bank has borrowed funds under the Federal Home Loan
Bank of Atlanta's ("FHLB-Atlanta") "Convertible Advance Program." These advances
have had original maturities of 10 years, with stated call features during the
life of the obligation, at fixed interest rates for the life of the obligations.
Principal is due at final maturity or on stated call dates, with interest
payable each quarter. On June 1, 1999, Community Bank, the Company's bank
subsidiary, borrowed $30,000,000 under the FHLB-Atlanta's "Convertible Advance
Program." This advance had a final maturity of June 1, 2009 (120 months), with a
call feature every three months during the life of the obligation, and carried a
fixed interest rate of 4.62% per annum. This obligation was called on September
1, 1999 due to an increase in market interest rates. As a result of this call,
Community Bank refinanced the original advance and borrowed an additional
$10,000,000 under the same "Convertible Advance Program." This advance, totaling
$40,000,000 at December 31, 1999, had a final maturity of September 1, 2009 (120
months), with a call feature every six months during the life of the obligation,
and carried a fixed rate of 4.99% per annum. Due to the call of this obligation
on March 1, 2000, Community Bank made a $2,000,000 reduction in the amount
advanced under the FHLB-Atlanta "Convertible Advance Program" and refinanced
$38,000,000. This new obligation has a final maturity of March 1, 2010 (120
months), a call feature every quarterly payment date during the life of the
obligation, and a fixed interest rate of 5.93% per annum. At December 31, 2001,
outstanding funds advanced to Community Bank under the FHLB-Atlanta "Convertible
Advance Program" totaled $38,000,000.
In March 2000, the Company formed a wholly-owned Delaware statutory business
trust, Community (AL) Capital Trust I (the "Trust"), which issued $10,000,000 of
guaranteed preferred securities representing undivided beneficial interests in
the assets of the Trust ("Capital Securities"). All of the common securities of
the Trust are owned by the Company. The proceeds from the issuance of the
Capital Securities ($10,000,000) and common securities ($310,000) were used by
the Trust to purchase $10,310,000 of junior subordinated deferrable interest
debentures of the Company which carry an annual interest rate of 10.875%. The
debentures represent the sole asset of the Trust. The debentures and related
income
62
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statement effects are eliminated in the Company's consolidated financial
statements. The Company is entitled to treat the aggregate liquidation amount of
the debentures as Tier I capital under Federal Reserve guidelines.
The Capital Securities accrue and pay distributions semiannually at a rate of
10.875% per annum of the stated liquidation value of $1,000 per capital
security. The Company has entered into an agreement which fully and
unconditionally guarantees payment of: (i) accrued and unpaid distributions
required to be paid on the Capital Securities; (ii) the redemption price with
respect to any Capital Securities called for redemption by the Trust; and (iii)
payments due upon a voluntary or involuntary liquidation, winding up or
termination of the Trust.
The Capital Securities are mandatorily redeemable upon the maturity of the
debentures on March 8, 2030, or upon earlier redemption as provided in the
indenture pursuant to which the debentures were issued. The Company has the
right to redeem the debentures purchased by the Trust: (i) in whole or in part,
on or after March 8, 2010; and (ii) in whole (but not in part) at any time
within 90 days following the occurrence and during the continuation of a tax
event, capital treatment event or investment company event (each as defined in
the indenture). As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be a percentage of the principal
amount, ranging from 105.438% in 2010 to 100.00% in and after 2020, plus accrued
but unpaid interest.
Under the terms of the indenture, the Company may elect to defer payments of
interest for up to ten semiannual payment periods. The Company elected to defer
its March and September 2002 interest payments. The balance of accrued interest
payable on the debentures was $1,541,872 at December 31, 2002. For the duration
of such deferral period, the Company is restricted from paying dividends to
shareholders or paying debt that is junior to the debentures.
Maturities and stated calls of long-term debt and FHLB borrowings following
December 31, 2002, are as follows:
Trust
Notes FHLB Preferred
Payable Borrowings Securities
------------- ------------- -------------
2003......................................... $ 408,167 $ - $ -
2004......................................... 428,292 - -
2005......................................... 449,467 - -
2006......................................... 471,745 - -
2007......................................... 495,193 - -
Thereafter................................... 1,324,823 38,000,000 10,000,000
------------- ------------- -------------
Total........................................ $ 3,577,687 $ 38,000,000 $ 10,000,000
============= ============= =============
Community Bank had $5,000,000 at year end 2002 and 2001 in available lines to
purchase federal funds on a secured basis from a commercial bank.
NOTE 12 - REGULATORY MATTERS AND RESTRICTIONS
Dividends paid by Community Bank are the primary source of funds available to
the Company for debt repayment, payment of dividends to its stockholders and
other needs. Certain restrictions exist regarding the ability of the Bank to
transfer funds to the Company in the form of cash dividends, loans or advances.
Under Alabama law, the approval of the Alabama Superintendent of Banks is
required to pay dividends in excess of the Bank's net earnings for the current
year plus retained net earnings for the preceding two years less any required
transfers to surplus.
Effective March 5, 2002 the Board of Directors of Community Bank adopted a
Safety and Soundness Compliance Plan pursuant to which Community Bank will not
pay cash dividends without the prior written consent of the FDIC and Alabama
State Banking Department.
No dividends were declared or paid in 2002 or 2001. Annual dividends of $.75 per
share and $.60 per share were declared by the Company's Board of Directors on
its common stock and paid in January of 2000 and 1999, respectively. The payment
of dividends on common stock is subject to the prior payment of principal and
interest on the Company's long-term debt, maintenance of sufficient earnings and
capital of the subsidiaries, and to regulatory restrictions. (See Note 11).
63
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the state and federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if taken, could have a
direct material effect on the consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Community Bank must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Community Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002 and 2001, that the Bank meets all capital adequacy requirements to which it
is subject as set forth in regulation.
At December 31, 2002 and 2001, under applicable banking regulations, the Company
and Community Bank, were considered well capitalized. The Company is entitled to
treat the aggregate liquidation amount of the junior subordinated deferrable
interest debentures, purchased by Community (AL) Capital Trust I, as Tier I
capital under Federal Reserve guidelines. At December 31, 2002, the aggregate
liquidation amount of the debentures included in Tier I capital was $10,000,000.
(See Note 11)
Community Bank's allowance for loan losses, limited to 1.25% of risk-weighted
assets, is a component of Tier II capital under capital adequacy guidelines. The
amount of the allowance for loan losses included in Tier II capital at December
31, 2002 was approximately $6,068,000 for the Company and approximately
$4,545,000 for Community Bank, compared to approximately $6,142,000 for both the
Company and approximately $6,110,000 for Community Bank at December 31, 2001.
On April 9, 2001, the Company's Board of Directors entered into a Memorandum of
Understanding (the "Memorandum") with the Federal Reserve Bank of Atlanta (the
"Reserve Bank"), which outlines actions to be taken by the Company to address
concerns identified by the Reserve Bank. One provision of the agreement calls
for the Company to maintain a Tier I leverage ratio of at least 6.5% while the
Memorandum is in effect.
On March 5, 2002, Community Bank adopted a Safety and Soundness Compliance Plan
("Plan"). Under the Plan, the Bank's Board committed to maintain a Tier I
leverage ratio of at least 7% and to obtain prior approval of the regulators
before paying any dividends.
Both the Company and the Bank are in compliance with the Tier I leverage ratios
requirements under the Memorandum and the Plan as of December 31, 2002 and fell
slightly short of these requirements as of December 31, 2001.
On December 10, 2002, the Board of Directors of Community Bank entered into an
agreement with the Alabama State Banking Department. The agreement provides that
the Board of Directors will take certain actions regarding (i) an investigation
into payments made in connection with several construction projects of the Bank,
(ii) approval and management of payments and loans involving directors, officers
and employees and (iii) expense controls and review of financial statements.
With respect to the investigation of construction payments, the Bank's Audit
Committee, with the assistance of independent accountants and counsel, must
determine whether any directors, officers or employees improperly benefited from
payments made by the Bank for construction projects. If improper benefits were
received, the Audit
64
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Committee must determine the amount of such benefits, fix an appropriate rate of
interest due to the Bank on the principal amount of any benefit, require
restitution of the amount of the benefit, plus accrued interest and investigate
any apparent negligence on the part of Bank employees with regard to improper
payments. The Bank must report the Audit Committee's findings to the Alabama
State Banking Department for its review and concurrence.
The Board has agreed, among other things, to require Board approval of all
extensions of credit to insiders, as defined in Regulation O of the Board of
Governors of the Federal Reserve System. The Board has also agreed to implement
certain procedures for managing existing loans to insiders, including
limitations on renewals, methods of collection of adversely classified loans to
certain insiders and obtaining current appraisals on collateral securing such
adversely classified loans. In addition, the Board has agreed to limit future
extensions of credit and any payments other than ordinary compensation to any
director, officer or employee who, after investigation, is deemed to owe
restitution to the Bank or whose loans have been adversely classified, to
consult with the Alabama State Banking Department regarding settlement of
litigation and to obtain prior approval for sales or transfers of Bank assets
benefiting any director, officer or employee deemed to owe restitution.
As a part of an effort to control the Bank's expenses, the Board has directed
the Audit Committee to review for adequacy and appropriateness bills paid by the
Bank for professional services from 1998 to the present, to recover fees
improperly paid, if any, for the benefit of third parties and to establish
additional internal controls for the payment of future bills. The Audit
Committee requires quarterly and annual reports from its auditors regarding the
adequacy of the Bank's loan loss reserve.
The following table sets forth the actual capital ratios at December 31, 2002
and 2001, for the Company and the Bank, as well as the minimum total risk-based,
Tier 1 risked-based and Tier 1 leverage ratios required to be classified as
adequately capitalized and well capitalized.
65
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Capital To Be
Actual Adequacy Purposes Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
As of December 31, 2002:
Total risk based capital
(To risk weighted assets):
Consolidated............................... $ 52,885 14.66% $ 28,857 8.00% $ 36,071 10.00%
Community Bank............................. 55,681 15.54 28,668 8.00 35,836 10.00
Tier 1 capital
(To risk weighted assets):
Consolidated............................... 46,817 12.98 14,428 4.00 21,643 6.00
Community Bank............................. 51,136 14.27 14,334 4.00 21,501 6.00
Tier 1 capital
(To average assets):
Consolidated............................... 46,196 8.20 22,836 4.00 28,545 5.00
Community Bank............................. 50,515 9.00 22,729 4.00 28,412 5.00
As of December 31, 2001: Total risk based capital (to Risk weighted assets):
Consolidated............................... $ 54,074 11.03 $ 39,218 8.00 $ 49,023 10.00
Community Bank............................. 55,830 11.45 39,011 8.00 48,764 10.00
Tier 1 capital (to risk weighted assets):
Consolidated............................... 46,359 9.46 19,609 4.00 29,414 6.00
Community Bank............................. 49,720 10.20 19,505 4.00 29,258 6.00
Tier 1 capital (to average assets):
Consolidated............................... 46,359 6.33 29,315 4.00 36,644 5.00
Community Bank............................. 49,720 6.80 29,244 4.00 36,555 5.00
The Company is required by law to maintain noninterest bearing deposits with the
Federal Reserve to meet regulatory reserve requirements. At December 31, 2002
these deposits were not material to the Company's funding requirements.
NOTE 13 - LEASES
The Company has operating lease agreements, involving land, buildings and
equipment. The operating leases are noncancellable and expire on various dates
through the year 2018. The leases provide for renewal options and generally
require the Company to pay maintenance, insurance and property taxes. Options to
purchase are also included in some leases. For the years ended December 31,
2002, 2001, and 2000, rental expense for operating leases was approximately
$467,000, 560,000 and $524,000, respectively.
During 2000, Community Bank entered into sale/leaseback arrangements on its
Hamilton, Alabama and Boaz, Alabama bank locations. Due to the structure of
these transactions, the leases qualified and have been accounted for under
capitalized lease rules. On May 31, 2002, the purchaser of Community Bank's
Marshall County branch offices assumed the Company's lease on the Boaz, Alabama
location. The balances of the capitalized lease asset and capitalized lease
obligation assumed by the purchaser were as follows:
Capitalized lease asset............................. $ 1,577,222
Less: Accumulated depreciation.................... 157,722
---------------
Net capitalized lease asset......................... $ 1,419,500
===============
Capitalized lease obligation........................ $ 1,614,318
===============
66
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A gain of $194,818 was recognized to account for the sale of the asset and the
release of the obligation and is netted in "net loss on disposal of assets" on
the Consolidated Statements of Income.
The following is an analysis of the leased property under capital leases by
major classes:
Asset Balances at
December 31,
-------------------------------
2002 2001
-------------- -------------
Buildings............................................................. $ 3,727,903 $ 5,305,125
Less allowance for depreciation....................................... 321,013 321,613
-------------- -------------
$ 3,406,890 $ 4,983,512
============== =============
The following is a schedule by year of future minimum lease payments under
capital and operating leases, together with the present value of the net minimum
lease payments as of December 31, 2002. All capitalized leases are with related
parties.
Related Party Total
Operating Operating Capitalized
-------------- -------------- ---------------
Years Ending December 31,
2003................................................. $ 9,600 $ 296,738 $ 250,932
2004................................................. 9,600 264,436 250,932
2005................................................. 9,600 242,878 250,932
2006................................................. 2,400 164,722 250,932
2007................................................. - 103,550 250,932
Thereafter........................................... - 258,359 5,621,765
-------------- -------------- ---------------
Total minimum lease payments......................... $ 31,200 $ 1,330,683 6,876,425
============== ==============
Less amount representing interest.................... 2,818,256
---------------
Present value of net minimum lease payments.......... $ 4,058,169
===============
The purchaser of Community Bank's Marshall County branch offices acquired the
land, building and land improvements located in Albertville, Alabama under a
sales type lease. The lease agreement calls for 60 payments of $14,000 per month
beginning June 1, 2002. The lease ends on May 31, 2007 and is subject to options
which give the right for the seller to require the purchaser to purchase the
property and gives the right to the purchaser to require the seller to sell the
property. The purchase price upon option by either party is $2,621,544. This
lease/sale qualifies and is accounted for under capitalized lease rules.
The following is a schedule by year of the future minimum lease payments to be
received by Community Bank together with the present value of the net minimum
lease payments as of December 31, 2002.
Years ending December 31,
2003.............................................. $ 168,000
2004.............................................. 168,000
2005.............................................. 168,000
2006.............................................. 168,000
2007.............................................. 2,691,591
----------------
Total minimum lease payments........................ 3,363,591
Less amount representing interest................. 310,049
----------------
Present value of net minimum lease payments......... $ 3,053,542
================
67
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - PENSION PLAN
The Company has a defined benefit plan that provides retirement and disability
benefits for substantially all employees of the Company and its subsidiaries,
and death benefits for their beneficiaries. An employee will become a
participant in the Pension Plan on January 1 or July 1 after completing 12
months of employment during which the employee works at least 1,000 hours. All
employees are eligible to become participants in the Pension Plan regardless of
age on the date they begin employment. In addition, participants in the Pension
Plan accrue benefits after they have attained the normal retirement age of 65.
Benefits under the Pension Plan depend upon a participant's years of credited
service with the Company or any of its subsidiaries and his average monthly
earnings for the highest five consecutive years out of the participants final 10
years of employment. An employee who becomes a participant on or after January
1, 1996 will not be vested in any benefit until he completes five years of
service at which time the employee will be 100% vested. An employee who became a
participant before January 1, 1996, is 20% vested in his accrued benefits after
completion of two years of service, 40% vested after three years of service, 60%
vested after four years of service and becomes fully vested upon completion of
five years of service. An employee who completes ten years of service and
attains age 55 is eligible for early retirement benefits. Plan assets consist
primarily of corporate stocks and bonds.
The Company contributes amounts to the pension funds sufficient to satisfy
funding requirements of the Employee Retirement Income Security Act.
Effective January 1, 1995, the Company established a nonqualified benefit plan
for certain key executives called the Community Bancshares, Inc. Benefit
Restoration Plan, the purpose of which is to provide the amount of the benefit
which would otherwise be paid under the Company's Pension Plan but which cannot
be paid under that plan due to the limitations imposed by the Internal Revenue
Code of 1986, as amended.
68
The following tables set forth the funding status and the amount recognized for
both the Pension Plan and the Benefit Restoration Plan in the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income.
Pension Plan as of December 31:
2002 2001
-------------- --------------
Change in benefit obligation:
Benefit obligation at beginning of year.................................... $ 7,891,166 $ 7,030,889
Service cost .............................................................. 506,164 614,252
Interest cost ............................................................. 535,797 495,976
Actuarial (gain) or loss. ................................................. 213,984 (37,271)
Benefits paid ............................................................. (283,218) (212,680)
-------------- ---------------
Benefit obligation at end of year....................................... $ 8,863,893 $ 7,891,166
============== ===============
Change in plan assets:
Fair value of plan assets at beginning of year............................. $ 5,442,852 $ 5,153,926
Actual return on plan assets .............................................. (586,816) (229,629)
Employer contribution ..................................................... 650,174 731,235
Benefits paid from plan assets ............................................ (283,218) (212,680)
-------------- ---------------
Fair value of plan assets at end of year................................ $ 5,222,992 $ 5,442,852
============== ===============
Funded status of plan:
Funded status of plan...................................................... $ (3,640,901) $ (2,448,314)
Unrecognized actuarial (gain) or loss ..................................... 3,050,602 1,946,596
Unrecognized prior service cost ........................................... 188,450 77,337
Unrecognized transition asset. ............................................ - (3,794)
-------------- ---------------
Accrued benefit cost.................................................... $ (401,849) $ (428,175)
============== ===============
Amounts recognized in the balance sheet consists of:
Prepaid benefit cost....................................................... $ - $ -
Accrued benefit liability.................................................. (2,287,205) (428,175)
Intangible asset........................................................... 188,450 -
Accumulated other comprehensive income..................................... 1,696,906 -
-------------- ---------------
Net amount recognized...................................................... $ (401,849) $ (428,175)
============== ===============
Other comprehensive income from changes.................................... $ 1,696,906 $ -
============== ===============
Weighted average rate assumptions used in determining pension cost and the
projected benefit obligation were:
Discount rate used to determine present value
of projected benefit obligation at end of year ...................... 6.75% 7.25%
Expected long-term rate of return on plan assets for the year ................ 7.50 9.25
Expected rate of increase in future compensation levels ................... 5.00 6.00
69
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of pension plan net periodic benefit cost:
2002 2001 2000
--------------- --------------- ---------------
Service cost............................................. $ 506,164 $ 614,252 $ 620,489
Interest cost............................................ 535,797 495,976 446,220
Expected return on plan assets........................... (512,128) (567,699) (529,400)
Amortization of prior service cost....................... 22,237 11,699 11,699
Amortization of transitional asset....................... (3,794) (16,879) (16,879)
Recognized actuarial loss................................ - - -
--------------- ---------------- ---------------
Net periodic benefit cost................................ $ 548,276 $ 537,349 $ 532,129
=============== ================ ===============
Benefit Restoration Plan as of December 31:
2002 2001
-------------- --------------
Change in benefit obligation:
Benefit obligation at beginning of year.................................... $ 3,200,932 $ 2,678,166
Service cost .............................................................. 97,129 157,302
Interest cost ............................................................. 157,344 202,471
Amendments ................................................................ - -
Actuarial loss. ........................................................... (922,828) 162,993
Benefits paid ............................................................. 48,053 -
-------------- ---------------
Benefit obligation at end of year . $ 2,580,630 $ 3,200,932
============== ===============
Change in plan assets:
Fair value of plan assets at beginning of year............................. $ - $ -
Actual return on plan assets .............................................. - -
Employer contribution ..................................................... 48,053 -
Benefits paid from plan assets ............................................ (48,053) -
-------------- --------------
Fair value of plan assets at end of year . $ - $ -
============== ===============
Funded status of plan:
Funded status of plan...................................................... $ (2,580,630) $ (3,200,932)
Unrecognized actuarial loss ............................................... 615,810 1,371,808
Unrecognized prior service cost ........................................... 446 98,439
Unrecognized transition (asset) or obligation ............................. - -
-------------- ---------------
Accrued benefit cost ...................................................... $ (1,964,374) $ (1,730,685)
============== ===============
Amounts recognized in balance sheet consist of:
Prepaid benefit cost....................................................... $ - $ -
Accrued benefit liability ................................................. (1,964,374) 1,730,685
Intangible asset .......................................................... - -
Accumulated other comprehensive income .................................... - -
-------------- ---------------
Net amount recognized..................................................... $ (1,964,374) $ (1,730,685)
Other comprehensive income from changes...................................... $ - $ -
============== ===============
Weighted average rate assumptions used in determining pension cost and the
projected benefit obligation were:
Discount rate used to determine present value
of projected benefit obligation at end of year...................... 6.75% 7.25%
Expected long-term rate of return on plan assets for the year................ 7.50% 9.25%
Expected rate of increase in future compensation levels...................... 5.00% 6.00%
70
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of benefit restoration plan net periodic benefit cost:
2002 2001 2000
-------------- ----------------- ---------------
Service cost.............................................. $ 97,129 $ 157,302 $ 141,048
Interest cost............................................. 157,344 202,471 170,368
Expected return on plan assets............................ - - -
Amortization of prior service cost........................ 245 34,907 34,907
Amortization of transitional (asset) or obligation........ - - -
Recognized actuarial loss................................. 27,024 89,407 63,748
-------------- --------------- ----------------
Net periodic benefit cost................................. $ 281,742 $ 484,087 $ 410,071
============== =============== ================
NOTE 15 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective as
of January 1, 1985, which enables eligible employees of the Company and its
subsidiaries to own Company common stock. An employee becomes a participant in
the ESOP on June 30 or December 31 after completing 12 months of employment
during which the employee is credited with 1,000 or more hours of service.
Contributions to the ESOP are made at the discretion of the Company's Board of
Directors, but may not be less than the amount required to cover the debt
service on the ESOP loan. Employer contributions are allocated to eligible
participants in proportion to their compensation, which equals W-2 wages plus
pre-tax reductions for the Company's cafeteria plan. The Internal Revenue Code
imposes a limit ($200,000 in 2002) on the amount of compensation which may be
considered under the plan.
On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock from the Company's public offering
of new common stock. The note was originally secured by 80,000 shares of
purchased stock. The promissory note has been refinanced in years subsequent to
1993 as additional shares were purchased by the ESOP. On December 31, 1998, this
note was refinanced and an additional 56,682 shares of the Company's common
stock were obtained by the ESOP. This debt, in the original amount of
$2,963,842, was secured by 261,433 shares of the Company's common stock. The
note bears interest at a floating rate, with principal and interest payments due
monthly through November 16, 2010, with the remaining principal, if any, due
upon that date. The initial principal and interest payment on this debt in
December 1998 was $31,677. As changes occur in the interest rate on the loan,
appropriate adjustments are made to the monthly principle and interest payments.
At December 31, 2002, the monthly payment was $33,852. The Company has
guaranteed this debt and in accordance with the applicable accounting and
reporting guidelines the debt has been recognized on the Company's statement of
condition, with an offsetting charge against equity. As principal payments are
made by the ESOP, the debt and offsetting charge against equity are reduced. The
shares securing the note are released on a pro rata basis by the lender as
monthly payments of principal and interest are made. As of December 31, 2002,
there were 148,972 unreleased shares with a fair value, based on an independent
valuation of $7.00 per share, of approximately $1,042,804. These shares are
subtracted from outstanding shares for earnings per share calculations.
The portion of payments made by the Company to the ESOP on behalf of its
participating employees which are used to pay interest on the ESOP debt
($99,532, $176,465 and $251,976 in 2002, 2001 and 2000, respectively) is
classified as interest expense on the Company's income statement.
Dividends paid on released ESOP shares are credited to the accounts of the
participants to whom the shares are allocated. Dividends on unreleased shares
may be used to repay debt associated with the ESOP or treated as other income of
the ESOP and allocated to the participants. No dividends were paid in 2002.
At December 31, 2002 and 2001, the Company's financial statements reflected
long-term debt related to the ESOP of $2,083,342 and $2,382,490, respectively.
The corresponding contra-equity account was $1,999,858 at December 31, 2002 and
$2,317,902 at December 31, 2001.
71
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Compensation costs recognized amounted to $374,565, $256,101 and $525,743 for
the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE 16 - STOCK PLANS
On January 7, 1999, the Board of Directors of the Company adopted a Share
Purchase Rights Plan and declared a dividend of one preferred share purchase
right (a "Right") for each outstanding share of common stock of the Company to
shareholders of record on January 7, 1999. Each Right entitles the stockholder
to purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock of the Company at a price of $84 per one
one-hundredth of a preferred share. In the event that any person or group of
affiliated or associated persons acquires beneficial ownership of 15% or more of
the outstanding common stock of the Company (an "Acquiring Person"), each holder
of a purchase right, other than the Acquiring Person, will thereafter have the
right to receive upon exercise of the Right that number of shares of common
stock of the Company having a market value of two times the exercise price of
the Right. If the Company is acquired in a merger or other business combination
transaction or 50% or more of its assets or earning power are sold after a
person or group has become an Acquiring Person, each holder of a Right, other
than an Acquiring Person, will thereafter have the right to receive that number
of shares of common stock of the acquiring company which at the time of such
transaction have a market value of two times the exercise price of the Right. At
any time after a person or group becomes an Acquiring Person and prior to the
acquisition of 50% or more of the outstanding common stock of the Company by
such person or group, the Board of Directors of the Company may exchange the
Rights, other than Rights owned by an Acquiring Person, in whole or in part, at
an exchange ratio of one common share or one one-hundredth of preferred share.
The purchase price and the number of shares issuable upon exercise of the Rights
are subject to adjustment in the event of a stock split, stock dividend,
reclassification or certain distributions with respect to the preferred stock.
The Rights will expire January 13, 2009 unless such date is extended or unless
the Rights are redeemed or exchanged prior to such date.
In March 1998, 203,331 options were issued to directors and certain senior
officers with an exercise price of $15.00 per share, the market value (as
determined by the Board of Directors) of the Company's common stock at the time
of issuance. These options are exercisable through March 25, 2003. In December
1999, an additional 204,000 options were issued to directors and certain senior
officers with an exercise price of $20.00 per share, the market value (as
determined by the Board of Directors) of the Company's common stock at the time
of issuance. These options are exercisable through December 3, 2004. In August
2000, the Company granted options to purchase an aggregate of 15,000 shares of
common stock to certain senior officers of Community Bank. Each of these options
has an exercise price of $18.00 per share, the market value (as determined by
the Board of Directors) of the Company's common stock at the time of issuance.
These options are exercisable through August 24, 2005. In December 2001, the
Company granted options to purchase an aggregate of 252,000 shares of common
stock to certain senior officers of Community Bank. Each of these options has an
exercise price of $10.00 per share, the market value (as determined by the Board
of Directors) of the Company's common stock at the time of issuance. The options
are exercisable through December 17, 2006. In July 2002, the Company granted
options to purchase an aggregate of 340,000 shares of common stock to certain
officers and directors of Community Bank. Each of these options has an exercise
price of $7.00 per share, the market value (as determined by the Board of
Directors) of the Company's common stock at the time of issuance. The options
are exercisable through July 18, 2007. The Company did not receive any payment
in exchange for granting any of such options, which were granted in reliance
upon an exemption from registration under Section 4(2) of the Securities Act of
1933.
72
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following sets forth certain information regarding stock options for the
years ended December 31, 2000, 2001 and 2002:
Number Wgt. Average
of Shares Exercise Price
------------- --------------
Balance, December 31, 1999..................................................... 691,331 $ 14.52
Granted, year ended December 31, 2000. ........................................ 15,000 18.00
Expired, year ended December 31, 2000. ........................................ (2,500) (20.00)
-------------
Balance, December 31, 2000..................................................... 703,831 14.57
Granted, year ended December 31, 2001. ........................................ 252,000 10.00
Exercised, year ended December 31, 2001........................................ (329,560) 11.35
Expired, year Ended December 31, 2001. ........................................ (49,666) 15.10
-------------
Balance, December 31, 2001 .................................................... 576,605 14.37
Granted, year ended December 31, 2002. ........................................ 340,000 7.00
Exercised, year ended December 31, 2002 ....................................... - -
Expired, year ended December 31, 2002. ........................................ (86,067) 15.74
-------------
Balance, December 31, 2002..................................................... 830,538 11.00
=============
Expiration Options
Exercise Prices Number Date Exercisable
------------- -------------- ---------------
Options with exercise price of $7.00.......................... 340,000 7-18-07 340,000
Options with exercise price of $10.00......................... 239,000 12-17-06 239,000
Options with exercise price of $15.00......................... 94,038 3-25-03 94,038
Options with exercise price of $20.00......................... 147,500 12-03-04 147,500
Options with exercise price of $18.00......................... 10,000 8-24-05 10,000
------------- ---------------
Total outstanding, December 31, 2001.......................... 830,538 830,538
============= ===============
The Company permits option holders to tender previously owned shares in lieu of
cash to pay the exercise price for shares acquired through option exercise. This
technique results in an increase in the number of shares outstanding with little
or no increase in capital account balances. No option holders tendered shares in
2002. During 2001, option holders tendered 207,883 shares in connection with the
exercise of options for 329,560 shares resulting in a net increase of 121,667
shares outstanding. The excess of the fair market value of the 329,560 shares
over the aggregate option price resulted in an income tax benefit of $751,566,
which was credited to capital surplus.
73
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community Bank has advisory director boards established in the various markets
it serves. These advisory directors are given the option to receive their fees
in cash or stock. Common stock issued in lieu of cash for advisory directors'
fees is summarized as follows:
2002 2001 2000
------------ ----------- -----------
Shares issued............................................... 19,680 11,661 9,481
============ =========== ===========
Fair market value on issue date............................. $ 196,801 $ 209,865 $ 222,804
============ =========== ===========
The aggregate fair market value of the shares issued was charged to expense in
each respective period.
NOTE 17 - CONTINGENCIES
Background
At a meeting of Community Bank's Board of Directors on June 20, 2000, a director
brought to the attention of the Board the total amount of money Community Bank
had paid subcontractors in connection with the construction of a new Community
Bank office in Guntersville, Alabama. Management of the Company commenced an
investigation of the expenditures. At the request of management, the architects
and subcontractors involved in the construction project made presentations to
the Boards of Directors of the Company and Community Bank on July 15 and July
18, 2000, respectively. At the July 18, 2000 meeting of the Board of Directors
of Community Bank, another director alleged that Community Bank had been
overcharged by subcontractors on that construction project and another current
construction project. On July 18, 2000, the Boards of Directors of the Company
and Community Bank appointed a joint committee comprised of independent
directors of the Company and of Community Bank to investigate the alleged
overcharges. The joint committee retained independent legal counsel and an
independent accounting firm to assist the committee in its investigation and has
made its report to the Boards of Directors. The directors of Community Bank who
alleged the construction overcharges have made similar charges to bank
regulatory agencies and law enforcement authorities. Management believes that
these agencies and authorities are currently conducting investigations regarding
this matter.
Benson Litigation
On July 21, 2000, three shareholders of the Company, M. Lewis Benson, Doris E.
Benson and John M. Packard, Jr., filed a lawsuit in the state Circuit Court of
Marshall County, Alabama against the Company, Community Bank, certain directors
and officers of the Company and Community Bank, an employee of Community Bank
and two construction subcontractors. The plaintiffs purported to file the
lawsuit as a shareholder derivative action, which relates to the alleged
construction overcharges being investigated by the joint committee of the Boards
of Directors of the Company and Community Bank. The complaint alleges that the
directors, officers and employee named as defendants in the complaint breached
their fiduciary duties, failed to properly supervise officers and agents of the
Company and Community Bank, and permitted waste of corporate assets by allegedly
permitting the subcontractor defendants to overcharge Community Bank in
connection with the construction of two new Community Bank offices, and to
perform the construction work without written contracts, budgets, performance
guarantees and assurances of indemnification. In addition, the complaint alleges
that Kennon R. Patterson, Sr., the Chairman, President and Chief Executive
Officer of the Company, breached his fiduciary duties by allegedly permitting
the two named subcontractors to overcharge for work performed on the two
construction projects in exchange for allegedly discounted charges for work
these subcontractors performed in connection with the construction of Mr.
Patterson's residence. The complaint further alleges that the director
defendants knew or should have known of this alleged arrangement between Mr.
Patterson and the subcontractors. The complaint also alleges that Mr. Patterson,
the Community Bank employee and the two subcontractor defendants made false
representations and suppressed information about the alleged overcharges and
arrangement between Mr. Patterson and the subcontractors.
74
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 15, 2000, the plaintiffs filed an amended complaint adding Andy C.
Mann, a shareholder of the Company, as a plaintiff and adding a former director
of the Company and Community Bank as a defendant. The amended complaint
generally reiterates the allegations of the original complaint. In addition, the
amended complaint alleges that Community Bank was overcharged on all
construction projects from January 1997 to the present. The amended complaint
also alleges that the defendants breached their fiduciary duties and are guilty
of gross financial mismanagement, including allegations concerning the making or
approval of certain loans and taking allegedly improper actions to conceal the
fact that certain loans were uncollectible. On September 18, 2000 the plaintiffs
filed a second amended complaint. The second amended complaint generally
reiterates the allegations of the original and first amended complaints. In
addition, the second amended complaint alleges that the plaintiffs were
improperly denied their rights to inspect and copy certain records of the
Company and Community Bank. The second amended complaint also alleges that the
directors of the Company abdicated their roles as directors either by express
agreement or as a result of wantonness and gross negligence. The second amended
complaint asserts that the counts involving inspection of corporate records and
director abdication are individual, non-derivative claims. The second amended
complaint seeks, on behalf of the Company, an unspecified amount of compensatory
damages in excess of $1 million, punitive damages, disgorgement of allegedly
improperly paid profits and appropriate equitable relief. Upon motion of the
defendants, the case was transferred to the state Circuit Court in Blount
County, Alabama by order dated September 21, 2000, as amended on October 12,
2000.
On August 24, 2000, the Board of Directors of the Company designated the
directors of the Company who serve on the joint investigative committee as a
special litigation committee to investigate and evaluate the allegations and
issues raised in this lawsuit and to arrive at such decisions and take such
action as the special litigation committee deems appropriate. On June 8, 2001,
the special litigation committee filed its report under seal with the court. On
June 18, 2001, the court entered an order affirming the confidentiality of the
special committee's report. On June 28, 2001, the Company, Community Bank and
various other defendants filed a motion with the court to adopt the report of
the special committee, for partial summary judgment and to realign the Company
and Community Bank as plaintiffs in the lawsuit.
Following a hearing on August 29, 2001, the court denied these motions on
November 8, 2001. The court also ruled that the plaintiffs were entitled to
conduct discovery except as it related to one of the subcontractor defendants
and granted the plaintiffs' motion to unseal the report of the special
litigation committee. On November 14, 2001, the directors of the Company filed a
motion for the court to alter, amend, or vacate its November 8, 2001 rulings. On
February 7, 2002, the Company and Community Bank filed a motion to disqualify
Maynard, Cooper & Gale, P.C., the law firm representing the plaintiffs, due to
conflicts of interest. The court held a hearing on these motions on February 22,
2002 and the parties are awaiting a ruling. A tentative settlement of the
lawsuit was announced in December, 2002, but was not carried through and is
unlikely to be under present circumstances. One of the subcontractors named as a
defendant in this action, Morgan City Construction, Inc., and its principals,
Mr. and Mrs. Dewey Hamaker, have been tried and convicted in the United States
District Court for the Northern District of Alabama and are awaiting sentencing.
Because of the inherent uncertainties of the litigation process, the Company is
unable at this time to predict the outcome of this lawsuit and its effect on the
Company's financial condition and results of operations.
Packard Derivative Litigation
On April 4, 2003, a group composed of the same plaintiffs as in the Benson case
filed another derivative action against Sheffield Electrical Contractors, Inc.,
Steve Sheffield, Jay Bolden, Dudley, Hopton-Jones, Sims & Freeman, PLLP, Glynn
Debter, Kennon R. Patterson, Jr., Robert O. Summerford, Jimmie Trotter, John
Lewis, Jr., Merritt Robbins, Stacy Mann, B. K. Walker, Jr., Denny Kelly, Roy B.
Jackson, Loy McGruder, and Hodge Patterson. The complaint in this new derivative
lawsuit, besides adding defendants known during but not named in the Benson
lawsuit, is based upon the same allegations as in the Benson case but bases its
claims against the director-defendants not "for what they did (and did not do)
before learning of the over billing [sic.] allegations against Patterson [Kennon
R. Patterson, Sr., the Company's former Chairman and CEO] in July 2000" but,
instead "only for what they have done (and failed to do) after the filing of the
Benson lawsuit-- that is, after they learned of the allegations against
Patterson in July 2000." [Emphasis in the original.]
75
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The time for answering the complaint in this case has not yet expired. Because
of the inherent uncertainties of the litigation process, the Company is unable
at this time to predict the outcome of this lawsuit and its effect on the
Company's financial condition and results of operations.
Towns Derivative Litigation
The lawsuit filed by Mr. William Towns, a shareholder of the Company, on
November 19, 1998, as a shareholder derivative action against the directors of
the Company in the Circuit Court of Blount County, Alabama, was settled and
dismissed during 2002. The settlement did not have a material effect on the
financial condition of the Company.
Corr Family Litigation
On September 14, 2000, Bryan A. Corr and six other shareholders of the Company
related to Mr. Corr filed an action in the Circuit Court of Blount County,
Alabama, against the Company, Community Bank, and certain directors and officers
of the Company and Community Bank. The plaintiffs have alleged that the
directors of the Company actively participated in or ratified the
misappropriation of corporate income. The action was not styled as a shareholder
derivative action. On January 3, 2001, the defendants filed a motion for summary
judgment on the basis that these claims are derivative in nature and cannot be
brought on behalf of individual shareholders. The court has not ruled on the
motion. Although management currently believes that this action will not have a
material adverse effect on the Company's financial condition or results of
operations, regardless of the outcome, the action could be costly, time
consuming, and a diversion of management's attention.
Auto Loan Litigation
The action filed by the Company in the United States District Court for the
Northern District of Alabama against Carl Gregory Ford L-M, Inc., an automobile
dealership located in Ft. Payne, Alabama, Carl Gregory and Doug Broaddus, the
owners of the dealership, several employees and former employees of the
dealership and Gerald Scot Parrish, a former employee of Community Bank, with
respect to certain loans originated during 1998 in Community Bank's Wal-Mart
office in Ft. Payne, Alabama, has been settled as to all defendants other than
G. S. Parrish, the former employee of the Bank. The Bank has one year within
which to re-file its claims against Mr. Parrish.
Employee Litigation
The lawsuit filed by Messrs. Michael W. Alred and Michael A. Bean, two former
directors and executive officers of Community Bank, filed suit against Community
Bank in the United States District Court for the Northern District of Alabama
alleging that their employment was wrongfully terminated for allegedly providing
information to bank regulatory and law enforcement authorities concerning
possible violations of laws and regulations, gross mismanagement, gross waste of
funds and abuse of authority by Community Bank, its directors, officers and
employees was settled and dismissed during 2002. The terms of the settlement of
this litigation were deemed confidential and are included in the statement of
income as an increase to litigation expense.
Lending Acts Litigation
On October 11, 2002, William Alston, Murphy Howard, and Jason Tittle filed an
action against Community Bank, Community Bancshares, Inc., Holsombeck Motors,
Inc., Lee Brown d/b/a Alabama Bond & Investigation a/k/a ABI Recovery, Chris
Holmes d/b/a Alabama Bond & Investigation a/k/a ABI Recovery, Regina Holsombeck,
Kennon "Ken" Patterson, Sr., Hodge Patterson, James Timothy "Tim" Hodge, Ernie
Stephens, and the State of Alabama Department of Revenue. The plaintiffs in this
class action allege that Community Bank and others conspired or used
extortionate methods to effect a lending scheme of "churning phantom loans", and
that profits from the scheme were used to secure an interest in and/or to invest
in an enterprise that affects interstate commerce. The allegations state that
Community Bank used various methods to get uneducated customers with fair to
poor credit to sign numerous "phantom loans"
76
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
when the customers only intended to sign for one loan. Claims include
racketeering activity within the meaning of the Racketeer Influenced and Corrupt
Organizations Act of 1970, conspiracy, spoliation, conversion, negligence,
wantonness, outrage, and civil conspiracy.
The Company and Community Bank intend to defend the action vigorously and
currently are conducting discovery to ascertain what substance, if any, there is
to the claims. Although management currently believes that this action will not
have a material adverse effect on the Company's financial condition or results
of operations, regardless of the outcome, the action could be costly, time
consuming, and a diversion of management's attention.
Patterson Litigation
On April 9, 2003 Kennon R. Patterson, Sr., former Chairman, President and Chief
Executive Officer of the Company, filed an adversary proceeding in the United
States Bankruptcy Court for the Northern District of Alabama in connection with
his petition for protection under Chapter 11 of the United States Bankruptcy
Code. Defendants of the adversary proceeding are the Company, Community Bank,
five directors of the Company and Community Bank and the law firm of Powell,
Goldstein, Frazer and Murphy, LLP which represents Community Bank's Audit
Committee. The complaint alleges that the Company breached its employment
agreement with Mr. Patterson by terminating his employment on January 27, 2003
and failed to pay him for compensation and benefits which had allegedly accrued
prior to his termination. The complaint also alleges that Community Bank,
members of Community Bank's Audit Committee, the Audit Committee's independent
counsel and the Company's current Chairman, President and Chief Executive
Officer conspired to interfere with Mr. Patterson's contract and business
relationship with the Company. The suit seeks damages in excess of $150 million
for, among other things, lost compensation and benefits, mental anguish, and
damage to Mr. Patterson's reputation. The Company believes that this lawsuit is
without merit and intends to defend the action vigorously. Although management
currently believes that this action will not have a material adverse effect on
the Company's financial condition or results of operations, regardless of the
outcome, the action could be costly, time consuming and a diversion of
management's attention.
General
The Company and its subsidiaries are from time to time also parties to other
legal proceedings arising in the ordinary course of business. Management
believes, after consultation with legal counsel, that no such proceedings, if
resulting in an outcome unfavorable to the Company, will, individually or in the
aggregate, have a material adverse effect on the Company's financial condition
or results of operations.
The Company's Certificate of Incorporation provides that, in certain
circumstances, the Company will indemnify and advance expenses to its directors
and officers for judgments, settlements and legal expenses incurred as a result
of their service as officers and directors of the Company. Community Bank's
Bylaws contain a similar provision for indemnification of directors and officers
of Community Bank.
NOTE 18 - RELATED PARTY TRANSACTIONS
The Company, through Community Bank, its wholly owned subsidiary, offers all
regular full-time employees, including executive officers, loans at interest
rates which are 1% below the prevailing market rate. As of December 31, 2002,
executive officers and directors of the Company and executive officers of
Community Bank and its subsidiaries, including members of their immediate
families and related interests, had loans outstanding pursuant to this policy
with total indebtedness of approximately $47,903.
The Company, through Community Bank, also offers first mortgage real estate
loans on the primary residence, at a rate of 5%, to employees who are required
to relocate in the course of their employment. As of December 31, 2002,
executive officers and directors of the Company and executive officers of
Community Bank and its subsidiaries, including members of their immediate
families and related interests, had relocation loans outstanding with total
indebtedness of approximately $1,063,186.
77
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2002, Community Bank had one real estate loan to Kennon R.
Patterson, Sr., the former Chairman and CEO of the Company in the amount of
$5,150,000. During 2002, the highest balance outstanding for this loan was
$5,150,000. The loan bears interest at 4.25% and is secured by real estate
having an appraised value in excess of the loan amount.
At December 31, 2002, Community Bank had one real estate loan to Hodge
Patterson, former Executive Vice President of the Bank in the amount of
$540,401. During 2002, the highest balance outstanding for this loan was
$552,732. The loan bears interest at 5.00%.
In June 2000, Community Bank loaned $1,696,576 to Debter Properties, LLC, an
Alabama limited liability company of which a director of the Company is a
member, to fund the purchase from Community Bank of the real property in which
Community Bank's Boaz, Alabama office was located. Concurrently with this loan
and the purchase of the real property, Community Bank entered into a lease
agreement, as the tenant, with Debter Properties, LLC to lease back this real
property from Debter Properties, LLC. On May 31, 2002 Community Bank sold its
Boaz, Alabama office to Peoples Bank of North Alabama which assumed the loan to
Debter Properties, LLC and Community Bank's obligations under the lease.
Interior Design: The Company and the Bank had no service contracts during 2002
or 2001 with Heritage Interiors, a decorating and design firm owned and operated
by the wife of Kennon R. Patterson, Sr., a director and officer of the Company.
The Company and the Bank, including the Bank's subsidiaries used the services of
Heritage Interiors during 2000 for the interior design, furniture, appliances,
fixtures, hardware, carpets, wall coverings, paint, drapes and accessories for
new facilities and similar work associated with the renovation of existing
locations. Total payments to Heritage Interiors in 2000 were $407,100. All
pending projects were completed prior to the end of 2000.
Accounting Services: The Company has engaged the accounting firm of Schauer,
Taylor, Cox, Vise and Morgan, P.C. to perform certain accounting services. Doug
Schauer, a member of the firm, is Kennon R. Patterson, Sr.'s son-in-law.
Services performed by Schauer, Taylor, Cox, Vise and Morgan, P.C. for the
Company in 2002 and 2001 have been limited to preparation of the Company's
quarterly tax accruals, preparation and filing the Company's federal and state
tax returns, consultation regarding interpretation and application of accounting
standards and EDGAR services in connection with the Company's filings with the
Securities and Exchange Commission. The Company and its subsidiaries paid
Schauer, Taylor, Cox, Vise and Morgan, P.C. $102,684, $121,707 and $117,898 for
services rendered during 2002, 2001 and 2000, respectively.
Leases: In June 2000, Community Bank entered into a capital lease agreement, as
the tenant, with Debter Properties, LLC, an Alabama limited liability company,
pursuant to which Community Bank leased the real property in which Community
Bank's Boaz, Alabama office is located. Mr. Glynn Debter, a director of the
Company, is a member of Debter Properties, LLC. In connection with the lease
agreement, Community Bank loaned funds to Debter Properties, LLC to finance its
purchase of the real property from Community Bank. The term of the lease is 20
years; provided, however, that in no event shall the term of the lease expire
prior to the time when the loan obtained by the lessor to purchase the leased
property is paid in full. The monthly rent on this lease is an amount equal to
the monthly debt amortization of funds which the lessor borrowed to purchase the
leased property. Because the interest rate on the loan used to purchase the
property adjusts with fluctuation in the prime rate, the monthly lease payments
are subject to change. Lease payments to Debter Properties, LLC during 2002
totaled approximately $55,679. Lease payments totaled $156,651 and $110,747 for
the years ended December 31,2001 and 2000, respectively. This lease was acquired
by the purchaser of the Marshall County offices on May 31, 2002. Community Bank
no longer has any obligations under this lease.
On March 13, 2001, Community Bank entered into a ground lease with Merritt
Robbins, a director of the Company and Community Bank, pursuant to which
Community Bank leases property in New Hope, Alabama, from Mr. Robbins for a
period of 5 years at a monthly rent of $800. Community Bank has the option to
renew the lease for up to seven
78
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
successive 5-year terms in which event the rent increases $200 per month with
each renewal term. At any time during the term of the lease Community Bank has
the option to purchase the property at a price agreed upon by the parties, or,
if the parties cannot agree, at a price determined by averaging appraisals of
the property performed by two licensed appraisers.
On June 14, 2001, Community Bank entered into a lease with Michael Robbins, the
son of a director of the Company and Community Bank pursuant to which Mr.
Robbins leases property in Madison County, Alabama from Community Bank for a
period of 5 years at a monthly rent of $700. Mr. Robbins has the option to renew
the lease for up to seven successive 5-year terms. At any time during the term
of the lease Mr. Robbins has the option to purchase the property at a price
agreed upon by the parties, or, if the parties cannot agree, at a price
determined by averaging appraisals of the property performed by two licensed
appraisers.
NOTE 19 - OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
Years Ended December 31,
2002 2001 2000
-------------- ----------------- ---------------
Amortization of intangibles-goodwill........................ $ - $ 478,487 $ 470,210
Amortization of intangibles-other........................... 76,797 83,311 83,311
Loss on write-down of goodwill.............................. - 2,652,620 -
Loss on impairment of premises and equipment................ - - 439,353
Insurance................................................... 832,000 279,164 298,052
Legal fees.................................................. 1,962,391 1,853,170 785,192
Professional fees........................................... 1,308,782 1,201,107 211,010
Supplies.................................................... 590,276 559,449 417,829
Postage..................................................... 288,924 383,048 436,947
Telephone................................................... 598,190 657,014 787,072
Courier services............................................ 364,141 389,932 209,212
ATM expense................................................. 164,881 221,360 229,052
Holding costs on other real estate owned.................... 252,827 61,430 23,854
Provision for debt cancellation............................. 306,611 95,686 126,781
Other....................................................... 2,454,450 1,481,991 2,412,836
-------------- --------------- ----------------
$ 9,200,270 $ 10,397,769 $ 6,930,711
============== =============== ================
NOTE 20 - INCOME TAXES
The components of income tax expense (benefit) for each of the years ended
December 31, 2002, 2001 and 2000 were:
2002 2001 2000
------------- ----------- -------------
Currently payable
Federal....................................................... $ (50,736) $ (64,666) $ 501,709
State......................................................... 70,858 (10,125) (7,325)
Deferred .......................................................... (573,197) (914,941) (2,198,860)
------------- ----------- -------------
Total .......................................................... $ (553,075) $ (989,732) $ (1,704,476)
============= =========== =============
79
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes is presented in the income statement as follows:
Years Ended December 31,
2002 2001 2000
-------------- ----------------- ---------------
Continuing operations....................................... $ (3,129,806) $ (1,520,856) $ (1,824,753)
Discontinued operations..................................... 2,576,731 531,124 120,277
-------------- --------------- ----------------
Total.............................................. $ (553,075) $ (989,732) $ (1,704,476)
============== =============== ================
Components of the Company's deferred tax asset were as follows:
December 31,
2002 2001
--------------- ---------------
Deferred Tax Assets
Net unrealized losses (gains) on securities available
for sale............................................................ $ - $ 162,735
Pension expense and benefits.......................................... 536,561 540,660
Provision for loan losses............................................. 3,196,573 1,968,906
Intangibles........................................................... 604,351 744,463
Provision for debt cancellation....................................... 84,756 52,378
Alternative minimum tax credit carryforward........................... 35,143 351,505
Net operating loss carryforward....................................... 64,010 191,353
Other real estate owned............................................... 441,106 -
Other................................................................. - 42,315
--------------- ---------------
Total deferred tax assets............................................. 4,962,500 4,054,315
--------------- ---------------
Deferred Tax Liabilities
Net unrealized losses (gains) on securities, available for sale....... (1,008,687) -
Depreciation.......................................................... (1,094,377) (1,260,335)
Minimum pension liability............................................. (624,626)
Other................................................................. (52,339) -
--------------- ---------------
Total deferred tax liabilities............................................. (2,780,029) (1,260,335)
--------------- ---------------
Net Deferred Tax Asset................................................ $ 2,182,471 $ 2,793,980
=============== ===============
The net deferred tax asset is included as a component of other assets in the
Consolidated Statements of Condition.
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which is uncertain. Accordingly, a valuation allowance in
the amount of $723,132 as of December 31, 2002 has been established to reflect
these uncertainties. The net deferred tax asset before valuation allowance was
$2,905,603.
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense. The primary
reason for this difference is tax-exempt interest income and disallowed interest
expense.
At December 31, 2002, for income tax purposes, the Company had federal
alternative minimum tax (AMT) credit carry forwards of $35,143 and $351,505. The
AMT credit carryforwards have no expiration date.
Tax effects of securities transactions resulted in an increase in income taxes
for 2002, 2001 and 2000 of $239,616, $470,823 and $1,682, respectively.
80
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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 these short-term instruments, the carrying amount
is a reasonable estimate of fair value.
Investment Securities : For securities and marketable equity securities held for
investment purposes, fair values are based on quoted market prices or dealer
quotes. For other securities held as investments, fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loan Receivables: For certain homogeneous categories of loans, such as some
residential mortgages, other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Deposits: The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposit of similar remaining maturities.
Short-term Borrowings: The fair value of the Company's fixed rate borrowings are
estimated using discounted cash flows, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. The
carrying amount of the Company's variable rate borrowing approximates their fair
values.
Commitments to extend credit and standby Letters of Credit: The fair value of
commitments and letters of credit is estimated to be approximately the same as
the notional amount of the related commitment. The estimated fair values of the
Company's financial instruments as of December 31, 2002 and 2001 are as follows:
2002 2001
--------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ -------------- --------------
(In thousands) (In thousands)
Financial Assets
Cash and short-term investments.............. $ 40,207 $ 40,207 $ 53,237 $ 53,237
Investment securities........................ 123,901 123,901 121,679 121,679
Loans and capitalized lease receivable ...... 362,238 368,082 501,520 517,454
Less: allowance for loan losses. ............ 9,784 9,784 7,292 7,292
------------- ------------ -------------- --------------
Loans, net................................... 352,454 358,298 494,228 510,162
------------- ------------ -------------- --------------
Total ....................................... $ 516,562 $ 522,406 $ 669,144 $ 685,078
============= ============= ============== ==============
Financial Liabilities
Deposits..................................... $ 459,464 $ 471,738 $ 617,706 $ 623,334
Short-term borrowings. ...................... 1,725 1,725 4,360 4,360
Long-term debt.............................. 55,636 63,768 58,433 78,066
------------- ------------ -------------- --------------
Total Financial Liabilities.................. $ 516,825 $ 537,231 $ 680,499 $ 705,760
============= ============ ============== ==============
81
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - PRIOR PERIOD ADJUSTMENTS
During the quarter ended September 30, 2002, it was determined that certain
items related to the fourth quarter of the year ended December 31, 2001 had not
been properly reported in that period. The items related to unrecorded
liabilities, valuation of repossessed assets and accounts receivable.
Accordingly, the December 31, 2001 Consolidated Statement of Condition and the
Consolidated Statement of Income have been restated. Also, during the fourth
quarter of 2002, the Audit Committee commenced a new investigation into the
allegations that Community Bank had been overcharged by certain subcontractors
in exchange for discounted charges for work done on the personal residence of
the Company and Bank's former Chief Executive Officer. The investigation is
ongoing and is expected to continue during 2003; however, the results thus far
are considered to be substantially complete and are, in management's best
estimation, the loss incurred due to overpayments on the Bank's construction
projects. The overcharges occurred between 1998 and 2000 and totaled $1,972,712.
The Company is considering these as an impairment to premises and equipment and
has reflected the appropriate amounts as prior period adjustments to the
corresponding financial reporting periods as well as restating all periods
presented in the Consolidated Statements of Financial Condition and the
Consolidated Statements of Income. At December 31, 2002 the Company has deemed
these amounts to be a loss because potential recoveries cannot be reasonably
estimated or known to be collectible at this time. The Company intends to seek
recoveries in full.
The schedule below shows all prior period adjustments discussed above and their
effects on net income and retained earnings for the periods presented:
Retained earnings, December 31, 1999, as previously reported................................. $ 19,038,875
Prior period adjustments:
Loss on impairment of premises and equipment............................................ (1,149,064)
Change in depreciation expense................................................................ 5,257
---------------
Retained earnings, December 31, 1999, as restated............................................. $ 17,895,068
===============
Retained earnings, December 31, 2000, as previously reported.................................. $ 13,490,799
Prior period adjustments:
Loss on impairment of premises and equipment............................................ (1,972,712)
Change in depreciation expense
24,561
Retained earnings, December 31, 2000, as restated............................................. $ 11,542,648
===============
Net loss, for the year ended December 31, 2000, as previously reported........................ $ (2,214,931)
Loss on impairment of premises and equipment......................................... (823,648)
Change in depreciation expense....................................................... 19,304
---------------
Net loss, for the year ended December 31, 2000, as restated................................... $ (3,019,275)
===============
Retained earnings, December 31, 2001, as previously reported................................. $ 12,390,300
Prior period adjustments:
Loss on impairment of premises and equipment............................................ $ (1,972,712)
Change in depreciation expense................................................................ 63,494
Unrecorded liabilities.................................................................. (227,985)
Valuation of repossessed assets......................................................... (85,986)
Accounts receivable..................................................................... (47,347)
---------------
Retained earnings, December 31, 2001, as restated ........................................ $ 10,119,764
===============
Net loss, for the year ended December 31, 2001, as previously reported........................ $ (1,100,499)
Change in depreciation expense.......................................................... 38,933
Unrecorded liabilities........................................................................ (227,985)
Valuation of repossessed assets............................................................... (85,986)
Accounts receivable..................................................................... (47,347)
---------------
Net loss, for the year ended December 31, 2001, as restated................................... $ (1,422,884)
===============
82
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 - SUBSEQUENT EVENTS
On January 27, 2003, the Board of Directors of the Company terminated the
employment of Kennon R. Patterson, Sr. Patrick M. Frawley was named Chairman,
Chief Executive Officer and President of the Company. On February 8, 2003, the
Board of Directors of Community Bank, the Company's wholly-owned subsidiary
announced Kennon R. Patterson, Sr. and Kennon R. Patterson, Jr. would no longer
serve on the Board of Directors of Community Bank. The Board of Directors of the
Company does not have the legal authority to remove a director of the Company,
although a director may resign. Mr. Patterson has not resigned as a director of
the Company.(See Note 17 "Patterson Litigation")
Also, on March 4, 2003, the Board of Directors of Community Bank (the "Bank"), a
wholly owned subsidiary of the Company, and the Federal Deposit Insurance
Corporation (the "FDIC") entered into a Stipulation and Consent to the Issuance
of an Order to Cease and Desist (the "Consent Agreement"). The Order will become
effective 10 days from March 12, 2003, the date of its issuance. The FDIC
alleges in the Order to Cease and Desist (the "Order") deficiencies relating to
the Board's supervision over active management of the Bank, supervision and
control of lending to insiders and accurate maintenance of the Bank's books and
records. The FDIC characterizes these deficiencies as unsafe and unsound banking
practices. The Board has consented to the Order without admitting or denying
those allegations. Pursuant to the Order, the Board of the Bank has agreed to
cease and desist from conduct giving rise to the noted deficiencies and to:
(v) develop within 30 days of the effective date of the Order a written plan
specifying the responsibilities and lines of authority for the Bank's
executive officers and outlining internal controls to ensure compliance
with the plan;
(vi) refrain from making, renewing or modifying any loans to current or former
officers or directors without prior approval of the FDIC and the Alabama
State Banking Department;
(vii)amend the Bank's books and records to reflect the actual value of the
Bank's premises and fixed assets; and
(viii) supply a copy of the Order to the Company and provide the Company with a
summary of the Order for inclusion in the Company's next shareholder
communication.
83
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24 - CONDENSED PARENT COMPANY INFORMATION
STATEMENTS OF CONDITION
December 31,
-------------------------------
2002 2001
-------------- ---------------
Assets
Cash and due from banks..................................................... $ 587,222 $ 982,434
Investment in subsidiaries*................................................. 54,318,635 51,578,654
Intangible assets, net ..................................................... 732,133 836,867
Deferred tax assets. ....................................................... 752,487 1,016,469
Refundable income taxes-current ............................................ 786,927 692,163
Other assets ............................................................... 445,817 797,078
-------------- ---------------
Total Assets............................................................. $ 57,623,221 $ 55,903,665
============== ===============
Liabilities and Shareholders' Equity
Long-term debt.............................................................. $ 3,577,687 $ 4,666,599
Trust preferred securities ................................................. 10,310,000 10,310,000
Other liabilities .......................................................... 4,045,460 2,532,233
Shareholders' Equity .................................................... 39,690,074 38,394,833
-------------- ---------------
Total Liabilities and Shareholders' Equity............................... $ 57,623,221 $ 55,903,665
============== ===============
* Eliminated in consolidation
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84
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF INCOME
Year Ended December 31,
2002 2001 2000
--------------- ---------------- --------------
Income
From subsidiaries - eliminated in consolidation:
Dividends........................................... $ - $ - $ 4,878,562
Management fees..................................... 300,000 300,000 300,000
Interest............................................ 46,385 111,322 169,455
Other income........................................ 1,200 15,007 27,759
--------------- ----------------- ---------------
347,585 426,329 5,375,776
--------------- ----------------- ---------------
Expenses
Salaries and employee benefits......................... 1,342,569 1,568,160 2,193,107
Interest............................................... 1,308,043 1,388,241 1,433,404
Other expenses......................................... 536,289 683,737 1,340,281
--------------- ----------------- ---------------
3,186,901 3,640,138 4,966,792
--------------- ----------------- ---------------
Income (loss) before income taxes and equity in
undistributed earnings of subsidiaries................. (2,839,316) (3,213,809) 408,984
Income taxes.............................................. (1,067,504) (1,107,020) (1,506,160)
---------------- ----------------- ---------------
Income before equity in undistributed earnings (loss)
of subsidiaries........................................ (1,771,812) (2,106,789) 1,915,144
Equity in undistributed earnings (loss)
of subsidiaries........................................ 2,676,010 683,905 (4,934,419)
--------------- ----------------- ---------------
Net income (loss)......................................... $ 904,198 $ (1,422,884) $ (3,019,275)
=============== ================= ===============
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85
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
--------------- ------------------ --------------
Cash Flows From Operating Activities
Net income (loss)...................................... $ 904,198 $ (1,422,884) $ (3,019,275)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Equity in undistributed income of subsidiaries...... (2,676,010) (683,905) 4,934,419
ESOP expense related to shares released............. 177,065 256,101 -
Provision for depreciation and amortization......... 107,847 86,707 108,362
Loss on disposal of assets.......................... 2,637 - -
Increase in other assets............................ 514,730 1,690,614 (1,547,353)
Increase in other liabilities....................... 1,468,226 (184,800) 1,291,716
--------------- ------------------ ---------------
Net cash provided by operating
activities...................................... 498,693 (258,167) 1,767,869
--------------- ------------------ ---------------
Cash Flows From Investing Activities
Proceeds from sale of assets........................... - - 33,431
Capitalization of subsidiaries......................... - (1,534,000) (5,940,879)
--------------- ----------------- ---------------
Net cash (used in) provided by
investing activities............................. - (1,534,000) (5,907,448)
--------------- ----------------- ----------------
Cash Flows From Financing Activities
Repayment of long-term debt............................ (1,088,914) (752,504) (961,958)
Issuance of Trust preferred securities................. - - 10,310,000
Issuance of common stock............................... 196,801 209,865 222,804
Retirement of common stock............................. (1,792) - -
Cash dividends......................................... - - (3,333,145)
--------------- ----------------- ---------------
Net cash provided by (used in)
financing activities............................. (893,905) (542,639) 6,237,701
----------------- ------------------ ---------------
Net increase (decrease) in cash and
cash equivalents....................................... (395,212) (2,590,907) 2,098,122
Cash and due from banks at beginning of year.............. 982,434 3,573,341 1,475,219
--------------- ----------------- ---------------
Cash and due from banks at end of year.................... $ 587,222 $ 982,434 $ 3,573,341
=============== ================= ===============
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86
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 25 - QUARTERLY RESULTS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 2002 and
2001 follows:
First Second Third
Quarter Quarter Quarter Fourth
(As Restated) (As Restated) (As Restated) Quarter
-------------- -------------- -------------- --------------
(In Thousands Except Per Share Data)
2002:
Total interest income..................................... $ 12,307 $ 8,640 $ 10,029 $ 9,681
Total interest expense ................................... 5,571 3,332 4,279 3,971
Provision for loan losses.................................... 1,042 3,012 2,389 3,589
Net interest income after
provision for loan losses .............................. 5,694 2,296 3,361 2,121
Investment securities gains (losses) ..................... 17 107 305 224
Total noninterest income ................................. 1,908 1,828 2,007 1,703
Total noninterest expense. ............................... 7,387 6,416 9,695 5,573
Income tax expense ....................................... 120 (328) (1,824) (1,097)
Income (loss) from continuing operations.................. 95 (1,963) (2,503) (652)
Income (loss) from discontinued operations................... 1,138 4,790 - -
Net income (loss)............................................ 1,233 2,827 (2,503) (652)
Per Common share:
Basic earnings (loss) from continuing operations........ $ 0.02 $ (0.42) $ (0.54) $ (0.14)
Diluted earnings (loss) from continuing operations..... 0.02 (0.42) (0.54) (0.14)
Basic earnings (loss)................................... 0.27 0.60 (0.54) (0.14)
Diluted earnings (loss)................................. 0.27 0.60 (0.54) (0.14)
2001:
Total interest income..................................... $ 14,429 $ 9,748 $ 11,825 $ 11,485
Total interest expense ................................... 8,367 4,844 6,198 5,224
Provision for loan losses. ............................... 974 1,281 2,292 1,547
Net interest income after
provision for loan losses .............................. 5,088 3,623 3,335 4,714
Investment securities gains (losses) ..................... 353 25 155 751
Total noninterest income ................................. 2,583 1,550 1,760 2,239
Total noninterest expense. ............................... 6,669 6,167 6,233 9,723
Income tax expense ....................................... 291 (395) (15) (1,401)
Income (loss) from continuing operations ................. 711 (599) (1,123) (1,370)
Income (loss) from discontinued operations................ 94 443 90 332
Net income (loss)......................................... 805 (156) (1,033) (1,038)
Per Common Share:
Basic earnings (loss) from continuing operations........ $ 0.16 $ (0.13) $ (0.24) $ (0.31)
Diluted earnings (loss) from continuing operations..... 0.16 (0.13) (0.24) (0.31)
Basic earnings (loss)................................... 0.18 (0.03) (0.22) (0.24)
Diluted earnings (loss)................................. 0.18 (0.03) (0.22) (0.24)
In December 2002, the Company amended the March 31, 2002, June 30, 2002 and the
September 30, 2002 Form 10-Q's to reflect certain prior period adjustments and
the appropriate presentation for discontinued operations.
87
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company's discussion of changes in its accountants are disclosed in:
(i.) The Company's Current Report on Form 8-K filed on May 16, 2000
(ii.) an amendment thereto on Form 8-K/A filed on May 30, 2000
(iii.) a Current Report on Form 8-K filed on September 28, 2000
(iv.) an amendment thereto on Form 8-K/A filed on October 10, 2000
(v.) a Current Report on Form 8-K filed on February 15, 2001.
(vi.) a Current Report on Form 8-K filed on October 11, 2002.
(vii.) An amendment thereto on Form 8-K/A filed on November 5, 2002.
PART III
Item 10 - Directors and Executive Officers of the Registrant
The directors of the Company, their ages, the positions held by them with the
Company and certain of its subsidiaries and their principal occupations for the
last five years are as follows:
Directors with Terms Expiring In 2003 (Class I)
Name, Age and Positions Held with the Director of Principal Occupation
Company and Subsidiaries Company Since During Past Five Years
------------------------------------------------------- ----------------- -----------------------------
Roy B. Jackson (68) 1999 (Retired) Owner of Jackson
Director of the Company, Community Bank, Farm & Garden Center,
1st Community Credit Corporation; Minor Hill, Tennessee
Community Appraisals, Inc., Community Insurance Corp.
and Southern Select Insurance, Inc.
Kennon R. Patterson, Jr. (37) 2000 Ranch Manager of Heritage
Director of the Company Valley Ranch (2000 - Present);
Executive Vice President of
Community Bank (1997-2000);
Senior Vice President of
Community Bank (1996-1997)
Jimmie Trotter (65) 2000 (Retired) Principal of Mortimer
Director of the Company, Community Bank, Jordan High School, Morris,
1st Community Credit Corporation; Alabama
Community Appraisals, Inc., Community Insurance Corp.
and Southern Select Insurance, Inc.
88
Directors with Terms Expiring In 2004 (Class II)
Name, Age and Positions Held with the Director of Principal Occupation
Company and Subsidiaries Company Since During Past Five Years
------------------------------------------------------- ----------------- -----------------------------
Glynn Debter (68) 1996 Owner-operator of Debter
Director of the Company, Community Bank, Farms (cattle breeding),
1st Community Credit Corporation; Horton, Alabama
Community Appraisals, Inc., Community Insurance Corp.
and Southern Select Insurance, Inc.
John J. Lewis, Jr. (55) 1997 Production Planning Manager
Director of the Company, Community Bank, for Tyson Foods, Inc.
1st Community Credit Corporation; (food processing)
Community Appraisals, Inc., Community Insurance Corp. Blountsville, Alabama
and Southern Select Insurance, Inc.
Loy McGruder (62) 1996 President of Community Bank
Director of the Company. (2002-Present); Executive Vice
President of Community Bank
(1994-2002)
89
Directors with Terms Expiring In 2005 (Class III)
Name, Age and Positions Held with the Director of Principal Occupation
Company and Subsidiaries Company Since During Past Five Years
------------------------------------------------------- ----------------- -----------------------------
Patrick M. Frawley (51) 2003 Chairman, President and Chief
Chairman, President and Chief Executive Officer of the Executive Officer of the
Company; Chairman and Chief Executive Officer of Company (2003-Present);
Community Bank; Chairman of 1st Community Credit Chairman and Chief Executive
Corporation, Community Appraisals, Inc., Community Officer of Community Bank
Insurance Corp. and Southern Select Insurance, Inc. (2003-Present); Senior Vice
President of Community Bank
(2002-2003); Director of
Regulatory Relations for Bank
of America (1991-2002).
Denny G. Kelly (63) 1986 (Retired) President of
Director and Vice Chairman of the Company and Community Bank (1993-2002)
Community Bank; Director of 1st Community Credit
Corporation, Community Appraisals, Inc., Community
Insurance Corp. and Southern Select Insurance, Inc.
Kennon R. Patterson, Sr. (60) 1983 Chairman, President and Chief
Director of the Company. Executive Officer of the
Company (1985-2003);
Chairman and Chief Executive
Officer of Community Bank
(1993-2003).
Merritt M. Robbins (65) 1996 Piggly Wiggly grocery store
Director of the Company, Community Bank, 1st Community operator and property
Credit Corporation, Community Appraisals, Inc., developer, New Hope, Alabama
Kennon R. Patterson, Sr. is the father of Kennon R. Patterson, Jr.
On January 20, 2003, Kennon R. Patterson, Sr. filed a petition for protection
under Chapter 11 of the United States Bankruptcy Code.
Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") requires the Company's directors, executive officers and persons who
beneficially own more than 10% of the Common Stock to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock. These officers, directors and stockholders
are also required by SEC rules to furnish the Company with copies of all Section
16(a) reports they file. There are specific dates by which these reports are to
be filed and the Company is required to report in this Proxy Statement any
failure to file reports as required for 2002.
The Company is not aware of any instance during 2002 in which directors or
executive officers of the Company failed to make timely filings required by
Section 16(a) of the Exchange Act. The Company has relied on written
representations of its directors and executive officers and copies of the
reports that have been filed in making required disclosures concerning
beneficial ownership reporting.
90
Item 11 - Executive Compensation
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------- -----------
Other Securities All
Annual Underlying Other
Name and Principal Position(1) Year Salary Bonus Compensation Options/SAR Compensation(2)
----------------------------- ------- --------- -------- ------------ ----------- --------------
Kennon R. Patterson, Sr. 2002 $ 917,000 - - 80,000 $ 21,363
Chairman, President 2001 917,000 - - 80,000 6,984
and Chief Executive Officer... 2000 1,017,000 - - 8,003
Loy McGruder 2002 $ 273,782 - - 25,000 $ 13,163
President 2001 220,500 - - 10,000 8,784
Community Bank................ 2000 245,000 - - - 9,803
Hodge Patterson, III (3) 2002 $ 257,438 - - 12,500 $ 13,163
Executive Vice President 2001 234,000 - - 10,000 8,784
Community Bank................ 2000 260,000 - 29,679 (4) 9,803
Stacey W. Mann................ 2002 $ 200,000 - - 12,500 $ 13,163
Executive Vice President 2001 185,852 - - 10,000 8,784
Community Bank................ 2000 185,000 - 18,964 (4) - 9,803
Patrick M. Frawley 2002 $ 175,782 (5) - - - -
Senior Vice President 2001 - - - - -
Community Bank................ 2000 - - - - -
Bishop K. Walker, Jr. 2002 $ 29,658 - 9,032 (6) - $ 300,000
Vice Chairman and 2001 428,400 - - - 10,761
General Counsel 2000 476,000 - - - 11,780
Denny G. Kelly 2002 $ 23,365 - - 15,000 $ 335,757
President 2001 337,500 - - 10,000 8,784
Community Bank................ 2000 375,000 - - - 9,803
1. The position shown is the position held during 2002. Mr. Walker and Mr.
Kelly retired from the Company and Community Bank as of January, 2002. In
January 2003 the Board of Directors terminated Kennon R. Patterson, Sr.'s
employment with the Company and Community Bank, and elected Patrick M.
Frawley as Chairman, President and Chief Executive Officer of the Company
and Chairman and Chief Executive Officer of Community Bank. In February
2003, Loy McGruder took a medical leave of absence and Stacey W. Mann was
elected Interim President. In April 2003, Hodge Patterson, III left
Community Bank to pursue other business interests.
2. Includes life insurance premiums paid by the Company and contributions by
the Company to the ESOP during 2002, 2001 and 2000, respectively, as
follows: Kennon R. Patterson, Sr., $21,363, $6,984 and $8,003; Bishop K.
Walker, Jr., $0, $10,761 and $11,780; Denny G. Kelly, $8,784 and $9,803;
Loy McGruder, $13,163, $8,784 and $9,803; Hodge Patterson, III, $13,163,
91
$8,784 and $9,803; Stacey W. Mann, $13,163, $8,874 and $9,803; and Patrick
M. Frawley, $0, $0 and $0. ESOP contributions for 2002 are estimated
because the allocations for the 2002 plan year have not been completed by
the plan record keeper. This column also includes, in the case of Mr.
Walker, a $300,000 severance payment and purchase of an automobile for
$50,957 made in connection with his retirement, and, in the case of Mr.
Kelly, a $247,500 severance payment made in connection with his retirement
and $37,300 in fees for his service during 2002 as a director of the
Company and its subsidiaries following his retirement.
3. Hodge Patterson is the brother of Kennon R. Patterson, Sr. and the uncle of
Kennon R. Patterson, Jr.
4. Includes for 2000 for Hodge Patterson and Stacy W. Mann, respectively,
$2,550 and $2,240 with respect to social club dues, $12,146 and $7,292 with
respect to usage of a Company-owned automobile, and $14,983 and $9,432 with
respect to discounted interest rates through participation in the Company's
employee loan programs.
5. Mr. Frawley's employment by Community Bank was subject to regulatory
approval which was obtained on May 30, 2002. Mr. Frawley was an independent
contractor from March 1, 2002 until June 10, 2002. The amount shown in the
table includes $56,875 paid to Mr. Frawley as an independent contractor and
$118,907 paid to him as a Community Bank employee.
6. Includes for 2002 for Bishop K. Walker, Jr. $8,959 with respect to usage of
Company-owned automobile, and $73 with respect to discounted interest rates
through participation, prior to his retirement, in the Company's employee
loan programs.
92
Stock Options
The following table provides information concerning grants of stock options by
the Company to the named executive officers during 2002:
Option Grants in Last Fiscal Year
Potential realizable value at
Individual assumed annual rates of stock
----------------------------------
Grants price appreciation for option term
---------------------------------
Percent of
Number of total options
securities granted to
underlying employees in Exercise or Expiration
Name options granted fiscal year base price date 5% 10%
------------------------- ----------------- --------------- ------------- ---------- --------- ----------
Kennon R. Patterson, Sr. 80,000 23.53% $ 7.00 7/18/07 $ 156,000 $ 342,400
Bishop K. Walker, Jr. 0 0% 7.00 7/18/07 0 0
Denny G. Kelly 15,000 4.41% 7.00 7/18/07 29,250 64,200
Hodge Patterson, III 12,500 3.68% 7.00 7/18/07 24,375 53,500
Loy McGruder 25,000 7.35% 7.00 7/18/07 48,750 107,000
Stacey W. Mann 12,500 3.68% 7.00 7/18/07 24,375 53,500
Patrick M. Frawley 0 0% 7.00 7/18/07 0 0
93
Option Exercises and Holdings
The following table provides information concerning the exercise of stock
options during 2002 by the named executive officers and the unexercised stock
options held by them at December 31, 2002.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-money
Options/SARs at FY-End Options/SARs at FY-End (1)
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------------ ----------- ------------ ------------- --------------- ------------- ---------------
Kennon R. Patterson, Sr. 0 $ 0 160,000 - - -
Bishop K. Walker, Jr. 0 0 0 - - -
Denny Kelly 0 0 35,000 - - -
Hodge Patterson 0 0 15,000 - - -
Loy McGruder 0 0 41,667 - - -
Stacey W. Mann 0 0 27,500 - - -
Patrick M. Frawley 0 0 0 - - -
(1) Represents market value of underlying shares of Common Stock of $7.00 per
share at December 31,2002, as determined by the Board of Directors, net of
the exercise price of the options.
94
Retirement Plan
The following table shows the estimated annual benefits payable at normal
retirement age (age 65) under a qualified defined benefit retirement plan
(Community Bancshares, Inc. Revised Pension Plan) as well as under a
non-qualified supplemental retirement plan (Community Bancshares Inc. Benefit
Restoration Plan). This supplemental plan provides benefits that would otherwise
be denied participants because if Internal Revenue Code limitations on qualified
plan benefits. All of the named executive officers except Mr. Frawley are
participants in this supplemental plan.
Pension Plan Table
Years of Credited Service
-------------------------------------------------------------
Average Annual
Compensation 10 20 30 40
---------------- ------------- ------------- -------------- -------------
$ 25,000 $ 3,750 $ 7,500 $ 11,250 $ 15,000
50,000 7,500 15,000 22,500 30,000
75,000 11,250 22,500 33,750 45,000
100,000 15,000 30,000 45,000 60,000
250,000 37,500 75,000 112,500 150,000
500,000 75,000 150,000 225,000 300,000
750,000 112,500 225,000 337,500 450,000
1,000,000 150,000 300,000 450,000 600,000
1,250,000 187,500 375,000 562,500 750,000
The benefits shown are not subject to any deduction for Social Security benefits
or other offset amounts. Benefits shown above are computed as a straight-line
annuity beginning at age 65.
The amount of compensation covered by the combination of plans covering the
named executive officers is total compensation, including bonuses, overtime or
other forms of extraordinary compensation. The amount of the retirement benefit
is determined by the length of the retiree's credited service under the plans
and his average monthly earnings for the five highest compensated, consecutive
calendar years of the retiree's final ten consecutive calendar years of
employment with the Company and its subsidiaries. The full years of credited
service under the plans for the named executive officers as of December 31, 2002
are as follows: Kennon R. Patterson, Sr.: 19 years; Bishop K. Walker, Jr.: 15
years; Denny G. Kelly: 16 years; Hodge Patterson, III: 15 years; Loy McGruder:
15 years, Stacey W. Mann: 19 years and Patrick M. Frawley: 1 year.
Compensation of Directors
During 2002 non-employee directors of the Company were paid a fee of $1,500 for
each month during which the director served. Non-employee members of the
Company's Executive Committee, Nominating Committee, Executive Compensation
Committee and Audit Committee received a fee of $500 per meeting. Non-employee
directors of the Company who were also directors of Community Bank or its
subsidiaries received the following monthly fees: Community Bank - $500; 1st
Community Credit Corporation - $250; and Community Insurance Corp. - $250.
Non-employee directors of Community Appraisals, Inc. received a quarterly fee of
$250. Non-employee members of Community Bank's committees receive the following
fees: Audit Committee and Asset Quality Committee - $500 per quarter;
Compensation Committee and Personnel Grievance Committee - $500 per meeting;
Electronic Data Processing Committee - $100 per quarter; and Executive
Committee, Directors Credit Committee and Construction Oversight Committee -
$100 per meeting.
Effective April 1, 2003, non-employee directors of the Company are paid a fee of
$500 for each quarterly meeting. Non-employee members of the Company's Executive
Committee, Nominating Committee, Executive Compensation Committee and Audit
Committee receive a fee of $250 per meeting. Non-employee directors of the
Company who are also directors of Community Bank receive a monthly fee of $1,500
plus $500 per meeting for each meeting in excess of two per month. Non-employee
directors of 1st Community Credit Corporation, Community Appraisal, Inc. and
Community Insurance Corp. receive a quarterly fee of $250. Non-employee members
of Community Bank's committees receive $250 per meeting.
95
Employment Agreements and Change in Control Arrangements
Employment Agreements
Effective April 1, 1996, the Company entered into an Employment Agreement with
Kennon R. Patterson, Sr., which was amended on October 14, 1999. The Employment
Agreement, as amended, provided that Mr. Patterson would serve as the Chairman
of the Board of Directors, President and Chief Executive Officer of the Company
and receive an annual cash compensation of at least $898,600, the amount of Mr.
Patterson's total cash compensation for 1999, with increases in his compensation
as determined by the Board of Directors based on the recommendation of the
Company's Executive Compensation Committee. Mr. Patterson's Employment Agreement
also provided that he would receive four weeks of paid vacation annually, use of
an automobile for business and personal purposes, reimbursement of reasonable
business and professional expenses, memberships in civic and social clubs, and
an annual allowance of $10,000 for the purchase of life insurance. In the event
that Mr. Patterson was disabled to the extent that he was incapable of
performing his duties, he would have been entitled to a continuation of his
compensation during the period of disability, but not to exceed one year. Mr.
Patterson's employment with the Company and Community Bank was terminated on
January 27, 2003. Pursuant to the Employment Agreement, Mr. Patterson may not
engage in the business of banking within a 25 mile radius of any office of the
Company or its subsidiaries for a period of two years following the termination
of his employment.
Change in Control Agreements
The Company entered into Change in Control Agreements with each of the named
executive officers except Mr. Frawley on December 4, 1999. These agreements have
terms of three years and are automatically renewed unless terminated at the end
of their terms by the Company's Executive Compensation Committee. In the event
of a change in control (as defined in the agreements) of the Company, the named
executive officer is entitled to receive certain severance benefits if his
employment is terminated by the Company within 30 months following the change in
control, unless the termination is for cause or by reason of the officer's
death, disability or retirement on or after age 65. The officer is also entitled
to these severance benefits if the officer terminates employment with the
Company within 30 months following a change in control because, among other
reasons, the officer's authority, duties, compensation or benefits have been
reduced or the officer is forced to relocate more than 50 miles from his place
of employment immediately prior to the change in control. If, during the term of
the agreement, a transaction is proposed which, if consummated, would constitute
a change in control and, the officer's employment is thereafter terminated by
the Company other than for cause or by reason of the officer's death, disability
or retirement on or after age 65, and the proposed transaction is consummated
within one year following the officer's termination of employment, the change in
control will be deemed to have occurred during the term of the agreement and the
officer will be entitled to severance benefits. The officer is also entitled to
receive severance benefits if the officer terminates employment for any reason
during a 30-day period beginning 12 months after the occurrence of a change in
control.
The severance benefits payable under the Change in Control Agreements are as
follows: (i) a lump sum payment equal to the present value of the officer's
monthly salary which would have been payable for 30 months following the
officer's termination of employment but for such termination; (ii) a lump sum
payment equal to the present value of a monthly payment payable for 30 months,
which monthly payment is calculated by taking one-twelfth of the average of the
bonuses earned by the officer for the two calendar years immediately preceding
the year in which the officer's termination of employment occurs; (iii)
continuation of the officer's health and life insurance benefits for 30 months
following the officer's termination of employment at the same level and on the
same terms as provided to the officer immediately prior to his termination of
employment; (iv) full vesting and continued participation for a period of 30
months following the officer's termination of employment in certain retirement
plans or, if such full vesting and continued participation is not allowed,
payment by the Company of a lump sum supplemental benefit in lieu of full
vesting and continued participation in such plans; and (v) individual career
counseling and outplacement services for a reasonable period of time following
the officer's termination of employment, up to a maximum cost to the Company of
$5,000 per officer.
96
The Change in Control Agreements with Bishop K. Walker, Jr. and Denny G. Kelly
were terminated on January 9, 2002. The Change in Control Agreement with Kennon
R. Patterson, Sr. was terminated on January 27, 2003. The Change in Control
Agreements with Hodge Patterson, III and Loy McGruder are expected to terminate
on April 18, 2003 and June 6, 2003, respectively. See footnote 1 to Summary
Compensation Table above.
Retirement/Consulting and Stock Purchase Agreements
On January 9, 2002 the Company entered into agreements with Bishop K. Walker,
Jr. and Denny G. Kelly in connection with the retirement of Mr. Walker and Mr.
Kelly as executive officers of the Company and Community Bank. Pursuant to these
agreements Mr. Walker and Mr. Kelly are to receive payments from Community Bank
of $600,000 and $495,000, respectively, payable in two equal installments in
January, 2002 and January, 2003. In addition, Community Bank agreed to transfer
a bank-owned vehicle to each of Mr. Walker and Mr. Kelly. Mr. Walker and Mr.
Kelly each waived all claims against the Company, Community Bank and their
respective directors, officers and employees, and agreed to provide consulting
services during 2002 and 2003 as requested by management and the Board of
Directors on matters to include, but not be limited to, title insurance and
stock transfer, in the case of Mr. Walker, and shareholder relations, customer
relations and new customer development, in the case of Mr. Kelly. The Company
agreed to purchase approximately 270,000 shares of Common Stock from Mr. Walker
and approximately 77,000 shares of Common Stock from Mr. Kelly at a price of
$12.00 per share subject to any required regulatory approvals. Mr. Walker's
stock is to be purchased no later than January, 2004 and Mr. Kelly's stock is to
be purchased no later than January, 2005. The Change in Control Agreements
between the Company and each of Mr. Walker and Mr. Kelly were terminated. In the
event of a change in control of the Company prior to the consummation of the
stock purchase by the Company, Mr. Walker and Mr. Kelly each have the option to
decline to sell their stock to the Company and to receive the same consideration
being paid to other stockholders of the Company in connection with the change in
control.
Due to regulatory concerns, the Company did not make the payments due under
these contracts in January, 2003. The Company is awaiting regulatory approval of
the payments made in January, 2002.
Compensation Committee Interlocks and Insider Participation
The following directors currently serve as members of the Executive Compensation
Committee of the Company's Board of Directors and also served on such committee
during 2002:
Merritt M. Robbins (Chairman) Roy B. Jackson Kennon R. Patterson, Jr.
Jimmie Trotter (Vice Chairman) Denny G. Kelly
Glynn Debter John J. Lewis, Jr.
Denny G. Kelly is a former executive officer of the Company and Community Bank.
Kennon R. Patterson, Jr. is a former executive officer of Community Bank and the
son of Kennon R. Patterson, Sr., the Company's Chief Executive Officer.
In June 2000, Community Bank sold to, and leased back from, Debter Properties,
LLC, an Alabama limited liability company of which Glynn Debter is a member,
real property. The lease was assigned to Peoples Bank of North Alabama in May
2002. See "Certain Relationships and Related Transactions" above.
97
EXECUTIVE COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
Overview
The Company's Executive Compensation Committee (the "Compensation Committee") is
responsible for establishing and administering the Company's executive
compensation program. The Compensation Committee also makes recommendations
regarding executive compensation to the Board of Directors, which has final
approval of the compensation of each executive officer, including the named
executive officers identified in the Summary Compensation Table above. The named
executive officers do not participate in the Board of Directors' review and
determination of their compensation or in the Compensation Committee's review
and recommendation of their compensation.
The Company's executive compensation program is designed to attract, reward,
retain and motivate executive officers who will provide strong leadership
necessary for the Company to achieve superior financial performance and
stockholder return, and who will be an integral part of the communities that the
Company serves. During 2002, the Company's executive compensation program
consisted only of base compensation and long-term incentives. Executive officers
also receive various perquisites comparable to those made available to executive
officers of other financial institutions, as well as retirement and other
employee benefits that are generally available to employees of the Company and
its subsidiaries.
Executive Compensation Program
Base Compensation
Base compensation provides the foundation for the Company's executive
compensation. Its purpose is to compensate the executive for performing the
basic duties that he or she is expected to perform. Salaries are typically
reviewed and adjusted each year. During 2002 the base compensation paid to
Kennon R. Patterson, Sr. was subject to the terms of his employment agreement
with the Company. Mr. Patterson's employment agreement provided for a minimum
base salary, is subject to annual review in the discretion of the Board of
Directors based upon the recommendation of the Compensation Committee
In determining the base compensation for a particular executive officer, the
Compensation Committee performs a subjective evaluation with three primary
factors in mind: (i) the officer's individual performance, (ii) performance of
the Company and business unit or units of the Company for which the officer is
responsible, and (iii) published compensation data for comparable positions at
other financial institutions. The Compensation Committee does not assign any
relative or specific weights to these factors, and individual members of the
Compensation Committee may give differing weights to different factors.
Accordingly, during a particular year, the base compensation of an executive
officer of the Company may not necessarily be related to the Company's
performance during that year or the prior year.
Individual Performance. In determining its recommended compensation for each
executive officer of the Company, the Compensation Committee considers the
officer's individual performance during the prior year. Individual performance
is generally evaluated by reference to the executive officer's annual
performance review, in which the officer is subjectively graded by his or her
superiors on various specified criteria, such as leadership skill and management
ability.
Company Performance. The Compensation Committee also considers the performance
during the prior year of the Company and the bank, branch, branches or other
business unit or units of the Company for which the executive officer is
responsible. For example, in determining the compensation for the Chairman,
Chief Executive Officer and President of the Company, the Compensation Committee
reviews the performance of the entire Company, and in determining the
compensation for the President of Community Bank, the Compensation Committee
reviews the performance of Community Bank as a whole. The Compensation Committee
subjectively evaluates the performance by the business units with respect to
criteria that the Compensation Committee believes to be relevant in assessing
the units' performance. The Compensation Committee has not established any
target amounts for these criteria,
98
which may differ from unit to unit, depending on the nature of the unit's
business (such as banking, consumer finance or insurance) and how long the unit
has been in operation, among other factors. The Compensation Committee generally
focuses on the following five criteria, to the extent applicable, in assessing
each unit's performance: (i) growth in loan portfolio; (ii) growth in deposits;
(iii) amount of employee turnover; (iv) net profit; and (v) charge-offs and loan
losses.
Published Compensation Data. The Company subscribes to several industry
publications that report compensation of the executive officers of other
financial institutions. The Compensation Committee reviews information regarding
the compensation of similarly-situated executives at comparable institutions in
determining its recommended compensation for a particular executive officer.
Based on these and other factors that the Compensation Committee and its members
may deem to be relevant, the Compensation Committee determines the base
compensation of each executive officer and makes its recommendations to the
Board of Directors. The Board of Directors then considers the Compensation
Committee's recommendations, and may elect to decrease, increase or approve the
compensation recommended by the Compensation Committee. During 2002 the annual
base compensation for Kennon R. Patterson, Sr. remained at $917,000. The annual
base compensation of the following named officers was increased to reflect
additional duties or positions: Loy McGruder to $273,782; Hodge Patterson to
$257,438; and Stacey W. Mann to $200,000. Bishop K. Walker, Jr. and Denny G.
Kelly retired in January 2002 and Patrick M. Frawley was hired during 2002.
Annual Bonuses
The Company has, to a limited extent, provided short-term incentives to
executive officers in the form of annual cash bonuses in recognition of
outstanding individual performance and/or business unit performance. The Board
of Directors did not award bonuses to any executive officer of the Company for
2002, based on the Board's determination that the officers' base compensation
provided adequate compensation based on the Company's performance during 2002.
Long-Term Incentives
The purpose of long-term incentives is to provide incentives and rewards
recognizing the performance of the Company over time and to motivate long-term,
strategic thinking among executives. During 2002, the Company granted stock
options to its directors and certain of its officers as long-term incentives
because, among other reasons, the Compensation Committee believes stock options
properly align executive pay with stockholders' interests. The grant of stock
options is a common method of incentive compensation for financial institutions
and other publicly held companies and allows the Company to be competitive with
other employers. The number of options granted to a particular executive officer
generally reflects the officer's position within the Company, the Compensation
Committee's subjective evaluation of the officer's performance and contribution
to the Company, and the Compensation Committee's analysis of the value of the
options awarded (using a standard methodology for valuing options). During 2002,
the Company granted options to Kennon R. Patterson, Sr., Loy McGruder, Hodge
Patterson, Stacey Mann, Denny Kelly and certain other senior officers of the
Company, with an exercise price equal to 100% of the fair market value of the
Common Stock on the date that the options were granted, as determined by the
Board of Directors.
Chief Executive Officer Compensation
Effective April 1, 1996, the Company entered into an employment agreement with
Kennon R. Patterson, Sr., the Chief Executive Officer of the Company, which was
amended on October 14, 1999. Compensation for Mr. Patterson during 2002 was
determined in accordance with the terms of his employment agreement and the
Board of Directors' subjective evaluation of Mr. Patterson's performance and
that of the Company, as well as the other factors and criteria described above
for other executive officers of the Company. For 2002 Mr. Patterson's annual
base salary remained at $917,000, the amount of his 2001 base salary. Mr.
Patterson's cash compensation for 2001 had been reduced by 10% as part of a
program to decrease non-interest expenses at the Company.
Mr. Patterson's employment with the Company and Community Bank was terminated on
January 27, 2003.
99
By the Executive Compensation Committee:
Merritt M. Robbins (Chairman) Roy B. Jackson Kennon R. Patterson, Jr.
Jimmie Trotter (Vice Chairman) Denny G. Kelly
Glynn Debter John J. Lewis, Jr.
100
PERFORMANCE GRAPH
Set forth below is a graph comparing the yearly percentage change in the
cumulative total return of the Common Stock against the cumulative total return
of the NASDAQ Stock Market Bank Index and the American Stock Exchange Major
Market Index for the last five years. It assumes that the value of the
investment in the Common Stock and in each index was $100.00 and that all
dividends were reinvested. There is no established trading market for the Common
Stock and, therefore, no reliable information is available as to the prices at
which such Common Stock has traded. To the extent that cumulative total return
data provided in the graph below is based in part on the price of the Common
Stock at the dates indicated, such information should not be viewed as
indicative of the actual or market value of the Common Stock.
[GRAPHIC OMITTED]
1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- --------
Community Bancshares $ 100.00 $ 137.78 $ 170.29 $ 146.35 $ 109.76 $ 109.76
AMEX 100.00 120.32 144.04 135.75 132.29 116.37
NASDAQ 100.00 99.36 95.51 108.95 117.97 120.61
Index 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
Community Bancshares, Inc. 100.00 137.78 170.29 146.35 109.76 109.76
AMEX Major Markets 100.00 120.32 144.04 135.75 132.29 116.37
NASDAQ Bank Index* 100.00 99.36 95.51 108.95 117.97 120.61
Source : SNL Financial L.C.
The information provided under the headings "Executive Compensation Committee
Report on Executive Compensation" and "Performance Graph" shall not be deemed to
be "soliciting material" or tobe "filed" with the SEC, or subject to Regulation
14A or 14C, other than as provided in Item 402 of Regulation S-K, or to
liabilities of Section 18 of the Exchange Act and, unless specific reference is
made therein to such headings, shall not be incorporated by reference to any
filings under the Securities Act of 1933 or the Exchange Act.
101
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of March 31, 2003, with
respect to ownership of shares of Common Stock by each of the Company's
directors, all directors, and executive officers of the Company as a group, and
each other person or group that is known by the Company, based solely upon a
review of filings made with the SEC, to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock.
Shares of Common Stock Beneficially Owned (1) Percentage of
---------------------------------------------
Total Shares
Person, Group or Entity Sole Power (2) Shared Power (3) Aggregate Outstanding
----------------------- -------------- ---------------- --------- -----------
I. Directors, Nominees and
Executive Officers
Glynn Debter 25,400 (4) 21,611 47,011 *
Patrick M. Frawley 75,500 (5) 174,267 250,267 5.20
Roy B. Jackson 26,500 (6) 6,600 33,100 *
Denny G. Kelly 45,500 (7) 60,208 105,708 2.20
John J. Lewis, Jr. 68,390 (8) 175,467 243,857 5.07
Loy McGruder 46,367 (9) 32,084 78,501 1.63
Kennon R. Patterson, Sr. 41,435 (10) 552,442 593,877 12.35
Kennon R. Patterson, Jr. 31,699 (11) 70,588 102,287 2.13
Merritt M. Robbins 198,427 (12) 179,337 377,764 7.85
Jimmie Trotter 27,000 (13) 178,281 205,281 4.27
All Company directors,
nominees for directors and
executive officers as a group
(11 persons) 601,718 857,496 1,459,764 30.35
II. Others
U.S. Trust Company, N.A. as
Trustee of the Community
Bancshares, Inc. Employee
Stock Ownership Plan (14) - 518,742 (15) 518,742 (15) 10.78
Doris S. Corr, Bryan A. Corr, Sr.
Tina M. Corr, Joan M. Currier,
John David Currier, Sr.,
Christy C. Chandler, John
David Currier, Jr., and Corr,
Inc., as a group, 600 Third
Avenue East, Oneonta,
AL 35121 (16) 181,278 200,071 381,349 7.93
Bishop K. Walker, Jr. 214,229 57,749 271,978 5.65
(1) The number of shares reflected is shares which, under applicable SEC
regulations, are deemed to be beneficially owned, including shares as to
which, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, either voting power or investment
power is held or shared. In addition, in computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person which are
currently exercisable, or which will become exercisable within 60 days
following March 31, 2003, are deemed to be outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. The total number of shares
beneficially owned is divided, where applicable, into two categories: (i)
shares as to which voting/investment power is held solely, and (ii) shares
as to which voting/investment power is shared.
102
(2) Unless otherwise specified in the following footnotes, if a beneficial
owner is shown as having sole power, the owner has sole voting as well as
sole investment power, and if a beneficial owner is shown as having shared
power, the owner has shared voting power as well as shared investment
power. Some individuals are shown as beneficial owners of shares held by
the Company's ESOP. The individual has sole power to direct the ESOP
trustee as to the manner in which shares allocated to the individual's
account under the ESOP are to be voted. The individual has no direct power
of disposition with respect to shares allocated to the individual's
account, except to request a distribution under the terms of the ESOP. The
ESOP record keeper has not completed the allocation as of December 31,
2002, so the number of shares shown as allocated to an individual's account
are as of December 31, 2001.
(3) This column may include shares held in the name of, among others, a spouse,
minor children or certain other relatives sharing the same home as the
director, nominee, executive officer or 5% stockholder. In the cases of
Messrs. Frawley, Lewis, Robbins and Trotter this column includes 174,267
shares which are held by the ESOP and which have not been allocated to any
participant account. These individuals serve as members of the
Administrative Committee of the ESOP and have investment authority over the
unallocated shares, but each individual disclaims any beneficial ownership
with respect to such unallocated shares.
(4) Includes 25,500 shares which could be acquired within 60 days following
March 31, 2003 pursuant to stock options.
(5) Includes 75,000 shares which could be acquired within 60 days following
March 31, 2003 pursuant to stock options.
(6) Includes 25,000 shares which could be acquired within 60 days following
March 31, 2003 pursuant to stock options.
(7) Includes 25,000 shares which could be acquired within 60 days following
March 31, 2003 pursuant to stock options and 17,528 shares allocated to Mr.
Kelly's ESOP account as of December 31, 2001.
(8) Includes 25,000 shares which could be acquired within 60 days following
March 31, 2003 pursuant to stock options and 19,868 shares held by an
estate of which Mr. Lewis is the executor and a beneficiary.
(9) Includes 35,000 shares which could be acquired within 60 days following
March 31, 2003 pursuant to stock options and 11,367 shares allocated to Mr.
McGruder's ESOP account as of December 31, 2001.
(10) Includes 41,335 shares allocated to Mr. Kennon R. Patterson, Sr.'s ESOP
account as of December 31, 2001.
(11) Includes 25,000 shares which could be acquired within 60 days following
March 31, 2003 pursuant to stock options.
(12) Includes 25,000 shares which could be acquired within 60 days following
March 31, 2003 pursuant to stock options.
(13) Includes 25,000 shares which could be acquired within 60 days following
March 31, 2003 pursuant to stock options.
(14) The address of North Star Trust Company is 500 West Madison Street, Suite
3630, Chicago, Illinois 60661.
103
(15) Participants in the ESOP have the power to direct the ESOP trustee how to
vote shares allocated to their individual accounts. Any unallocated shares,
and any allocated shares with respect to which voting instructions are not
received from a participant, will be voted by the appropriate ESOP
fiduciary in its discretion.
(16) Information about this group was obtained from a Schedule 13D, and
amendments thereto, filed by such group with the SEC.
Item 13 - Certain Relationships and Related Transactions
Community Bank has from time to time made loans to certain of its directors and
executive officers, and members of their immediate families. Except as noted
below, all such loans are made in the ordinary course of business on
substantially the same credit terms, including interest rates and collateral and
do not represent more than a normal risk of collection or present other
unfavorable features. Community Bank maintains a program whereby each of its
full-time employees is eligible for a 1% discount in the rate of interest
charged on a loan from Community Bank. Federal banking regulations permit
executive officers of Community Bank to participate in this program. In
addition, Community Bank maintains a program for executive officers and other of
its employees who are required by Community Bank to relocate within its market
area in connection with their employment with Community Bank. Under this
program, each of these employees is eligible for a 5% annual interest rate on
first mortgage, real estate loans from Community Bank. The largest aggregate
amount of loans to directors and executive officers of the Company and members
of their immediate families outstanding at any time during 2002 under these two
programs was approximately $2.1 million. As of April 10, 2003, the total
outstanding balance of loans by Community Bank to directors and executive
officers of the Company and members of their immediate families under these two
programs was approximately $1.1 million.
As of March 28, 2003, Community Bank has outstanding to Kennon R. Patterson,
Sr., a director of the Company a real-estate loan in the amount of $5,372,050.
During 2002, the highest balance outstanding for this loan was $5,150,000, and
its balance at year end was $5,150,000. The loan bears interest at 4.25%. On
January 20, 2003, Mr. Patterson filed a petition for protection under Chapter 11
of the United States Bankruptcy Code, and this loan is currently on nonaccrual
status.
As of March 28, 2003, Community Bank has outstanding to Hodge Patterson, former
Executive Vice President of Community Bank a real-estate loan of $538,350.
During 2002, the highest balance outstanding for this loan was $552,732, and its
balance at year end was $540,401. The loan bears interest at 5.00%.
As of March 28, 2003, Community Bank has outstanding to Denny G. Kelly, a
director of the Company and Community Bank:
(i) a real estate loan in the amount of $305,402. During 2002, the highest
balance outstanding for this loan was $305,402 and its balance at year end
was $305,402. The loan bears interest at 5.5%.
(ii) a loan in the amount of $630,150. During 2002, the highest balance
outstanding for this loan was $580,000 and its balance at year end was
$580,000. The loan bears interest at 4.25% and is secured by 61,670 shares
of Company common stock. This loan is currently on nonaccrual status.
(iii)An unsecured loan in the amount of $101,377. During 2002, the highest
balance outstanding for this loan was $97,500 and its balance at year end
was $97,500. The loan bears interest at 4.25% and is currently on
nonaccrual status.
The Company has engaged the accounting firm of Schauer, Taylor, Cox, Vise and
Morgan, P.C. to perform certain accounting services. Doug Schauer, a member of
the firm, is Kennon R. Patterson, Sr.'s son-in-law. Services performed by
Schauer, Taylor, Cox, Vise and Morgan, P.C. for the Company in 2002 have been
limited to preparation of the Company's quarterly tax accruals, preparation and
filing the Company's federal and state tax returns, consultation regarding
interpretation and application of accounting standards and EDGAR services in
105
connection with the company's filings with the Securities and Exchange
Commission. The Company and its subsidiaries paid Schauer, Taylor, Cox, Vise and
Morgan, P.C. $102,684 for services rendered during 2002.
In June 2000, Community Bank loaned $1,696,576 to Debter Properties, LLC, an
Alabama limited liability company of which a director of the Company is a
member, to fund the purchase from Community Bank of the real property in which
Community Bank's Boaz, Alabama office was located. Concurrently with this loan
and the purchase of the real property, Community Bank entered into a lease
agreement, as the tenant, with Debter Properties, LLC to lease back this real
property from Debter Properties, LLC. On May 31, 2002 Community Bank sold its
Boaz, Alabama office to Peoples Bank of North Alabama which assumed the loan to
Debter Properties, LLC and Community Bank's obligations under the lease.
At December 31, 2002, the total outstanding balance of indebtedness incurred by
the ESOP to purchase shares of Common Stock was approximately $2,083,342. This
indebtedness, which is owed to a third party and is secured by a pledge of
148,972 shares of Common Stock that have not been allocated by the ESOP, is
guaranteed by the Company.
Item 14 - Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company has evaluated the effectiveness of its disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-14. The evaluation
was performed under the supervision and with the participation of
management, including the chief executive officer and the chief financial
officer, within 90 days prior to the date of the filing of this annual
report. Based on this evaluation, the chief executive officer and chief
financial officer have concluded that the disclosure controls and
procedures are effective in ensuring that all material information required
to be disclosed in this annual report has been communicated to them in a
manner appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls.
Subsequent to the date of their evaluation, there were no significant
changes in internal controls or other factors that could significantly
affect internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
105
PART IV
Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Index of documents filed as part of this report:
Community Bancshares, Inc. and Subsidiaries
Financial Statements Page(s)
Report of Independent Accountants.................................................................... 42
Consolidated Statements of Financial Condition as of
December 31, 2002 and 2001........................................................................ 43
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000.................................................................. 44-45
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000.................................................................. 46
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.................................................................. 47-48
Notes to Consolidated Financial Statements - December 31, 2002, 2001 and 2000........................ 49-87
(b) Reports on Form 8-K
The Company filed four reports on Form 8-K during the fourth quarter
of 2002:
October 11, 2002 - Changes in Registrant's Certifying Accountant.
November 5, 2002 - (8-K/A) to include letter from previous accountant
in the changes in Registrant's Certifying Accountant.
November 29, 2002 - Proposed settlement of Benson litigation.
December 16, 2002 - Consent Agreement with the Alabama State Banking
Department.
(c) Exhibits
3.1 Certificate of Incorporation, as amended and restated May 2000
(1)
3.2 By-Laws of Registrant, as amended and restated May 2000 (2)
4.1 Rights Agent Agreement, dated January 13, 1999, between Community
Bancshares, Inc. and the Bank of New York (3)
4.2 Indenture, dated March 23, 2000, by and between Community
Bancshares, Inc. and The Bank of New York (4)
10.1 Promissory Note, Guaranty and Pledge Agreement, dated December 1,
1998, by and between Community Bancshares, Inc. and Colonial
Bank, N.A. (5)
10.2 Plan document for the Community Bancshares, Inc. Benefit
Restoration Plan adopted April 12, 1994, effective January 1,
1995 (6) (*)
10.3 Subordinated Promissory Note, dated October 4, 1994, between
Community Bancshares, Inc. as borrower and Jeffrey K. Cornelius
as holder (7)
10.4 Employment Agreement, dated March 28, 1996 by and between Kennon
R. Patterson, Sr. and Community Bancshares, Inc. (8) (*)
106
10.5 Amendment to Employment Agreement, dated October 14, 1999, by and
between Kennon R. Patterson, Sr. and Community Bancshares, Inc.
(9) (*)
10.6 Stock Option Agreement between Community Bancshares, Inc. and
Denny Kelly, dated March 26, 1998 (10) (*)
10.7 Stock Option Agreement between Community Bancshares, Inc. and Loy
McGruder, dated March 26, 1998 (11) (*)
10.8 Form of Stock Option Agreement between Community Bancshares, Inc.
and grantees, dated March 26, 1998 (12) (*)
10.9 Form of Change in Control Agreement between Community Bancshares,
Inc. and each of Kennon R. Patterson, Sr. and Loy McGruder dated
December 4, 1999 (13) (*)
10.10 Form of Stock Option Agreement for Non-Employee Directors
between Community Bancshares, Inc., and each of Glynn Debter, Roy
B. Jackson, John J. Lewis, Jr., Merritt Robbins and Robert O.
Summerford, dated December 4, 1999 (14) (*)
10.11 Form of Stock Option Agreement for Employees between Community
Bancshares, Inc., and each of Kennon R. Patterson, Sr., Bishop K.
Walker, Jr., Denny Kelly, and Loy McGruder, dated December 4,
1999 (15) (*)
10.12 Amended and Restated Declaration of Trust, dated March 23, 2000,
by and between The Bank of New York (Delaware), The Bank of New
York, Community Bancshares, Inc. and Community (AL) Capital Trust
I (16)
10.13 Guarantee Agreement, dated March 23, 2000, by and between
Community Bancshares, Inc. and The Bank of New York (17)
10.14 Placement Agreement, dated March 23, 2000, between Community
(AL) Capital Trust I, Community Bancshares, Inc. and Salomon
Smith Barney, Inc. (18)
10.15 Lease Agreement, dated May 31, 2000, between REM, LLC, as
lessor, and Community Bank, as lessee (19)
10.16 Addendum to Lease Agreement and Loan Agreement, dated May 31,
2000, between REM, LLC and Community Bank (20)
10.17 Lease Agreement, dated June 1, 2000, between Debter Properties,
LLC, as lessor, and Community Bank, as lessee (21)
10.18 Addendum to Lease Agreement and Loan Agreement, dated June 1,
2000, between Debter Properties, LLC and Community Bank (22)
10.19 Form of Amendment to Nonqualified Stock Option Agreement,
between Community Bancshares, Inc. and grantee, dated December
12, 2000 (23) (*)
10.20 Change in Control Agreement, dated September 18, 2001, between
Community Bancshares, Inc. and Kerri C. Newton (24)(*)
10.21 Form of Stock Option Agreement between Community Bancshares,
Inc. and each of Kennon R. Patterson, Sr., Glynn Debter, Roy B.
Jackson, Denny Kelly, John J. Lewis, Jr., Loy McGruder, Kennon R.
Patterson, Jr., Merritt Robbins, Robert O. Summerford, Jimmie
Trotter and Kerri Newton dated December 18, 2001 (25)(*)
10.22 Stock Purchase Agreement dated January, 2002 between Community
Bancshares, Inc. and Denny G. Kelly and Arlene S. Kelly (26)(*)
10.23 Stock Purchase Agreement dated January, 2002 between Community
Bancshares, Inc. and Bishop K. Walker and Wanda W. Walker (27)(*)
10.24 Severance Agreement dated the 9th day of January, 2002 by and
between Denny G. Kelly and Community Bancshares, Inc. and
Community Bank (28)(*)
10.25 Severance Agreement dated the 9th day of January, 2002 by and
between Bishop K. Walker and Community Bancshares, Inc. and
Community Bank (29)(*)
10.26 Acquisition Agreement dated December 21, 2001 by and among First
Farmers and Merchants Corporation, First Farmers and Merchants
National Bank of Columbia, Community Bank and Community
Bancshares, Inc. (30)
10.27 Supplemental Agreement dated January 23, 2002 between First
Farmers and Merchants Corporation, First Farmers and Merchants
National Bank of Columbia, Community Bank and Community
Bancshares, Inc. (31)
10.28 Acquisition Agreement dated the 25th day of February, 2002 by
and between First Southern National Bank and Community Bank (32)
10.29 Acquisition Agreement dated the 25th day of February, 2002 by
and between Peoples Bank of North Alabama and Community Bank (33)
107
10.30 Amendment to Subordinated Promissory Note, dated March 26, 2002,
between Community Bancshares, Inc. and Jeffrey K. Cornelius (34)
10.31 Form of Stock Option Agreement between Community Bancshares,
Inc. and each of Kennon R. Patterson, Sr., Glynn Debter, Roy B.
Jackson, Denny Kelly, John J. Lewis, Merritt Robbins, Robert O.
Summerford and Jimmie Trotter dated July 19, 2002 (*)
10.32 Form of Stock Option Agreement between Community Bancshares,
Inc. and each of Patrick M. Frawley and Kerri C. Kinney dated
February 6, 2003 (*)
11 Statement of computation of per share earnings
16 Letter re: change in Certifying Accountant (35)
21 Subsidiaries of the Registrant
108
Notes to Exhibits:
(1) Filed as Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference
(2) Filed as Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference
(3) Filed as Exhibit 4.1 to Form 8-A, filed January 21, 1999, and incorporated
herein by reference
(4) Filed as Exhibit 4.4 to Form 10-Q for the quarter ended March 31, 2000, and
incorporated herein by reference
(5) Filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 1998,
and incorporated herein by reference
(6) Filed as Exhibit 10.13 to Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference
(7) Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference
(8) Filed as Exhibit 10.1 to Form 10-Q/A-2 for the quarter ended September 30,
1998, and incorporated herein by reference
(9) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30,
1999, and incorporated herein by reference
(10) Filed as Exhibit 10.38 to Form 10-K for the year ended December 31, 1998,
and incorporated herein by reference
(11) Filed as Exhibit 10.40 to Form 10-K for the year ended December 31, 1998,
and incorporated herein by reference
(12) Filed as Exhibit 10.41 to Form 10-K for the year ended December 31, 1998,
and incorporated herein by reference
(13) Filed as Exhibit 10.32 to Form 10-K for the year ended December 31, 1999,
and incorporated herein by reference
(14) Filed as Exhibit 10.33 to Form 10-K for the year ended December 31, 1999,
and incorporated herein by reference
(15) Filed as Exhibit 10.34 to Form 10-K for the year ended December 31, 1999,
and incorporated herein by reference
(16) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2000,
and incorporated herein by reference
(17) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2000,
and incorporated herein by reference
(18) Filed as Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2000,
and incorporated herein by reference
(19) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference
(20) Filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference
(21) Filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference
(22) Filed as Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference
(23) Filed as Exhibit 10.45 to Form 10-K for the year ended December 31, 2000,
and incorporated herein by reference
(24) Filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30,
2001, and incorporated herein by reference
(25) Filed as Exhibit 10.22 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
(26) Filed as Exhibit 10.23 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
(27) Filed as Exhibit 10.24 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
(28) Filed as Exhibit 10.25 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
(29) Filed as Exhibit 10.26 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
109
(30) Filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
(31) Filed as Exhibit 10.28 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
(32) Filed as Exhibit 10.29 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
(33) Filed as Exhibit 10.30 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
(34) Filed as Exhibit 10.31 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference
(35) Filed as Exhibit 16 to Form 8-K/A dated October 4, 2002, and incorporated
herein by reference
(*) Management contract or compensation plan or arrangement
Certain financial statements, schedules and exhibits have been omitted
because they are not applicable.
110
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, hereunto duly authorized, in the city of
Blountsville, State of Alabama, on April 15, 2003. Each of the undersigned
certifies that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
COMMUNITY BANCSHARES, INC.
By: /s/ PATRICK M. FRAWLEY
------------------------------------
Patrick M. Frawley
Chairman and Chief Executive Officer
By: /s/ KERRI C. KINNEY
------------------------------------
Kerri C. Kinney
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in capacities and on the dates indicated.
Signature
/s/ PATRICK M. FRAWLEY
---------------------------------------
Patrick M. Frawley Chairman of the Board, President,
Chief Executive Officer, Director
(principal executive officer)
/s/ KERRI C. KINNEY
---------------------------------------
Kerri C. Kinney Chief Financial Officer (principal
accounting officer)
/s/ GLYNN DEBTOR
---------------------------------------
Glynn Debter Director
/s/ ROY B. JACKSON
---------------------------------------
Roy B. Jackson Director
/s/ DENNY KELLY
---------------------------------------
Denny Kelly Director
/s/ JOHN J. LEWIS, JR.
---------------------------------------
John J. Lewis, Jr. Director
/s/ LOY MCGRUDER
---------------------------------------
Loy McGruder Director
111
---------------------------------------
Kennon R. Patterson, Jr. Director
---------------------------------------
Merritt Robbins Director
---------------------------------------
Kennon R. Patterson, Sr. Director
/s/ JIMMIE TROTTER
---------------------------------------
Jimmie Trotter Director
112
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Community Bancshares, Inc. ("Company") Quarterly Report
on Form 10-K for the period ended December 31, 2002 ("Report"), each of the
undersigned certify that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: April 15, 2003 By: /s/ Patrick M. Frawley
--------------- -----------------------------------------------
Patrick M. Frawley
Chairman, Chief Executive Officer and President
Date: April 15, 2003 By: /s/ Kerri C. Kinney
--------------- -----------------------------------------------
Kerri C. Kinney
Chief Financial Officer
113
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Patrick M. Frawley, Chief Executive Officer, certify that:
1. I have reviewed this annual report on form 10-K of Community
Bancshares, Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date");
c) presented in this annual report our conclusions about the
effectiveness of the controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies, in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 15, 2003 /s/ Patrick M. Frawley
---------------- -------------------------------------------
Patrick M. Frawley, Chief Executive Officer
114
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Kerri C. Kinney, Chief Financial Officer, certify that:
1. I have reviewed this annual report on form 10-K of Community
Bancshares, Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date");
c) presented in this annual report our conclusions about the
effectiveness of the controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies, in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 15, 2003 /s/ KERRI C. KINNEY
---------------- -------------------------------------------
Kerri C. Kinney, Chief Financial Officer
115
EXHIBIT 10.31
Form of Stock Option Agreement between Community Bancshares, Inc. and each of
Kennon R. Patterson, Sr., Glynn Debter, Roy B. Jackson, Denny Kelly, John J.
Lewis, Merritt Robbins, Robert O. Summerford and Jimmie Trotter dated July 19,
2002
116
COMMUNITY BANCSHARES, INC.
2003 NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into as of July 19, 2002, between
grantor Community Bancshares, Inc., a Delaware corporation (the "Corporation")
and grantee, ______________, (the "Grantee").
W I T N E S S E T H:
The Board of Directors of the Corporation (the "Board") on July 19, 2002
approved the grant to Grantee of awards under the Corporation's long-term
incentive program and established the terms and conditions of such awards, as
contained in this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option. Grantee shall have the right and option to purchase on the
terms and conditions set forth herein, all or any part of an aggregate of
____________ shares ("Option Shares") of the $.10 par value common stock of
the Corporation (the "Common Stock") at the purchase price of $7.00 per
share (the "Option Price"). The Option Price is 100% of the fair market
value of the Common Stock on July 19, 2002, the date of the grant of the
option covered by this Agreement.
2. Terms and Conditions. It is understood and agreed that the option evidenced
hereby is subject to the following terms and conditions:
(a) Expiration Date. The option shall expire five (5) years after the date
of grant (the "Expiration Date"). After the Expiration Date, the
parties shall have no further rights or obligations hereunder.
(b) Exercise of Option. The option covered by this Agreement may be
exercised by Grantee from time to time, in whole or in part, at any
time prior to the Expiration Date subject to the restrictions in
Section 2(d), (e) and (f) and Section 7.
(c) Method of Exercise and Payment of Purchase Price Upon Exercise. The
Grantee may elect to exercise the option by giving written notice of
such election to the Corporation, in such form as the Board may
require, accompanied by payment in cash or in such other manner as may
be approved by the Board, of the full purchase price of the Option
Shares for which the election is made. As determined by the Board, in
its sole discretion, payment of the Option Price shall be made in cash
or Common Stock that was acquired at least six (6) months prior to the
exercise of the option, or a combination thereof. To the extent
permitted by applicable law, the option may be exercised and the
exercise price paid pursuant to arrangements with brokerage firms
permitted under Regulation T of the Federal Reserve Board or successor
regulations or statutes. Any federal or state tax withholding
requirements can be satisfied by shares of Common Stock acquired
pursuant to the option exercise.
(d) Exercise Upon Death. In the event that Grantee ceases to be affiliated
with the Corporation or its subsidiaries (either as an employee or
director) by reason of death, the option may thereafter be exercised
as to all shares subject to the option by the legal representative of
the estate or by the person or persons entitled to the option under
the Grantee's will or the laws of descent and distribution, as
appropriate, until the earlier of (i) the expiration of the stated
term of the option or (ii) the first anniversary of the date of the
Grantee's death.
(e) Exercise Upon Termination of Affiliation by Reason of Disability. In
the event that Grantee ceases to be affiliated with the Corporation or
its subsidiaries (either as an employee or director) by reason of
Disability (as defined below), the option may thereafter be exercised
as to all shares subject to the option until the earlier of (i) the
expiration of the stated term of the option or (ii) the first
anniversary of the date that Grantee is determined by the Corporation
to be disabled.
117
(f) Exercise Upon Termination of Affiliation by Reason Other than Death or
Disability. The option or any unexercised portions thereof shall
expire upon the earlier of (i) the expiration of the stated term of
the option or (ii) the 90th day after the termination of Grantee's
affiliation with the Corporation and its subsidiaries (both as an
employee and as a director) for any reason other than death or
Disability. Provided, however, if the Grantee's affiliation is
terminated for Cause (as defined below), the option shall expire on
the date of the termination of the Grantee's affiliation.
3. No Rights as Shareholder or to Employment or to Directorship. No option
granted hereunder shall entitle the holder thereof to any rights as a
shareholder in the Corporation with respect to any shares to which the
option relates until such shares have been paid for in full and issued.
Furthermore, the option shall not confer upon the Grantee any rights of
employment with the Corporation or any of its subsidiaries or any rights to
be a director of the Corporation or any of its subsidiaries or affect the
right of the Corporation or its subsidiaries to terminate the affiliation
of the Grantee at any time, with or without cause.
4. Restrictions on Transfer of Shares. Grantee hereby agrees for himself or
herself and his or her legal representative, heirs and distributees, that
if a registration statement covering the shares issuable upon exercise of
any option hereunder is not effective under the Securities Act of 1933, as
amended (the "Act"), at the time of such exercise, or if some other
exemption from the provisions of the Act is not available, then all shares
of Common Stock then received or purchased upon such exercise shall be
acquired for investment, and that the notice of exercise delivered to the
Corporation shall be accompanied by a representation in writing acceptable
in scope and form to counsel to the Corporation and signed by Grantee or
Grantee's legal representative, heirs or distributees, as the case may be,
to the effect that the shares are being acquired in good faith for
investment and not with a view to distribution thereof. Any shares so
acquired may be deemed restricted securities under Rule 144 as promulgated
by the Securities and Exchange Commission under the Act, and as the same
may be amended or replaced and subject to restrictions upon sale or other
disposition.
5. Registration of Shares. If at any time the Board shall determine that the
listing, registration or qualification of any shares subject to the option
upon any securities exchange, or under any state or federal law, or the
consent or approval of any governmental or regulatory body is necessary or
desirable as a condition of or in connection with the issuance or purchase
of shares hereunder, the option may not be exercised in whole or in part
unless such listing, registration, qualification, consent, or approval has
been effected or obtained free of any conditions not acceptable to the
Board.
6. Transfer of Rights. This option is not transferable except by will or by
the laws of descent and distribution and shall be exercisable during
Grantee's lifetime only by Grantee. After the death of Grantee, this option
may be exercised only by Grantee's estate or by the person or persons
entitled to the option under Grantee's will or the laws of descent and
distribution, as appropriate. In the event the option is transferred to the
Grantee's estate, the option may be exercised by the estate only to the
extent that the Grantee would have been entitled had the option not been
transferred.
7. Competition with Employer - Covenant Not to Compete. In consideration of
the grant by the Corporation of the option, Grantee agrees with the
Corporation as follows:
(a) While Grantee is affiliated with the Corporation or one or more of its
subsidiaries (hereinafter collectively referred to as the "Company")
either as an employee or a director, Grantee will devote his or her
entire time, energy and skills to the service of the Company. Any
employment shall be at the pleasure of the board of directors of each
employing corporation. Except as provided in Section 2 hereof, no
option granted under this Agreement shall be exercised after the
termination of Grantee's affiliation (both as an employee and a
director) with the Company.
118
(b) Grantee will not, during the term of his or her affiliation (either as
an employee or director) with the Company, or for a period of two
years after termination for any reason of his or her affiliation with
the Company, directly or indirectly, either individually or as a
stockholder (except for passive investments of less than one percent
of the outstanding shares), director, officer, consultant, independent
contractor, employee, agent, member or otherwise of or through any
corporation, partnership, association, joint venture, firm, individual
or otherwise (hereinafter "Firm"), or in any other capacity:
(i) Carry on or engage in a business like or similar to any business
engaged in by the Company either (A) in the county in which the
Grantee has primarily been employed by the Company at the time of
termination of employment or (B) within a 25-mile radius of the
location where the Grantee has primarily been employed by the
Company at the time of termination of employment; or
(ii) Solicit or do business (like or similar to any business engaged
in by the Company) with any customer of the Company either (A)in
the county in which the Grantee has primarily been employed by
the Company at the time of termination of employment or (B)
within a 25-mile radius of the location where the Grantee has
primarily been employed by the Company at the time of termination
of employment; or
(iii)Solicit, directly or indirectly, any employee of the Company to
leave their employment with the Company for any reason. For
purposes of this Agreement, the Company and Grantee agree that
Grantee shall be deemed to have solicited any employee in
violation of this Agreement if such employee is hired by Grantee
or his or her Firm within six (6) months of Grantee's last date
of affiliation (either as an employee or a director) with the
Company.
If Grantee is a nonemployee director, the restrictions in (i) and (ii)
above shall apply with respect to either (A) the county in which the director
resides at the time he ceases to be a director, or (B) within a 25-mile radius
of the location where the director resides at the time he ceases to be a
director.
The above two-year period shall be extended by any period of time during
which Grantee is in default of the covenants contained in this Agreement.
(c) During the term of his or her affiliation (either as an employee or a
director) with the Company and thereafter, Grantee shall not divulge,
or furnish or make accessible to any third party, company, corporation
or other organization (including, but not limited to, customers,
competitors or governmental agencies), without the Corporation's prior
written consent, any trade secrets, customer lists, information
regarding customers, or other confidential information concerning the
Company or its business, including without limitation, confidential
methods of operation and organization, trade secrets, confidential
matters related to pricing, markups, commissions and customer lists.
(d) In the event of a breach or threatened breach by Grantee of all or any
part of the provisions of subdivisions (b) or (c) of this Section 7,
the Company shall be entitled to an injunction restraining Grantee
from such breach without limiting any other rights or remedies
available to the Company for such breach or threatened breach.
(e) Grantee specifically recognizes and affirms that each of the covenants
contained in subdivisions (b) and (c) of this Section 7 is a material
and important term of this Agreement which has induced the Company to
provide for the award of the option granted hereunder, and Grantee
further agrees that should all or any part or application of
subdivisions (b) or (c) of Section 7 of this Agreement be held or
found invalid or unenforceable for
119
any reason whatsoever by a court of competent jurisdiction in an
action between Grantee and the Company, the Corporation shall be
entitled to receive (but not obligated to acquire) from Grantee all
Common Stock held by Grantee which was obtained by Grantee under this
Agreement (including all shares obtained by virtue of any stock
dividend or distribution, recapitalization, merger, consolidation,
split-up, combination, exchange of shares, or other transaction,
hereinafter "stock dividends") by returning to Grantee for each share
received the Option Price paid by Grantee (as adjusted for stock
dividends). If Grantee has sold, transferred, or otherwise disposed of
Common Stock obtained under this Agreement (including all shares
obtained by virtue of any stock dividend), the Corporation shall be
entitled to receive from Grantee the difference between the Option
Price paid by Grantee and the fair market value of the Common Stock
(including all shares obtained by virtue of any stock dividends) on
the date of sale transfer or other disposition.
(f) Notwithstanding any provision to the contrary herein contained,
Section 7(b) shall not apply: (i) Upon the termination of the
Grantee's affiliation with the Corporation (either as an employee or a
director) other than for Cause within one (1) year following a Change
in Control of the Corporation; or
(ii) Upon the voluntary termination of Grantee's affiliation with the
Corporation (either as an employee or a director) for any reason
within the thirty (30) day period immediately after the one (1) year
period following a Change in Control of the Corporation.
8. Definitions. For the purposes of this Agreement, the following terms shall
have the definitions set forth below:
(a) "Cause" means (i) any act (A) that constitutes, on the part of the
Grantee, fraud, dishonesty, a felony or gross malfeasance of duty and
(B) that directly results in a material injury to the Corporation; or
(ii) conduct by the Grantee in his office with the Corporation that is
grossly inappropriate and demonstrably likely to lead to material
injury to the Corporation, as determined by the Board acting
reasonably and in good faith; provided, however, that in the case of
(ii) above, such conduct shall not constitute Cause unless the Board
shall have delivered to the Grantee notice setting forth with
specificity (A) the conduct deemed to qualify as Cause, (B) reasonable
action that would remedy such objection, and (C) a reasonable time
(not less than 30 days) within which the Grantee may take such
remedial action, and the Grantee shall not have taken such specified
remedial action within such specified reasonable time.
(b) "Change in Control of the Corporation" means (i) the acquisition,
directly or indirectly, by any "person" (within the meaning of
Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") within any twelve-month period of
securities of the Corporation representing an aggregate of twenty
percent (20%) or more of the combined voting power of the
Corporation's then outstanding securities; or (ii) during any period
of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation, cease for
any reason to constitute at least a majority thereof, unless the
election of each new director was approved in advance by a vote of at
least a majority of the directors then still in office who were
directors at the beginning of the period; or (iii) consummation of a
merger or consolidation or other business combination of the
Corporation with any other person, other than a merger, consolidation
or business combination which would result in the outstanding Common
Stock immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into common stock of the
surviving entity or a parent or affiliate thereof) at least sixty
percent (60%) of the outstanding common stock of the Corporation or
such surviving entity or parent of affiliate thereof outstanding
immediately after such merger, consolidation or business combination;
or (iv) a plan of complete liquidation of the Corporation or an
agreement for the sale or disposition by the Corporation of all or
substantially all of the Corporation's assets; or (v) the occurrence
of any other event or circumstance which is not covered by (i) through
(iv) above which the Board determines affects control of the
Corporation and, in order to implement the purposes of this agreement,
adopts a resolution that such event or circumstance constitutes a
Change in Control for purposes of this agreement.
120
(c) "Disability" means total and permanent disability as determined under
the Corporation's long-term disability plan.
(d) "Retirement" means termination of employment under circumstances in
which the Grantee is entitled to a benefit from the Corporation's
defined benefit pension plan.
9. Disposition of Shares. Grantee agrees to notify the Corporation promptly of
the disposition of any shares of Common Stock purchased pursuant to this
option which are disposed of within one year after transfer of such shares
to Grantee, or within two years of the date of the grant of such option.
For purposes of such notification, "disposition" shall have the meaning
assigned to it in Section 425(c) of the Code.
10. Adjustment of Awards. In the event of any change in corporate
capitalization, such as stock split, or a corporate transaction, such as a
merger, consolidation, separation or other distribution of stock or
property of the Corporation, any reorganization (whether or not such
reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Corporation, such
adjustment shall be made in the number and class of and/or price of the
Option Shares as may be determined to be appropriate and equitable by the
Corporation's Board of Directors, in its sole discretion, to prevent
dilution or enlargement of the benefits or potential benefits intended to
be available under this agreement; provided that the number of Option
Shares shall always be a whole number.
11. Interpretation. Any question of interpretation or application of this
Agreement shall be resolved by the Corporation's Board of Directors and its
determination shall be final and binding on the Corporation and Grantee.
12. Notices. All notices hereunder shall be in writing and, if to the
Corporation, shall be delivered personally to the Chairman or mailed to the
Corporation's principal office at P.O. Box 1000, Blountsville, Alabama
35031, addressed to the attention of the Chairman; and if to Grantee, shall
be delivered personally or mailed to him at the address for Grantee found
in the Corporation's records. Such addresses may be changed at any time by
notice from one party to the other.
13. Binding Effect. This Agreement shall bind and inure to the benefit of the
parties hereto, the successors and assigns of the Corporation and the
person to whom the rights of Grantee are transferred by will or the laws of
descent and distribution.
14. Amendment. This Agreement may be amended from time to time by the Board,
but no such amendment shall impair the rights of the Grantee without the
Grantee's consent.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COMMUNITY BANCSHARES, INC.
By:__________________________________________
WITNESS: GRANTEE:
--------------------------- ---------------------------------------------
Signature
121
EXHIBIT 10.32
Form of Stock Option Agreement between Community Bancshares, Inc. and each of
Patrick M. Frawley and Kerri C. Kinney dated February 6, 2003.
122
COMMUNITY BANCSHARES, INC.
2003 NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into as of February 6, 2003, between
grantor Community Bancshares, Inc., a Delaware corporation (the "Corporation")
and grantee, ______________, (the "Grantee").
W I T N E S S E T H:
The Board of Directors of the Corporation (the "Board") on February 6, 2003
approved the grant to Grantee of awards under the Corporation's long-term
incentive program and established the terms and conditions of such awards, as
contained in this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option. Grantee shall have the right and option to purchase on the
terms and conditions set forth herein, all or any part of an aggregate of
____________ shares ("Option Shares") of the $.10 par value common stock of
the Corporation (the "Common Stock") at the purchase price of $7.00 per
share (the "Option Price"). The Option Price is 100% of the fair market
value of the Common Stock on February 6, 2003, the date of the grant of the
option covered by this Agreement.
2. Terms and Conditions. It is understood and agreed that the option evidenced
hereby is subject to the following terms and conditions:
(a) Expiration Date. The option shall expire five (5) years after the date
of grant (the "Expiration Date"). After the Expiration Date, the
parties shall have no further rights or obligations hereunder.
(b) Exercise of Option. The option covered by this Agreement may be
exercised by Grantee from time to time, in whole or in part, at any
time prior to the Expiration Date subject to the restrictions in
Section 2(d), (e) and (f) and Section 7.
(c) Method of Exercise and Payment of Purchase Price Upon Exercise. The
Grantee may elect to exercise the option by giving written notice of
such election to the Corporation, in such form as the Board may
require, accompanied by payment in cash or in such other manner as may
be approved by the Board, of the full purchase price of the Option
Shares for which the election is made. As determined by the Board, in
its sole discretion, payment of the Option Price shall be made in cash
or Common Stock that was acquired at least six (6) months prior to the
exercise of the option, or a combination thereof. To the extent
permitted by applicable law, the option may be exercised and the
exercise price paid pursuant to arrangements with brokerage firms
permitted under Regulation T of the Federal Reserve Board or successor
regulations or statutes. Any federal or state tax withholding
requirements can be satisfied by shares of Common Stock acquired
pursuant to the option exercise.
(d) Exercise Upon Death. In the event that Grantee ceases to be affiliated
with the Corporation or its subsidiaries (either as an employee or
director) by reason of death, the option may thereafter be exercised
as to all shares subject to the option by the legal representative of
the estate or by the person or persons entitled to the option under
the Grantee's will or the laws of descent and distribution, as
appropriate, until the earlier of (i) the expiration of the stated
term of the option or (ii) the first anniversary of the date of the
Grantee's death.
(e) Exercise Upon Termination of Affiliation by Reason of Disability. In
the event that Grantee ceases to be affiliated with the Corporation or
its subsidiaries (either as an employee or director) by reason of
Disability (as defined below), the option may thereafter be exercised
as to all shares subject to the option until the earlier of (i) the
expiration of the stated term of the option or (ii) the first
anniversary of the date that Grantee is determined by the Corporation
to be disabled.
123
(f) Exercise Upon Termination of Affiliation by Reason Other than Death or
Disability. The option or any unexercised portions thereof shall
expire upon the earlier of (i) the expiration of the stated term of
the option or (ii) the 90th day after the termination of Grantee's
affiliation with the Corporation and its subsidiaries (both as an
employee and as a director) for any reason other than death or
Disability. Provided, however, if the Grantee's affiliation is
terminated for Cause (as defined below), the option shall expire on
the date of the termination of the Grantee's affiliation.
3. No Rights as Shareholder or to Employment or to Directorship. No option
granted hereunder shall entitle the holder thereof to any rights as a
shareholder in the Corporation with respect to any shares to which the
option relates until such shares have been paid for in full and issued.
Furthermore, the option shall not confer upon the Grantee any rights of
employment with the Corporation or any of its subsidiaries or any rights to
be a director of the Corporation or any of its subsidiaries or affect the
right of the Corporation or its subsidiaries to terminate the affiliation
of the Grantee at any time, with or without cause.
4. Restrictions on Transfer of Shares. Grantee hereby agrees for himself or
herself and his or her legal representative, heirs and distributees, that
if a registration statement covering the shares issuable upon exercise of
any option hereunder is not effective under the Securities Act of 1933, as
amended (the "Act"), at the time of such exercise, or if some other
exemption from the provisions of the Act is not available, then all shares
of Common Stock then received or purchased upon such exercise shall be
acquired for investment, and that the notice of exercise delivered to the
Corporation shall be accompanied by a representation in writing acceptable
in scope and form to counsel to the Corporation and signed by Grantee or
Grantee's legal representative, heirs or distributees, as the case may be,
to the effect that the shares are being acquired in good faith for
investment and not with a view to distribution thereof. Any shares so
acquired may be deemed restricted securities under Rule 144 as promulgated
by the Securities and Exchange Commission under the Act, and as the same
may be amended or replaced and subject to restrictions upon sale or other
disposition.
5. Registration of Shares. If at any time the Board shall determine that the
listing, registration or qualification of any shares subject to the option
upon any securities exchange, or under any state or federal law, or the
consent or approval of any governmental or regulatory body is necessary or
desirable as a condition of or in connection with the issuance or purchase
of shares hereunder, the option may not be exercised in whole or in part
unless such listing, registration, qualification, consent, or approval has
been effected or obtained free of any conditions not acceptable to the
Board.
6. Transfer of Rights. This option is not transferable except by will or by
the laws of descent and distribution and shall be exercisable during
Grantee's lifetime only by Grantee. After the death of Grantee, this option
may be exercised only by Grantee's estate or by the person or persons
entitled to the option under Grantee's will or the laws of descent and
distribution, as appropriate. In the event the option is transferred to the
Grantee's estate, the option may be exercised by the estate only to the
extent that the Grantee would have been entitled had the option not been
transferred.
7. Competition with Employer - Covenant Not to Compete. In consideration of
the grant by the Corporation of the option, Grantee agrees with the
Corporation as follows:
(a) While Grantee is affiliated with the Corporation or one or more of its
subsidiaries (hereinafter collectively referred to as the "Company")
either as an employee or a director, Grantee will devote his or her
entire time, energy and skills to the service of the Company. Any
employment shall be at the pleasure of the board of directors of each
employing corporation. Except as provided in Section 2 hereof, no
option granted under this Agreement shall be exercised after the
termination of Grantee's affiliation (both as an employee and a
director) with the Company.
124
(b) Grantee will not, during the term of his or her affiliation (either as
an employee or director) with the Company, or for a period of two
years after termination for any reason of his or her affiliation with
the Company, directly or indirectly, either individually or as a
stockholder (except for passive investments of less than one percent
of the outstanding shares), director, officer, consultant, independent
contractor, employee, agent, member or otherwise of or through any
corporation, partnership, association, joint venture, firm, individual
or otherwise (hereinafter "Firm"), or in any other capacity:
(i) Carry on or engage in a business like or similar to any business
engaged in by the Company either (A) in the county in which the
Grantee has primarily been employed by the Company at the time of
termination of employment or (B) within a 25-mile radius of the
location where the Grantee has primarily been employed by the
Company at the time of termination of employment; or
(ii) Solicit or do business (like or similar to any business engaged
in by the Company) with any customer of the Company either (A)in
the county in which the Grantee has primarily been employed by
the Company at the time of termination of employment or (B)
within a 25-mile radius of the location where the Grantee has
primarily been employed by the Company at the time of termination
of employment; or
(iii)Solicit, directly or indirectly, any employee of the Company to
leave their employment with the Company for any reason. For
purposes of this Agreement, the Company and Grantee agree that
Grantee shall be deemed to have solicited any employee in
violation of this Agreement if such employee is hired by Grantee
or his or her Firm within six (6) months of Grantee's last date
of affiliation (either as an employee or a director) with the
Company.
If Grantee is a nonemployee director, the restrictions in (i) and (ii)
above shall apply with respect to either (A) the county in which the director
resides at the time he ceases to be a director, or (B) within a 25-mile radius
of the location where the director resides at the time he ceases to be a
director.
The above two-year period shall be extended by any period of time during
which Grantee is in default of the covenants contained in this Agreement.
(c) During the term of his or her affiliation (either as an employee or a
director) with the Company and thereafter, Grantee shall not divulge,
or furnish or make accessible to any third party, company, corporation
or other organization (including, but not limited to, customers,
competitors or governmental agencies), without the Corporation's prior
written consent, any trade secrets, customer lists, information
regarding customers, or other confidential information concerning the
Company or its business, including without limitation, confidential
methods of operation and organization, trade secrets, confidential
matters related to pricing, markups, commissions and customer lists.
(d) In the event of a breach or threatened breach by Grantee of all or any
part of the provisions of subdivisions (b) or (c) of this Section 7,
the Company shall be entitled to an injunction restraining Grantee
from such breach without limiting any other rights or remedies
available to the Company for such breach or threatened breach.
(e) Grantee specifically recognizes and affirms that each of the covenants
contained in subdivisions (b) and (c) of this Section 7 is a material
and important term of this Agreement which has induced the Company to
provide for the award of the option granted hereunder, and Grantee
further agrees that should all or any part or application of
subdivisions (b) or (c) of Section 7 of this Agreement be held or
found invalid or unenforceable
126
for any reason whatsoever by a court of competent jurisdiction in an
action between Grantee and the Company, the Corporation shall be
entitled to receive (but not obligated to acquire) from Grantee all
Common Stock held by Grantee which was obtained by Grantee under this
Agreement (including all shares obtained by virtue of any stock
dividend or distribution, recapitalization, merger, consolidation,
split-up, combination, exchange of shares, or other transaction,
hereinafter "stock dividends") by returning to Grantee for each share
received the Option Price paid by Grantee (as adjusted for stock
dividends). If Grantee has sold, transferred, or otherwise disposed of
Common Stock obtained under this Agreement (including all shares
obtained by virtue of any stock dividend), the Corporation shall be
entitled to receive from Grantee the difference between the Option
Price paid by Grantee and the fair market value of the Common Stock
(including all shares obtained by virtue of any stock dividends) on
the date of sale transfer or other disposition.
(f) Notwithstanding any provision to the contrary herein contained,
Section 7(b) shall not apply: (i) Upon the termination of the
Grantee's affiliation with the Corporation (either as an employee or a
director) other than for Cause within one (1) year following a Change
in Control of the Corporation; or
(ii) Upon the voluntary termination of Grantee's affiliation with the
Corporation (either as an employee or a director) for any reason
within the thirty (30) day period immediately after the one (1) year
period following a Change in Control of the Corporation.
8. Definitions. For the purposes of this Agreement, the following terms shall
have the definitions set forth below:
(a) "Cause" means (i) any act (A) that constitutes, on the part of the
Grantee, fraud, dishonesty, a felony or gross malfeasance of duty and
(B) that directly results in a material injury to the Corporation; or
(ii) conduct by the Grantee in his office with the Corporation that is
grossly inappropriate and demonstrably likely to lead to material
injury to the Corporation, as determined by the Board acting
reasonably and in good faith; provided, however, that in the case of
(ii) above, such conduct shall not constitute Cause unless the Board
shall have delivered to the Grantee notice setting forth with
specificity (A) the conduct deemed to qualify as Cause, (B) reasonable
action that would remedy such objection, and (C) a reasonable time
(not less than 30 days) within which the Grantee may take such
remedial action, and the Grantee shall not have taken such specified
remedial action within such specified reasonable time.
(b) "Change in Control of the Corporation" means (i) the acquisition,
directly or indirectly, by any "person" (within the meaning of
Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") within any twelve-month period of
securities of the Corporation representing an aggregate of twenty
percent (20%) or more of the combined voting power of the
Corporation's then outstanding securities; or (ii) during any period
of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation, cease for
any reason to constitute at least a majority thereof, unless the
election of each new director was approved in advance by a vote of at
least a majority of the directors then still in office who were
directors at the beginning of the period; or (iii) consummation of a
merger or consolidation or other business combination of the
Corporation with any other person, other than a merger, consolidation
or business combination which would result in the outstanding Common
Stock immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into common stock of the
surviving entity or a parent or affiliate thereof) at least sixty
percent (60%) of the outstanding common stock of the Corporation or
such surviving entity or parent of affiliate thereof outstanding
immediately after such merger, consolidation or business combination;
or (iv) a plan of complete liquidation of the Corporation or an
agreement for the sale or disposition by the Corporation of all or
substantially all of the Corporation's assets; or (v) the occurrence
of any other event or circumstance which is not covered by (i) through
(iv) above which the Board determines affects control of the
Corporation and, in order to implement the purposes of this agreement,
adopts a resolution that such event or circumstance constitutes a
Change in Control for purposes of this agreement.
126
(c) "Disability" means total and permanent disability as determined under
the Corporation's long-term disability plan.
(d) "Retirement" means termination of employment under circumstances in
which the Grantee is entitled to a benefit from the Corporation's
defined benefit pension plan.
9. Disposition of Shares. Grantee agrees to notify the Corporation promptly of
the disposition of any shares of Common Stock purchased pursuant to this
option which are disposed of within one year after transfer of such shares
to Grantee, or within two years of the date of the grant of such option.
For purposes of such notification, "disposition" shall have the meaning
assigned to it in Section 425(c) of the Code.
10. Adjustment of Awards. In the event of any change in corporate
capitalization, such as stock split, or a corporate transaction, such as a
merger, consolidation, separation or other distribution of stock or
property of the Corporation, any reorganization (whether or not such
reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Corporation, such
adjustment shall be made in the number and class of and/or price of the
Option Shares as may be determined to be appropriate and equitable by the
Corporation's Board of Directors, in its sole discretion, to prevent
dilution or enlargement of the benefits or potential benefits intended to
be available under this agreement; provided that the number of Option
Shares shall always be a whole number.
11. Interpretation. Any question of interpretation or application of this
Agreement shall be resolved by the Corporation's Board of Directors and its
determination shall be final and binding on the Corporation and Grantee.
12. Notices. All notices hereunder shall be in writing and, if to the
Corporation, shall be delivered personally to the Chairman or mailed to the
Corporation's principal office at P.O. Box 1000, Blountsville, Alabama
35031, addressed to the attention of the Chairman; and if to Grantee, shall
be delivered personally or mailed to him at the address for Grantee found
in the Corporation's records. Such addresses may be changed at any time by
notice from one party to the other.
13. Binding Effect. This Agreement shall bind and inure to the benefit of the
parties hereto, the successors and assigns of the Corporation and the
person to whom the rights of Grantee are transferred by will or the laws of
descent and distribution.
14. Amendment. This Agreement may be amended from time to time by the Board,
but no such amendment shall impair the rights of the Grantee without the
Grantee's consent.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COMMUNITY BANCSHARES, INC.
By:__________________________________________
WITNESS: GRANTEE:
--------------------------- ---------------------------------------------
Signature
127
Exhibit 11 - Statements Re: Computation of Per Share Earnings
Community Bancshares, Inc.
Computation of Net Income per Common Share
The following tabulation presents the calculation of basic and fully diluted
earnings per common share for the years ended December 31, 2002, 2001 and 2000.
2002 2001 2000
----------------- ---------------- ------------------
Reported income (loss) from continuing operations $ (5,023,133) $ (2,381,351) $ (2,852,657)
================= ================ ==================
Reported income (loss) from discontinued operations $ 5,927,331 $ 958,467 $ (166,618)
================= ================ ==================
Earnings (losses) on common shares $ 904,198 $ (1,422,884) $ (3,019,275)
================= ================ ==================
Weighted average common shares outstanding - basic 4,642,182 4,572,301 4,460,295
================= ================ ==================
Earnings per common share- basic
Income (loss) from continuing operations $ (1.08) $ (0.52) $ (0.64)
================= =============== =================
Net income (loss) $ 0.19 $ (0.31) $ (0.68)
================= =============== =================
Weighted average common shares outstanding - diluted 4,642,182 4,572,301 4,671,430
================= ================ ==================
Earnings per common share- diluted
Income (loss) from continuing operations $ (1.08) $ (0.52) $ (0.61)
================= =============== =================
Net income (loss) $ 0.19 $ (0.31) $ (0.65)
================= =============== =================
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Exhibit 21 - Subsidiaries of the Registrant
Subsidiaries - Direct / wholly-owned State of Incorporation
Community Bank..................................................................... Alabama
Community (AL) Capital Trust I..................................................... Delaware
Subsidiaries - Indirect / wholly-owned by Community Bank
Community Appraisals, Inc.......................................................... Alabama
1st Community Credit Corporation................................................... Alabama
Community Insurance Corp........................................................... Alabama
Subsidiaries - Indirect / wholly-owned by Community Insurance Corp.
Southern Select Insurance, Inc..................................................... Alabama
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