<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q/A-2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-16461
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, AL 35031
- --------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (205) 429-1000
-----------------
NO CHANGE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
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 THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASS OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
- ---------------------------- ---------------------------------
COMMON STOCK, $.10 PAR VALUE 4,231,320
<PAGE> 2
INDEX
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1998 and December 31, 1997......................... 3
Consolidated statements of income and consolidated statements of comprehensive income-
Three months ended September 30,1998 and 1997.................................................. 4
Consolidated statements of income and consolidated statements of comprehensive income-
Nine months ended September 30, 1998 and 1997.................................................. 6
Consolidated statements of cash flows - Nine months ended September 30,
1998 and 1997.................................................................................. 8
Notes to consolidated financial statements - September 30, 1998................................ 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ............................................. 19
Item 6. Exhibits and Reports on Form 8-K................................................................. 19
</TABLE>
SIGNATURES
EXHIBIT 3 - Certificate of Amendment to Certificate of Incorporation
EXHIBIT 10.1 - Employment Agreement, dated March 28, 1996, between Community
Bancshares, Inc. and Kennon R. Patterson, Sr.
EXHIBIT 10.2 - Employment Agreement, dated March 28, 1996, between Community
Bancshares, Inc. and Bishop K. Walker, Jr.
EXHIBIT 11 - Statement RE: Computation of Earnings per Share
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash .................................................................. $ 7,474,109 $ 6,359,331
Due from banks ........................................................ 12,164,648 13,292,647
Interest-bearing deposits with banks .................................. 950,000 2,514,558
Federal funds sold .................................................... -0- 26,600,000
Securities available for sale ......................................... 91,760,138 85,092,069
Loans ................................................................. 418,197,067 327,084,688
Less: Unearned income ................................................. 1,611,552 950,205
Allowance for loan losses ...................................... 3,232,563 2,131,354
------------- -------------
NET LOANS ..................................................... 413,352,952 324,003,129
Premises and equipment, net ........................................... 27,125,713 22,362,432
Accrued interest ...................................................... 5,762,606 5,089,765
Intangibles, net ...................................................... 5,912,307 4,117,825
Other real estate ..................................................... 699,656 656,271
Other assets .......................................................... 2,787,242 1,750,819
------------- -------------
TOTAL ASSETS .................................................. $ 567,989,371 $ 491,838,846
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ................................................ $ 57,563,658 $ 52,356,858
Interest-bearing ................................................... 447,453,717 388,531,773
------------- -------------
TOTAL DEPOSITS ................................................ 505,017,375 440,888,631
Other short-term borrowings ........................................... 7,924,053 2,630,387
Accrued interest ...................................................... 3,771,410 2,912,286
Long-term debt ........................................................ 6,726,391 7,397,612
Other liabilities ..................................................... 4,492,505 2,012,500
------------- -------------
TOTAL LIABILITIES ............................................. 527,931,734 455,841,416
Minority interest in consolidated subsidiary .......................... -0- 18,382
Shareholders' equity
Preferred stock, par value $.10 per share, 200,000 shares
authorized, no shares issued .................................. -0- -0-
Common stock, par value $.10 per share, 20,000,000
shares authorized, 4,231,320 shares issued as of
September 30, 1998 and 2,031,606 shares issued as
of December 31, 1997 .......................................... 423,132 203,161
Capital surplus .................................................... 21,054,751 18,524,301
Retained earnings .................................................. 19,306,069 18,824,795
Unearned ESOP shares - 189,886 and 204,610 shares
unreleased at September 30, 1998 and December 31,1997 ......... (1,909,428) (2,002,902)
Accumulated comprehensive income: unrealized gains on
investment securities available for sale, net of deferred taxes 1,183,113 429,693
------------- -------------
TOTAL SHAREHOLDERS' EQUITY .................................... 40,057,637 35,979,048
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................... $ 567,989,371 $ 491,838,846
============= =============
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1998 1997
----------- ----------
<S> <C> <C>
REVENUE FROM EARNING ASSETS
Interest and fees on loans .................... $10,315,562 $8,039,900
Interest on investment securities:
Taxable securities ............................ 1,129,264 1,084,307
Securities exempt from federal income taxes.. 188,420 175,950
Interest on federal funds sold ................ 27,779 289,332
Interest on deposits in other banks ........... 15,594 36,437
----------- ----------
TOTAL REVENUE FROM EARNING ASSETS ........ 11,676,619 9,625,926
----------- ----------
INTEREST EXPENSE
Interest on deposits .......................... 5,701,346 4,867,064
Interest on other short-term borrowings ....... 35,152 34,055
Interest on long-term debt .................... 14,525 151,957
----------- ----------
TOTAL INTEREST EXPENSE ................... 5,751,023 5,053,076
----------- ----------
NET INTEREST INCOME ............................... 5,925,596 4,572,850
Provision for loan losses ......................... 225,653 302,477
----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,699,943 4,270,373
NONINTEREST INCOME
Service charges on deposits ................... 794,519 621,825
Insurance commissions ......................... 536,124 208,489
Bank club dues ................................ 159,146 144,795
Other operating income ........................ 546,512 231,650
Investment securities gains ................... 7,200 -0-
----------- ----------
TOTAL NONINTEREST INCOME ................. 2,043,501 1,206,759
----------- ----------
NONINTEREST EXPENSES
Salaries and employee benefits ................ 3,806,813 2,621,206
Occupancy expense ............................. 572,625 396,445
Furniture and equipment expense ............... 380,424 311,086
Director and committee fees ................... 189,300 162,450
Other operating expenses ...................... 1,469,459 1,021,819
----------- ----------
TOTAL NONINTEREST EXPENSES ............... 6,418,621 4,513,006
----------- ----------
Income before income taxes ........................ 1,324,823 964,126
Provision for income taxes ........................ 400,940 255,890
----------- ----------
NET INCOME BEFORE MINORITY INTEREST ...... $ 923,883 $ 708,236
Minority Interest in consolidated subsidiaries .... $ -0- $ 2,802
----------- ----------
NET INCOME ............................... $ 923,883 $ 705,434
=========== ==========
EARNINGS PER COMMON SHARE
Net income..................................... $ .24 $ .19
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
Net income..................................... $ .23 $ .18
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Net income .................................. $ 923,883 $ 705,434
Other comprehensive income, net of tax:
Realized investment security gains ...... 7,200 -0-
Unrealized gains (losses) on securities 1,130,885 306,276
Less income tax effect ................ (455,235) (122,571)
----------- ---------
Total other comprehensive income ... 682,850 183,705
----------- ---------
Comprehensive income ........................ $ 1,606,733 $ 889,139
=========== =========
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1998 1997
----------- ------------
<S> <C> <C>
REVENUE FROM EARNING ASSETS
Interest and fees on loans .................... $27,761,457 $ 23,663,472
Interest on investment securities:
Taxable securities .......................... 3,277,780 3,290,221
Securities exempt from federal income taxes . 542,436 534,877
Interest on federal funds sold ................ 553,080 485,013
Interest on deposits in other banks ........... 51,020 85,871
----------- ------------
TOTAL REVENUE FROM EARNING ASSETS ........ 32,185,773 28,059,454
----------- ------------
INTEREST EXPENSE
Interest on deposits .......................... 16,114,086 13,988,046
Interest on other short-term borrowings ....... 88,091 114,028
Interest on long-term debt .................... 307,358 476,270
----------- ------------
TOTAL INTEREST EXPENSE ................... 16,509,535 14,578,344
----------- ------------
NET INTEREST INCOME ............................... 15,676,238 13,481,110
Provision for loan losses ......................... 622,397 796,724
----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,053,841 12,684,386
NONINTEREST INCOME
Service charges on deposits ................... 2,217,292 1,858,402
Insurance commissions ......................... 1,623,448 541,097
Bank club dues ................................ 459,671 421,702
Other operating income ........................ 1,367,636 708,130
Investment securities gains ................... 18,708 (2,590)
----------- ------------
TOTAL NONINTEREST INCOME ................. 5,686,755 3,526,741
----------- ------------
NONINTEREST EXPENSES
Salaries and employee benefits ................ 10,334,033 7,538,368
Occupancy expense ............................. 1,497,160 1,093,592
Furniture and equipment expense ............... 1,071,217 879,787
Director and committee fees ................... 514,858 474,320
Other operating expenses ...................... 3,782,656 2,723,849
----------- ------------
TOTAL NONINTEREST EXPENSES ............... 17,199,924 12,709,916
----------- ------------
Income before income taxes ........................ 3,540,672 3,501,211
Provision for income taxes ........................ 1,023,623 968,621
----------- ------------
NET INCOME BEFORE MINORITY INTEREST ...... 2,517,049 2,532,590
Minority interest in consolidated subsidiary ...... 4,167 2,802
----------- ------------
NET INCOME ............................... $ 2,512,882 $ 2,529,788
=========== ============
EARNINGS PER COMMON SHARE
Net income.................................... $ .65 $ .67
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
Net income.................................... $ .64 $ .66
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1998 1997
----------- ------------
<S> <C> <C>
Net income .............................. $ 2,512,882 $ 2,529,788
Other comprehensive income, net of tax:
Realized investment security gains .. 18,708 (2,590)
Unrealized gains on securities ...... 1,236,993 83,029
Less income tax effect ............ (502,281) (32,236)
----------- -----------
Total other comprehensive income 753,420 $ 48,203
----------- -----------
Comprehensive income .................... $ 3,266,302 $ 2,577,991
=========== ===========
</TABLE>
See notes to consolidated financial statements
7
<PAGE> 8
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $ 2,512,882 $ 2,529,788
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ..................................... 622,397 796,724
Provision for depreciation and amortization ................... 967,446 1,143,347
Amortization of investment security premiums and
accretion of discounts ....................................... 114,790 48,191
Deferred tax expense .......................................... 156,409 62,452
Loss on sale of premises and equipment ........................ 4,607 1,058
Realized investment security losses (gains) ................... (18,708) 2,590
Increase (decrease) in accrued interest receivable ............ (672,841) 38,151
Increase in accrued interest payable .......................... 859,124 717,270
Other ......................................................... 101,010 (1,168,975)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............. 4,647,116 4,170,596
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities ...................... 6,773,700 5,007,863
Proceeds from maturity of investment securities ................... 7,121,562 5,588,513
Purchase of investment securities ................................. (19,403,712) (4,656,676)
Decrease (increase) in interest-bearing deposits with other banks . 1,564,558 (729,678)
Cash disbursed in acquisition of finance offices .................. (6,543,108) -0-
Cash disbursed in acquisition of insurance operations ............. (930,219) -0-
Cash received in acquisition of branch office ..................... 2,763,393 -0-
Net increase in loans to customers ................................ (82,111,874) (2,577,415)
Proceeds from sale of premises and equipment ...................... 237,544 312,900
Net proceeds from sale of other real estate ....................... 42,500 -0-
Capital expenditures .............................................. (5,304,696) (5,673,721)
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ............ (95,790,352) (2,728,214)
------------ ------------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts ............................................ 19,920,413 3,821,677
Net increase in certificates of deposit ........................... 38,564,181 23,391,368
Net increase/(decrease) in short-term borrowings .................. 5,904,355 (5,246,356)
Issuance and sale of common stock ................................. 2,750,421 462,740
Repayment of long-term debt ....................................... (577,747) (574,772)
Cash dividends .................................................... (2,031,608) (1,500,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................... 64,530,015 20,354,657
------------ ------------
Net increase in cash and cash equivalents ............................. (26,613,221) 21,797,039
Cash and cash equivalents at beginning of period ...................... 46,251,978 17,612,177
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 19,638,757 $ 39,409,216
============ ============
</TABLE>
See notes to consolidated financial statements
8
<PAGE> 9
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------- -----------
1998 1997
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................... $16,573,210 $13,861,074
Income taxes ........................................................... 569,986 1,623,340
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
Other real estate of $374,000 and $87,500 was acquired in 1998 and 1997,
respectively, from employees as a result of the Company's relocation program.
Upon the pledging of purchased shares to obtain additional ESOP debt of
$137,918 on October 2, 1995, long-term debt was increased and equity was
decreased. The debt was reduced and shares were released by $93,474 and $86,954
during the nine month periods ended September 30, 1998 and 1997, respectively,
as a result of payments made by the Company's ESOP on the outstanding ESOP debt.
Unrealized gains on investment securities available for sale increased by
$1,255,701 during the nine months ended September 30, 1998.
See notes to consolidated financial statements
9
<PAGE> 10
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month and three month periods
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE B - INCOME TAXES
The effective tax rates of approximately 28.9 percent and 27.7 percent for the
nine months ended September 30, 1998 and 1997 are less than the statutory rate
principally because of the effect of tax-exempt interest income.
NOTE C - INVESTMENT SECURITIES
Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"). This
pronouncement requires that all investments in debt securities be classified as
either HELD-TO-MATURITY SECURITIES, which are reported at amortized cost;
TRADING SECURITIES, which are reported at fair value, with unrealized gains and
losses included in earnings; or AVAILABLE-FOR-SALE SECURITIES, which are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of stockholders' equity (net of deferred
tax effect).
At September 30, 1998, the Company had net unrealized gains of $1,971,856 in
available-for-sale securities which are reflected in the presented assets and
resulted in a increase in stockholders' equity of $1,183,113, net of deferred
tax liability. There were no trading securities. The net increase in
stockholders' equity as a result of the SFAS 115 adjustment from December 31,
1997 to September 30, 1998 was $753,420.
NOTE D - SHAREHOLDERS' EQUITY
In January of 1997, the Board of Directors of the Company declared a dividend of
$.75 per share to shareholders of record as of January 8, 1997, and another
dividend of $1.00 per share was declared in January of 1998 to shareholders of
record as of January 26, 1998. Additionally, a one-for-one stock dividend was
declared and distributed to stockholders of record as of the same date. 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.
All per share disclosures have been adjusted to reflect the impact of the
one-for-one stock dividend in the first quarter of 1998.
10
<PAGE> 11
NOTE D - SHAREHOLDERS' EQUITY (CONTINUED)
On March 26, 1998, March 27, 1997, and March 28, 1996, the Company issued
203,331, 103,000, and 270,000 options, respectively, to purchase its common
shares to its directors and or senior managers. The options were distributed
among the directors and or senior managers based upon their years of service and
their positions of leadership with the Company. Each of the stock option
agreements contained an option price of $15.00 per share (1998 issuance), $12.50
per share (1997 issuance) or $10.00 per share (1996 issuance), the market value
of the shares at the time of issuance. The options are exercisable between April
1, 1996 and March 31, 2003, and are treated as non-qualified options under the
provisions of the Internal Revenue Code. The agreements also contain a provision
whereby the Company shall compensate the optionee in cash for any federal or
state tax liability incurred upon the exercise of the options.
These options have been treated as common stock equivalents and have been
included in the calculation of average common shares outstanding, for the
purpose of calculating diluted earnings per share, in Exhibit 11, causing the
equivalent average number of shares outstanding for the first three quarters to
rise by 55,083 shares and 17,352 shares, respectively, in 1998 and 1997. There
was no dilutive effect on book value per share at September 30, 1998, nor on the
book value of the Company's common shares at September 30, 1997.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, Accounting and Disclosure
of Stock-Based Compensation ("SFAS 123"). SFAS 123 is effective for years
beginning after December 15, 1995, and allows for the option of continuing to
follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and the related Interpretations or selecting the minimum value
method of expense recognition as described in SFAS 123. The Company has elected
to apply APB Opinion No. 25 in accounting for its incentive stock options;
accordingly, no compensation expense cost has been recognized by the Company.
The Company's net income, earnings per share - basic, and earnings per share -
diluted would have been reduced by $236,677, $0.06, and $0.06, respectively,
for the nine months ended September 30, 1998, had compensation cost for the
Company's stock option plan been determined based on the fair value ("minimum
value method") at the grant date for options under the plan. The effect would
have been $129,162, $0.04, and $0.03, respectively, for the same period in
1997.
NOTE E - 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. Employees who work 1,000 hours in any
consecutive twelve month period become participants in the ESOP on December 31
of that year, and remain eligible in every subsequent year in which 1,000 hours
of work are completed. Employer contributions, which are made at the discretion
of the Company's Board of Directors, are allocated to eligible participants in
proportion to their eligible pay, which equals W-2 wages plus pre-tax reductions
for the Company's cafeteria plan. The Internal Revenue Service imposes a limit
($160,000 in 1998) on the maximum amount of eligible pay 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. On October 2, 1995, the ESOP acquired 7,455 additional shares
with the proceeds of a second promissory note, collateralized by the acquired
shares. On May 17, 1996, these two notes were refinanced and an additional
58,000 shares of stock were obtained by the ESOP. These shares were funded with
the same promissory note which provided funds to refinance the previously
executed notes. This new note was originally secured by 117,847 shares of the
Company's common stock. The shares securing the note are released proratably by
the lender as monthly payments of principal and interest are made. The note is
guaranteed by the Company. As of September 30, 1998, there were 189,886
unreleased shares with a fair value of approximately $3,600,000. These shares
are subtracted from outstanding shares for earnings per share calculations.
Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Position No. 93-6, Employers' Accounting for
Employee Stock Ownership Plans ("SOP 93-6"). Under the provisions of SOP 93-6,
the employer must recognize the indebtedness of its sponsored ESOP on its
financial statement and reduce its stockholder's equity for shares of stock
which have not been released by a lender to the ESOP for allocation to its
participating employees. The portion of payments made by the Company to the ESOP
11
<PAGE> 12
NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
on behalf of its participating employees which are used to pay interest on the
ESOP debt 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
are treated as other income of the ESOP.
At September 30, 1998, the Company's financial statements reflect long term debt
and a corresponding contra-equity account, as a result of the ESOP debt, of
$1,909,428.
12
<PAGE> 13
ITEM 2.
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is intended to assist an understanding of the Company and its
Subsidiaries' financial condition and results of operations. Unless the context
otherwise indicates, the "Company" shall include the Company and its
Subsidiaries. This analysis should be read in conjunction with the financial
statements and related notes appearing in Item 1 of this Report and Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
FINANCIAL CONDITION
LOANS
Loans comprised the largest single category of the Company's earning assets on
September 30, 1998. Loans, net of unearned income and reserve for loan losses,
were 72.8% of total assets at September 30, 1998 and 65.9% of total assets at
December 31, 1997. Total net loans were $413,352,952 at September 30, 1998,
representing a 27.6% increase from the December 31, 1997 total of $324,003,129.
INVESTMENT SECURITIES AND OTHER EARNING ASSETS
Investment securities and federal funds sold decreased $19,931,931 or 17.9%
from December 31, 1997 to September 30, 1998. This decrease was due primarily to
loan growth in excess of deposit growth .The investment securities portfolio is
used to make various term investments, to provide a source of liquidity and to
serve as collateral to secure certain government deposits. Investment securities
at September 30, 1998 were $91,760,138 compared with $85,092,069 at December 31,
1997, reflecting a 7.8% increase of $6,668,069. Short-term investments in the
form of interest-bearing deposits with banks were $950,000 at September 30, 1998
and $2,514,558 at December 31, 1997.
ASSET QUALITY
Between December 31, 1998 and September 30, 1997, the Company experienced a
slight decline in the quality of its assets. The ratio of loan loss allowance to
total nonperforming assets (defined as nonaccrual loans, loans past due 90 days
or greater, restructured loans, nonaccruing securities, and other real estate)
decreased from 0.78 to 0.71. The ratio of total nonperforming assets to total
assets increased from 0.006 to 0.008, and the ratio of nonperforming loans to
total loans increased to 0.009 from 0.006 at 12/31/97. These ratios declined due
to an increase in past due and nonaccrual loans, and an increase in other real
estate due to the purchase of employees' homes who were relocated by the
Company. All three of these ratios remain favorable as compared with industry
averages, and management is aware of no factors which would suggest that they
are prone to erosion in future periods.
DEPOSITS
Total deposits of $505,017,375 at September 30, 1998 increased $64,128,744 or
14.6% over total deposits of $440,888,631 at year-end 1997. Deposits are the
Company's primary source of funds with which to support its earning assets.
Noninterest-bearing deposits increased $5,206,800 or 9.9% from year-end 1997 to
September 30, 1998, and interest-bearing deposits increased $58,921,944 or 15.2%
from year-end 1997. Certificates of deposit of $100,000 or more increased
$18,578,270 or 27.2%.
13
<PAGE> 14
OTHER SHORT-TERM BORROWINGS
Other short-term borrowings totaled $7,924,053 at September 30, 1998, a
$5,293,666 increase from the December 31, 1997 total of $2,630,387 and was
primarily due to an increase in short-term borrowings from the Federal Home Loan
Bank.
LONG-TERM DEBT
At September 30, 1998 and December 31, 1997, the Company had notes payable
totaling $6,726,391, and $7,397,612, respectively.
On December 17, 1992, the Company entered into a loan agreement with a regional
bank for amounts up to $6,500,000. At September 30, 1998 and December 31, 1997,
the amounts outstanding were $3,023,882 and $3,557,509, respectively, due
December 17, 2002, bearing interest at a floating prime, and collateralized by
100% of the common stock of the subsidiary banks. The note agreement contains
provisions which limit the Company's right to transfer or issue shares of
subsidiary banks' stock. Principal payments of $59,292 are due monthly; however,
the Company has the option of postponing up to twenty-four monthly principal
payments, provided that no more than six consecutively scheduled installments
are deferred.
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. On October 2, 1995, the ESOP acquired 7,455 additional shares
with the proceeds of a second promissory note, collateralized by the acquired
shares. On May 17, 1996, these two notes were refinanced and an additional
58,000 shares of stock were obtained by the ESOP with a promissory note with a
beginning balance of $2,183,805. The Company has guaranteed this debt;
accounting and reporting guidelines mandate that the debt be 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. This note was originally secured by 117,847 shares of the
Company's common stock. The note bears interest at a floating rate, with
principal and interest payments of $23,948 due monthly through June 17, 2018,
with all remaining principal, if any, due upon that date. The shares securing
the note are released proratably by the lender as monthly payments of principal
and interest are made. The outstanding balance of this note was $1,909,428 at
September 30, 1998, secured by 189,886 of unreleased shares of Company stock
(adjusted for the one-for-one stock split in March of 1998.).
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 rate of 7 %. The Company maintains the right to
prepay the note at its sole discretion. The balance of the note was $1,793,081
at September 30, 1998.
Maturities of long-term debt for the years ending December 31 are as follows:
<TABLE>
<S> <C>
1998...................... $ 270,708
1999...................... 907,869
2000...................... 923,767
2001...................... 941,467
2002...................... 961,013
Thereafter................ 2,721,567
------------
$ 6,726,391
============
</TABLE>
SHAREHOLDERS' EQUITY
Company shareholders' equity increased $4,078,589 from December 31, 1997 to
September 30, 1998, due to: net earnings of $2,512,882, the payment of a cash
dividend of $2,031,607, the reduction of unearned ESOP shares by $93,474, the
issuance of additional common stock for $2,750,421, and the increase of
unrealized gains on securities available for sale totaling $753,420, net of
deferred tax liability.
14
<PAGE> 15
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.
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 I capital, which consists of common equity less
goodwill, amounted to $34.9 million at September 30, 1998. 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 $39.8
million at September 30, 1998.
The Company's current capital positions exceed the new guidelines. Management
has reviewed and will continue to monitor the Company's asset mix and product
pricing, and the loan loss allowance, which are the areas determined to be most
affected by these new requirements.
RESULTS OF OPERATIONS
SUMMARY
Net earnings of the Company for the nine months ended September 30, 1998, were
$2,512,882 compares to $2,529,788 for the same period in 1997, relatively
unchanged. Earnings for the nine months remained relatively unchanged as
earnings from increased earning assets and fee based services offset increased
noninterest expenses from expansion activities.
Net earnings of the Company for the quarter ended September 30, 1998, were
$923,883 or 30.6% higher than the $705,434 reported for the quarter ended
September 30, 1997. The increase in quarterly earnings, as compared to the same
quarter of the preceding year, was due to revenues from earning assets and fee
based services growing more that the increase in noninterest expenses.
NET INTEREST INCOME
Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, is the largest component of the Company's
net income. Revenue from earning assets of the Company during the nine months
ended September 30, 1998 increased $4,126,319 or 14.7% from the same period in
1997. This increase was due to higher average outstanding balances of earning
assets. Average earning assets outstanding during the first nine months of 1998
were $68,197,462 higher than during the first nine months of 1997. Interest
expense for the nine months ended September 30, 1998 increased $1,931,191 or
13.2% over the corresponding period of 1997. As a result of these factors, net
interest income increased $2,195,128 or 16.3%, in the nine months ended
September 30, 1998, compared to the same period of 1997.
Net interest income for the quarter ended September 30, 1998, was $5,925,596 or
29.6% greater than the $4,572,850 for the quarter ended September 30, 1997. The
increase in the current year quarter is primarily due to increased earning
assets, principally loans, over the same quarter in the previous year.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the charge against current earnings
necessary to maintain the reserve for loan losses at a level which management
considers appropriate. This level is determined based upon Community Bank's
historical charge-offs, management's assessment of current economic conditions,
the composition of the loan portfolio and the levels of nonaccruing and past due
loans. The provision for loan losses was $622,397 for the nine months ended
September 30, 1998 compared to $796,724 for the same period of 1997. Charge-offs
15
<PAGE> 16
exceeded recoveries by $795,020 for the nine months ended September 30, 1998.
The reserve for loan losses as a percent of outstanding loans, net of unearned
income, was 0.78% at September 30, 1998 compared to 0.65% at year-end 1997.
The provisions for loan losses for the third quarter of 1998, was $225,653
compared to $302,477 for the same quarter of 1997. Charge-offs exceeded
recoveries by $348,921 for the quarter ended September 30, 1998.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 1998 was $5,686,755
compared to $3,526,741 for the same period of 1997. This 61.3% increase was
primarily due to an increase in insurance commissions realized of $1,082,351 in
the first nine months of 1998 as compared to the same period of 1997, and an
increase in fees on debt cancellation contracts of $629,549 reported as other
income. Significant components of noninterest income are as follows: Service
charges on deposits increased $358,890 or 19.3%, insurance commissions increased
$1,082,351 or 200%; security gains of $18,708 were realized, as opposed to a
loss of $2,590 in the first quarter of 1997; and other operating income,
primarily dues for the bank club account, fees on debt cancellation contracts,
and appraisal fees, increased $659,506 or 93.1% to $1,367,636.
Noninterest income for the three months ended September 30, 1998, increased
$836,742 or 69.3% to $2,043,501 as compared to $1,206,759 for the same quarter
of 1997. Significant components of noninterest income are as follows: Service
charges on deposits increased $172,694 or 27.8%; insurance commissions increased
$327,635 or 157.2%; and other operating income, primarily dues of the bank club
account, fees on debt cancellation contracts and appraisal fees, increased
$314,862 or 135.9%.
NONINTEREST EXPENSES
Noninterest expenses for the nine months ended September 30, 1998 were
$17,199,924, reflecting a 35.3% increase over the same period of 1997. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $10,334,033 for the nine months ended September 30, 1998,
37.1% higher than in the same period of 1997. The increases in salaries and
employee benefits are due to staffing for new banking locations and future
expansion as well as merit increases and incentive payments. Occupancy costs
increased $403,568 or 36.9%, furniture and equipment expenses rose by $191,430
or 21.8%, and director and committee fees increased by $40,538 or 8.6%. Other
operating expenses rose by 38.9% to $3,782,656.
Noninterest expense increased $1,905,615 or 42.2 % to $6,418,621 for the third
quarter of 1998 as compared to $4,513,006 for the third quarter of 1997. All
major categories of noninterest expense increased during the quarter with the
largest increase reflected in salaries and benefits.
The substantial increase in the Company's size has necessitated increased
expenditures for data processing and other support activities and personnel,
which will continue.
The majority of these expenses should continue at or above the levels for the
nine months ended September 30, 1998, since management intends to continue its
growth policies.
The Company's strategy is to make each office of its subsidiary bank a vital
part of the community it serves. Each office has management and personnel as
similar to a full service, stand-alone bank as possible. Although more
expensive, we believe this strategy has been successful for Community Bank, and
will best serve our communities, customers and shareholders.
INCOME TAXES
The Company attempts to maximize its net income through active tax planning. The
provision for income taxes of $1,023,623 for the nine months ended September 30,
1998 increased $55,002 compared to the same period of 1997, due to the slight
increase in income before tax. Taxes as a percent of earnings increased from
27.7% in 1997 to 28.9% in 1998. The effective tax rates for the quarters ended
September 30, 1998, and September 30, 1997, were 30.3% and 26.5%, respectively.
The effective tax rate of approximately 29% is less than the statutory rate
principally because of the effect of tax-exempt interest income.
16
<PAGE> 17
YEAR 2000 ISSUES
The Year 2000 issue is the result of potential problems with computer systems or
other equipment with computer chips that use dates that have been sorted as two
digits rather than four (e.g., "98" for 1998). On January 1, 2000, any clock or
date recording mechanism, including date sensitive software, which uses only two
digits to represent the year may recognize a date using "00" as the year 1900.
This could result in system failures or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions, send invoices or perform similar tasks.
The Company initiated a program in 1997 to identify and review all of the
information technology ("IT") and non-IT systems used by the Company and its
subsidiaries in order to determine whether the systems were Year 2000 compliant.
This study involved identifying any required modifications or replacements of
certain hardware and software maintained by the Company. In addition, the
Company has taken steps to obtain assurance from third party vendors that
appropriate actions have been taken or are being taken to remedy any Year 2000
issues for computer systems that the vendors are responsible for maintaining and
that are relied upon by the Company.
As a financial institution, the Company's compliance has been closely monitored
by federal regulatory agencies which have completed a phase one examination of
the Company and its Year 2000 readiness in the past six months. The Company is
not aware of any existing regulatory restrictions imposed on it by the federal
regulatory authorities as a result of the Company's current plan and
implementation.
As of September 30, 1998, the Company had identified its mission critical and
non-mission critical systems and had completed the assessment phase of each
system's Year 2000 readiness. Mission critical systems are those systems that
are vital to the core business activity of the Company and include mainframe
computer applications such as deposit, loan and general ledger systems as well
as the system operating software. In July 1998, the Company purchased and
installed new Year 2000 compliant hardware and software systems to support all
core application processing which were deemed to be mission critical.
Non-mission critical systems typically include embedded technology such as
micro-controllers in elevators. It is anticipated that validation of all mission
critical systems will be completed by December 31, 1998. All remaining
non-critical systems will be validated by March 31, 1999.
The Company has also evaluated all significant credit customer relationships to
determine any risks represented to the Company by the impact of Year 2000 on
customers' operations. Based on this evaluation, the Company is not aware of
more than normal credit risks associated with these relationships; no special
additions to the allowance for loan losses are believed to be necessary. The
Company's assessment of these parties will be ongoing throughout 1998 and 1999
in order to identify any changes in their readiness that could negatively impact
the Company.
During the first nine months of 1998, the Company has spent approximately
$415,000 related to the purchase of new hardware and software to correct Year
2000 problems. These costs have been capitalized and will be amortized over the
life of the related assets. The Company estimates it will spend approximately an
additional $20,000 in the remainder of 1998 and 1999 for proxy testing and third
party reviews of test results. Since this is an on-going process involving
continual evaluation, the Company could incur additional unanticipated cost
associated with its Year 2000 readiness. However, management does not feel that
these cost would be material to the financial statements of the Company.
Throughout 1998, the Company has been working to assess Year 2000 readiness of
vendors, business partners, and other counterparties focusing on those
considered critical to the Company's operations. The Company began assessing the
Year 2000 readiness of depositors and other funds providers during the third
quarter of 1998. The Company will continue to monitor and evaluate the Year 2000
readiness of third parties whose Year 2000 noncompliance could have a material
adverse impact on the operations of the Company, through the first quarter of
the Year 2000. The Company will take appropriate measures including development
of contingency plans to mitigate the risk to the Company of Year 2000
noncompliance by third parties. However, the impact of Year 2000 noncompliance
by all third parties with which the Company transacts business cannot be
assessed at this time.
Management expects its remediation efforts to occur in a timely manner and does
not anticipate significant disruptions in its operations. Failure to complete
such remediations in a timely fashion could have an adverse impact on the
Company's results of operations and financial condition. Management is currently
developing a contingency plan to address any potential failures.
17
<PAGE> 18
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Based on the Company's interest sensitivity analysis, a 200 basis points
decrease in the interest rate environment results in a 3.0% improvement in
net-interest income for the 12 month period from September 30, 1998. Conversely,
a 200 basis points increase in interest rates would result in a 10.0% decrease
in net-interest income for the same period. This shift in interest sensitivity
is primarily due to an increase in fixed rate loans in a declining interest rate
environment.
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders of the Company was held on Thursday, September
10, 1998, at which an amendment to the Company's certificate of incorporation
was voted upon and approved by the stockholders of the Company. The amendment
increased the number of authorized shares of common stock of the Company to
20,000,000 from 5,000,000. The vote with respect to such amendment was as
follows:
<TABLE>
<CAPTION>
Votes cast Abstentions
Votes cast Against or or Broker
In Favor Withheld Non-Votes
<S> <C> <C>
2,835,909 2,490 100
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description of Exhibit
-------------- ----------------------
3 Certificate of Amendment to
Certificate of Incorporation
10.1 Employment Agreement, dated as of March
28, 1996, between the Registrant and
Kennon R. Patterson, Sr.
10.2 Employment Agreement, dated as of March
28, 1996, between the Registrant and
Bishop K. Walker, Jr.
11 Computation of Earnings
Per Share
27 Financial Data Schedule
(for the SEC use only)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1998.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANCSHARES, INC.
February 2, 1999 /s/ Kennon R. Patterson, Sr.
- -------------------------------- ------------------------------------------
Date Kennon R. Patterson, Sr., as its
President and Chief Executive
Officer
February 2, 1999 /s/ Michael A. Bean
- -------------------------------- ------------------------------------------
Date Michael A. Bean, as its Executive
Vice President and Chief Financial Officer
20
<PAGE> 1
EXHIBIT 3 - CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION
AMENDED
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Community Bancshares, Inc. a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Community Bancshares, Inc.
a resolution was duly adopted setting forth a proposed amendment to the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and placing it before the special meeting of the stockholders of said
corporation for consideration thereof. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this corporation be
amended by changing Section 4.01 of Article thereof numbered "Article IV" so
that, as amended, said Article shall be and read as follows:
"4.01 The total number of shares of all classes of capital stock ("Shares")
which the Corporation shall have the authority to issue is 20,200,000,
consisting of the following classes:
(1) 20,000,000 shares of common stock, $.10 par value per share
("Common Stock"),
(2) 200,000 shares of preferred stock, $.10 par value per share
("Preferred Stock").
SECOND: That thereafter, pursuant to resolution of its Board of Directors, the
special meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware at which meeting the necessary number of shares as
required by statue were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provision of
Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That the capital of said corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, said Community Bancshares, Inc. has caused this certificate
to be signed by Kennon R. Patterson, Sr., it President, and Bishop K. Walker,
Jr., Secretary, this 25th day of November, 1998.
BY: /s/ Kennon R. Patterson, Sr.
--------------------------------
President
ATTESTED: /s/ Bishop K. Walker, Jr.
--------------------------
Secretary
<PAGE> 1
EXHIBIT 10.1
STATE OF ALABAMA )
COUNTY OF BLOUNT )
A G R E E M E N T
THIS AGREEMENT made and entered into on this the 28th day of March,
1996, by and between KENNON R. PATTERSON, SR., hereinafter known as and referred
to as Party of the First Part and Community Bancshares, Inc., a Delaware
Corporation, hereinafter known as and referred to as Party of the Second Part.
W I T N E S S E T H:
WHEREAS, the Party of the First Part is hired as an employee and is
presently serving as President, Chief Executive Officer and Chairman of the
Board of Directors of Community Bancshares, Inc.; Chief Executive Officer and
Chairman of the Board of its subsidiary, Community Bank, an Alabama banking
corporation, and Chairman of the Board of its subsidiary, Community Bank, a
Tennessee banking corporation, and all parties hereto deem it to be in the best
interest of the Party of the Second Part and the Party of the First Part that
the said Employee continue in these capacities.
NOW, THEREFORE, the parties hereto, in consideration of the premises
and the mutual covenants herein contained, do hereby agree as follows:
1. The Party of the Second Part agrees to employ Kennon Ray Patterson,
Sr., to perform the duties and render the services herein provided, and Kennon
Ray Patterson, Sr., faithfully and diligently agrees to perform such duties and
render such services, for the period commencing on the 1st day of April, 1996,
and ending on the 31st day of March, 2008. The intention of the parties is that
this Contract be for a term of twelve (12) years without the right of either
party to terminate. The Party of the Second Part hereby employs the said Kennon
Ray Patterson, Sr., to perform faithfully, duties assigned to him as President
and Chief Executive Officer and Chairman of the Board of Directors of Community
Bancshares, Inc.; Chief Executive Officer and Chairman of the Board of Community
Bank, an Alabama banking corporation, and Chairman of the Board of Community
Bank, a Tennessee banking corporation, and such other duties as the board of
directors of Community Bancshares,
<PAGE> 2
Inc. may assign to him. In the event that Party of the First Part is not
re-elected to the positions as stated herein, Party of the First Part shall have
the option to give notice, to the Party of the Second Part to accelerate
compensation to Party of the First Part pursuant to the terms hereof, Party of
the Second Part shall, within sixty (60) days, make payment to Party of the
First Part for all amounts which would otherwise have been paid to Party of the
First Part for the then remaining term of this Agreement.
2. The Party of the First Part agrees that he will at all times,
faithfully, industriously, and to the best of his ability, experience, and
talent perform all duties that may be required of and from him pursuant to the
expressed and implicit terms hereof. That the duties of said Party of the First
Part shall be those that are normally and customarily associated with the
positions held by the Party of the First Part. The Party of the First Part shall
exercise supervision of Community Bancshares, Inc., and its subsidiaries and
affiliates. In connection with the exercising of these duties, the Party of the
First Part will have full and complete freedom to organize, reorganize and
arrange the administrative and supervisory staff and other employees of the
Party of the Second Part which in his judgment, best serves the Party of the
Second Part; that the administration of banking and business affairs of the
Party of the Second Part will be lodged with the Party of the First Part and
administered by him with the assistance of his staff and in accordance with and
within the Policy and guidelines adopted by the Board of Directors of the Party
of the Second Part. The Party of the First Part has full authority to make any
and all purchases of Assets, both fixed assets or otherwise, for or in behalf of
the Party of the Second Part as in the full discretion of the party of the First
Party. The Party of the First Part is to keep the Board of Directors of the
Party of the Second Part fully informed and advised on all business affairs of
the Party of the Second Part at all times. That the Party of the First Part
shall with the advice of the Board of Directors nominate, hire and fire all
Officers of the Party of the Second Part.
3. The Party of the Second Part shall pay the Party of the First Part
the sum of One Hundred Fifty Thousand and no/100 Dollars ($150,000.00) in twelve
equal payments and the sum of Three Hundred Thousand and no/100 Dollars
($300,000.00) in one payment on January 15 of each year and will be paid One
Hundred Fifty Thousand and no/100 Dollars ($150,000.00) bonus January 15 of each
year. The Party of the First Part shall also be paid board fees as other board
members as set from time to time by the Board of Directors. This compensating
package shall be increased no less than 10% of the compensating package each
December of said contract.
2
<PAGE> 3
4. Expense Allowance. That the Party of the Second Part shall provide
the Party of the First Part with an expense account to cover expenses in the
discretion of the Party of the First Part.
5. Transportation Allowance. The Party of the Second Part shall provide
the Party of the First Part during the term of this Contract an automobile of
his choice for the business and personal use of the Party of the First Part.
6. Civic & Social Clubs. That the Party of the Second Part shall pay
such dues for membership of the Party of the First Part in such civic and/or
social clubs or organizations at the discretion of the Party of the First Part.
7. Life Insurance. The Party of the Second Part shall provide and pay
to the Party of the First Part the further sum of Ten Thousand and no/100
($10,000.00) dollars annually for life insurance of the choosing of the Party of
the First Part. Such life insurance policy or policies shall be the property of
the party of the First Part and he shall be the owner and designate the
beneficiaries thereon.
8. Vacation, Sick Leave and Disability. That the Party of the First
Part shall receive an annual paid vacation of four weeks and shall be entitled
to sick leave according to normal Company policy in that respect. In the event
of the disability of the Party of the First Part to the extent that he is
incapable of performing his duties, the Party of the First Part shall be
entitled to normal and usual salary and compensation for such period of
disability not to exceed 365 calendar days.
9. Professional Meetings. That the Party of the First Part may attend
normal, usual and customary, professional and educational meetings at the local,
state, and national level and the expense of such attendance to be incurred and
paid by the Party of the Second Part.
10. It is understood by and between the parties (the Party of the
Second Part and Party of the First Part), that the business of the Party of the
Second Part is highly confidential to the Party of the Second Part and its
customers and in the event of the termination of Agreement of Employment by
Party of the Second Part or Party of the First Part, then the Party of the First
Part shall not compete against the Party of the Second Part in the business of
banking within a twenty-five (25) mile radius of any office of the company for a
period of two (2) years from the date of termination.
3
<PAGE> 4
11. Severability. All agreements and covenants contained herein are
severable, and in the event any of them, with the exceptions of those contained
in Sections One and Three hereof, shall be held to be invalid by any competent
court, this contract shall be interpreted as if such invalid agreements or
covenants were not contained herein.
IN WITNESS WHEREOF, the parties have executed this Agreement at
Blountsville, Alabama, on this the 28th day of March, 1996.
PARTY OF THE FIRST PART
/s/ Kennon Ray Patterson, Sr.
------------------------------------
Kennon Ray Patterson, Sr.
PARTY OF THE SECOND PART
ATTEST COMMUNITY BANCSHARES, INC.
/s/ Bishop K. Walker, Jr. By: /s/ Bishop K. Walker, Jr.
- ----------------------------------- --------------------------------
Secretary Vice Chairman
4
<PAGE> 5
STATE OF ALABAMA )
COUNTY OF BLOUNT )
I, the undersigned, a Notary Public in and for said County, in said
State, hereby certify that Kennon Ray Patterson, Sr., whose name is signed to
the foregoing instrument and who is known to me, acknowledged before me on this
day that, being informed of the contents of said instrument, he executed the
same voluntarily on the day the same bears date.
Given under my hand and official seal, this the 28th day of March,
1996.
/s/ Elaine E. Corvin
------------------------------------
Notary Public
STATE OF ALABAMA )
COUNTY OF BLOUNT )
I, the undersigned, a Notary Public in and for said County, in said
State, hereby certify that Bishop K. Walker, Jr., as Vice Chairman of Community
Bancshares, Inc., a corporation, whose name is signed to the foregoing
instrument and who is known to me, acknowledged before me on this day that,
being informed of the contents of said instrument, he executed the same
voluntarily on the day the same bears date.
Given under my hand and official seal, this the 28th day of March,
1996.
/s/ Elaine E. Corvin
------------------------------------
Notary Public
5
<PAGE> 1
EXHIBIT 10.2
STATE OF ALABAMA)
COUNTY OF BLOUNT)
AGREEMENT
THIS AGREEMENT made and entered into on this the 28th day of March,
1996, by and between BISHOP K. WALKER, JR., hereinafter known as and referred to
as "Employee", and Community Bancshares, Inc., a Delaware Corporation,
hereinafter known as and referred to as Party of the Second Part.
W I T N E S S E T H:
WHEREAS, the Employee is presently serving as Vice Chairman, Executive
Vice President and General Counsel and Secretary of Community Bancshares, Inc.;
Secretary and President of Community Insurance, an affiliate of Community Bank,
an Alabama banking corporation, and all parties hereto deem it to be in the best
interest of the Employer and Employee that an employment contract be entered
into by the said parties.
NOW, THEREFORE, the parties hereto in consideration of the premises and
the mutual covenants herein contained, do hereby agree as follows:
1. The Employer hereby employs the Employee for a term of five (5)
years from the 1st day of April, l996, to perform faithfully duties assigned to
him as Vice Chairman, Executive Vice President and General Counsel and Secretary
of Community Bancshares, Inc.; Secretary of Community Bank, an Alabama banking
corporation; and President of Community Insurance, an affiliate of Community
Bank, an Alabama banking corporation, Blountsville, Alabama.
2. The Employee agrees that he will at all times faithfully,
industriously, and to the best of his ability, experience and talent perform all
of the duties which may be required of and from him pursuant to the expressed
and implicit terms hereof. That the duties of said Employee shall be those that
are normally and customarily associated with the position held by the Employee.
The Employee shall perform such duties as may be assigned to him by the Chief
Executive Officer and shall answer to and be accountable to the Chief Executive
Officer of the Employer and perform such duties as the job description shall
provide.
<PAGE> 2
3. The Employer shall pay the Employee the sum of One Hundred Ten
Thousand Dollars ($110,000.00) annually in installments as customary for other
employees of Employer. Also, the Employee shall be paid the sum of Ninety
Thousand and No/100 Dollars ($90,000.00) on January 15th of each year of said
contract equaling a total salary compensation annually of Two Hundred Thousand
Dollars ($200,000.00). The salary of the employee shall be reviewed annually as
the other officers.
4. Expense Allowance. That the Employer shall provide the Employee with
an expense account to cover reasonable and necessary business and professional
expenses in such an amount as is suitable to the needs of the Employer and
Employee,
5. Civic and Social Clubs. That the Employer shall pay such dues for
membership of the Employee in such civic and/or social clubs or organizations as
such are deemed to be in the best interest of the Employer and Employee with the
advice and consent of the Chief Executive Officer of the Employee.
6. Transportation Allowance. The Employer shall provide the Employee
during the term of this contract a suitable automobile for the business and
personal use of the Employee.
7. Life Insurance. The Employer shall provide and pay for a policy of
Universal Life Insurance in the amount of $100,000.00. The Employee shall be the
owner of said policy and shall designate the beneficiary thereof. Such life
insurance policy shall be the property of the Party of the First Part and he
shall be the owner and designate the beneficiaries thereon.
8. Vacation, Sick Leave and Disability. That the Employee shall receive
an annual paid vacation of three (3) weeks and shall be entitled to sick leave
according to normal Employer policy in that respect. In the event of disability
of the Employee to the extent that he is incapable of performing his duties for
a period of ninety (90) consecutive calendar days, the Employee shall be
entitled to the disability benefits computed according to normal Employer policy
and the standards in that respect. The Employee would continue to receive normal
salary and compensation for any period of disability which does not exceed
ninety (90) calendar days.
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<PAGE> 3
9. Professional Meetings. That the Employee may attend normal, usual
and customary professional and educational meetings at the local, state and
national level and the expense of such attendance to be incurred and paid by the
Employer, and subject to approval of the Chief Executive Officer of the
Employer.
10. This Agreement may be terminated by the Employer for good and just
causes related to the employment of the Employee, provided, however, that the
Employer shall not arbitrarily, or for capricious, personal, or political
reasons terminate this employment. In the event such action should be taken at
any time, the Employee shall have the right to service of written charges,
reasonable notice of the hearing, and a fair and impartial hearing before the
Board of Directors.
11. It is understood by and between the parties, the Employer and
Employee, that the business of the Employer is highly confidential to the
Employer and its customers and in the event of the termination of this agreement
by the Employer or the Employee for any reason, including, termination by the
Employer for just causes, retirement by the Employee or the resignation of the
Employee, then the Employee agrees that in addition to any other limitations,
for a period of two (2) years after the termination of his employment hereunder,
he will not directly or indirectly engage in, or in any manner he connected with
or employed by any person, firm or corporation in competition with the Employer
or engage in the banking business within an area or radius of twenty-five (25)
miles of the Blountsville Office, or in any other County within which the
Employer does business.
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<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this agreement at
Blountsville in Blount County, Alabama, on this the 28th day of March, 1996.
WITNESS:
/s/ Mark O South /s/ Bishop K. Walker, Jr.
- -------------------------------------- ----------------------------------
Bishop K. Walker, Jr.
EMPLOYEE
WITNESS: COMMUNITY BANCSHARES,
INC., BLOUNTSVILLE, ALABAMA
/s/ Mark O South /s/ Kennon R. Patterson, Sr.
- -------------------------------------- ----------------------------------
Its Chairman
EMPLOYER
STATE OF ALABAMA )
COUNTY OF BLOUNT)
I, the undersigned, a Notary Public in and for said County, in said
state, hereby certify that Kennon R. Patterson, Sr., whose name as Chairman of
Community Bancshares, Inc. is signed to the foregoing instrument and who is
known to me, acknowledged before me on this day that, being informed of the
contents of said instrument, he with full authority and as Chairman of Community
Bancshares, Inc., executed the same for and as the act of Community Bancshares,
Inc. on the day the same bears date.
Given under my hand and official seal, this the 28th day of March,
1996.
/s/ Elaine E. Corvin
----------------------------------
Notary Public
STATE OF ALABAMA )
COUNTY OF BLOUNT)
I, the undersigned, a Notary Public in and for said County, in said
state, hereby certify that Bishop K. Walker, Jr., whose name is signed to the
foregoing instrument and who is known to me, acknowledged before me on this day
that, being informed of the contents of said instrument, he executed the same
for and as the act of Community Bancshares, Inc. on the day the same bears date.
Given under my hand and official seal, this the 28th day of March,
1996.
/s/ Elaine E. Corvin
----------------------------------
Notary Public
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<PAGE> 1
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
The following tabulation presents the calculation of primary and fully diluted
earnings per common share for the nine-month and three-month periods ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Reported net income ............... $2,512,822 $2,529,788 $ 923,883 $ 705,434
Earnings on common shares ......... $2,512,822 $2,529,788 $ 923,883 $ 705,434
========== ========== ========= =============
Weighted average common
shares outstanding - basic.. 3,915,091 3,794,997 3,959,060 3,809,494
========== ========== ========= =============
Earnings per common share-basic
Income from continuing operations $ .64 $ .67 $ .23 $ .19
========== ========== ========= =============
Net income ...................... $ .64 $ .67 $ .23 $ .19
========== ========== ========= =============
Weighted average common
shares outstanding - diluted 3,970,174 3,812,349 4,066,897 3,842,357
========== ========== ========= =============
Earnings per common share-diluted
Income from continuing operations $ .63 $ .66 $ .23 $ .18
========== ========== ========= =============
Net income ...................... $ .63 $ .66 $ .23 $ .18
========== ========== ========= =============
</TABLE>
