<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1994 Commission File No. 0-16461
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0868361
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Main Street, P. O. Box 1000
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS 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
--- ---
AS OF FEBRUARY 1, 1995 THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD
BY NON-AFFILIATES WAS $ 20,495,688.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASS OF COMMON
STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT FEBRUARY 1, 1995
---------------------------- -------------------------------
COMMON STOCK, $.10 PAR VALUE 1,620,215
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
- --------------------------------------- ----------------------------------
PROXY STATEMENT FOR 1995 ANNUAL MEETING PART III
THE TOTAL NUMBER OF PAGES IN THIS REPORT IS 27.
<PAGE> 2
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Shares of the Company's Common Stock ("Shares") were held by approximately 946
stockholders of record at December 31, 1994. There is no established trading
market for the Shares, which have been traded inactively in private
transactions. Therefore, no reliable information is available as to trades of
the Shares, or as to the prices at which such Shares have traded. Management
has reviewed the limited information available as to the ranges at which Shares
have sold. The following data regarding Shares is provided for information
purposes only, and should not be viewed as indicative of the actual or market
value of Shares.
<TABLE>
<CAPTION>
Estimated Price Range
Per Share
------------------------
High Low
--------- --------
<S> <C> <C>
1994:
FIRST QUARTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.00 $13.00
SECOND QUARTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.50 17.50
THIRD QUARTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.00 18.00
FOURTH QUARTER (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.00 25.00
1993:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.66 $ 8.50
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00 9.66
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.00 11.67
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.25 12.00
</TABLE>
A cash dividend of $.50 per share was declared by the Company's Board of
Directors on January 9, 1995 and was paid on January 20, 1995. Management
continues to anticipate retaining substantially all earnings to finance the
Company's growth. The payment of dividends on Shares is subject to the prior
payment of principal and interest on the Company's long-term debt, sufficient
earnings and capital in the subsidiaries and to regulatory restrictions. See
"Financial and Statistical Information" and Consolidated Financial Statements
and related notes.
_____________________________
(1) On October 4, 1994, the Company purchased 115,978.384 shares of Common
Stock from Jeffrey K. Cornelius, a former director and officer of the
Company, for a purchase price of approximately $25.00 per share.
<PAGE> 3
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five years.
All averages are daily averages.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(in Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Interest income . . . . . . . . . . . . . . . $ 20,751 $ 17,774 $ 17,798 $ 17,794 $ 16,699
Interest expense . . . . . . . . . . . . . . 9,507 8,008 8,949 10,774 10,633
Net interest income . . . . . . . . . . . . . 11,244 9,766 8,849 7,020 6,066
Provision for loan losses . . . . . . . . . . 638 418 539 423 577
Non-interest income . . . . . . . . . . . . . 3,189 2,914 2,618 1,740 1,928
Non-interest expense . . . . . . . . . . . . 10,193 8,824 7,297 6,279 5,568
Net income . . . . . . . . . . . . . . . . . 2,817 2,572 2,699 1,619 1,473
Per Share data:
Net income . . . . . . . . . . . . . . . 1.67 1.94 2.19 1.29 1.17
Cash dividends . . . . . . . . . . . . . -0- -0- -0- -0- -0-
Shareholders' equity (book value)
at period end . . . . . . . . . . . . 13.99 13.49 10.80 8.61 7.24
Balance Sheet:
Loans . . . . . . . . . . . . . . . . . . 206,428 151,651 135,782 120,636 111,287
Deposits . . . . . . . . . . . . . . . . 263,413 227,770 198,312 185,050 165,978
Long-term debt . . . . . . . . . . . . . 8,713 6,392 3,745 4,275 4,905
Average equity . . . . . . . . . . . . . 22,698 15,723 12,493 9,891 8,616
Average assets . . . . . . . . . . . . . 276,063 232,340 209,169 191,992 168,742
Total assets . . . . . . . . . . . . . . 299,482 262,192 219,812 203,676 183,507
Ratios:
Return on average assets . . . . . . . . 1.02% 1.11% 1.29% .84% .87%
Return on average equity . . . . . . . . 12.41 16.36 21.60 16.37 17.10
Dividend payout ratio . . . . . . . . . . -0- -0- -0- -0- -0-
Average equity to average assets . . . . 8.22 6.77 5.97 5.15 5.11
Total risk-based capital . . . . . . . . 13.64 16.53 11.20 10.72 9.87
Leverage ratio . . . . . . . . . . . . . 7.57 8.95 6.60 5.82 5.65
</TABLE>
2
<PAGE> 4
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 the past three years. This discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report. Per share data for the year ended December 31, 1992
has been restated to reflect a 3-for-1 stock split effected through the
issuance of a stock dividend on June 1, 1993.
The discussion of net interest income in this financial review is presented on
a taxable equivalent basis to facilitate performance comparisons among various
taxable and tax-exempt assets.
SUMMARY
The Company's principal market areas are located in north central Alabama (in
the counties of Blount, Dekalb, Lauderdale, Limestone, Madison, Marshall, and
Morgan) and in south central Tennessee (in Giles County). All of the Company's
banking facilities are located in relatively rural areas, placing an emphasis
on personal service. None of the banks are located in urban areas but benefit
from their reasonably close proximity to certain urban areas, as more fully
described below.
Management believes that the economies of the areas in which the Company's
banks operate are healthy and expanding, but not at a pace that threatens
stability. With the exception of the Blount County, Alabama market, each of
the Company's markets is a separate and distinct economy, located approximately
10 to 45 miles from Huntsville, Alabama and therefore close enough to share in
its economic and employment benefits. Blount County is adjacent to Jefferson
County, Alabama, in which the city of Birmingham is located, and is therefore
close enough to Birmingham to share in its economic and employment benefits.
The employment base of the Huntsville, Alabama Metropolitan Statistical Area
("MSA") is diverse. Significant employers include the military and aerospace
industries, manufacturers of durable goods, machinery, and transportation
equipment, as well as retailers and service providers. Soybean, hay, corn,
cotton, tobacco, dairy and poultry farming make up a significant portion of the
economy as well. The Huntsville, Alabama MSA had an average unemployment rate
of 5.2% in 1994, and the counties served by the Company had unemployment
averaging 5.6% in 1994, both lower than the average of 6.0% experienced in
Alabama in 1994. In the Company's markets, the increase in the per capita
income over the last ten years has surpassed the rate for the State of Alabama,
as has population growth over the last year. The current economic prospects in
the Company's markets are good, and the Company attempts to assist those
prospects by returning the deposits of its customers to the communities from
which they come in the form of loans.
The Company's net income of $2,817,046 for 1994 was 10 percent more than 1993's
amount of $2,572,366, which was 5 percent less than the $2,698,784 earned
during 1992. When stated as changes in net income per share, 1994 represented
a 14 percent decrease from 1993 compared to an 11 percent
3
<PAGE> 5
decrease in 1993 over 1992. The initial costs of opening the new Tennessee bank
subsidiary, resulting in net losses of $152,007 and $176,981 in 1994 and 1993,
respectively, has had a significant impact on the growth of the Company's net
earnings.
The continued growth in Company earnings is a response to management's emphasis
on quality loans and investments with good yields while keeping expenses in
line. The loss sustained by Community Bank (Tennessee) was fully anticipated
and projected prior to opening. The expected growth of the Tennessee bank
should become a significant factor to the Company's future earnings.
A stock offering of $9 million commenced in October 1993 and closed fully sold
in February 1994. This additional capital and the retained earnings generated
have placed the Company in the strongest capital position since its inception
for future growth and expansion.
EARNING ASSETS
Average earning assets in 1994 increased 19 percent over 1993 primarily as a
result of increases in the loan portfolio. The mix of average earning assets
shifted toward the loan portfolio during 1994 as loans averaged 70 percent of
the total for 1994, up from 66 percent during 1993. As a percentage of total
average earning assets, investments securities averaged 28 percent and other
earning asset categories averaged 2 percent for 1994. In the previous year,
the comparable mix was 31 percent in investment securities and 3 percent in the
other earning asset categories. The increased volume in earning assets
contributed to the higher net interest income reported by the Company. Average
earning assets for 1993 increased 11 percent over 1992.
Average loans increased 27 percent in 1994 with much of the increase
concentrated in the real estate financing areas. Total loans outstanding at
year-end were up 36 percent over the previous year-end level. Real
estate-mortgage loans increased 36 percent and consumer loans increased 34
percent from year-end 1993 to year-end 1994. Commercial, financial and
agricultural loans, which made up 23 percent of the total loans, increased 37
percent when compared to the previous year. Real estate-construction loans
increased 82 percent but had little effect due to representing only 2 percent
of total loans. Total loans at year-end 1993 grew 12 percent over 1992 and
average loans grew 9 percent over the same period.
The Company has intentionally avoided the growing national market in loans to
finance leveraged buy-outs, participating in no nationally syndicated leveraged
buy-out loans. Concurrently, it has avoided exposure to lesser developed
country ("LDC") debt, having no LDC loans in its portfolio.
4
<PAGE> 6
The following table shows the classification of loans by major category at
December 31, 1994 and for each of the preceding four years. The second table
provides maturities of certain loan classifications and an analysis of these
loans maturing in over one year.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------------- ------------------ ------------------ ------------------- --------------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
------- -------- ------- -------- ------- -------- -------- -------- ------- --------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural . $ 46,892 22.1% $ 34,200 22.0% $ 32,261 23.1% $ 30,918 24.9% $ 33,100 28.6%
Real estate -
construction . 3,972 1.9 2,186 1.4 2,294 1.7 2,794 2.2 1,652 1.4
Real estate -
mortgage . . 103,194 48.6 75,835 48.7 64,846 46.5 52,998 42.6 46,432 40.2
Consumer . . . 58,051 27.4 43,470 27.9 39,988 28.7 37,630 30.3 34,475 29.8
------- ---- -------- ---- -------- ---- -------- ---- ------ ----
212,109 100.0% 155,691 100.0% 139,389 100.0% 124,340 100.0% 115,659 100.0%
===== ===== ===== ===== =====
Less: Unearned
income . . . 5,681 4,040 3,607 3,704 4,372
Allowance for
loan losses . 1,548 1,255 1,062 940 777
------- -------- -------- -------- --------
Net loans . . . $204,880 $150,396 $134,720 119,696 $110,510
======== ======== ======== ======== ========
</TABLE>
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
Rate Structure For Loans
Maturity Maturing Over One Year
------------------------------------------------ ----------------------------
Over One
Year
One Through Over Predetermined Floating or
Year or Five Five Interest Adjustable
Less Years Years Total Rate Rate
------- ------ ------- ------- --------- -----------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural . . . . . $15,801 $7,991 $23,100 $46,892 $20,232 $10,859
Real estate -
construction . . . . . . . 3,369 65 539 3,973 245 359
------- ------ ------- ------- ------- -------
$19,170 $8,056 $23,639 $50,865 $20,477 $11,218
======= ====== ======= ======= ======= =======
</TABLE>
5
<PAGE> 7
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 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. For
securities classified as investment securities, it is the intention to hold
such securities for the foreseeable future. On January 1, 1994, the Company
transferred selected securities to an available for sale category to
appropriately reflect the nature of the Company's holdings that are available
for sale should liquidity needs dictate. Management of the maturity of the
portfolio is necessary to provide liquidity and to control interest rate risk.
During 1994 gross investment securities sales were $19.8 million and maturities
were $33.1 million, representing 28.1 percent and 46.9 percent, respectively,
of the average portfolio for the year. Gains associated with the sales were $21
thousand, accounting for 1 percent of noninterest income. Gross unrealized
gains in the portfolio amounted to $379 thousand at year end 1994 and
unrealized losses amounted to $3.6 million. Average investment securities
increased 6.0 percent from 1993.
Mortgage-backed securities have varying degrees of risk of impairment of
principal compared 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. As of December 31, 1994 and 1993, the
Company's mortgage-backed securities portfolio contained no interest-only strip
securities and the amount of unamortized premium on mortgage-backed securities
was only $21,300. The recoverability of the Company's investment in
mortgage-backed securities is reviewed periodically, and if necessary,
appropriate adjustments will be made to income for impaired values.
6
<PAGE> 8
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
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1994 1993 1992
------- ------- -------
(in Thousands)
<S> <C> <C> <C>
Securities Held to Maturity:
- ----------------------------
U. S. Treasury and U.S. Government agencies . . . . . . . $12,345 $10,564 $23,417
Mortgage-backed securities . . . . . . . . . . . . . . . . 12,680 16,479 24,278
State and municipal securities . . . . . . . . . . . . . . 16,508 14,962 11,183
Foreign debt securities . . . . . . . . . . . . . . . . . -0- 485 -0-
------- ------- --------
Total securities held to maturity . . . . . . . . . . . $41,533 $42,490 $58,878
======= ======= =======
Securities Available for Sale:
- ------------------------------
U. S. Treasury and U.S. Government agencies . . . . . . . $15,719 $24,655 $ -0-
Mortgage-backed securities . . . . . . . . . . . . . . . . 2,331 12,226 -0-
State and municipal securities . . . . . . . . . . . . . . 2,804 2,862 -0-
Foreign debt securities . . . . . . . . . . . . . . . . . -0- -0- -0-
------- ------- --------
Total securities available for sale . . . . . . . . . . $20,854 $39,743 $ -0-
======= ======= =======
Total Investment Securities:
- ----------------------------
U. S. Treasury and U.S. Government agencies . . . . . . . $28,064 $35,219 $23,417
Mortgage-backed securities . . . . . . . . . . . . . . . . 15,011 28,705 24,278
State and municipal securities . . . . . . . . . . . . . . 19,312 17,824 11,183
Foreign debt securities . . . . . . . . . . . . . . . . . -0- 485 -0-
------- ------- --------
Total investment securities . . . . . . . . . . . . . . $62,387 $82,233 $58,878
======= ======= =======
</TABLE>
Average taxable securities were 73.5 percent of the portfolio in 1994 and 77.3
percent in 1993 while tax-exempt securities were 26.5 percent in 1994 and 22.7
percent in 1993. Average taxable securities increased 0.8 percent while
average tax-exempt securities increased 23.7 percent in 1994. Average
investment securities for 1993 increased 8.4 percent from 1992 average levels.
Period-end securities for 1994 decreased 24.1 percent from the previous year
due to loan demand in excess of deposit growth.
7
<PAGE> 9
The maturities and weighted average yields of the investments in the 1994
portfolio of investment securities are presented below. Taxable equivalent
adjustments (using a 34 percent tax rate) have been made in calculating yields
on tax-exempt obligations. The average maturity of the investment portfolio is
10.6 years with an average yield of 7.1 percent. Mortgage-backed securities
have been included in the maturity table based upon the guaranteed payoff date
of each security.
INVESTMENT PORTFOLIO MATURITY SCHEDULE
<TABLE>
<CAPTION>
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
--------- ------- --------- ------- -------- ------- --------- -------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity:
- ----------------------------
U. S. Treasury $ -0- -0-% $ 2,342 5.67% $ -0- -0-% $ -0- -0-%
U. S. Government
agencies . . . . 3,612 5.12 4,807 7.08 3,244 6.26 11,020 6.00
State and municipal
securities . . . 15 7.20 580 8.52 2,671 9.17 13,241 8.94
------ ------- ------- -------
Subtotal . . .
$3,627 5.13 $ 7,729 6.76 $ 5,915 7.57 $24,261 7.60
====== ======= ======= =======
Securities Available for Sale:
- ------------------------------
U. S. Treasury $2,525 7.38% $ 8,205 5.74% $ 4,989 5.56% $ -0- -0-%
U. S. Government
agencies . . . . 11 8.23 1,179 8.23 312 9.00 830 6.63
State and municipal
securities . . . 81 12.00 485 10.56 363 10.53 1,875 10.52
------ ------- ------- -------
Subtotal . . .
$2,617 7.52 $ 9,869 6.28 $ 5,664 6.07 $ 2,705 9.93
====== ======= ======= =======
Total Investment Securities:
- ----------------------------
U. S. Treasury $2,525 7.38% $10,547 5.72% $ 4,989 5.56% $ -0- -0-%
U. S. Government
agencies . . . . 3,623 5.13 5,986 7.31 3,556 6.50 11,850 6.04
State and municipal
securities . . . 96 11.25 1,065 9.45 3,024 9.33 15,116 9.14
------ ------- ------- -------
Total . . . .
$6,244 6.13 $17,598 6.49 $11,579 6.84 $26,966 7.77
====== ======= ======= =======
</TABLE>
There were no securities held by the Company, whose aggregate value on December
31, 1994 exceeded ten percent of the Company's consolidated shareholders'
equity at that date. (1)
____________________
(1) Securities which are payable from and secured by the same source of revenue
or taxing authority are considered to be securities of a single issuer.
Securities of the U. S. Government and U. S. Government agencies and
corporations are not included.
Average Federal funds sold decreased 62.4 percent, reflecting the decreased
cash available from loan growth. During 1993, average Federal Funds increased
98.9 percent from 1992 levels. As a percentage of average earning assets,
these funds represented .8 percent for 1994 compared to 2.5 percent for 1993.
The average balance of interest-bearing deposits with other banks increased
75.6 percent from 1993 to 1994. The average balance from 1992 to 1993 increased
64.4 percent. Total average earning assets as compared to total average assets
for 1994 and 1993 were 91.7 and 91.9 percent, respectively.
8
<PAGE> 10
There has been no significant impact on the Company's financial statements as a
result of the provisions of Statement of Financial Accounting Standards No.
119, Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments.
DEPOSITS AND BORROWED FUNDS
The Company's primary source of funds is derived from its deposits. Continued
enhancement of existing products and emphasis upon better customer service
fuels the growth in the deposit base. Emphasis has been placed upon attracting
consumer deposits. It is the Company's intent to expand its consumer base in
order to continue to fund asset growth.
The portion of the Company's average liabilities represented by
interest-bearing deposits increased in both 1994 and 1993 by 15.0 percent and
9.8 percent, respectively. During the same periods, average
noninterest-bearing deposits increased 21.7 percent and 15.1 percent,
respectively. Customer confidence and satisfaction is evidenced by the
increase in total average deposits of 15.8 percent in 1994 and 10.4 percent in
1993. The largest dollar increase was in the time deposits category.
Average interest-bearing demand deposits rose 23.7 percent while average
savings deposits increased 6.9 percent, and average time deposits increased
15.0 percent. The two categories of lowest cost deposits comprised the
following percentages of total deposits during 1994 and 1993, respectively:
average noninterest-bearing demand deposits - 13.0 percent and 12.3 percent;
and average interest-bearing demand deposits - 18.7 percent and 17.5 percent.
Of total time deposits, approximately 22.0 percent were large denomination
certificates of deposit. The maturities of the time certificates of deposit
and other time deposits of $100,000 or more issued by the Company at December
31, 1994 are summarized in the table below.
MATURITIES OF LARGE TIME DEPOSITS
<TABLE>
<CAPTION>
Time Other
Certificates Time
of Deposit Deposits Total
------------- ------------ ------------
(in Thousands)
<S> <C> <C> <C>
Three months or less . . . . . . . . . . . . . . . . . . $ 5,369 $14,555 $19,924
Over three through six months . . . . . . . . . . . . . . 2,676 -0- 2,676
Over six through twelve months . . . . . . . . . . . . . 4,610 -0- 4,610
Over twelve months . . . . . . . . . . . . . . . . . . . 18,553 -0- 18,553
------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . $31,208 $14,555 $45,763
======= ======= =======
</TABLE>
Borrowed funds consist primarily of short-term borrowings and long-term debt.
Short-term borrowings at year-end 1994 and 1993 consisted the U. S. Treasury
Tax and Loan Note Option account and securities sold under agreements to
repurchase. Long-term debt consisted of various commitments with scheduled
maturities from one to twenty years.
9
<PAGE> 11
The following table sets forth expected debt service for the next five years
based on interest rates and repayment provisions as of December 31, 1994.
MATURITIES OF LONG-TERM DEBT
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Interest on indebtedness . . . . . . . . . $ 653 $ 577 $ 497 $ 419 $ 340
Repayment of principal . . . . . . . . . . 924 927 931 935 939
----- ------ ------ ------ ------
$1,577 $1,504 $1,428 $1,354 $1,279
====== ====== ====== ====== ======
</TABLE>
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 the subsidiary Banks' customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to 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 assets and liabilities 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 requirements of its shareholders. Daily monitoring of the sources
and uses of funds is necessary to maintain an acceptable cash position that
meets both requirements. In a banking environment, both assets and liabilities
are considered sources of liquidity funding and both are, therefore, monitored
on a daily basis.
Dividends paid by Community Bank (Alabama) 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. The approval of the Alabama Superintendent of Banks is
required to pay dividends in excess of the Bank's earnings retained in the
current year plus retained net profits for the preceding two years. At
December 31, 1994, Community Bank (Alabama) could have declared dividends of
$6,688,768 without approval of regulatory authorities.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments or sales of investment and trading account
securities. Real estate-construction and commercial, financial and
agricultural loans that mature in one year or less equaled approximately $19.2
million or 9.0 percent of the total loan portfolio at December 31, 1994 and
investment securities maturing in one year or less equaled $6.2 million or 10.0
percent of the portfolio. Other sources of liquidity include 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 another
commercial bank from an available line of up to $2,000,000. Liquidity
management involves the daily monitoring of the sources and uses of funds to
maintain an acceptable company cash position.
10
<PAGE> 12
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of the
Company's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities
are subject to change in interest rates either at replacement or maturity
during the life of the instruments. Sensitivity is measured as the difference
between the volume of assets and liabilities in the Company's current portfolio
that are subject to repricing in future time periods. The differences are
known as interest sensitivity gaps and are usually calculated separately for
segments of time ranging from zero to thirty days, thirty-one to ninety days,
ninety-one days to one year, one to five years, over five years and on a
cumulative basis. The following tables show interest sensitivity gaps for
these different intervals as of December 31, 1994.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
0-30 31-90 91-365 1-5 Over 5
Days Days Days Years Years Total
-------- -------- -------- -------- ------- --------
At December 31, 1994 (in Thousands)
Interest-earning assets (1)
- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans . . . . . . . . . . . . $ 18,623 $ 22,149 $ 35,409 $ 97,487 $32,338 $206,006
Investment Securities:
Taxable . . . . . . . . . . -0- 1,007 5,130 16,543 20,395 43,075
Tax-exempt . . . . . . . . -0- -0- 96 1,065 18,150 19,311
Time deposits in other banks 1,164 -0- 750 200 -0- 2,114
Federal funds sold . . . . . 100 -0- -0- -0- -0- 100
-------- -------- -------- -------- ------- --------
19,887 23,156 41,385 115,295 70,883 270,606
-------- -------- -------- -------- ------- --------
Interest-bearing liabilities (2)
Demand deposits (3) . . . . . 16,184 16,184 16,184 -0- -0- 48,552
Savings deposits (3) . . . . 14,438 14,438 14,439 -0- -0- 43,315
Time deposits . . . . . . . . 8,339 26,160 37,358 70,123 50 142,030
Other short-term borrowings . 2,044 -0- -0- -0- -0- 2,044
Long term debt . . . . . . . 77 154 693 3,732 4,057 8,713
-------- -------- -------- -------- ------- --------
41,082 56,936 68,674 73,855 4,107 244,654
-------- -------- -------- -------- ------- --------
Interest sensitivity gap . . . $(21,195) $(33,780) $(27,289) $ 41,440 $66,776 $ 25,952
======== ======== ======== ======== ======= ========
Cumulative interest
sensitivity gap . . . . . . . $(21,195) $(54,975) $(82,264) $(40,824) $25,952
======== ======== ========= ======== =======
Ratio of interest-earning assets
to interest-bearing liabilities 0.48 0.41 0.60 1.56 17.26
======== ======== ========= ======== =======
Cumulative ratio . . . . . . . 0.48 0.44 0.51 0.83 1.11
======== ======== ========= ======== =======
Ratio of cumulative gap to
total interest-bearing assets (0.08) (0.20) (0.30) (0.15) 0.10
======== ======== ========= ======== =======
- -----------------
</TABLE>
(1) Excludes nonaccrual loans and securities.
(2) Excludes matured certificates which have not been redeemed by the customer
and on which no interest is accruing.
(3) Demand and savings deposits are assumed to be subject to movement into
other deposit instruments in equal amounts during the 0-30 day period,
the 31-90 day period, and the 91-365 day period.
11
<PAGE> 13
The above table indicates that in a rising interest rate environment, the
Company's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets.
As seen in the preceding table, for the first 30 days of repricing opportunity
there is an excess of interest-bearing liabilities over earning assets of $21.2
million. For the first 365 days, interest-bearing liabilities exceed earning
assets by $82.3 million. During this one year time period, 68.1 percent of all
interest bearing liabilities will reprice compared to 31.2 percent of all
interest-earning assets. This suggests that the interest margin of the Company
would expand should interest rates decline and shrink should rates increase.
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and the liability remain the same, thus impacting net interest
income. It should be noted, therefore, that a matched interest-sensitive
position by itself will not ensure maximum net interest income. Management
continually evaluates the condition of the economy, the pattern of market
interest rates and other economic data to determine the types of investments
that should be made and at what maturities. Using this analysis, management
from time to time assumes calculated interest sensitivity gap positions to
maximize net interest income based upon anticipated movements in the general
level of interest rates.
CAPITAL RESOURCES
A strong capital position is vital to the continued profitability of the
Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth of the organization. The Company has
provided the majority of its capital requirements through the retention of
earnings.
During the last quarter of 1993 and the first quarter of 1994, the Company
offered a maximum of 600,000 shares of its $.10 par value common stock at $15
per share with the anticipation of raising up to $9,000,000 of capital. On
February 11, 1994 the offering was closed upon full subscription of all 600,000
shares offered for sale, raising $8,916,742 of capital after reduction for
offering costs. The proceeds of this offering are available for debt
reduction, capital enhancement and future growth and expansion of the Company.
Bank regulatory authorities are placing increased emphasis on the maintenance
of adequate capital. In 1990, new risk-based capital requirements became
effective. The guidelines take into consideration risk factors, as defined by
regulators, 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 1 capital, which consists of
common equity, amounted to $23.3 million at December 31, 1994. 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 is referred to as Total Risk-based capital and was $26.7
million at year-end 1994. The percentage ratios, as calculated under the
guidelines were 11.91 percent and 13.64 percent for Tier I and Total Risk-based
capital, respectively, at year-end 1994. Both levels currently exceed the
minimum ratios of four percent and eight percent, respectively.
Applying the current guidelines to the preceding two years also resulted in
capital ratios exceeding the minimum requirements.
12
<PAGE> 14
Other important indicators of capital adequacy in the banking industry are the
leverage ratio and the tangible leverage ratio. The leverage ratio is defined
as the ratio the Company's shareholders equity, minus goodwill bears to total
assets minus goodwill. The tangible leverage ratio is defined as the Company's
shareholders equity, minus all intangibles, divided by total assets minus all
intangibles. The Company's leverage ratios as of December 31, 1994, 1993 and
1992 exceeded the regulatory minimum requirements which are generally 3% plus
an additional cushion of at least 100-200 basis points depending on risk
profiles and other factors.
The table below illustrates the company's regulatory capital ratios at December
31, 1994, 1993 and 1992 under the year end 1994 requirements.
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . $ 23,311 $ 23,465 $ 13,810
Tier 2 Capital . . . . . . . . . . . . . . . . . . . . . 3,381 1,255 1,494
-------- -------- --------
TOTAL QUALIFYING CAPITAL . . . . . . . . . . . . . $ 26,692 $ 24,720 $ 15,304
======== ======== ========
Risk Adjusted Total Assets (including
off-balance-sheet exposures) . . . . . . . . . . . . . $195,646 $149,576 $136,683
======== ======== ========
Tier 1 Risk-Based Capital Ratio . . . . . . . . . . . . 11.91% 15.69% 10.10%
======== ======== ========
Total Risk-Based Capital Ratio . . . . . . . . . . . . . 13.64% 16.53% 11.20%
======== ======== ========
Leverage Ratio . . . . . . . . . . . . . . . . . . . . . 7.57% 8.95% 6.60%
======== ======== ========
Tangible Leverage Ratio . . . . . . . . . . . . . . . . 7.08% 8.35% 5.76%
======== ======== ========
</TABLE>
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 these and other key ratios for the Company for each
of the last three years.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Return on average assets . . . . . . . . . . . . . . . . . . 1.02% 1.11% 1.29%
Return on average equity . . . . . . . . . . . . . . . . . . 12.41 16.36 21.60
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . ----- ----- -----
Average equity to average assets ratio . . . . . . . . . . . 8.22 6.77 5.97
</TABLE>
13
<PAGE> 15
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal source of a financial institution's
earnings stream and represents the difference or spread between interest and
fee 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 materially
impact net interest income. All discussions in this section assume a taxable
equivalent basis unless otherwise noted.
Net interest income for 1994 increased 15.4 percent from 1993 and 11.4 percent
in 1993 over 1992. Increased volume in 1994 and 1993 accounted for the majority
of the increase. The schedule on pages 24 and 25 provides the detail changes in
interest income, interest expense and net interest income due to changes in
volume and rate.
Interest income increased 16.9 percent in 1994 and .8 percent in 1993. The
1994 increase is due solely to the 18.6 percent increase in average earning
assets, as there was a 13 basis point decline in the average yield on earning
assets. The nominal increase in interest income in 1993 was attributable to the
84 basis point decline in the yields on earning assets. Interest income on
loans increased 24.7 percent due entirely to increased volume. Interest income
on investment securities decreased 3.3 percent from 1993 to 1994 as a result of
decreased rates.
Total interest expense increased 18.7 percent due to the effect of a 16.7
percent increase in volume of average interest-bearing liabilities added to the
effect of an 8 basis point increase in the rate paid. The rise of interest on
deposits and short-term borrowings was due to an increase in both rates and
volume.
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 fully
taxable equivalent 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
net interest margin for 1994 was 4.79 percent as compared to 4.92 percent for
1993.
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 1994 decreased 21 basis points to 4.21
percent from the 1993 spread of 4.42 percent as the yields on earning assets
increased at a slower pace than the cost of interest-bearing liabilities.
See the accompanying schedules entitled "Rate/Volume Variance Analysis" and
"Consolidated Average Balances, Interest Income/Expenses and Yields/Rates" for
more information.
Federal income tax laws applicable to banks during 1994 and 1993 were
substantially different from those applicable in prior years. Imposition of
the alternative minimum tax, changes in tax rates and the effective elimination
of the tax-exempt status of certain previously tax-exempt income, resulted in
the distortion of the comparability of yields, interest rate spreads and
margins presented on an assumed tax equivalency basis.
14
<PAGE> 16
The following tabulation presents certain net interest income data without
modification for assumed tax equivalency:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rate earned on earning assets . . . . . . . . 8.20% 8.32% 9.22% 10.03% 10.77%
Rate paid on borrowed funds . . . . . . . . . 4.33 4.25 5.21 6.73 7.62
Interest rate spread . . . . . . . . . . . . 3.87 4.07 4.01 3.30 3.15
Net yield on earning assets . . . . . . . . . 4.44 4.57 4.58 3.96 3.91
</TABLE>
1994 was characterized by interest rates which were lower than the last few
years in the beginning of the year, but were steadily increasing during the
course of the year. Despite the increasing rate environment, which saw
interest-bearing liabilities reprice at a faster pace than that of
interest-earning assets, net interest income increased by 15.1 percent due to
the 18.6 percent increase in average earning asset volume.
Absolute changes in net interest income from 1993 to 1994 and from 1992 to 1993
were $1.5 million and $917 thousand, respectively, as reported in the
Consolidated Statements of Income. The net interest margin decreased to 4.44
percent in 1994 from 4.57 percent in 1993 and the interest rate spread
decreased to 3.87 percent for 1994 from 1993's 4.07 percent.
15
<PAGE> 17
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis (in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994
---------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-------- ------- ----
<S> <C> <C> <C>
ASSETS
Earning assets:
Loans, net of unearned income (1) . . . . . . . . . . $178,123 $16,614 9.33%
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . 51,846 3,105 5.99
Tax-exempt . . . . . . . . . . . . . . . . . . . . . 18,667 1,719 9.21
-------- -------
Total investment securities . . . . . . . . . . . . 70,513 4,824 6.84
Time deposits in other banks . . . . . . . . . . . . 2,581 108 4.18
Federal funds sold . . . . . . . . . . . . . . . . . 1,987 81 4.08
-------- -------
Total interest-earning assets (2) . . . . . . . . . 253,204 21,627 8.54
Non interest-earning assets:
Cash and due from banks . . . . . . . . . . . . . . . 11,780
Premises and equipment . . . . . . . . . . . . . . . . 8,251
Accrued interest and other assets . . . . . . . . . . 4,251
Allowance for loan losses . . . . . . . . . . . . . . (1,423)
--------
Total assets . . . . . . . . . . . . . . . . . . . . $276,063
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . . . . . $ 45,249 1,509 3.33
Savings deposits . . . . . . . . . . . . . . . . . . . 42,425 1,400 3.30
Time deposits . . . . . . . . . . . . . . . . . . . . 123,124 5,940 4.82
-------- -------
210,798 8,849 4.20
Other short-term borrowings . . . . . . . . . . . . . 1,554 112 7.21
Long-term debt . . . . . . . . . . . . . . . . . . . . 7,403 546 7.38
-------- -------
Total interest-bearing liabilities . . . . . . . . . 219,755 9,507 4.33
------- ----
Noninterest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . . . . . 31,369
Accrued interest and other liabilities . . . . . . . . 2,241
Shareholders' equity . . . . . . . . . . . . . . . . . 22,698
--------
Total liabilities and shareholders' equity . . . . . $276,063
========
Net interest income/net interest spread . . . . . . . . . 12,120 4.21%
====
Net yield on earning assets . . . . . . . . . . . . . . . 4.79%
====
Taxable equivalent adjustment:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . 291
Investment securities . . . . . . . . . . . . . . . . . 585
-------
Total taxable equivalent adjustment . . . . . . . . . 876
-------
Net interest income . . . . . . . . . . . . . . . . . . . $11,244
=======
</TABLE>
______________________________
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34
percent, and do not give effect to the disallowance for federal income tax
purpose of interest expense related to certain tax-exempt earning assets.
(columns continued on next page)
16
<PAGE> 18
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------
1993 1992
---------------------------------------- --------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
$140,294 $13,319 9.49% $128,167 $13,175 10.28%
51,436 3,528 6.86 52,706 4,129 7.83
15,089 1,462 9.69 8,655 932 10.77
-------- ------- -------- -------
66,525 4,990 7.50 61,361 5,061 8.25
1,470 41 2.79 894 43 4.81
5,281 158 2.99 2,655 91 3.43
-------- ------- -------- -------
213,570 18,508 8.67 193,077 18,370 9.51
9,256 6,943
6,457 5,612
4,216 4,545
(1,159) (1,008)
-------- --------
$232,340 $209,169
======== ========
$ 36,580 1,189 3.25 $ 28,527 1,055 3.70
39,686 1,296 3.27 34,881 1,503 4.31
107,054 5,230 4.89 103,516 6,091 5.88
-------- ------- -------- -------
183,320 7,715 4.21 166,924 8,649 5.18
949 22 2.32 920 30 3.26
4,102 272 6.63 3,963 270 6.81
-------- ------- -------- ------ -----
188,371 8,009 4.25 171,807 8,949 5.21
------- ---- ------- -----
25,779 22,404
2,467 2,465
15,723 12,493
-------- --------
$232,340 $209,169
======== ========
10,499 4.42% 9,421 4.30%
==== =====
4.92% 4.88%
==== =====
233 253
500 319
------- -------
733 572
------- -------
$ 9,766 $ 8,849
======= =======
</TABLE>
17
<PAGE> 19
RATE/VOLUME VARIANCE ANALYSIS
Taxable Equivalent Basis
<TABLE>
<CAPTION>
Average Volume Change in Volume
--------------------------------- ---------------------
1994 1993 1992 1994-1993 1993-1992
-------- -------- -------- --------- ---------
(in Thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned income . . . . . . . . . . $178,123 $140,294 $128,167 $37,829 $12,127
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . 51,846 51,436 52,706 410
(1,270)
Tax exempt . . . . . . . . . . . . . . . . . . 18,667 15,089 8,655 3,578 6,434
-------- -------- -------- ------- -------
Total investment securities . . . . . . . . . 70,513 66,525 61,361 3,988 5,164
Interest-bearing deposits with other banks . . . 2,581 1,470 894 1,111 576
Federal funds sold . . . . . . . . . . . . . . . 1,987 5,281 2,655 (3,294) 2,626
-------- -------- -------- ------- -------
Total earning assets . . . . . . . . . . . . $253,204 $213,570 $193,077 $39,634 $20,493
======== ======== ======== ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . $ 45,249 $ 36,580 $ 28,527 $ 8,669 $ 8,053
Savings . . . . . . . . . . . . . . . . . . . . 42,425 39,686 34,881 2,739 4,805
Time . . . . . . . . . . . . . . . . . . . . . 123,124 107,054 103,516 16,070 3,538
-------- -------- -------- ------- -------
Total interest-bearing deposits . . . . . . . 210,798 183,320 166,924 27,478 16,396
Other short-term borrowings . . . . . . . . . . . 1,554 949 920 605 29
Long-term debt . . . . . . . . . . . . . . . . . 7,403 4,102 3,963 3,301 139
-------- -------- -------- ------- -------
Total interest-bearing liabilities . . . . . $219,755 $188,371 $171,807 $31,384 $16,564
======== ======== ======== ======= =======
Net interest income/net interest spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net yield on earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cost of funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
(columns continued on next page)
18
<PAGE> 20
<TABLE>
<CAPTION>
Variance Attributed to (1)
------------------------------------
AVERAGE RATE Interest Income/Expense Variance 1994 1993
- -------------------------- -------------------------- ----------------------- ---------------- ------------------
1994 1993 1992 1994 1993 1992 1994-1993 1993-1992 Volume Rate Volume Rate
- -------- -------- -------- -------- -------- -------- ----------- ----------- ------ ---- ------ ----
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.33% 9.49% 10.28% $16,614 $13,319 $13,175 $3,295 $ 144 $3,524 (229) $1,197 (1,053)
5.99 6.86 7.83 3,105 3,528 4,129 (423) (601) 28 (451) (98) (503)
9.21 9.69 10.77 1,719 1,462 932 257 530 332 (75) 631 (101)
------- ------- ------- ------ ------ ------ ----- ------ -------
6.84 7.50 8.25 4,824 4,990 5,061 (166) (71) 360 (526) 533 (604)
4.18 2.79 4.81 108 41 43 67 (2) 40 27 21 (23)
4.08 2.99 3.43 81 158 91 (77) 67 (121) 44 80 (13)
------- ------- ------- ------ ------ ------ ----- ------ -------
8.54 8.67 9.51 21,627 18,508 18,370 3,119 138 3,803 (684) 1,831 (1,693)
3.33 3.25 3.70 1,509 1,189 1,055 320 134 290 30 273 (139)
3.30 3.27 4.31 1,400 1,296 1,503 104 (207) 92 12 188 (395)
4.82 4.89 5.88 5,940 5,230 6,091 710 (861) 785 (75) 201 (1,062)
------- ------- ------- ------ ------ ------ ----- ------ -------
4.20 4.21 5.18 8,849 7,715 8,649 1,134 (934) 1,167 (33) 662 (1,596)
7.21 2.32 3.26 112 22 30 90 (8) 21 69 1 (9)
7.38 6.63 6.81 546 272 270 274 2 240 34 9 (7)
------- ------- ------- ------ ------ ------ ----- ------ -------
4.33 4.25 5.21 9,507 8,009 8,949 1,498 (940) 1,428 70 672 (1,612)
---- ---- ---- ------- ------- ------- ------ ------ ------ ----- ------ -------
4.21% 4.42% 4.30% $12,120 $10,499 $ 9,421 $1,621 $1,078 $2,375 $(754) $1,159 $ (81)
==== ==== ==== ======= ======= ======= ====== ====== ======= ===== ====== =======
4.79% 4.92% 4.88%
==== ==== ====
3.75% 3.75% 4.63%
==== ==== ====
</TABLE>
_______________
(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.
19
<PAGE> 21
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses, which is charged to operations, 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 increased 52.6
percent in 1994 compared to a decrease of 22.4 percent in 1993, providing an
increase of 23.3 percent in the allowance for loan losses. Net loan charge-offs
increased 53.3 percent in 1994 after decreasing 46.0 percent in 1993. Net
charge-offs on consumer loans amounted to 89.3 percent of total net charge-offs
for 1994 compared to 31.6 percent in 1993 and 41.5 percent in 1992. Management
believes that the $1,548,000 in the allowance for loan losses at December 31,
1994 (.75% of total net outstanding loans at that date) was adequate to absorb
known risks in the 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.
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, 1994.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- ---------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year . . . $ 1,255 $ 1,062 $ 940 $ 777 $ 543
Loan charged off
Commercial, financial and agricultural . . . . . . 91 129 112 82 162
Real Estate - Mortgage . . . . . . . . . . . . . . -0- 33 143 53 64
Consumer. . . . . . . . . . . . . . . . . . . . . . 319 134 226 221 168
-------- -------- -------- -------- --------
Total loans charged off . . . . . . . . . . . . . . . 410 296 481 356 394
-------- -------- -------- -------- --------
Recoveries on loans previously charged off
Commercial, financial and agricultural . . . . . . 52 8 2 14 ---
Real Estate - Mortgage . . . . . . . . . . . . . . 2 -0- 9 4 ---
Consumer. . . . . . . . . . . . . . . . . . . . . . 11 63 53 78 51
-------- -------- -------- -------- --------
Total recoveries . . . . . . . . . . . . . . . . . 65 71 64 96 51
-------- -------- -------- -------- --------
Net loans charged off . . . . . . . . . . . . . . . . 345 225 417 260 343
Provision for loan losses . . . . . . . . . . . . . . 638 418 539 423 577
-------- -------- -------- -------- --------
Allowance for loan losses at end of period . . . . . $ 1,548 $ 1,255 $ 1,062 $ 940 $ 777
======== ======== ======== ======== =========
Loans, net of unearned income, at end of period . . . $206,428 $151,651 $135,782 $120,636 $ 111,287
======== ======== ======== ======== =========
Average loans, net of unearned income,
outstanding for the period . . . . . . . . . . . . $178,123 $140,294 $128,167 $113,920 $ 100,112
======== ======== ======== ======== =========
1994 1993 1992 1991 1990
-------- -------- -------- -------- ---------
Ratios:
Allowance at end of period to loans, net of
unearned income . . . . . . . . . . . . . . . . . .75% .83% .78% .78% .70%
Allowance at end of period to average loans,
net of unearned income . . . . . . . . . . . . . .87 .89 .83 .83 .78
Net charge-offs to average loans, net of
unearned income . . . . . . . . . . . . . . . . . .19 .16 .33 .23 .34
Net charge-offs to allowance at end of period . . . 22.29 17.93 39.27 27.66 44.14
Recoveries to prior year charge-offs . . . . . . . 21.96 14.76 17.98 24.37 20.73
</TABLE>
20
<PAGE> 22
In assessing adequacy, 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, and also those of bank regulatory agencies that review the loan
portfolio as part of the regular bank examination process.
In evaluating the allowance, management also considers the 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.
Management allocated the reserve for loan losses to specific loan classes as
follows:
ALLOCATION OF LOAN LOSS RESERVE
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic loans
Commercial,
financial and
and agricultural $ 170 11% $ 678 54% 276 26% $244 26% $366 47%
Real estate -
mortgage . . --- --- 188 15 340 32 179 19 145 19
Consumer . . 1,378 89 389 31 446 42 517 55 266 34
------ --- ------ --- ------ --- ---- --- ---- ---
$1,548 100% $1,255 100% $1,062 100% $940 100% $777 100%
====== === ====== === ====== === ===== === ==== ===
- -------------------------
</TABLE>
(1) The Company had no foreign loans.
21
<PAGE> 23
NONPERFORMING ASSETS
Nonperforming assets as of December 31, 1994 increased 50.1 percent from
year-end 1993. Nonperforming loans include loans classified as nonaccrual or
renegotiated and those past due 90 days or more for which interest is still
being accrued. There were no commitments to lend any additional funds on
nonaccrual or renegotiated loans at December 31, 1994. The following table
summarizes the Company's nonperforming assets for each of the last five years.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31,
1994 1993 1992 1991 1990
--------- -------- -------- --------- ---------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans . . . . . . . . . . . . . . $ 422 $ 265 $ 276 $ 374 $ 475
Loans past due 90 days or more . . . . . . . 343 154 604 255 394
Restructured loans . . . . . . . . . . . . . -0- -0- -0- -0- -0-
------ ----- ------ ------ ------
Total nonperforming loans . . . . . . . . . . 765 419 880 629 869
Nonaccruing securities . . . . . . . . . . . -0- -0- 260 260 -0-
Other real estate . . . . . . . . . . . . . . 290 284 60 532 306
------ ----- ------ ------ ------
Total nonperforming assets . . . . . . . . $1,055 703 $1,200 $1,421 $1,175
====== ===== ====== ====== ======
Ratios:
Loan loss allowance to
total nonperforming assets . . . . . . . . 1.47 1.79 0.89 0.66 0.66
====== ===== ====== ====== ======
Total nonperforming loans to total
loans (net of unearned interest) . . . . . 0.004 0.003 0.006 0.005 0.008
====== ===== ====== ====== ======
Total nonperforming assets
to total assets . . . . . . . . . . . . . . 0.004 0.003 0.005 0.007 0.006
====== ===== ====== ====== ======
</TABLE>
The ratio of loan loss allowance to total nonperforming assets declined by
17.9% from 1993 to 1994, but remains significantly higher than the ratios for
1992, 1991 and 1990. Both the ratios of total nonperforming loans to total
loans and total nonperforming assets to total assets increased by 0.1% from
1993 to 1994, but remained below the levels of the previous three years. Each
of these ratios compares favorably with industry averages, and management is
aware of no factors which indicate that these ratios will change significantly
in future periods.
For the years ended December 31, 1994, 1993 and 1992, the difference between
the gross interest income that would have been recorded in such period if
nonaccruing loans had been current in accordance with their original terms and
the amount of interest income on those loans that was included in such period's
net income was negligible.
There were no concentrations of loans exceeding 10% of total loans which are
not otherwise disclosed as a category of loans.
22
<PAGE> 24
It is the general policy of the Company's subsidiary 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. Accrual of
interest income on consumer installment loans is suspended when any payment of
principal or interest, or both, is more than ninety days delinquent. When a
loan is placed on a nonaccrual basis any interest previously accrued but not
collected 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.
There has been no significant impact on the Company's financial statements as a
result of the provisions of Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, or Statement of
Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures.
NONINTEREST INCOME
Noninterest income for 1994 totaled $3,188,760 as compared to $2,914,015 in
1993 and $2,618,107 in 1992. These amounts are primarily from service charges
on deposit accounts, insurance commissions and fees on services to customers.
Service charge increases are primarily a reflection of the deposit growth of
the Company as it has expanded into new markets, and the result that that
deposit growth has on deposit account service charges and NSF income. The
insurance commissions have increased significantly as a result of the
activities of the Company's Community Insurance unit in the areas of title
insurance and life insurance, as well as increased credit life insurance
commissions as a result of a significant rise in loan activity.
Investment securities gains were unusually high in 1993 as a result of
recoveries made in connection with a federal court ruling in favor of
bondholders on municipal bonds backed by guaranteed investment contracts issued
by Executive Life Insurance Company. Losses had been recognized on these bonds
originally in 1991.
NONINTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31 Percent Change
-------------------------- ----------------------
1994 1993 1992 1994/1993 1993/1992
------ ------ ------ --------- ---------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposits . . . . . . $1,521 $1,333 $1,234 14.1% 8.0 %
Insurance commissions . . . . . . . . . 828 527 529 57.1 (.4)
Investment securities gains (losses) . 21 471 89 (95.5) ---
Bank club dues . . . . . . . . . . . . 306 258 244 18.6 5.7
Other . . . . . . . . . . . . . . . . . 513 325 522 57.8 (37.7)
------ ------ ------
$3,189 $2,914 $2,618 9.4 11.3
====== ====== ======
</TABLE>
23
<PAGE> 25
NONINTEREST EXPENSES
Noninterest expenses totaled $10,192,893 in 1994 which represents a 15.5
percent increase over 1993 noninterest expenses, which were 20.9 percent higher
than in 1992. Salaries and benefits increased $902,974 (18.2%) to $5,876,916
in 1994 reflecting the increased personnel costs of completing the staffing of
both Tennessee locations and two additional Alabama locations. Director and
committee fees, which were $183,900 in 1992 and $241,300 in 1993 increased
18.8% in 1994 to $286,650 due primarily to the operation of the Tennessee bank
subsidiary for the full year. Occupancy expense increased 3.4% to $756,021 in
1994 primarily as a result of the renovation of existing branches and the
opening of the Tennessee bank locations. Furniture and equipment expense
increased 20.0% in 1994 from the 1993 amount of $509,509, compared to a 8.1%
increase in 1993. Other operating expenses increased 12.4% to $2,661,796
during 1994. From 1992 to 1993, other operating expenses increased 24.5%
NONINTEREST EXPENSES
<TABLE>
<CAPTION>
Years Ended December 31 Percent Change
------------------------------------- --------------------------
1994 1993 1992 1994/1993 1993/1992
---------- ---------- ---------- ------------ ----------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits . . . . $ 5,877 $4,974 $4,087 18.2% 21.7%
Occupancy expense . . . . . . . . . . . 756 731 651 3.4 12.3
Furniture and equipment expense . . . . 612 510 471 20.0 8.3
Director and committee fees . . . . . . 287 241 184 19.1 31.0
Amortization of intangibles . . . . . . 127 84 86 51.2 (2.3)
Advertising . . . . . . . . . . . . . . 250 239 164 4.6 45.7
Insurance . . . . . . . . . . . . . . . 725 507 511 43.0 (.8)
Professional fees . . . . . . . . . . . 218 222 276 (1.8) (19.6)
Supplies . . . . . . . . . . . . . . . 213 223 209 (4.5) 6.7
Other . . . . . . . . . . . . . . . . . 1,128 1,094 658 3.1 66.3
------- ------ ------
$10,193 $8,825 $7,297 15.5 20.9
======= ====== ======
</TABLE>
INCOME TAXES
The Company attempts to maximize its net income through active tax planning.
This planning resulted in a provision for income taxes of $784,710 (21.8%) for
1994, on income of $3,601,756. The tax for 1993 was $865,238 (25.2%) on income
of $3,437,604 and for 1992 was $931,592 (25.7%) on income of $3,630,376. These
tax amounts and rates are lower than the statutory Federal tax rate of 34
percent primarily due to investments in loans and securities earning interest
income that is exempt from Federal taxation.
The effective tax rate for 1994 decreased primarily due to the utilization of
historical rehabilitation tax credits from the restoration of the main banking
facility in Tennessee. As proportionately fewer available funds are invested in
tax-exempt assets, the effective tax rate will more closely approximate the
statutory Federal tax rate. In 1994 the effective tax rate was 64 percent of
the statutory Federal tax rate compared to 74 percent in 1993 and 76 percent in
1992. A more detailed explanation of income tax expense is included in the
accompanying notes to the Consolidated Financial Statements.
24
<PAGE> 26
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 Annual Report will assist in the
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.
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Blountsville, Alabama, on this 21st day of April, 1995.
COMMUNITY BANCSHARES, INC.
By /s/ Kennon R. Patterson, Sr.
----------------------------
KENNON R. PATTERSON, SR.
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
26
